Commentary

New Study on California City Pension Burdens

A recent study by the California Policy Center analyzes the burden of pensions costs on 459 California municipalities, using a number of metrics. One of the metrics is the ratio of required pension contributions to estimated total revenue. Based on this measure, the most heavily burdened cities are San Rafael, Costa Mesa, and San Jose, which have the ratios estimated at 17.58%, 14.36%, and 13.88%, respectively. Generous retirement benefits are a common factor behind the financial state of these cities. The good news is that all of the three cities have been taking measures to reduce pension costs.

Another metric is the ratio of pension debt-to-revenue. Pension debt here equals unfunded liability plus outstanding pension obligation bonds. Based on this measure, the most heavily burdened cities are Oakland, Costa Mesa, and Richmond, which have the ratios estimated at 203.3%, 182.0%, and 180.9% respectively. The interesting thing is that some cities, such as Richmond, have more pension debt carried in the form of pension obligation bonds than unfunded liability. These cities’ pension systems, therefore, look much more favorable than they really are if only unfunded liabilities are taken into account.

Employer contribution rate, the percentage of current employee payroll that must be paid to the pension plan by the employer, is also a revealing measure. Expectedly, heavily burdened cities tend to have high contribution rates, with San Rafael, Costa Mesa, and San Jose having to pay 57.7%, 47.5%, and 70.8% respectively of their employee payrolls to their pension systems.

Based on the study’s pension cost projection to fiscal year 2020, Monrovia and Fremont are two cities that can expect to face sharply increased pension burdens. Both have 2015 pension cost-to-revenue ratios exceeding 10% and both will likely see significant cost growth from now to 2020.

The study also provides an interactive map that summarizes the key figures for each city. To read the full study, go here.

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