Opinion: Pension obligations damage Berkeley’s finances

Berkeley owes $640M in pension obligations, which means Berkeley has to funnel funds toward that rather than fixing its parks, piers, and roads. Our leaders must address this.

The City is currently in contract negotiations with most of its employee bargaining units, and without strong leadership by the Mayor and City Council, any increase to city employees’ compensation – which would also increase future pensions – will cause a further decline in the quality of life for Berkeley’s residents, as is happening in other cities across California such as Santa Cruz, Sacramento, Palo Alto, and Pacific Grove

The City has a current annual structural deficit that exceeds $5 million. This deficit increases every year due to ballooning employee compensation which includes increased required annual payments to the PERS retirement system (>$50 million this year). To balance the budget (a state law), the Council must vote every year to impose service cuts and/or increase taxes commensurate to the amount of the deficit. Thus, any employee raises this year will increase the structural deficit above and beyond the $5 million and necessitate even greater service cuts and higher taxes next year.

In addition to the structural deficit, the City’s unfunded pension obligations for its retirees now exceed $640 million (1), or approximately $15,000 per household including every rental unit. These obligations have increased by an astounding $500 million over the last decade. This includes the roughly $100 million in retiree healthcare costs to which – unlike other municipalities such as San Francisco – employees do not contribute anything to during their employment with the city.

Neither city staff nor City Council has a plan to reduce pension obligations despite repeated pleas by concerned citizens to address them. Residents who ask about this issue are repeatedly rebuffed by government officials or told that they are “working on it.” The problem is, they are not working on it and Figure 1 illustrates the ramifications of ignoring the mounting debt. Clearly, city leaders and their powerful backers, the city’s unions, are determined to protect and prioritize the current system at any cost.

What many residents do not realize is that it is not the employee salaries that are causing the greatest damage to Berkeley’s fiscal condition but rather the six-figure pensions and highly subsidized healthcare for the employee and their spouse upon retirement (free for all safety workers). An employee’s pension starts at 90% of their final salary, assuming 30 years of employment.

A year ago, Teresa Berkeley Simmons, the budget director for Berkeley, delivered some alarming statistics regarding pensions (Projections of Future Liabilities Feb. 28, 2017, City Council). She stated that payments for city workers’ retirements to CalPERS will increase by 50% over the next 10 years from $49.3 million every year to $73.3 million every year (Figure 2). The budget director went on to say, “This will affect pretty much everything we do.”

What exactly did the budget director mean by “everything we do?” My guess is that she was referring to “pension crowd out.” According to a recent Stanford study by Joe Nation, pension crowd out occurs when pension contributions overwhelm a city’s operating expenditures, as is occurring in cities such as Pacific Grove. (See gif below).

As stated in the Stanford report, “As pension funding amounts have increased, governments have reduced social, welfare and educational services, as well as softer services, including libraries, recreation, and community services.” This is precisely what we have been witnessing in Berkeley for at least the last decade. Spending for infrastructure and services is flat or gets cut virtually every budget cycle. Meanwhile, an ever-increasing part of the budget pie is spent on pensions.

Berkeley’s pension liabilities have risen dramatically because of a state law that was passed in 1999, SB400. This allowed employees to retire earlier, at age 50 or 55  starting with 90% of their final salary rather than the previous 50%. In addition, employees now retire with extremely generous starting pensions due to higher salaries than in years past (many receive pensions of $100K to $200K+ every year for the rest of their lives, the equivalent of a multimillion-dollar 401K assuming they live to be 80 years of age). And these pensions increase every year due to automatic inflators.

A key reason for the pension debacle is years of mismanagement by the labor-dominated PERS board. They assumed an unrealistically high expected rate of return on its investment portfolio, thereby painting an optimistic of the future returns and lulling jurisdictions with unrealistically low initial contributions. CalPERS has set a 7.0%+ anticipated average rate of return; however, over the last decade, despite one of the strongest stock market rallies in U.S. history, the actual rate of return was a meager 4.4%. Hence, the unfunded liabilities and the assumption that taxpayers will ultimately pick up the gap.

Thus, even with huge tax increases every year, revenue simply cannot keep pace with personnel costs. Ex-City Manager Phil Kamlarz first warned of this in the 2006 budget. Nevertheless, this year the city has said it will put a sales tax increase on the ballot to pay for employee raises.  But where is the money for the increased pension and medical costs?

The City of Santa Cruz is also proposing to raise its sales tax after declaring a fiscal emergency several weeks ago due to mounting employee costs. According to the Mercury News, the sales tax increase has support from SEIU in that city. This is no surprise since their members will no doubt be the major beneficiaries.

In addition to pensions, another relentless pressure on Berkeley’s budget is the projected 300% increase in health care expenditures over the next decade (See figure 3). According to Deputy City Manager Jovan Grogan, there is no health-care cost sharing between the city and its workers; employees (and their families who are covered) do not pay anything for their premiums, co-pays, etc. When there is a >17% increase in Kaiser premiums, as is the case this year, the increase is paid for entirely by taxpayers. This is despite the fact that many city workers’ total compensation (salary plus benefits) approximates $200K a year.

As the city engages in contract negotiations with its unions. I would like it to inform the public what tradeoffs there will be as a result of raises. What specific city services and amenities will be cut, and what taxes will be increased (or new taxes imposed) to pay for raises and increased pensions. I would also want to know the data showing that Berkeley residents can even afford to pay for increased pensions, health care, and salaries of City workers. As past president of NEBA and candidate for City Council in 2016, I have spoken to many retirees on fixed incomes who are struggling to make ends meet on their Social Security checks (in 2017, the maximum was $32K/year). Some may own their homes but have few, if any, other sources of income. Others struggle with large medical bills, home upkeep costs, and erratic and undependable 401K returns if they have them. In contrast, hundreds of city of Berkeley retirees receive >$100K/year guaranteed escalating pensions without ever having contributed a dime to their own retirement fund.

Does Council carefully consider the impact on Social Security recipients in our city when they enter into contract negotiations? Does “social justice” extend to private sector workers? Must retired private sector workers with limited means be forced to heavily subsidize the generous pensions and lifelong health care benefits of public sector workers and their spouses? Where is the equity?

Things need to change. But as long as unions (SEIU, police, and fire) and their PACs are the largest and loudest donors to the politicians in Berkeley, the power will be in their hands. Meanwhile, our parks, pools, roads, Old City Hall, and pier will continue to deteriorate so that city employees’ can receive extremely comfortable benefits and retirements. We must restore balance and that will only start when there is respect for those hardworking taxpayers paying the bills. We also need to respect the next generation, a generation destined to inherit an enormous debt unless something is done soon. To me, that is what it is to be progressive.

Berkeley residents have grown weary of promises of improved infrastructure and services. They know instinctively that something is wrong. Endless bond measures and parcel taxes which never seem to move the needle.  But at least we know what to call it now – pension crowd out.

Update March 16: The op-ed has been corrected to remove the suggestion that no law prevents the public from sitting in on contract negotiations. In fact, Governor Ronald Reagan signed a law in 1968 which said that “all local and county collective bargaining negotiations were confidential.”

Isabelle Gaston is a medical writer and lives in Berkeley