City services slashed to fund pensions, but your taxes are still going up

PensionsIn the coming months and years, California voters can expect to see a variety of tax increases pop up on their local election ballots. They will be called “public safety” taxes to hire more police or firefighters or “parks” or “library” taxes to pay for those popular public services. But don’t be fooled. Any new tax proposal is in reality a “pension tax” designed to help the California Public Employees’ Retirement System make up for shortfalls in its investment strategy.

In fact, liberal interest groups are getting ready to circulate a statewide ballot initiative that will gut Proposition 13 – the 1978 initiative that has limited property tax increases to 1 percent of a property’s sales price. It also limits property tax increases to 2 percent a year. The new initiative would remove those protections from many commercial property owners, thus raising taxes by another $11 billion a year. Money is fungible, so this is partly about paying for pensions, too.

California has an enormous problem with pension costs. Many observers see it as a crisis that threatens the economic health of the state. A recent study from the well-respected Stanford Institute for Economic Policy Research, run by former Democratic Assemblyman Joe Nation, details how pension costs already are “crowding out” public services, especially at the local level. Cities pay so much for retired employees that they are cutting spending on everything else.

“California public pension plans are funded on the basis of policies and assumptions that can delay recognition of their true cost,” according to the report. Yet pension costs still are rising and “are certain to continue their rise over the next one to two decades, even under assumptions that critics regard as optimistic.” So they are cutting “core services, including higher education, social services, public assistance, welfare, recreation and libraries, health, public works, and in some cases, public safety.”

Aside from cutting public services and running up and hiding debt levels, there’s only one other way that localities can come up with the cash to pay for these overly generous pensions, especially as pension costs consume 15 percent or more of their general-fund revenue. They will raise taxes. Meanwhile, the state government has to backfill pension costs as well, which leads to constant pressure for legislators to promote additional state-level tax increases. It’s a “heads they win, tails you lose” situation, as Californians pay more to get less.

Much of the problem goes back to 1999, when the Legislature rammed through a law to provide 50-percent pension increases to the California Highway Patrol. Backers knew that once CHP received these overly generous deals (including retroactivity, which is a pure giveaway that hikes pensions back to each employee’s starting date), pension increases would spread across the state. Indeed, they did. CalPERS said it wouldn’t cost taxpayers a “dime” because of stock-market growth, but then the market crashed.

Under the current defined-benefit system, public employees are promised an irrevocable level of pension benefits based on a formula. For instance, most California “public safety” workers (police, fire, billboard inspectors, prison guards, etc.) receive “3 percent at 50.” If they work 30 years, they get 90 percent of their final three years’ pay (often higher, because of pension-spiking gimmicks) until they die. They can retire with full benefits at age 50. Non-safety workers often receive a pension formula that lets them retire with 81 percent of their final pay beginning at age 57. These are very generous benefits given their typically high final salaries.

CalPERS invests the money in the stock market. It calculates the “unfunded pension liabilities” (i.e., debt) based on a projected rate of return for their investments. Higher expectations enable the pension funds and cities to go along their merry way, not worrying about their ability to pay for all the promises and avoiding pressure to pare back pay levels. CalPERS just lowered its rate of return from 7.5 percent to 7 percent, which is still overly optimistic.

But the lowered assumed rates mean that cities have to pay the pension fund additional fees to cover the difference. This is cutting into their operating budgets. In fact, cities have faced four rate increases in the past five years and are expecting a fifth one. A recent article tells the stories of El Segundo and Arcadia, two Los Angeles County cities that are considering hiking their sales taxes to maintain their current level of service.

El Segundo’s mayor pro tem said that in five years “the payment to CalPERS is expected to be $18 million and 25 percent of general fund revenue as the employer rate for safety employees increases from 50 percent of pay to 80 percent of pay,” reported Calpensions’ Ed Mendel. He noted that cities face a statewide cap on the size of their sales tax, but that Gov. Jerry Brown in October signed a law that allows some localities to bust through that cap.

You can see what’s coming: A push by unions to eliminate the sales-tax cap across the state, and a torrent of sales tax increases to pay for soaring pension costs. The other thing to expect: Continuing efforts to hide the size of the pension debt.

“The nation’s largest pension system is expected to adopt a funding plan … that anticipates shortfalls during the next decade and then banks on exceptional investment returns over the following half century to make up the difference,” wrote Contra Costa Times columnist Dan Borenstein this week. “It’s an absurd strategy designed to placate labor unions, who want more public money available now for raises, and local government officials who are struggling to make annual installment payments on past debt CalPERS has rung up.”

The only other hope beyond debt and taxes is if the California Supreme Court guts the so-called California Rule, which forbids governments from reducing pension benefits even going forward unless they are provided with something of equal or greater value. That “rule” has made it nearly impossible to reduce costs for current employees. But there’s no guarantee the court will roll back the rule in a case it will soon consider –  or that the state and localities will bother to cut back benefit levels even if they are allowed to do so given union political power.

In the meantime, expect not only more of the same of hidden debt and reduced government services – but tax increases at every turn.

