Pasadena's Budget Dilemma: How We Got Here

Pasadena’s coming budget woes were predictable, observers say. How did we get here, and what can be done?

Published : Monday, March 13, 2017 | 5:44 AM

The City of Pasadena is facing budget deficits starting in the coming 2017-2018 fiscal year. Put simply, the City is on track to spend more than it brings in for at least the next few years.

While definitive answers on how to resolve what may eventually become a serious situation are elusive, observers are quick to point to the primary reason for projected increased costs — the cost of pensions for City personnel.

Personnel costs played the central roles in the bankruptcy cases of two of California cities in the last ten years — San Bernardino and Stockton.

“The biggest obstacles are the ever-increasing costs of doing business,” said City Manager Steve Mermell, “Specifically, increased contributions required to properly fund CalPERS pension liabilities; the essentially flat, or in some cases, reduced revenues and the general difficulty in reducing services that the community has come to depend on.”

And the short answer to the problem?

Mermell explains, “Reduce expenses, increase revenues or some combination thereof. As we develop the operating budget and beyond we will explore the various options.”

City leaders have recently touted the number of new hotels which are currently being built in the City, whose tax revenues could prop up the City’s budget, but few are betting that that will be enough.

“There must be some way out of here,” Bob Dylan sang in an epic song. In the case of Pasadena’s impending budget deficits, however, there seems to be no relief or easy escape, Pasadena Now concluded after a number of interviews with government officials and academicians.

And, says Joe Nation, professor of the Practice of Public Policy and Director of Graduate Practicum at the Stanford Institute for Economic Policy Research, “You ain’t seen nothing yet. This is the tip of the iceberg. And very few people appreciate the magnitude of this pension problem, this public employee pension problem we have.”

Like so many observers, Nation places the blame for the budget mess squarely on employee pensions, a hefty part of any city’s budget, and especially Pasadena’s.

Mayor Terry Tornek said recently, “We’re going to have to take a good hard look on pensions, with regard to the current budget.”

Taking the long view, Nation explained, “In 1999 the legislature passed a bill called SB 400. SB 400 greatly increased benefits. It took someone who was a public safety employee, firefighter, a cop, a Highway Patrol officer, at the state level and it moved them to what is commonly called a 3% and 50 benefit plan.”

Spelled out, the bill means that when that state employee retires, he or she will earn 3% of their final year’s salary times their years of service.

As Nation explained, a firefighter, for example, who has been working for 32 years would be able to retire at 32 year times the three percent which translates to 96% of his or her final year’s salary. A firefighter making $100,000 a year will retire at $96,000 a year.”

Nation told Pasadena Now in a recent interview that California legislators argued at the time that the stock market was doing well, CALPERS was well-funded, and state workers had not received adequate raises during 16 years of Republican leadership.

Interestingly, Nation noted, CalPERS itself sponsored the bill.

Looking back, Nation asserted that “everyone thought it was a bad idea.”

Whether that hindsight is true or not, adding to the budget woes is the problem of employees’ deferred compensation, which, as Caltech Political Science Professor Rod Kiewiet explains, means, “We’ll hire people today, and rather than pay you all your benefits today, for what you’re doing today, we’ll pay you a portion of your promised benefits today and the rest years down the road.”

Kiewit continues: “We’ll promise them some really sweet retirement benefits in the future. And that’s attractive because we (the city) don’t have to pay for that stuff today. So us in the year 2017 are paying for benefits and money that was promised 20 to 30 years ago. And unfortunately those promises are pretty strong and that’s what virtually every city in California is facing, and that is that they have these ongoing and rapidly growing pension obligations. “

“Which they then meet by cutting back on current services and employees,” Kiewit added, “but of course, when you cut back on employees, you’ve got fewer employees paying into the retirement system, so it’s like a mini version of Social Security. You’ve got more and more retirees and fewer workers. The number of public retirees grows by about 4% a year.”
Pasadena will continue to keep long-made promises to employees at the same time that employees begin to retire and prepare to collect. As City services begin to diminish, residents and business could possibly relocate, cutting more revenue to the City.

Thus the damaging cycle continues.

Ed. Note: This is the first part of a two-part series on the City’s budget struggle. The second part is scheduled for publication on Friday, March 17.

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