Another year went by without the City of Bakersfield having to cut services due to ballooning pension costs but the way things are trending, those years may be coming to an end.
The city’s pension costs have been steadily rising every year since 2011-12 — when they were $28.1 million — due to several things including the Great Recession, a push to get closer to being fully funded and the California Public Employees Retirement System not receiving the rate of return on investments it expected.
This fiscal year the city expects to spend $42.1 million on pensions, a rise of $2.4 million from last year. Next year’s bill is projected to increase by another $6.5 million.
So what’s that mean for Bakersfield residents? A city that could struggle to keep up with its considerable growth, officials say.
“Can we add more staff? These are costs,” Assistant City Manager Steve Teglia said. “We’ve been holding the line on staffing levels.”
Teglia said the city facing stagnant revenues and rising pension costs is a factor in them holding the line on staffing levels.
Those staff collect your trash, treat your water and mow city park grass.
The city was able to add three more police officers and one solid waste employee for this fiscal year. But those employees will not be paid for with general fund money.
The city and state have taken steps to reduce their pension costs in the future. Recently hired city employees do not have retiree health-care benefits, must pay more of the pension cost burden and have to work longer to receive their benefits.
But even with those reforms, the city’s contributions to CalPERS are rising.
Why are CalPERS costs rising?
It doesn’t help that people are living longer, but CalPERS has not met its target rate of return on investments for the last two years.
So now the state pension system has set a new lower rate of return to meet, and employers, aka cities, counties and the state, must fill the gap.
“We are very much in a position where we have to be responsive to decisions that CalPERS makes,” Teglia said.
In this case, it’s balancing increasing CalPERS obligations with fairly flat revenue coming from sales and property taxes.
City Manager Alan Tandy said in his FY 2017-18 budget message that these “unanticipated cost increases create significant challenges” in addressing other needs within the city.
As Bakersfield Finance Director Nelson Smith said, the city would direct any new revenue it receives to pay CalPERS costs, and then deal with adding staff.
The City of Bakersfield lost about 160 employees from FY 2008-09 to 2009-10. The number of employees is now higher than its lowest point of 1,441 in FY 2010-11 at 1,525 employees.
But the city’s population has grown by nearly 28,000 people from 2010 to 2016, according to U.S. Census data. And Tandy said the city is adding more than 50 new homes a month with 1,472 homes that have been built since the last solid waste employee was added.
Before 2002, CalPERS was “super-funded” and the City of Bakersfield did not pay anything for its employees’ pensions. Projections during that time led the city to retroactively sweeten pension benefits for all employees.
But then the dot.com bust hit and the city had to start paying again. Between 2006-7 and 2010-11, costs stayed relatively flat, between $23.6 million and $25 million. They’ve been going up ever since.
Around 2010, before the state-instituted “PEPRA,” the city negotiated and asked voters to lower pension benefits for city employees. This eliminated health care benefits, required them to pay more and work for more years to receive their benefits.
In addition to holding the line on hiring, the city has put aside $500,000 in this fiscal year’s budget for anticipated increases in CalPERS costs, and Smith said city finance and city manager staff have made clear to the City Council their concerns of costs increasing faster than the revenue stream.
“It’s never a good idea to have ongoing expenditures without ongoing revenues to sustain them,” Teglia said.
City Council members have talked about similar efforts to understand what the city will be dealing with several years later. For example, Ward 4 Councilman Bob Smith asked city staff after passing the budget to prepare a projection of where the city will be in five years.
Smith said the biggest problem facing the city for the last couple of years has been the economy, with a downturn in the oil and agriculture industries.
The northwest Bakersfield councilman said with CalPERS and health care costs predicted to rise, it would be good to have an idea of where the city is going.
“If you have a contracting economy,” Smith said and named those rising costs, “and stuff’s going up, how are we going to deal with it?”
Meanwhile, he doesn’t think pension costs have determined budget decisions so far.
The newest councilman, Bruce Freeman, said it’s a good start to begin a conversation about CalPERS.
“I think any reasonable person who reads (the budget) is going to go, ‘Oh, we’re going to have a problem,’” Freeman said.
Freeman, the former president of the land-planning company Castle & Cooke’s mainland division, made a point of talking about the city’s pension costs during his campaign for the Ward 5 City Council seat that opened up after Jeff Tkac’s death earlier this year. Freeman took office June 28.
“I don’t think people should panic today,” Freeman said. “They should work to fix these problems.”
He did not want to offer a solution when he might not yet have all the information, but Freeman said “we’re going to have to wrap our brains together to create solutions.”
Bakersfield is not alone. Rising employer pension costs are something every city and county that contracts with CalPERS is dealing with. Even the state of California, which contracts with CalPERS, is talking about the increase in its unfunded liability.
Finance Director Smith said that while the current CalPERS cost projections seem to just keep rising — from about $42 million in fiscal year 2017-18 to $68.5 million in FY 2022-23 — at some point those costs should level out.
Tandy announced Friday some “good news” from CalPERS as the system beat rate of return projections by hitting 11.2 percent.
“This information is positive news,” he wrote, “but due to CalPERS calculation methodologies and timing issues, the benefits to the City of these positive investment returns will not be reflected in the City’s CalPERS rates until Fiscal Year 2019-20.”