Steven Greenhut is a contributing editor for the California Policy Center. He is Western region director for the R Street Institute. Write to him at [email protected]

This article was originally published by the California Policy Center

Comments

  1. retiredxlr8r says

    Unions have become the enemy of the taxpaying Citizen. Particularly public employee unions that should be outlawed as they are not ethical.
    The problem could be resolved by complete audits of every government office and agency. Starting with the governor’s office on down. Audit should be by a private Citizen group similar to a grand jury, but with far reaching authority and sufficient resources to secure consultants to advise on finance, management, forecasting etc..
    The state and most counties and cities have gotten, shall I say, to big for their bank accounts, and only because they lack the wisdom to budget well. Most probably lack wisdom to forecast for the citizen, instead, they live for the moment and spend all their assets the same.
    A lot of the state, counties, and cities are managed poorly and are poor stewards of the Citizens property, be it land, buildings, or cash!

  2. Bill Macauley says

    Some people believe that taxpayers fund the total cost of public pensions. This is untrue.
    The largest contribution comes from CalPERS investment dollars, with additional funding from employee and employer contributions. Workers currently contribute up to 15.25 percent of their paychecks to help fund their own pensions.
    The CalPERS Pension Buck illustrates the sources of income that fund public employee pensions. Based on data over the past 20 years ending June 30, 2017, for every dollar CalPERS pays in pensions, 61 cents comes from investment earnings, 26 cents from employer contributions, and 13 cents from employee contributions. In other words, 74 cents out of every public employee pension dollar is funded by CalPERS’ own investment earnings and member contributions.
    CalPERS also invests in California. Of our roughly $302 billion portfolio in June 2016, we invested $27.3 billion in California-based companies and projects, generating a ripple effect of economic activity across the state. CalPERS’ investments in California support jobs, economic activity, infrastructure, and business expansion*.

    • Do you really believe that SHIT!!! Your so called investments have been given rosy scenarios only to have them come back to the taxpayers because their investments did not pan out..Come on dude, I live in California and you sound like a Union thug?? Get ready to lose those benes….Taxpayers of Ca don’t owe you a dam thing…Loser

      • Bill Macauley says

        What’s the matter? You can’t handle the facts? But political minions like you just repeat false information. Good luck living in the echo chamber.

        • Sorry but the facts are that CalPers has lost their butts in investments and the state is so underfunded in retirement funds that everyone involved should go to jail. Okay, let’s play with your figures since you don’t think the taxpayers have too much of a say. A 20 yr old city worker making 100k/yr for 30 years retires at 90% vested at 50 yrs of age. In those 30 yrs he’s paid in $457,500 if your figures are correct keeping is salary the same all along. So how many years is his investment going to pay him back before the taxpayers are paying it ALL ??? I have a friend whose father put in 25 yrs with LAPD and was fully vested. Retired and collected his pension for 51 yrs, died at 96, and now his 64 yr old disabled son is being paid $3,700/month plus all medical off of his father’s LAPD pension. The last paycheck his father saw in 1961 was for $2,326.00 gross. Now, although the City of LA is not part of CalPers, you best believe that taxpayers are footing those enormous amounts in comparison to the contributions made by his late father.

          • Bill Macauley says

            Suzee, the facts are that calpers is 75% funded and their investments are one of most stable of retirement systems in the world. I liked how you used $100,000 in your calculations. Thus promoting the myth that public employees make that every year. The average annual benefit is $34,500. The average monthly benefit is $2876. The average age of retirement is 58 with an average years of service of 19.8. At pers children can only be beneficiaries until age of 18. I would think that LA city retirement would be similar. Yes your LA city buddy did not pay into as much as he got, but he is an exception to the rule.

  3. California resident and it is time to stand up and throw these scumbag Demwits put of office..That is why Brown ans his asswipes will not do a voter audit because they want the trash ILLEGAL mexican vote…People are leaving California in droves, they were third only behind New York and Jersey, blue states that are preaching Socialism. Throw these dumb F..CKS out of office..

  4. ScienceABC123 says

    California will never learn about spending beyond their means. They’ll have to go completely bankrupt before they face reality, maybe not even then.

  5. Noe, NaDa, ain’t gonna happen…….
    Regardless of need they may “portray” to us, the vote will be NO!
    Ca and Ca Cities & Counties can go pound sand. Every notice EVERY election year a School Bond of some kind pops up? No More. I think voters will shut down any type of NEW tax proposal because of the Fuel/DMV monstrosity that the DEMS voted for recently. BS is polite, but the STUPID voters that base their votes on TV ads and Radio SHOULD NOT BE VOTING at all. Seems to me we recently threw out a sitting gov over this……. As long as Dems have majority in Sen/Assy, it will continue as more liberal pablum with a cost attached……….
    HISTORY HAS PROVEN THIS!

    • Seems to me that the California Government does not ” VOTE” on these things but are simply passed into law by an illegal corrupt socialist mock government called Demoncraps .
      It is past time for recalls or voting these Treasonous Pos out of office. It is time for arrest , conviction and execution of those who are screaming that they want an end to this country.
      There is also a criminal action wide spread in California that is a cancer that is killing the tax payer here. This action is that many government employees , in their last year of employment , are corruptly getting overtime to pad their monthly or yearly paycheck up to and including twice what their real base pay was so that the American tax payer is left paying Double or more to a criminal who have abused their position and authority and yet they are not arrested. So screw them , just like they are doing us.

      • Bill Macauley says

        Damocles
        Please stop promoting false propaganda! PERS rules DO NOT allow anyone to increase their pensions by adding overtime. It is based on their ending salary and their time on the job. Period!!!!!!

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