Pensions sledgehammer Stockton’s future

Chastened by bankruptcy, Stockton created a prudent long-range budget — which pensions are going to murder.

That’s the word the Council got on Tuesday.

The California’s Public Employee Retirement System, CalPERS — a.k.a. Hogzilla — is actually reforming after years of irresponsibly advocating penion increases and hiding the true cost.

Unfortunately, the real bill is obscene.

Here’s a chart showing the ups and downs — but ultimately the sustainability — of Stockton’s Long-Range Fiscal Plan, or L-RFP, before the latest developments.

City finances, gobbled by pensions, dip deeply in the mid-2020s. The General Fund balance falls not only below the 16.7% working capital reserve which is the industry standard, it actually falls below the 5% minimum. That is a crisis, a state of near-insolvency. Whoever’s running the show then will have to get out the chainsaw.

It won’t be pretty. But with the aid of reserves, the city will scrape by. That was the plan.

And the plan was conservative in that the L-RFP anticipated CalPERS would hike its bill (Hogzilla hikes the bill by lowering its “discount rate,” the discount it can offer by co-paying the bill by using its investment returns.

The discount rate when Stockton tanked was 7.5% — which is to say CalPERS anticipated a 7.5% return on its investment porfolio, money with which it would defray Stockton’s pension costs.

Skeptical — becasue projecting rosy investment returns was one way CalPERS hid pensions’ true cost — The L-RFP foresaw a reduction to 7.25%

This fractional change may sound teeny. But every quarter-percent drop translates approximately to a 10 percent increase in city pension costs. The last time I checked, Stockton pays $37.8 million a year toward pensions. So 10 percent equals about $3.8 million a year.

Staff was obliged to inform the Council that CalPERS has utterly upended the city’s fiscal plan. “The recent board action exceeds prior L-RFP assumptions” is how staff dryly put it in this staff report.

And it will “exceed” the budget more and more. CalPERS is going to reduce its discount rate over time from 7.375% …

to 7.25% …

to 7% by in fiscal 2020-21.

“Based on preliminary estimates, the City’s CalPERS costs will exceed those projected in the Long-Range Financial Plan (L-RFP) by $4.2 million in FY 2020-21, and $16.5 million in FY 2024-25 when the full annual effect is realized,” the analysis says.

Which is to say pension costs, already doubled over the last decade, will spike another roughly 50% over the next decade.

Behold what a shambles that makes of the city’s long-range budget.

In reality, state law requires cities to submit annual blanced budgets — unlike Uncle Sam, Stockton cannot run up a deficit. So what you’re looking at there is a chapter 19, a second bankruptcy, if the city doesn’t take steps now.

Fortunately, it has. The city has squirreled away millions of Measure A tax dollars intended to fund police positions that have remained vacant longer than expected. Now you know why leaders didn’t mind too much if the Measure A money wasn’t expended.

Staff puts a brave face on the hammer blows CalPERS is going to rain on Stockton. “With prudent and rapid action the City is well positioned to weather the CalPERS changes … and ensure financial sustainability.”

They think the future looks like this:

I hope they are right.

In their defense, they, too, are being conservative; the above chart reflects a bad-case scenario in which voters do not renew the Strong Communities (Measure M) tax in fiscal 2034-35 at an annual cost of $11 million.

But there’s reason to doubt.

The fiscal consultant who devised the L-RFP was hailed as a wizard for factoring in one bill hike. But CalPERS’ voracious appetite for tax dollars dead-lettered his projections and made him look shortsighted only three years into the L-RFP. It is simply impossible to overestimate the money-sucking capacity of California’s public employee pension system.

Of course, the courts may rescue municipalities by ruling pensions may be cut. There are myriad other variables. However, the poet Robert Burns may have it right: “The best laid schemes o’ Mice an’ Men, Gang aft agley/An’ lea’e us nought but grief an’ pain …”

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    Michael Fitzgerald

    Mike Fitzgerald is The Record’s award-winning metro columnist. His column runs in the paper three times a week. Born in San Francisco, he was raised in Stockton. His column covers diverse beats including, sometimes, the offbeat. Read Full
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