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Pensions: How we got here

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Posted: Wednesday, December 12, 2012 5:45 am

Around the state, public benefits are a hot topic in the press and within public policy circles as California’s economic crisis continues to persist. San Bernardino and Stockton declared bankruptcy this year, and the City of Compton continues to flirt with becoming the first city in Los Angeles County to file for bankruptcy. 

Each of these cities is bound by one common thread: generous pension plans guaranteed to employees during an economic peak, which later came back to haunt those cities as the economy went under. 

Bearing this in mind, The Malibu Times interviewed officials with the City of Malibu to gage the city’s financial state when it comes to employee pensions. This is the first of a multipart series on the city’s finances. This article traces the history of how entitlement costs have put many California cities in fiscal danger, while subsequent stories will examine to what extent their example influences the City of Malibu’s planning. 

How other cities went under 

The seeds of today’s burgeoning crisis were sewn more than a decade ago. In 1999 then-Gov. Gray Davis signed a bill, SB 400, which sweetened retirement incentives for state workers. The timing was politically ripe. Davis had just become the state’s first Democratic governor in 16 years, and his predecessor, Republican Pete Wilson, had overseen a cut to state worker pensions in 1991, according to longtime Capitol reporter Ed Mendel. Davis pushed for greater benefits for California Highway Patrol workers, and the result was SB 400. 

Soaring expenses 

Between 1999 and 2010, annual state payments to workers’ pension benefits soared from $159 million to $3.9 billion, according to Mendel. What’s more, the bill set a precedent for other cities to follow. The state measure, and other agreements similar to it, often resulted in cities lowering the retirement age for police and fire workers from 55 to 50, while allowing them to collect up to 90 percent of their highest annual salary, factor unused sick and vacation leave into their pension calculations and still take jobs elsewhere after retiring. 

Only later did textbook cases of abuse begin to come out. In Stockton, former police chief Tom Morris assumed the city’s top cop job in 2008 after working for years at other cities. He left just eight months later, retiring at age 52 with a $204,000 annual pension. Morris was the third of four police chiefs who spent less than three years on the job and yet retired with an average of 92 percent of their annual salaries, according to Bloomberg News. 

Unnegotiable costs 

When the pension deals were negotiated, many California cities were riding healthy tax revenue and a strong stock market. When the economy collapsed in 2008 and unemployment soared, many cities began to lose property-tax and sales-tax revenue. The first thing they looked to do was cut spending, but they could not cut pensions. Unlike city services or programs, pension agreements cannot be cut or deferred. A city is obligated to pay a fixed pension cost laid out in its employee agreements even when the economy plummets, credit expert Eric Friedland told the Bloomberg News. 

“As their tax revenues go down, they’re stuck with these fixed costs,” Friedland said. 

In many cases, these costs consume 10 percent or more of cities’ annual revenue. 

In August 2006, San Bernardino’s City Council lowered the minimum retirement age for public safety workers from 55 to 50. By the end of 2007, nine percent of the city’s annual budget was going to pensions. Just five years later, that number had leapt to 13 percent, and its City Council voted to file an emergency bankruptcy claim. San Bernardino is now more than $6 million behind in retirement payments to CalPERS, the state retirement agency. 

Stockton officials filed for bankruptcy in June, citing rising pension costs, a sluggish local economy and a drop in tax revenue. 

Rumblings of a bankruptcy filing by the City of Compton began to swirl last summer when officials said the city had only $3 million and $5 million in bills to pay. Compton also has a more than $40 million long-term deficit and no financial reserve. 

Next week: the City of Malibu and CalPERS (the California Public Employees’ Retirement System). 

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