Commentary: A slow motion disaster; Sacramento's Measure U, growing pension liabilities

By Dan Walters | 

CalMatters Columnist | 

Sacramento city officials, led by Mayor Darrell Steinberg, have been discussing how best to spend proceeds of an additional sales tax that the city’s voters passed last year.

Measure U continued a half-cent sales tax that was due to expire and added another half-cent that, city officials said optimistically, would generate nearly $50 million a year.

Steinberg, the measure’s chief advocate, described it as a “game-changer.” In pitching for the tax hike, he said he wanted to ramp up spending for infrastructure, affordable housing, cultural amenities and incentives to attract new business, with an emphasis on improving conditions in the city’s poorest neighborhoods.

“With more capital, we can direct and lead more of the change we want to see,” Steinberg said.

After the measure passed, Steinberg, city council members and representatives of various neighborhoods and interest groups began dickering over what specific projects and services would receive its revenue.

Just this month, officials debated whether to use Measure U funds to guarantee bonds for an aquatic complex in one middle-class neighborhood, or devote them to projects in poor areas.

As they pore over proposals to spend Measure U money, however, Steinberg, et al, try to avoid the financial gorilla that is prowling city hall – rapidly rising costs of pensions for city employees that threaten to soak up all the money.

The city’s current budget declares that over the next five years, mandatory payments to the California Public Employees Retirement System (CalPERS) will increase by 58 percent or $47.3 million a year – almost exactly what the extra half-cent of sales tax in Measure U would raise.

Most of that money is directed at reducing the immense unfunded liabilities that CalPERS acquired during the Great Recession a decade ago and has not been able to erase despite an extended period of economic prosperity. Recently, CalPERS reported that its earnings during the preceding year fell a bit short of expectations, which means its unfunded liabilities grew even more.

Eventually, to meet its ever-increasing pension payments, Sacramento will either have to use Measure U’s revenues, thus setting aside the ambitious civic improvements Steinberg and others want to make, or cut other city services. It’s simple, inescapable arithmetic.

Sacramento certainly isn’t alone. Throughout California, as pension payments accelerate faster than property and sales tax revenue, city officials are facing similar tradeoffs and/or asking their voters to raise taxes.

A new study by UC-Berkeley Professor Sarah Anzia, using data from a variety of sources, sees it as a nationwide problem. “My analysis here,” Anzia writes, “shows that as local governments spend more on pensions, they have fewer public-sector jobs to offer – an implication that is not positive for government employees or their unions.”

Anzia foresees a “pension-induced transformation of local government” and suggests that “the future of local government may look very different than the past” as a result.

One could frame it as a slow-motion emergency, or even disaster, that can be directly traced to some very expedient, ill-considered decisions in the Legislature and in local governments two decades ago. They sharply increased pension benefits retroactively without setting aside money to pay for them.

CalPERS was complicit by declaring that new benefits would be fully covered by healthy trust fund earnings. Within a few years, however, it and other pension funds were being hammered by the Great Recession and their slide began.

CalPERS, once 100 percent funded, now has scarcely two-thirds of what it needs to cover pension promises. As it hammers local governments, their residents will pay the bills in higher taxes and/or lower services.

CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary