The Burden of Pension Costs on California Municipalities

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California cities that participate in defined benefit pension plans are expected to make a total of $5.1 billion in contributions during fiscal year 2015, accounting for nearly 7 percent of their total revenue.

The California City Pension Burden estimates the burden of pension costs on 459 California municipalities by measuring the ratio of required pension contributions to estimated total revenue for each city, contribution rates per employee and at pension funding levels.

In general, pension costs do not represent a near-term threat to municipal solvency, but in many cities, the burden of financing pension benefits is crowding out other spending priorities or adding to pressure for tax increases. A number of cities are spending more than 12 percent of total revenue on pension contributions.

Cities with the highest burdens typically have responsibility for both safety and non-safety employee pensions, while cities with relatively low burdens generally do not have a safety plan. The city with the highest pension contribution/revenue ratio is San Rafael, which spends more than one-sixth of its revenue on retirement fund contributions. The second is Costa Mesa. Both of them have a legacy of generous benefits. San Jose is the third, with fiscal year 2015 contributions of over $250 million accounting for almost 14 percent of total revenue.

The impacts of public employee pension costs vary widely across California cities. By offering new employees defined contribution plans or more modest defined benefit formulas, heavily burdened municipalities can gradually reduce the share of their budgets devoted to this legacy cost. However, it is very difficult to pare back generous pension benefit packages once they are granted. Sweetening benefits for existing employees is a recipe for trouble.

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The Burden of Pension Costs on California Municipalities