|O.C. cities reeling from revenue loss, public safety costs|
|In The News|
|Monday, 22 August 2011 09:50|
Public safety pay, pensions pressuring city fathers: Spiraling public safety costs and plummeting revenues have pushed Orange County cities to the brink. Many can't pay their bills without raiding their reserves. Twenty-three Orange County cities outspent their general fund revenues during fiscal 2009-10, the most recent audited year.
By JON CASSIDY and TONY SAAVEDRA / THE ORANGE COUNTY REGISTER
Spiraling public safety costs and plummeting revenues have pushed Orange County cities to the brink. Many can't pay their bills without raiding their reserves, an analysis by the Orange County Register has found.
The Register also found that the unfunded portion of accrued pension and health care costs for Orange County and its cities now total $8.75 billion – boosted by the cost of retirement for police officers and firefighters.
Most cities do not have a plan in place to address that debt. Like a consumer who has pegged his credit card, they are paying only what's due immediately.
Declines in city revenue have pushed Costa Mesa to dismantle its two-helicopter air patrol and consider outsourcing half the jobs at City Hall. Stanton has locked the public out of its police station, hoping to reopen the office with volunteers. Anaheim cut $5 million from police and fire budgets, sidelining a fire engine and its crew.
The cuts to come could be worse, experts say.
"It has been a painful couple of years and I think it will be painful still," said Chapman University economist Esmael Adibi.
The Register looked at audited financial reports for each city as well as state pension documents and found:
"With (the benefits) that municipalities have agreed to, they've put themselves in a real squeeze," said Bob Burton, spokesman for the California Public Employees Retirement System, which administers the pensions for nearly all Orange County cities. "They negotiated benefit packages they are having a hard time paying for."
Few local officials recognize the depth of the pension trouble, the Register found.
CalPERS uses asset valuations based on historical averages to avoid overcharging agencies every time their stock values dip. But that method means cities typically wait years to take action after a market dip becomes a crash.
Last month, CalPERS reported its best investment returns in 14 years, but those gains barely put a dent in the debt owed by most cities.
Overall, the entire CalPERS system was underfunded by $115 billion at the close of the 2009 fiscal year. Stellar investment returns over the next two years reduced underfunding by about 10 percent. As of June 30, 2011, CalPERS' assets were back up to the 2008 pre-crash level, but in the interim, total liabilities grew by around $74 billion.
Between 2008 and 2010, the Register found, general fund revenues for Orange County cities fell by $258 million, a drop of 12 percent. Those revenues came mostly from sales and property taxes, which took a drubbing as land values fell and fewer people opened their wallets.
As the recession hit, many cities voted to use their reserves rather than make major cutbacks.
"You don't want to cut off your arm when you only need to cut off your finger," said Carol Jacobs, city manager in Stanton.
With a staff of 43, Stanton was already lean, outsourcing landscape maintenance, planning, police and fire services.
Then nine years of sales tax growth withered in one year. Annual property tax revenues fell by nearly $1 million.
So Stanton closed its police station to the public and dipped into its reserves the last two years, whittling its rainy day fund to $12 million. This fiscal year, in an attempt to rebuild the reserves, the city started making cutbacks, eliminating six staffers, including the city clerk.
Jacobs, the city manager, now doubles as the clerk.
Some cities have reserves large enough to cover another few years. Orange has $15 million in reserves; Irvine, $20 million.
Irvine has spent $48.2 million more than it collected in its General Fund over the last three audited years.
Other cities, like Garden Grove, have no cushion left. Its operating revenues dropped by $5.5 million between 2008 and 2010.
The city will have burned through $14 million in reserves by the end of this fiscal year.
City Manager Matt Fertal is concerned that his 159 officers aren't enough to adequately patrol his 18-square-mile city, population 170,000.
"We just don't have anymore left to cut," he said.
Fertal said the city is counting on auto sales and hotel taxes to come back this year. If not, more positions may need to get axed. And spending planners may have to get creative.
"Maybe we should start taxing medical marijuana,'' Fertal said, only half in jest.
Anaheim, with an operating budget of $226 million, has depleted its reserves from $45 million in 2007 to $11 million. Its general fund revenues fell by $33 million between 2008 and 2010. The city tapped most of its special funds to avoid widespread cutbacks.
Said Mayor Tom Tait, "If we don't do anything there's going to be layoffs, pretty massive layoffs."
PUBLIC SAFETY SPENDING
Fire and police officers are generally the most expensive employees, in terms of salary and pensions. So budgets that are heavily weighted with public safety expenses can be a danger sign. Vallejo declared bankruptcy in May 2008 when it was unable to pay $219 million in retirement benefits, largely for retired police and firefighters.
The Register found that Santa Ana spent $154 million out of its $200 million general fund in 2010 on police and fire alone. At the same time it was drawing down on its reserves to survive, leaving only about $5 million in its general fund reserves. Operating revenues were down $18.4 million over the previous two years.
Councilwoman Michele Martinez said the city needs to reevaluate its spending on police and fire, especially with its cash flow problems.
"We can't cripple all the other departments," said Martinez. "There are other services besides public safety."
In addition to its use of reserves, Santa Ana has cut about $80 million and 40 jobs over the last three years, Martinez said.
Westminster spent $35 million out of $46 million in its 2010 general fund on police and fire. Revenues in the general fund had fallen by $6.5 million over the previous two years.
Stanton spent $12 million out of a $16 million general fund on public safety – and the city does not have its own fire or police department.
Costa Mesa is a prime example of the high cost of public safety. Of the 85 city employees earning more than $200,000 total compensation in 2010, all but six were police or firefighters. The average firefighter in Costa Mesa earns $181,000.
Costa Mesa spends 64 percent of its general fund on police and fire.
