Pasadena’s Budget Shortfall: What’s the Answer?

[Editor’s Note: This is the second part of a series on Pasadena’s budget woes. The first story, Pasadena’s Budget Dilemma: How We Got Here, was published on March 13, 2017.]

[Updated Monday, April 3, 2017]  The City of Pasadena has a big budget problem on its hands.

Beginning with the coming fiscal year, the City’s spending will begin to outgrow its revenue. And, ironically, the answer to the problem lies smack in the middle of the reason for the problem.

The problem and the answer, experts agree, both fall under the heading of “pension costs.”

As Mayor Terry Tornek said in his last “State of the City” speech, “Our [pension] cost during this time held in the lower $30 million range. Last year, it climbed to $39 million; four years out, the forecast is a whopping $65 million; a 100% increase in five years. And based upon recent CalPers actions, the number will get even worse.”

While the Mayor and a number of other City officials have already suggested cutting back services and laying off City employees, at least two experts say that solution has already left the station.

Caltech political science professor Rod Kiewit explained that those steps wouldn’t work because “when you cut back on the number of employees, then you’ve got fewer employees paying into the retirement system, so it’s like a mini version of Social Security. You’ve got more and more retirees and fewer workers. The number of public retirees grows by about 4% a year.”

One needs look no further than the city of San Bernardino, just an hour so down the 210 east, to prove Kiewit’s point.

Several years ago, San Bernardino imposed a 10 percent pay cut for its city employees, but the firefighters union challenged the decision in court and won. The city now owes union members back pay. Pension costs in San Bernardino reached $25 million in 2012, doubling the 2006 costs in only six years.

A 2007 review by consulting firm Management Partners Inc had said that San Bernardino’s finances were at risk because public safety spending was growing faster than city revenue. The review called the public safety salaries “autopilot” budgeting, budgeting that provided “little incentive for labor groups to negotiate at the bargaining table.”

In his 2010 presentation, San Bernardino City Manager Charles McNeely projected that spending would outstrip revenue through 2015. For the current fiscal year, he predicted spending would exceed revenue by $40 million, which is about the difference city officials forecast last week.

“I don’t know how you could come out of that meeting not understanding we had a serious problem,” McNeely said at the time. “I told them, ‘You’re headed for trouble, it’s a train wreck, you can’t keep doing business this way.’”

San Bernardino filed for bankruptcy in August, 2012, buried under a deficit of more than $45 million. The City has only recently begun to re-emerge financially, having had their bankruptcy payment plan approved in December by U.S. Bankruptcy Judge Meredith Jury.

Stockton also suffered the same problem in 2012 and became the biggest U.S. city to ever file for bankruptcy.

In that year, the Stockton city manager said that the root of the pension crisis was a decision that gave firefighters full healthcare benefits in retirement starting in 1996, prodding other Stockton employees to demand the same in the years that followed, to which the city agreed.

And so it went.

Professor Joe Nation at Stanford University, who runs PensionTracker.org and has done extensive research and work on the pension phenomenon, also provides background on how police and firefighter pension expenses are affecting Pasadena.

Nation, who served in the California State Assembly from 2000 to 2006, points to a State bill as being a key factor in the pension runup.

As Nation explained, “In 1999, the legislature passed a bill called SB400. But SB400 greatly increased benefits. It took someone who was a public safety employee, firefighter, cop, CHP etc. at the state level and it moved them to what is commonly called a ‘three percent and 50’ benefit plan,” Nation said. “That means that when you retire, you can get three percent of your final year’s salary times your years of service, times your final salary.”

Nation said many of the legislators at the time assumed the economy would stay robust and that any investment would get a high rate of return, so they supported huge benefit plans favorable to the unions.

“It was a very generous benefit and the argument that CalPERS legislators made back in 1999 was, ‘Look, the stock market is on fire, CalPERS is super funded and they got more money than they know what to do with, these workers haven’t gotten adequate raises and they’ve gotten shafted by Governor Wilson for so long,’” Nation said. “It was a huge mistake, everyone admits it. Governor Davis, who signed the bill, admits it was a mistake to do that. But it happened.”

Some say there may be a path for cities in California’s Supreme Court.

A three-judge California Appellate Court declared in August of last year that retirement plans for public employees were not “immutable,” or unchangeable, and that public employees only required a “reasonable” pension , which could make it easier for state and local governments, like Pasadena’s, to implement reforms in the pension system and reduce pension costs.

The ruling amounts to a major change in California pensions law which has long maintained that state and local employees were entitled to the pension that was in place on the day they started working.

The labor unions filed an appeal at the state Supreme Court. If the labor unions’ appeal fails, the ruling could pave the way for local governments to begin to actually reduce huge shortfalls in public pensions in California.

Other states could then follow suit.

A decision on the appeal could still take several months. In the meantime, the City of Pasadena may have to take drastic measures to cut down on expenses and attempt to reduce a deficit that could climb as high as $10 million by Fiscal Year 2021.