City officials review options as pension costs to rise in next decade
At the city’s recent Budget, Finance and Economic Development Committee meeting, officials gave their forecast for pension contributions for the next decade. Their projection: Pension rates are going up.
In California, many current and retired public employees are covered by the California Public Employees’ Retirement System, or CalPERS, the nation’s largest state pension fund.
Pensions cost the city an estimated $59.5 million in the 2021-22 fiscal year. Officials expect the cost this year to reach $64.5 million and nearly $70.7 million for the 2023-24 cycle. Going forward, officials estimate pension costs to rise by roughly $5 million each year until the cost peaks at the end of 2031, at $101.3 million, before it starts to trend downward.
“The point of these presentations is to make clear that we have these required payments — things that we cannot get away from or turn our back on,” said Randy McKeegan, the city’s finance director. “We have to be aware of these escalations moving forward.”
Officials at the May 22 meeting assured the committee — composed of Ward 1 Councilman Eric Arias, Ward 2 Councilman and Vice Mayor Andrae Gonzales and Ward 3 Councilman Ken Weir, who was absent — that the city has options to address what is a mandatory charge to future budgets.
“We need to know what the demands will be 5 to 10 years out and make plans accordingly to address it,” McKeegan said. “I feel we are making those plans.”
What’s causing the rise, McKeegan explained, is the increase in retirements among classic pension members — those hired before 2013, when California’s public employee pension system was reformed and its rate reduced by 1%.
Broken into several tiers, pensions in Bakersfield are formulated based on one’s position and time served. Those hired after 2013, depending on the plan, get 2% of their salary for every year of service up to age 62, whereas
classic members — hired before the state’s reform in 2013 — get 3% per year.
“They have my information,” McKeegan said. “They know that I’ve worked for the city for 17 years. They know that I’ll probably retire at 60. What is that benefit I’m going to be owed and how long am I expected to live — that’s all built in.”
Under the direction of then-Gov. Jerry Brown, the pension system was remade under the California Public Employees’ Pension Reform Act, which saved state and local governments an estimated $55 billion. Without PEPRA, McKeegan said the city would see an annual contribution close to $120 million.
“PEPRA forced, in essence, cities and counties to change that benefit level so that we don’t see these escalations after 2031,” McKeegan said. “But until those classic, pre-PEPRA employees lose their majority, those escalations will continue.”
Currently, about 40% of the city’s public employees were hired after 2013.
And since state courts shield pre-2013 pension rates for classic employees, the financial burden is shouldered by public employers who have to make up the difference.
Pension costs arguably led to the 2012 bankruptcy of Stockton, which by that time had shaved a quarter of its police force and a third of its fire department, among other cuts, to try to meet its obligations to retirees.
Bakersfield City Manager Christian Clegg assured that the flexibility in the Public Safety and Vital Services Tax has been a “game changer” and can aid the city to bear the added charges, as it is not limited to particular operational costs.
“I’m not suggesting that we do anything here but we’re fortunate to still have it within our sales tax cap,” Clegg said.
Clegg also pointed out that many California cities have cornered themselves in recent years by capping their sales tax locked into certain conditions, meaning they can’t use the money to cover increased pension costs.
And while it is too earlier to say, city officials agreed they need to be at the ready in future budgets.
“I don’t have a crystal ball, but I do believe that some cities in coming years will be in the same situation as Stockton was,” McKeegan said. “Because they don’t have the flexibility to address increases.”