City worker pensions in Bakersfield present a major budgeting challenge, but not an insurmountable one.
In 2000 and 2002, changes in state law allowed state, county and city workers to get more retirement benefits, and get them earlier. The changes dramatically increased pension benefits. Someone who worked for the government for 30 years would now get an amazing 90 percent of his salary for the rest of his life (instead of the previous 60 percent) and public safety workers were eligible to retire at a younger age.
At the time, the economy was going well and state and local governments rushed to implement these new benefits. Over the next six years, retirement costs for state employees increased by over 2,000 percent, and taxpayers went from footing $157 million in state pension benefits to over $2.7 billion per year.
A similar pattern has unfolded in cities, with pension costs consuming much larger shares of city budgets. Bakersfield has nearly $100 million in unfunded pension liabilities — nearly a third of the annual operating budget. And the city’s pension costs for police officers skyrocketed from nearly $3 million in 2002-03 to $10 million in 2007-08.
When the city increased the pension benefits, it hoped older workers would retire and be replaced by “cheaper” newer workers. But that hasn’t worked out because pension costs are so exorbitant. For every 10 public safety workers that retire, the city pays pension costs equivalent to nine full-time staff. That means taxpayers are paying for nine police officers — only none of them are working. The city can only afford to hire one officer to replace the 10 who retired.
The city can, and must, fix this problem.
First, for new employees, shift from the current defined benefit plan, which guarantees a percent of salary for life, to a defined contribution plan, where the city and the employee put a specified amount of money into an account each year that money goes to the employee upon retirement.
Second, for current workers, reinstate the requirement that they pay some modest share of pension costs. The city currently requires employees to pay 9 percent of pension costs only for their first five years on the job. After five years, workers don’t contribute anything towards their own retirement.
Third, for all current employees, base the retirement salary calculation on their highest three years of pay, not one year. The city already does this for new hires. This avoids “pension spiking,” where employees work a ton of overtime to increase their salary in a single year because that year’s salary can set their pension level.
Fourth, since pension obligations are a promise to pay money in the future, they are a form of debt. As such, taxpayers should have the same public vote requirement on pension deals that we have on other forms of city debt. Ideally, the city would use pay-as-you-go, with no pension debt.
Pension costs are only going to get higher, and consume more of the city budget, unless both city workers and city leaders take responsible steps to meet current obligations and ensure future obligations are sustainable.
Adrian Moore is vice president of research at Reason Foundation. This column first appeared in the Bakersfield Californian.