Berkeley’s budget mess is proving difficult to solve, but easy to trace. The city, like 248 other local agencies, has gambled and so far lost on a hastily passed 2000 state law to boost employee retirement benefits on the promise that the state retirement fund had the cash reserves to cover their short term costs.
But when the stock market tanked, Berkeley—like many of its neighbors—has had pay up almost immediately. In the upcoming fiscal year, the combination of increased pension fund obligations and plummeting investment returns amounts to $6 million of the city’s $10 million general fund deficit.
Those figures only scratch the surface of Berkeley pension problems.
In fiscal year 2005, according to a report released in November by former city Budget Director Paul Navazio, $15 million of Berkeley’s $115 million general fund will pay for contributions to the California Public Employees System (PERS). Last year, the city spent $8 million on retirement benefits. The year before, when the state Legislature passed the bill that allowed Berkeley to improve the pension benefits, the city spent only $2.8 million.
A lot of that money is going to cover stock market losses, but a good chunk will pay for improved pension benefits to Berkeley’s growing ranks of retirees—72 left the city’s employment ranks last year alone—who threaten to strangle the city’s general fund for the foreseeable future.
Berkeley Police Lieutenant Sherrie Aldinger, who is retiring after 28 years on the job, will receive 84 percent of her highest annual salary from the city for the remainder of her life. The salary for a Berkeley Police Lieutenant ranges from $104,568 to $119,136.
“Basically they’ve given away the store,” said Ron Roach of the California Taxpayers Association, one of the few groups to oppose the bill—SB 2000—which passed nearly unanimously through the state legislature.
The legislation granted generous new benefits for state public employees, and in a last minute addition, he said, gave local agencies the option to negotiate the benefit into their union contracts.
For local police and firefighters the bill meant they could now bargain to retire at age 50 with a pension that equaled three percent times their years of service—75 percent of his or her highest yearly salary, for instance, for an officer who retires at age 50 after spending 25 years on the force.
Subsequently the state passed a law allowing police and firefighters to receive a pension as high as 90 percent of their highest annual salary.
Once the city grants the benefit, it becomes binding for all current officers.
The bill’s passage wasn’t a proud moment for the legislative process, said Steve Keil, legislative analyst with the California State Association of Counties. “They jammed it through without any debate,” he said.
Tom Branan, owner of the Public Retirement Journal, said the bill was the product of a mutual campaign by the unions who came forward with the idea and the PERS board which was selling the benefit.
“They were being overly optimistic,” he said. “The whole thing was based on a continuation of what everyone said was unprecedented market growth.”
After 10 years of flush investment returns, PERS told lawmakers and local officials that the fund had enough reserves to cover the more costly retirement formulas for several years. But just as former Gov. Gray Davis signed the legislation, the bottom fell out of the stock market. From June, 2000 through June, 2003 the value of the PERS fund dropped by $28 billion, leaving employers like Berkeley to make up the difference.
Despite the alarming stock market returns, Keil said that once a few localities negotiated the generous new benefits, “a panic started driving the rest of them to follow.”
The pressure was especially strong when it came to police contracts, Keil said. Cities typically spend about $100,000 training a new recruit before the recruit actually joins the force. With the state already offering the new benefits, Keil said, the highway patrol began luring away recent hires from local agencies rather than paying to train their own officers.
Berkeley faced a uniquely severe recruitment problem, said City Manager Phil Kamlarz. Not only did the city pay below the Bay Area median wage, but it required officers to have a two-year degree without added compensation, a distinction for which other localities offered a bonus.
“They told us you guys aren’t matching apples for apples,” he said.
So in 2001, when it was time for Berkeley to negotiate a new police contract and replace its aging force, the city granted officers the improved retirement formula on top of a hefty raise.
That contract has had a snowball effect. A year before, the city had granted firefighters the new pension benefits in return for giving up cost of living raises. The firefighters protested the new police contract and ended up with a 7.6 percent raise as part of a contract extension to achieve parity with the police. At the same time, the city negotiated a new contract with its non-public safety employees and improved their pension formula.
The combination of the improved pension benefits and poor investment returns have been staggering.
Since 2000, according to the Navazio report, the percentage of the personnel costs the city pays in pension benefits have soared from 2.5 percent to 20 percent for non-uniformed employees, 3.63 percent to 40 percent for police, and 3.63 percent to 25 percent for firefighters. The city subsequently used an option to refinance their police pension obligation which lowered its 2005 contribution rate to 33 percent.
Total benefits for police, including pension, social security, insurance, now amount to 58 percent of an officer’s salary.
Other cities have suffered the same dilemma. Last year, Lodi had to contribute 48 percent of firefighters’ pay and 42 percent of police officers’ pay to PERS and the city of Orange last year announced it was experiencing a 384 percent increase in pension costs for police and fire employees.
Darin Hall, a PERS spokesperson, said better news might be on the way. Since PERS factors in a two-year lag in calculating contribution rates, this year’s shortfall is tied to the poor performance of the stock market in 2001 and 2002. Hall said the fund reaped strong returns in 2003 which will help bring down future contribution rates.
But the burden of higher pension payouts to increasingly younger retirees could still leave Berkeley perpetually in the red, even if the market recovery continues.
According to a PERS Actuarial report provided to Berkeley, even if PERS earns a 8.25 percent return over the next six years, Berkeley PERS contributions to its firefighter’s pension would increase from 25 percent to 40 percent.
“This problem doesn’t completely go away,” said City Councilmember Gordon Wozniak, who has generated a report that tracks expense rate increases for the average Berkeley homeowner since 1993. If current trends continue, Wozniak contends that by 2009 the cost of employee salaries and PERS contributions will have increased by 87 percent, while the Consumer Price Index will have risen by 55 percent.
The new benefits are permanent for all active city workers, but the city does have the option of unilaterally imposing a reduced pension rate for new hires.
Gov. Arnold Schwarzenegger is lobbying to roll back the benefit for state workers, and Kamlarz said it remained an option for the city as well.
“That’s something we have to think about,” Wozniak said. “We have to look at this because it’s what’s driving up our costs.”