Surge in pension costs may impact future budgets, city reports

At the city of Bakersfield’s Budget, Finance and Economic Development Committee meeting on Monday, officials gave their forecast for pension contributions for the next decade. Their projection: Rates are going up and the city will soon feel the squeeze.

In California, more than 2.2 million current and retired public employees are covered by the California Public Employees’ Retirement System, or CalPERS, the nation’s largest state pension fund.

Under the direction of then-Gov. Jerry Brown, the pension system was remade under the California Public Employees’ Pension Reform Act in 2013, which saved state and local governments an estimated $55 billion. Without PEPRA, Bakersfield Finance Director Randy McKeegan said, the city would see an annual contribution close to $120 million.

But PEPRA reforms happen slowly as they are primarily restricted to new hires, which means savings will take decades to be fully realized. Meanwhile, the pension costs for California’s municipalities have reached record highs.

Compared with $59.5 million in the 2021-22 fiscal year, Bakersfield officials expect the pension costs this year to reach $72.5 million and nearly $78 million in the 2024-25 cycle. Going forward, officials estimate pension costs will rise by roughly $5 million each year until the cost peaks at the end of 2031, at $96.3 million, before it starts to trend downward.

“Pension costs are skyrocketing,” said McKeegan said.

Several factors are causing the rise, he explained.

For one, there are still large numbers of classic pension members — those hired before 2013, who get 3% of their salary for every year of service up to age 62. These employees constitute around one-third of the city’s police and fire departments, which typically also have a higher cost of benefits when compared with other departments — $76,000 on average, or about

81% more than the average for other city retirees.

Currently, about 60% of the city’s public employees were hired before 2013. And since state courts shield pre2013 pension rates for classic employees, the financial burden is shouldered by public employers who have to make up the difference.

“As those individuals begin to retire, the cost of the total plan begins to decrease,” McKeegan said.

The city has also hired a lot more people in the past three years, as a result of funds available through the Public Safety and Vital Services Tax. While this addresses vacancy issues, it increases pension costs.

Also, the state’s investments sometimes — the past two fiscal years, for example — do not yield the expected 6.8% in returns that they anticipate, leaving municipalities to cover their losses.

For every dollar in the CalPERS system, 56 cents is covered by the return on investment the program makes each year, while 11 cents is covered by employees paying into the plan and 33 cents is covered by municipalities and employers within CalPERS.

When returns come back short, it tanks municipalities’ overall pension coverage, as they look to make up the shortfall.

Officials at the 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 Monday — that the city has options to address what is a mandatory charge to future budgets. By 2033, CalPERS expects the program to be 90% funded, assuming the state meets its investment returns every year in between.

This means the city must do whatever it can to stay solvent until then.

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.

Several million dollars aren’t enough to derail the city’s operating budget. But it will likely require the city to shave off several capital improvement or contingency projects in the coming years.

“We’re not in a deficit. It’s just that we can’t commit as much as … we have in the past,” McKeegan said. “We’ve got to make the numbers meet and figure that out.”

To exit the plan, McKeegan said, would cost the city about $1 billion.

“So, there aren’t any great solutions to this,” Arias said.