Privatization Can Help Cover Costa Mesa’s Rising Pension Costs

Commentary

Privatization Can Help Cover Costa Mesa’s Rising Pension Costs

California city may also need to revisit its pursuit of charter city status

As the Register’s Editorial Board recently noted, Costa Mesa’s Pension Oversight Committee presented data to the City Council showing that the city’s total annual payments to the pension system are going to skyrocket, rising from approximately $25 million this year to almost $40 million a year by 2030.

Even scarier, the analysis showed that pension costs are increasing at roughly twice the rate of overall city revenue (approximately 6.5 percent versus 3 percent, respectively).

The rising cost of government employee pensions in Costa Mesa has long been recognized as a major fiscal problem. In fact, the pension costs were a motivating factor behind the large-scale – and ultimately failed – attempts to privatize city services in recent years because pensions have been swallowing a growing share of the city budget and increasingly eating up spending that would go to public works, public safety, parks, libraries and other services citizens expect and rely on.

The city is spending more and more on a workforce that is no longer working, and citizens are getting fewer services as a result.

This trend will only continue to worsen for Costa Mesa residents, which is why privatization should remain a serious pursuit. In 2012 courts blocked a sweeping privatization initiative that would have contracted out 18 services performed by over 100 city employees.

Specifically, the Court of Appeal upheld a trial court’s injunction against Costa Mesa’s finding that the city did not properly confer with public employee unions on the proposed privatizations and that many of them would violate state laws restricting general law cities – those that do not operate under their own charter – from privatizing all but very specialized services like engineering, financial and accounting services.

After that, Costa Mesa did what it could, implementing some sensible proposals to privatize street sweeping and jail operations to cut costs (in part by getting union approval). It looks like the outsourcing of park maintenance to private companies may be next.

But the court rulings effectively took other opportunities to privatize things like building inspections, vehicle fleet maintenance, facility maintenance, street maintenance, animal control, information technology and employee benefit administration off the table unless unions agree to let them be privatized.

Ironically, by blocking privatization and fighting the city charter movement to protect current workers, unions are basically guaranteeing a long-term decline in the city workforce, since pension costs will increasingly squeeze out spending on the future workforce.

In a 2014 report to the City Council, the pension committee noted that the growing pension crisis was “the single most compelling reason” to privatize services, adding that “if Costa Mesa cannot contain and manage its current and future costs, [it] should not exacerbate the problem for future generations by enrolling additional employees in [pension] plans.”

The committee also helpfully anticipated an anti-privatization argument by refuting the idea that you would need more workers paying into the system in the future to pay off current unfunded pension liabilities. The city’s over $200 million unfunded pension liability is debt that has to be paid off, “which is not materially influenced by increases or decreases in city payroll.”

Wholesale reforms to Costa Mesa’s retirement systems are sorely needed and privatization certainly cannot solve the entire problem. Nonetheless, Costa Mesa may need to revisit its pursuit of charter city status, which would allow much more opportunity for city officials to privatize services to free up funds to cover rising pension costs.

Privatization can certainly play a significant role in covering the rising costs of pensions and reducing the “crowd-out” effect on other services. Otherwise, Costa Mesa’s citizens are looking at a future where they pay more and more to the city, only to get less and less back in terms of city services.

Leonard Gilroy is director of government reform at Reason Foundation. This article originally appeared in the Orange County Register.

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.