NCPA - National Center for Policy Analysis

California Retirement Benefit Costs Causing Infrastructure Maintenance to Suffer

April 17, 2015

In recent years, California municipalities have seen retirement benefit costs grow at a rate above that of taxes, fees, and charges. "Crowd-out" is the term given to this condition by some public officials forced to deal with the resulting fiscal strain. Balanced budget requirements mandate that when costs grow more rapidly than revenues, something must give. All too often, this has meant reductions in core government services, most of which—police, fire, libraries, parks, and street and sidewalk maintenance—are delivered at the local level in California.

Consider several causes:

  • Crowd-out is a structural problem that asserts itself mainly during economic downturns and recoveries. In each of the last three recessions since the early 1990s, California local governments have seen annual pension contributions grow at a rate above tax revenues.
  • A survey of cost trends in own-source revenues and retirement benefits across 25 municipalities, including San Diego, San Jose, and San Francisco, found that all experienced crowd-out over the last decade.
  • Active employee health care benefit costs have also grown rapidly over the last decade, though in more recent years, the pressure has weakened. A survey of 14 localities' active employee health care spending found that the median increase during FY05-09 was 40 percent, but only 20 percent during FY09-14.

Here are a few effects:

  • Census Bureau data show that, between 2004 and 2012, growth in pension costs for California local governments outpaced spending on core services, such as police and fire, and quality-of-life services, such as parks and libraries.
  • Crowd-out's most tangible effect has been on personnel. In December 2014, local government staffing levels in California remained eight percent below where they were in December 2007. Private-sector job levels in California, by contrast, were 2.4 percent higher.
  • Job cuts have not been across the board. Local staffing data suggest that reductions in public-safety personnel have been less steep in recent years than for non-public-safety personnel. Bureau of Labor Statistics data show that local government education jobs have been reduced more than non-education jobs.

Source: Stephen D. Eide, "California Crowd-Out: How Rising Retirement Benefit Costs Threaten Municipal Services," Manhattan Institute, April 2015. 


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