Pension debt could sink River City

Jan. 9, 2013

By Katy Grimes

The bad news delivered last evening to the Sacramento City Council is dire: Sacramento has nearly $2 billion in unfunded liabilities, which include pension contributions and retiree medical benefits, most of which have no reliable or stable funding source, as well as excessive bond and lease payments on public projects.


The next phone call should be to a good bankruptcy attorney.

The lingering question that cities like Sacramento refuse to ask: Do the city employees make enough of a contribution after only 20 to 25 years of employment to build up enough principal and interest to pay pension benefits?  Nope.

As a private sector employee, my contribution to my own retirement account has always been 100 percent. After consistently contributing at my last job for 20 years, there is not enough to live on… yet. But unlike a public sector employee, I will have to live on what I’ve saved.

Most public employees only pay between 2 and 4 percent to their pension fund, an amount which cannot support such rich benefits 20 to 25 years later. Taxpayers will end up footing the bill.

“I know these numbers are big and can seem scary,” Sacramento’s City Manager John Shirey, formerly of the California Redevelopment Agency, told the Sacramento Bee. “This is about trying to inform and make people aware that the city does have debts and liabilities, and we are managing them. If we’re prudent in our financial dealings, we’ll be fine.”

Ya sure, we’ll be fine. You betcha.

“Most worrisome, Shirey said, is $440 million in retiree medical benefits that the city has no plan to fund besides annual payments of $11 million from the already battered general fund budget, which funds core city services such as police protection, park maintenance and fire personnel, the Bee reported. The total unfunded liability stemming from medical benefits has grown by $60 million in the past five years.

Everyone in a position of authority in the city knew that these pensions and health benefits were unsustainable. But the city just kept on making bad deals, always sanctioned by the City Council.

Decades of retirement

“What part of the message by Shirley dont you get?” a Sacramento Bee reader commented on the story. “Retirees who have been retired for DECADES!!! You didnt pay in enough over your years of working to ever come close to covering decades of retirement. Geesh talk about feeling entitled Our system isn’t build to have retirees live 30 years after they retire….sorry it’s cruel but true. Do you even have any idea how much health care costs have risen to cover a retiree of 30 years since that person left the workforce.”

This reader has more sense than the Sacramento City Council collectively has.

Sacramento and other California cities cannot continue to pay police officers and fire fighters four times what an average person makes, and then allow them to retire at 50 with full pay. The cost for the ‘decades of retirement’ far outweighs what the employees contributed.

“Sacramento’s practice of paying retirees a flat rate every month is somewhat rare in California, Shirey said,” the Bee reported. “He said cities such as Sacramento came to those kinds of agreements with labor unions – and continued to increase benefits – when finances were better.”

City Councils ignored the dire warnings about the economic recession, and have continued to pay out salaries and pensions like drunken sailors.

“It was all funded with the general concept that the world was always going to be the same as it was 2005, with rising housing values and rising stock market values,” he said. “The last four or five years, reality has set in and cities are getting handed the bill.”

“While Shirey said the unfunded medical benefits were the most worrisome debt facing Sacramento, unfunded obligations also exist in the city’s pension plans. That number has nearly tripled, from $161 million in 2004 to $469 million today, according to a report submitted to the City Council by Treasurer Russ Fehr,” the Bee reported.

“The amount of unfunded pension liability is a result of many factors, according to Fehr’s report. Returns on investments made by pension plans have fallen short of assumptions for half of the years since 2000; retirees are living longer, requiring cities to make pension payments for greater lengths of time; the city took ‘rate holidays’ in which it did not contribute to its pension plans at full scale for a year at a time; and employee benefits have been enhanced as city contributions remained steady.”

It appears that California has indeed already fallen off the fiscal cliff.  And they still don’t get it.

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