Costa Mesa's general fund revenue fell $14 million between 2008 and 2010. The city is now trying to corral spending. The council is considering laying off up to 213 workers and outsourcing their jobs – a tactic that earned national attention when a city employee slated to receive a pink slip jumped to his death from City Hall.
Experts agree that the pension debt is the single largest financial problem threatening California cities.
CalPERS administers more than $200 billion set aside to pay the pensions of retired state and municipal workers. Each year, the retirement system sends every participating agency a bill to cover the cost of that year's benefits, plus a little more to pay down the long term liability.
Anaheim, for example, was charged $24 million just toward its unfunded liability of $694 million this year, even though the liability will increase by $50 million.
In Orange County, the pension debt appears concentrated in the older cities of the north, with the debt relatively low in the south.
The reasons are simple.
The northern cities are older, with a larger number of retirees. They also have their own fire and police departments, each with large budgets and vocal unions.
Of the 10 cities in the county that have the most pension debt per capita, nine are in north Orange County. The tenth – Laguna Beach – is structured on the north county model, with its own police and fire departments.
In terms of sheer debt, Anaheim owes the most for pensions and health care, with $787 million, followed by Santa Ana, $626 million, and Huntington Beach, $381 million.
The southern cities are generally more affluent – because property values are higher near the beach. They often contract with outside agencies for their public safety and can more easily tailor their spending to their finances. They don't have to carry the cost of such things as police training and helicopter patrols. However, there is a tradeoff to the cost savings. They generally have fewer officers than cities with their own departments and, consequently, citizens wait longer for police to arrive.
Newport Beach City Manager Dave Kiff pointed out that it is hard to determine what contract cities pay for police and fire pensions, since those costs are not itemized in the bills paid by cities.
The differences in the older cities to the north and younger cities to the south can be seen in Laguna Niguel and Anaheim. Laguna Niguel has 63,000 residents but only 59 full-time employees, who generally concentrate on providing recreational services and well-paved streets. Virtually everything else is outsourced at a savings.
One-third of the 14.7-square-mile city is land reserved for open space.
With that recipe, Laguna Niguel has compiled $40 million in reserves and only $6.7 million in pension debt. It has only 17 retirees.
Now take Anaheim, a bustling municipal force with its own water and power utilities and one of the largest police departments in Orange County. It also has 2,154 retirees to support.
Paying off its pension debt over 30 years would cost Anaheim $109 million annually. It currently sends PERS around $70 million a year. That's up from $10 million in 2003.
Municipalities may pay down all or part of their unfunded liabilities at any time in order to reduce money spent on interest.
For instance, in 2008, Seal Beach and Buena Park refinanced part of their unfunded liability. They took out 10-year loans to pay CalPERS up front. Seal Beach's $10.9 million in pension obligation bonds cost around 5.5 percent annually, while Buena Park's $16.8 million bank loan costs 4.16 percent. Both are cheaper than the 7.75 percent CalPERS charges.
In order to address the pension debt, municipalities are freezing wages and negotiating new union contracts that have current employees paying more toward retirement. Cities also are striking deals calling for new employees to receive less generous pensions.
Jennifer Muir, spokesperson for the Orange County Employees Association, noted that such changes have saved California $600 million in pension costs. Overall, California public employees' contributions to their pensions have climbed from 5 percent to as much as 11 percent, Muir said.
Police officers and firefighters, with pensions that allow them to retire at age 50 with 90 percent of their salaries, have received the lion's share of the attention for the growing liabilities.
"They've been overpaid. When times are good, California makes unsustainable decisions that we don't see until times are bad," said Rod Kiewiet, a professor at the California Institute of Technology.
With the state taking local money to spackle its own budget, cities will be left with little alternatives but to cut more services or seek higher taxes for the coming pension storm, Kiewiet said.
Some cities are consolidating services, such as sharing fire administration, in hopes of saving money.
Others, such as Costa Mesa and Newport Beach, are outsourcing.
Experts said outsourcing can be cheaper in lower skilled jobs, like tree-trimming and building maintenance. For one thing, private employers don't have to depend on voters – often their own workers – to stay in office. And private competition can drive down the cost of a job.
"Generally speaking, private sector organizations are more efficient," said Steven Frates, a professor at Pepperdine University.
But outsourcing may cost more when it comes to hiring a private lawyer or a consultant, whose skills are more specialized, experts said.
Private fire companies, which already contract with the U.S. military overseas, are attempting to break into municipal services.
In April, the Bay area city of San Carlos considered privatizing its fire department, with Wackenhut bidding $4 million on a job that was costing the city $7 million.
The public uproar, however, prompted the city to partner with a neighboring municipality at $6 million.
Since 9/11, more and more communities have looked at replacing or augmenting their police services with private squads – a strategy that picked up momentum with the recession. However, there have been problems.
The Wall Street Journal reported that Oakland recently voted to outsource part of its police patrol to International Services Inc. However, the city retracted the offer after two of the company's vice presidents were accused by Los Angeles prosecutors of defrauding the state out of more than $9 million in workers' compensation.
Bruce L. Benson, author of "To Serve and Protect: Privatization and Community in Criminal Justice," said corruption can happen in both public and private police agencies. However, Benson said, it's easier to make the private sector pay for its mistakes.
He contends that cities uncomfortable with outsourcing their entire departments can outsource for specific services, such as parking patrols.
"You end up lowering costs," Benson said. "The biggest fact in a lot of cities is public police are unionized and private are not, so you don't have the big pension cost and the threat of strike. And a big advantage of contracting out, if you don't like their services, you get another one."
Benson, an economist at Florida State University, added: "If you get an officer who's a bully, the private firm won't get much business and will be liable in court. Just try to collect from a public police officer who accidentally shoots someone."