How Long Beach Got Into Its Fiscal Mess
From Issue: Volume XXI - Number 4
By Jeremy Matusow
The California Public Employees Retirement System (CalPERS) provides health, retirement and related financial programs as well as benefits to more than 1.6 million public employees, retirees and their families as well as more than 3,000 public employers. CalPERS is currently the largest retirement system in America. For over 60 years, the public employee retirement system had performed well.
James Johnson, who was elected to City Council on June 8, 2010, represents the Seventh District of Long Beach, having previously served as the Assistant City Auditor. One of his major objectives in office has been to reform public pensions in an effort to return them to the level of sustainability they enjoyed for decades. In a Feb. 6 presentation to the Rotary Club of Long Beach on the Queen Mary, Johnson addressed the topic of pensions and asked, “How do we get short term political institutions to make the right long-term decisions? We need to return to a sustainable system that treats employees fairly while making sure we have money to provide [city] services that are important.” To do that, he reasoned, we need to understand the problem.
CalPERS, in Johnson’s estimate, began to run into trouble in 1999. That year, the California Senate passed SB 400, which gave California Highway Patrol a 50 percent pension increase. The bill also allowed for cities to give similar pension increases to their employees, and the ability to give the increased benefits to employees retroactively, meaning that employees received additional retirement benefits for years already worked. The City of Long Beach, between 1999 and 2002, increased benefits for employees instead of increasing wages as was being requested by the employee groups. In addition, since the increases were retroactive, all prior years worked by those employees were also given an increase in benefit. “That’d be like your boss telling you that you did a great job in 1982 and he was going to pay you extra this year for your work 30 years ago,” says Johnson. The retroactive pension increases alone cost Long Beach $202 million.
In 2010, Johnson introduced an item to the City Council making it the City’s official position to prohibit retroactive increases and to request the State of California do the same. In 2012, the state legislature adopted this position by prohibiting retroactive pension increases.
There were also additional causes to the current pension problem. With a strong economy, cities stopped contributing any money toward their retirement obligations. This eventually created unfunded liability, meaning the value of the benefit exceeds the present value of funds available. “At the same time we were raising benefits, we stopped [setting aside money for] benefits at all. The idea was, ‘well, as long the stock market keeps returning at 15-20% per year, we’ll be fine’. Turns out, it didn’t work out that way. [The City] unfunded its system intentionally,” Johnson says. In addition, the stock market crash in 2008 created a perfect storm of increased benefits, unfunded pensions, and decimated returns. This combination of events led Long Beach to having roughly $1 billion in unfunded pension liabilities.
Johnson argues that the city has made progress and has stopped the bleeding. In addition to prohibiting retroactive increases, new agreements with employee groups have achieved pension reform, repealing the increases given prior, returning new employees to levels similar to those offered prior to 1999. Additionally, employees are now paying their full share of their pension costs, the maximum allowed by law. Prior to the new agreements, employees were roughly paying $1 for every $10 paid by the City.
However, there are still problems. Paying off the $1 billion liability is a large task, and even small changes in return in CalPERS investments can cause great turmoil to the city’s General Fund. Even a 0.25% change in the rate of return can cost the city $7-8 million each year.
According to Johnson, the question is: How do cities emerge from this pension crisis? He sees four options: “We could raise taxes to bring in more money,” said Johnson. “We could cut services: cut libraries, parks, police and fire. We could continue to reform the system. Or, we could declare bankruptcy.” Johnson doesn’t think bankruptcy is the solution for Long Beach, though other cities have pursued it and an improved economy could soften the blow. Counting on the economy is questionable, according to Johnson, “Hope is not really a strategy.”
“A lot of people blame the employees,” Johnson said. “I don’t. They’re the ones who do the work we need. At the time, 1999 through 2002, city employees were asking for a raise as part of contract negotiations. City management’s counteroffer was an increase in pension benefits, worth 100 times the pay increase.” Johnson feels that current city management and elected officials must solve the problem created by giving away benefits that employees weren’t even requesting.
James Johnson received a bachelor’s degree in economics from Harvard University and a law degree from U.C. Berkeley.