Debt race: Sacramento police get pay raises as state’s retirement fund is projected to reach an unprecedented deficit
Experts warn California’s unfunded pension liabilities are higher than CalPERS is admitting
A week after Sacramento leaders tried to fix morale issues in their police department by boosting pay and compensation, economists gathered at Stanford University to discuss a darkening cloud over California’s long term pensions.
Specifically, the California Public Employees’ Retirement System, which government workers depend on, has a staggering shortfall in its ability to make future payments. Meanwhile, Sacramento’s $363 million portion of that unfunded liability could be rising, depending on what happens in upcoming contract negotiations.
The twinned fortunes of the state retirement system and local governments became painfully clear during the recession. In the years since, cities and counties have struggled to scale back the overly generous pension obligations they made during the boom times.
According to Sacramento Police Officers Association President Timothy Davis, before the new police contract was enacted September 11, city officers earned 22 percent less pay than their counterparts at surrounding agencies. Davis said the $8.4 million increase to the contract brings Sacramento officers to just 3 percent under the regional average. Compensation is one of several factors officials have cited to explain an exodus of men and women wearing the badge.
According to the FBI’s Uniform Crime Reporting Program, the Sacramento Police Department had 652 officers on the payroll in 2016, six more officers than the previous year. That’s still down roughly 60 officers since before the recession.
“This is the first contract the city and SPOA have collaboratively negotiated together since 2005,” Davis said publicly. “It took trust and a leap of faith for both sides.”
Prior to voting, Mayor Darrell Steinberg praised “a balanced and fair contract” he said did right by the officers. He also called the two-year, $20 million contract “fiscally smart for the city.”
Steinberg didn’t mention pension liabilities, which will go up $5 million this year. But the specter of them was the main topic that elected officials from around the state were talking about days later at Stanford’s Institute for Economic Policy Research, or SIEPR. Four prominent economists agreed that CalPERS’ self-reported $150 billion unfunded liability is actually far higher, especially when calculated with more realistic assumptions.
“We put the number, on a market basis, at about a trillion dollars for California,” said Stanford professor Joe Nation, a SIEPR researcher. “And I’m not counting retiree health obligations. … You add that in, the number grows even more.”
Another key speaker was former San Jose Mayor Chuck Reed, who led a battle to overhaul that city’s pension system in 2012.
Reed described the saga as an exhaustive process that resulted in a ballot measure approved by San Jose voters. The measure called for smaller pensions and higher retirement ages. Reed said San Jose leadership felt the need to take action because of what economists call “pension crowd-out,” meaning a local government has to spend more and more of its annual budget on pension contributions, while it spends less on providing services in real time.
“We had 10 years of cutting services, every year, to balance the budget,” Reed recalled. “We’d reached the end of the line in cuts. You know when you’re laying off cops and firefighters you’re pretty much out of things you can do.”
But San Jose’s pension reform came with a cost, according to current Councilwoman Dev Davis, who told the conference a large number of police officers quit when the measure passed.
“The measure was necessary to reign in costs,” Davis said, “but there were unintended consequences. … Workers wanted to go where the benefits were better, regardless of whether or not they were sustainable.”
San Jose has been on a campaign to hire cops ever since.
Retaining police officers was a main motivator behind Sacramento City Council’s agreeing to the new contract, at least four council members told SN&R in the months leading up to the vote.
Finance Director Leyne Milstein said the question of whether the contract will impact the city’s pension shortfall will be clearer once negotiations end with four other employee unions. The city’s budget has a built-in assumption of 3 percent salary growth. If the police and other contracts add up to more than 3 percent, it will push the pension liability in the wrong direction. A new Fire Department contract next year will also be a factor.
CalPERS officials informed the City Council in June it can expect a three-tiered rate hike over the next eight years.
“With or without the salary change, pension costs are skyrocketing and it’s unsustainable,” Milstein told SN&R.
Councilman Steve Hansen acknowledged the city is going to have to make incremental adjustments in its future budgets to keep up with the growing contribution demands from CalPERS. Whether or not that crowds out services, Hansen said, will depend on how CalPERS’ investments fare. So far, Hansen’s not impressed.
“The returns on their investments have been embarrassingly small,” Hansen stressed. “It’s seems like they’re horribly off the mark on managing the retirement funds. If they don’t start to get better returns, it’s going to be calamitous.”