Gullixson: What is being squeezed out to pay increasing pension costs?

Here’s an important question to pose to Sonoma County’s new pension advisory committee. For that matter, it should go to all local elected officials. How much are rising pension costs crowding out other spending - money for public assistance, park maintenance and “soft services” such as libraries and museums?

If the county, cities and school districts are honest, local residents probably won’t like the answer. And given the increased contributions that local agencies are having to pay to the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, the “crowding-out effect” of pensions is expected to get far worse.

“In counties, what we are seeing is a decrease in spending share in particular in public assistance and health care,” said Stanford professor Joe Nation, who represented Marin and southern Sonoma counties in the state Assembly until being termed out in 2006. “The irony here is as pension costs increase, the people who are arguably being hurt the most are the people who can least afford it. It’s people who need the public assistance from counties.”

Nation, now project director at the Stanford Institute for Economic Policy Research, hosted a workshop on Tuesday where he presented the preliminary findings of a study of this crowding-out effect. His research team looked at the finances of cities such as Los Angeles, Sacramento and Pacific Grove as well as counties and school districts - small, medium and large - and the state as a whole. These case studies offer a snapshot of what’s happening statewide.

Los Angeles County, for example, was contributing 3 percent of its operating budget toward pensions in 2002 before public employee retirement benefits were boosted retroactively almost statewide. Since then, that slice of the pie has nearly tripled to about 8.7 percent. According to the Stanford analysis, it is expected to grow to 10.2 percent by 2029-30, if the county meets its goals of about 7 percent average annual return on investments. If not, and returns come in at more around 5 percent, the share of the budget taken up by pensions will be 13.8 percent - an 11 percent increase in just 17 years.

In Pacific Grove, “it’s an even more dramatic story,” Nation said. Pension contributions have gone from 2 percent of the operating budget in 2002 to 22.5 percent today and are projected to grow to 23 percent to 28 percent by 2029.

Meanwhile, the Mill Valley School District is expected to see pension costs double from roughly $4 million to $8 million by 2029.

That’s similar to what Santa Rosa City Schools has been experiencing. By 2020-21, the district’s payments to the California Public Employees Retirement System, which covers many nonteaching positions, and the California State Teachers Retirement System will eat up roughly 20 percent of payroll dollars - about double the level it was in 2014-15. This explains why the Santa Rosa district was forced to cut more than $4.5 million from this year’s budget, funding equal to about ?13 full-time teaching jobs.

So as these retirement costs increase, where is the money coming from?

“For the state of California, what is getting squeezed … are social services and higher education,” Nation said. “As the state has had to increase the amount of money put in for state employees, the share of the budget for social services has declined considerably.”

Public assistance and health care are getting squeezed so much in counties that in Los Angeles it’s almost a dollar-for-dollar trade-off.

“A dollar increase in pensions has led to a dollar decrease in public assistance,” Nation said.

At the city level, what’s being cut back most are so-called “soft services,” such as libraries, museums, parks, recreation and public works - services that don’t have strong constituencies. At school districts, salaries are being squeezed the most.

“They are either holding salaries down, or they are hiring fewer people,” Nation said.

And the problem is not likely to get any better, given the massive phased-in contribution increases that school districts face each year in order to meet a state goal of making CalSTRS fully funded by 2047. As of April 6, CalSTRS only had about 64 percent of the assets needed to meet its obligations.

Meanwhile, CalPERS, the largest pension fund in the nation with some ?$323 billion in assets, has only 68 percent of the assets needed to cover the promises made to public employees. And, as with CalSTRS, it has cut expectations on investment returns from an annual average rate of 7.5 percent to 7 percent for the next ?20 years.

Lowering expectations on returns means local agencies need to pony up more money to bolster the funds, which means more services and programs getting squeezed.

“Based on what we are seeing,” said Josh Rauh, professor of finance at the Stanford Graduate School of Business, “I would say get ready for much higher taxes and much worse public services.”

So what services are being squeezed in Sonoma County and local cities? It’s not clear, but we can guess. The most honest answer can be found in the final report issued last year by the county’s Independent Citizens Advisory Committee on Pension Matters. The committee calculated that the enhanced benefits Sonoma County granted to employees have cost the county an extra $260 million over the 10 years from 2009 to 2016. That’s money that “would have been available to fund critical public services,” the report said.

To put that in perspective, the committee noted, for every $10 million extra, the county could have hired 44 more deputies or repaired 40 miles of roads. According to the pension committee, those costs are expected to total ?$741 million by 2030.

Unfortunately, that committee has since been disbanded, replaced earlier this month by a permanent seven-member advisory panel on pension reform. In addition to having three members of the previous committee, the panel now includes two members with ties to organized labor and a former assistant executive officer for CalPERS. The seventh is former Rep. Lynn Woolsey, who represented this region in Congress for ?20 years. The jury is out for now on whether this group will continue the good work of the previous panel or try to sugarcoat what’s happening. For my money, the best way to tell is how thorough it will be in looking at not just the cost of pensions in dollars but the costs in terms of reduced services. The public may not always understand the long-term impacts of unfunded liabilities. But they understand the cost of poor roads, shabby parks and reduced public assistance. Ultimately, it’s never programs that really get squeezed. It’s people.

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