| SAN FRANCISCO, July 17
SAN FRANCISCO, July 17 California's fortunes
have been on an upswing in recent months, rebounding from the
bruising effects of the recession and the housing market's
slide, but many of the Golden State's cities face uncertain
futures as they struggle with pension and healthcare costs.
Losses suffered by pension funds during the financial crisis
still must be made up, and spending on pensions is still rising
despite a recent wave of pension reforms.
Many cities, including some of the state's largest, worry
that austerity measures and higher taxes may not be enough.
At a recent meeting of California's big city mayors, "Almost
all of them are worried where pension costs are going, where
retiree health-care costs are going," said Chuck Reed, mayor of
San Jose, California's third largest city.
One of the biggest issues looming over cities, is rising
pension costs. California's $260 billion pension fund for public
employees recently approved raising employer contribution rates
by up to 50 percent to help fully fund its obligations in 30
If cities cannot shift more of the cost for funding pensions
onto current public employees, they will be forced to cut back
on services in order to pay their retirees, said Joe Nation, a
former state lawmaker who teaches public policy at Stanford
University. "Services people associate with a city will just
disappear," he said. "Parks will disappear, libraries will
Because pension benefits generally have a high level of
legal protection, cities are looking for other ways to trim
costs. One of those is retiree health benefits.
Stockton, which last year filed for bankruptcy, scrapped its
retiree health program. In Sacramento, the state's capital, City
Manager John Shirey said retiree health spending must be reined
in. "We've got to end that benefit for new employees," he said.
San Jose is a key example of the importance of pension
reforms. The city's revenue is improving, and San Jose may
restore some services after cutting 2,000 jobs over a decade,
Reed, the mayor, said. But the city's fiscal health could be
derailed if a lawsuit challenging a pension reform measure,
which lowers future pension benefits for current employees, that
was approved last year is successful.
The measure addressed the key issue of forcing current
workers to pick up a greater share of the bill for pensions,
meaning that officials across California will be watching
closely for the ruling on the lawsuit.
Without the $68 million in savings over four years expected
from the pension overhaul, "we'll go back in the mode where we
have to cut services to balance the budget," Reed said.
TAXES, LAYOFFS ... AND BANKRUPTCIES?
Many cities are also turning to tax hikes. Last November,
voters approved 48 of 60 city general tax measures and more may
be on the way. Stockton residents will vote in November on a
sales tax hike to help fund the city's exit from bankruptcy.
Another cost-cutting front has been outsourcing to private
companies, which can do many jobs at a lower cost than public
agencies. Costa Mesa, in Southern California, hired a private
company to run a jail.
Bill Zenoni, of Municipal Resource Group, an adviser to
local governments, expects cities to keep contractors busy. "In
years past that wasn't something that was considered seriously,"
There is another option for California's roughly 480 cities
if their budgets troubles are great - bankruptcy. But that is
truly a last resort because of bankruptcy's stigma, said Chris
McKenzie, executive director of the League of California Cities.
Bankruptcy results in increased borrowing costs on the
municipal debt market, and it is expensive in other ways. Both
Stockton and San Bernardino, which also filed for bankruptcy
last year, will spend millions of dollars in bankruptcy court,
and they face years of work to rebuild their reputations,
"The cascading effects just underscore why it's something to
be done only if it's necessary," he said. "City officials are
going to do their damnedest to avoid it all costs."
That doesn't mean that potential bankruptcy filings are
completely off the table. Moody's Investors Service, in a report
in May, said other cities could follow Stockton and San
Bernardino if those two force steep losses onto bondholders.
That could be "an inducement to other, similarly pressured
cities to consider bankruptcy," Moody's said.