Borenstein: City managers concerned pensions will cause more bankruptcies

Lodi City Manager Steve Schwabauer worries about his town's fiscal solvency - and estimates roughly a third of California's municipalities are in the same position because of rising pension costs.

Nancy Kerry, city manager of South Lake Tahoe, says her community will avoid bankruptcy but will have to make severe cuts in services to do so.

Schwabauer and Kerry are among a small number of top administrators now publicly talking about the financial crisis ahead. They both say the only way to stave it off begins with reducing pension benefits for existing employees.

“If we had taken this on 15 years ago and said we had a real problem, I think there might have been another way out,” Schwabauer says. “We waited too long to deal with it because nobody wanted to pay the bill.”

Kerry and Schwabauer independently contacted me recently. It's refreshing to hear their candor. For far too long, top government administrators in California have remained silent, or offered up timid ideas, while most of them knew, or should have known, a crisis was brewing.

These are the people who are supposed to provide the financial expertise and neutral analysis and be the bearer of good or bad news. Rather than sound the alarm, many of them have been enablers of the 21st century financial can-kicking.

“The system is teetering, you can't deny it anymore,” says Kerry. The turning point was the December decision by the board of the California Public Employees' Retirement System to lower its investment forecast.

The labor-dominated board finally recognized that it could no longer rely on unrealistic market returns to shore up the nation's largest pension plan. Unfortunately, it was too little too late.

The lowered forecast means that local governments across the state must contribute more to make up the difference. And the years of delay make the day of reckoning more painful.

City managers across the state are now calculating how much more. Schwabauer, for example, estimates Lodi's annual pension costs will increase from $6 million to $13 million over the next five years. This for a city of 65,000 residents and a $48 million general fund budget.

To understand the magnitude of the increase: “That's our library, parks and rec department, a police beat and a fire station,” Schwabauer said. It would take all of them to offset the $7 million additional pension cost.

Kerry says she faces tough cuts in South Lake Tahoe, a city of 21,000 which was incorporated in 1965. “We were formed to provide service to the public, to have local control of your destiny,” she says. “The system with CalPERS has flipped it on its head.”

Neither of them blames CalPERS for lowering the investment return forecast. Quite the contrary, they wonder what took the pension fund so long.

Schwabauer blames CalPERS for the double-bind cities find themselves in. On the one hand, pension rates must increase to shore up the retirement system, which is badly underfunded. On the other hand, it's clear that cities cannot afford the current level of public employee pension benefits.

But CalPERS opposes attempts to reduce future pension accruals for existing employees and defends the so-called California Rule, the current state constitutional requirement locking in pension formulas once an employee starts working. The formulas can be increased during workers' careers but never reduced.

CalPERS' “response is if you try to come up with your own solution, ‘we're going to take you on,'?” Schwabauer says. Rather than flexing its legal muscle to defend the status quo, CalPERS should be using it to find ways to give cities more options for addressing the crisis.

Schwabauer and Kerry agree the way out begins with overturning the California Rule, either through an upcoming state Supreme Court review or at the polls. Otherwise more and more cities will file for bankruptcy, they say.

Older, lower-income cities like Lodi that provide their own police and fire departments, rather than contracting out, are especially vulnerable, Schwabauer says.

“You would never hear me say that a cop or a firefighter doesn't earn the pension they get,” Schwabauer says. “What you would hear me say is, ‘I don't know how to pay for it.'?”

Daniel Borenstein is a columnist for the East Bay Times.