Loss of sales taxes and exploding pension costs could force cities to cut personnel, slash services, eliminate programs
As nightclubs and bars close their doors, as foot traffic at shops and malls evaporates, and as stock market investments plummet, California cities are bracing for a fiscal double-whammy that could slam the services they provide to Joe Citizen — and they’re beseeching state legislators for help.
Sales and hotel bed taxes — the lifeblood for many cities — are expected to tank. And they’ll have to fork over more to recover losses in pension funds, even as they’re still scrambling to fill the pension hole left by the last recession.
One month ago, the value of the gargantuan California Public Employee Retirement System was $400 billion. Now its value has plunged to $352.9 billion. It’s a terrifying deja vu for local governments, which will be paying off the Great Recession’s 2008 devastation for at least the next decade.
“When the bear comes, it doesn’t tip-toe in. It’s ugly and it’s fast,” said Sen. John Moorlach, R-Costa Mesa, who has been warning about the instability of California’s public pension systems for nearly two decades.
“It’s going to be a mess. I don’t know how it plays out. It’s not going to be pretty.”
Revenues down, costs up
In Anaheim, home of Disneyland and California Adventure, the city reaped $247 million in sales and hotel bed taxes in 2019, covering nearly half of city spending, according to its last audited financial statement.
In Long Beach, home of the Aquarium of the Pacific and Queen Mary, officials are bracing for a hit that could total more than $100 million.
Sales and hotel taxes often provide 15 percent or more of city budgets, according to financial statements. And, tourist hub or not, millions of dollars are expected to suddenly disappear precisely as annual CalPERS contributions rise.
“One of the frightening items I am also looking at is the severe impact to our future revenue structure, mostly from the reduced sales tax and transit occupancy (hotel bed) tax which has already started,” Fullerton City Manager Ken Domer said in a memo to state legislators.
“For many of us, the reduction of consumer activity from banning large events, implementing social distancing, and consumers reducing activity overall in a way to wait this crisis out, is the card at the bottom of the card house that will bring down much of what we do.”
The amount of money cities must pay to cover employee pensions each year has skyrocketed since the Great Recession.
Anaheim paid $30.5 million to CalPERS to cover worker pensions in 2008. That soared to $88.1 million in 2019-20, according to CalPERS valuation reports.
In Long Beach during the same period, annual pension payments have more than tripled, from $42.3 million to $137.3 million. In San Bernardino, they grew from $12.6 million to $38.7 million. In Riverside, from $23.1 million to $73.5 million.
“We all know that CalPERS will continue to increase its costs to local governments and we will not see a downward direction for at least 12-16 years,” Domer wrote. “We also know that CalPERS’ rate of return assumption is unrealistic and that they need to reduce it from their current 7% to less, which would drastically increase our required unfunded liability pension costs.
“We do not know where the markets will head and we do not know where this crisis will take us, but what I do know is that I cannot afford the hit I fully expect CalPERS to pass on to local governments to overcome these losses. It will put many cities over the edge and force many more to slash services, programs, and personnel to include public safety.
“The point is, something must be done now.”
One of the easiest and quickest ways to offer relief is to pass emergency legislation eliminating cost-of-living adjustments for CalPERS retirees, Domer said.
COLAs can range from 1 to nearly 4 percent, depending on the agency and employee union agreements.
“We’re not saying give us a break on paying — just suspend the COLA,” Domer said. “I have twice as many retirees as I do active employees.”
Steven Maviglio, a spokesman for Californians for Retirement Security, a coalition of public labor unions, said suspending cost-of-living increases for retirees “would put the elderly, who are most at risk in this crisis, in a more precarious position.”
CalPERS couldn’t unilaterally suspend COLAs, officials said — that would have to be done by the Legislature. But the giant recognizes the impact contribution increases have on public agencies and, while it can’t estimate what returns will be during this exceptionally volatile market, “We have worked over the past few years to provide the public agencies additional tools to help them better understand their contributions and prepare for the future,” said a statement from spokeswoman Amy Morgan.
“CalPERS is a long-term investor, with an investment horizon that stretches out years and decades,” she said. “We are paying close attention to the major stock market declines. But one of our greatest strengths is our ability to endure short-term market turbulence and focus on the long term. We can use our strengths, which besides our long-term focus include our size, our branding as a global investor, and our liquidity profile, to our advantage in turbulent times.”
Stock market losses critical
Organizations that represent cities in Sacramento are concerned.
It’s hard to reasonably predict what the full effects on city budgets will be, but it’s “certainly fair” to note that a sustained stock market collapse could wreak havoc on CalPERS, said Bruce Channing, executive director of the Association of California Cities – Orange County.
Giving COLAs to retirees — while some cities struggle to make payroll, much less grant raises to current employees — seems unfair to some, Channing said. And CalPERS’ own studies have concluded that suspending COLAs would help its financial condition.
The association believes public pensions should be subject to reasonable modification, and hopes for legislative and judicial relief. “Cities are likely to need help from the governor and state Legislature to get through this next stretch of hard economic times,” Channing said.
The League of California Cities, meanwhile, has called for everyone to come together to work on solutions.
“We have been concerned about the unsustainable fiscal impact of growing pension costs for some time, and the recent market behavior highlights the need for continued collaboration,” league spokeswoman Kayla Woods said by email.
In Anaheim, spokesman Mike Lyster said, “There is no doubt we will see impacts from the temporary closure of theme parks, our convention center and from fewer people at our hotels. … we have reserves and flexibility within our budget to address situations such as this, and are doing that.”
Will Sacramento ‘do the right thing?’
In Sacramento, prospects seemed grim.
“The worst nightmare that’s been keeping me up at night is here now,” Moorlach said. “Half of me is panicking, the other half is putting on a firefighter outfit and starting to looking for answers. But I’m not sure the governor and Legislature have the wherewithal to do the right thing.”
That, in Moorlach’s opinion, means reducing the public liability for pensions. He was a co-author on Democratic Sen. Steve Glazer’s bill that would have allowed new hires to choose a 401(k)-type plan, with a guaranteed state pay-in, rather than CalPERS’ defined benefit plan, with a guaranteed state payout. The bill died in committee last year.
“Until the unions wake up and realize this is a mess, nothing is going to change,” Moorlach said.