City Finances Squeezed by Pensions

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Perhaps the most telling comment in response to the California State Auditor’s report on the financial health of the state’s cities came from a League of Cities official who complained that the auditor was working off old figures because cities have approved new taxes and other measures to improve finances.

The crux of the matter for cities is the obligation for pensions and other post-employment benefits like health care eating away at the municipalities’ budgets to perform core services. Cities have to count more and more on taxpayers to fill the budget holes. In turn, that means to meet generous pension and health care payments to public workers taxpayers must dig deeper into their reserves and have less for their own retirements.

The state auditor, Elaine Howle’s, study ranked the state’s 471 cities based on current complete information as of 2016-17. The auditors considered a city’s cash position, debt burden, financial reserves, revenue trends and retirement obligations.

While cities have other fiscal issues to deal with, Howle noted that 70-percent of California cities do not have the necessary funds set aside to cover post-employment benefits.

Should a recession hit, the pension and health care commitments do not go away but the budget shrinks forcing cities to cut services or go back to taxpayers. 

Stanford’s Institute for Economic Policy Research titled a report on the pension affects on budgets: Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030. That title tells the story.

We’ve already seen a rush to the ballot box to raise local taxes. In 2018’s November election, numbers not included in the auditor’s report, cities put 200 tax and bond measures on the ballot. 

Howle raised concerns that a number of cities were floating bonds to pay for pensions, according to a Los Angeles Daily News report. 

There will be more tax measures aimed at the 2020 ballot with government officials and spending interests hoping that large voter turnouts in the presidential election will bring out voters who will approve tax increases.

The tax increases won’t mention the need to pay for public worker retirements. The arguments in support of the measures are always cloaked in language about preserving services. In one sense that is correct because services will be cut if the pension obligation is not met. But a truthful campaign would reveal that the reason for the tax increase is driven by the pension and health care costs.

While you’ll hear much about school funding connected to the attempt to raise property taxes with the proposed split roll initiative, a larger portion of the revenue attained from the tax is designated for local governments. The reason the powerful SEIU union is driving the split roll effort is to deal with the coming pension crisis.

The auditor did a public service by getting information to voters who can make an informed decision when confronted with a slew of tax increase proposals in coming elections.

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