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U.S. Cities Strangled by Cost of Ballooning Pensions

When Beverly Hills residents found out that many of their city’s 950 municipal and public safety employees were earning stunning salaries, 13 weeks of paid vacation, unlimited overtime and other tax-free retirement benefits, taxpayers were outraged and city officials rushed into closed-door sessions to figure out what to do.

These revelations, exposed through the efforts of the city’s hometown newspaper, The Beverly Hills Courier, unmasked an even deeper problem: many California cities, and likely other municipalities across the U.S., are being strangled by the cost of ballooning pension benefits they can no longer afford.

All this has taken place in the throes of a global recession that is clobbering federal, state and local tax revenues used to pay for public services and pensions, and against the backdrop of the nation’s private-sector workers, who are feeling the pain of reductions, or total losses of their pension funds. And, in many cases, their jobs.

“What we have now is a grab bag of incredible benefits for public employees that are totally detached from what’s been happening in the private sector, and it’s neither fair nor sustainable,” said John Mirisch, a first-term Beverly Hills council member elected in 2009. “When the city was rolling in dough, officials may have thought the salary and pension structure was sustainable, but certainly, it was not fair.”

A former statistician for the California Public Employee Retirement System (CalPERS), the state’s pension fund, warned that by 2014, local governments could be paying 50 percent of a police officer’s salary, 40 percent of a firefighter’s salary and 25 percent of an employee’s salary for their pensions, according to a recent report by the California League of Cities, a statewide advocacy group.

Many cities will face 25 percent or more increases in pension contribution costs in the next three years and those rates are likely to remain high for the next 10 years or more, the report said.

“It was a perfect storm that spun out of control,” Mirisch said, referring to what he calls the “go-go years” of 15 percent returns on investments.

The current pension structure in the state took shape when stock market investments swelled in the early 2000s, and with it, the coffers of California’s public pension system.

In fact, the California League’s report cited that earnings were so high, employers were given a “rate holiday” for a number of years and did not have to make employer contributions into their respective pension systems.

Public employee organizations saw the huge returns on pension fund investments and figured that the bounty should be shared by all, the report indicated. So, they proposed – and were granted – a series of retirement benefit formula increases, including lowering the retirement age from 55 to 50 for police and fire.

In Beverly Hills, city employees do not contribute to their own retirement pensions; the city pays everything with half of that contribution being largely tax-free, according to the Beverly Hills Pension Task Force headed by City Treasurer Elliot Finkel, as reported in the Courier. The Task Force presented its findings at a recent city council meeting.

When a city employee retires, he or she is guaranteed a fixed amount that increases every year. If CalPERS funding falls short, taxpayers make up the difference.

“When taxpayers are paying the bill, it’s embarrassing institutionally, [especially when] they see the economy of the state, the news reports and plights of people,” says Thomas White, chairman of the Beverly Hills Municipal League, a citizens’ group. “Where is the cost-cutting, the effort to control expenses on a local level, and the control of how our city is managed?”

With revenue streams growing modestly or, in some cases, not at all, local taxpayers are crying foul and city officials are scrambling to figure out how they will continue to pay for a system that does not ask city employees to pitch in.

“Nobody expected this,” says Dan Carrigg, the California League of Cities’ legislative director. “Tough times in the last three to four years have forced cities to deal with the cost side of their ledgers, including employee costs and pensions.”

Carrigg said that many labor groups, now at the bargaining table with city agencies across the state, are agreeing to lower-tier pension benefits for new employees, wage cuts, and even layoffs among public safety employees – concessions they wouldn’t have agreed to several years ago.

After the city of Beverly Hills was forced to provide the “total cost to the city” for each employee as a result of three California Public Records Act demands and the threat of litigation by the Courier, the published reports kicked off a public firestorm. The salary and compensation information were prepared by the City of Beverly Hills and published by the Courier without editing or modification, said Clifton Smith Jr., the paper’s publisher.

“Until that point, the city published staff compensation exclusively by “salary,” which represents only about half what the City of Beverly Hills pays per employee,” he said. Added to that amount are: guaranteed overtime (city employment agreements with unionized workers includes “guaranteed” overtime), overtime, administrative leave, paid vacation, sick time off (paid if not used), 100 percent retirement contributions (the employee pays nothing), full health care, “9/80” days (every other Monday or Friday off), and legal holidays, he said. Exempt employees get the same amount of sick leave and vacation time, but receive administrative leave instead of overtime pay.

With a population of 34,000, Beverly Hills has one employee for every 34 residents, the highest ratio in California.

Earlier this year, citing a budget deficit, the city council sought to make a number of cuts, including eliminating a quarter of its business marketing budget, instituting fee increases for the use of city parks by organized sports, removing special police coverage from local schools, and reducing or eliminating the city's longstanding two-hour free parking.

“Relative to Los Angeles and Culver City, our tax base is three to four times greater, but the city government has spent money carelessly, said the Municipal League’s chairman, Thomas White. “It’s now time to be looking at the excessive cost of government.”

In a recent closed session, the council began discussing sustainable compensation and pension benefit options with the Beverly Hills Fire Department Association, Police Officers Association and Police Management Association, all of which are in the process of bargaining with the city. Their contracts are up in October. Contracts for the rest of the city’s unions will expire in October 2013.

“The ultimate responsibility rests with the city council to make necessary changes,” Mirisch said. “Who retires at 50 today? Isn’t 70 the new 50? That rhetorical question is indicative of what is wrong with our [pension] system today.”