TheBakersfieldCalifornian.com

Maybe the city was too generous. Maybe it was irresponsible. Maybe it was just unlucky.

Either way, Bakersfield owes its employees $205 million more than it has in savings. The city has 30 years to come up with the money, and the taxpayers of Bakersfield are on the hook.

Some fear it will become a drag on municipal finances — possibly in just a few years.

“It’s a big hole in the budget that keeps getting bigger,” said Councilman Zack Scrivner. “At the end of the day, this impacts our ability to provide services.”

The increase in annual pension payments has already meant millions of dollars have gone into employee benefits that could have gone to hire, well, more employees.

The city’s debts — “unfunded liabilities” in the parlance of municipal finance — are already a hot political issue. They’re fueling antipathy between employee unions and the Abernathy wing of the local Republican Party, which has three of the seven seats on the Bakersfield City Council and tried — but failed — last year to snag a fourth.

And changing the system is a huge issue in ongoing negotiations between the city and the police and firefighter unions.

“It’s a very big deal in cities and government agencies,” said Steven Frates, senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College.

It’s not just a matter of numbers. It’s about who pays, and who takes the risk.

And, according to some, it’s about who gets the credit.

Councilman David Couch said the issue isn’t impossible, so long as both sides negotiate with cool heads.

“This problem is solvable,” he said. “Both management and labor cannot take options off the table without understanding them all the way through.”

Scrivner and Councilman Ken Weir say the city simply cannot meet its pension obligations and keep providing services. They’re the only two members not there in 2001 when the council increased pensions.

But Derek Tisinger, president of the Bakersfield Firefighters Labor Organization and a captain in the Bakersfield Fire Department, thinks the pair want to cut pension benefits so that they can be heroes to a segment of the Republican Party that targets employee benefits.

“They want to take us backwards. It’s political, and they want to wear it as a badge of honor,” Tisinger said. “Most of the people jumping up and down about our pensions are so wealthy they don’t need pensions.”

How bad is it? The actuaries, according to Frates, want a city’s pension fund to be at least 90 percent funded. When it gets less than 80 percent, that’s a sign it’s really in bad shape.

Bakersfield’s pensions were well above that, at least according to the June 30, 2007, numbers, the last available. The police fund was 90 percent funded, and the fire and miscellaneous plans were 105 percent and 103 percent funded, respectively.

But that was before the market crash.

And that’s only the pension side. The city hasn’t kept up with its obligations for retiree medical care.

In the short term, the city’s payments are expected to worsen — the market collapse last fall took one-third of the value of the state-run pension plan with it, so the liability is expected to spike, and with it the city’s required annual payments.

In the long term, the city’s debt continues to grow, and eventually every dollar will come due.

RETIREMENT BENEFITS

Half the debt — $96 million — is for the city’s pension plans. The plan was set up so the city would never go into debt, but it hasn’t worked out that way.

When an employee starts work, his or her pension benefit is calculated, based on when the employee is expected to retire and die. Then the worker and city put money into the fund while the employee works, so the pension cash is available when the employee retires.

That annual contribution is called the “normal cost.”

But here’s reality:

The City Council sweetened the pensions in 2001, giving police and fire personnel 3-at-50: 3 percent of their salary per year worked, at a retirement age of 50. The city suddenly owed its employees more than it had been putting in, creating an unfunded liability.

That was part of a statewide trend that started with the California Highway Patrol and seemed affordable at the time, with the stock market riding high. A year later, employees in other departments got 3-at-60: the same benefit, but a later retirement age.

Sometimes actuaries are wrong about when employees retire and die, and have to adjust calculations.

The money in the fund is invested by CalPERS — the state Public Employees Retirement System — in the markets. Sometimes the market does so well it doesn’t look like the city will have to put any money in at all. Other times it drops so much it exacerbates the unfunded liability.

The result is that the city’s pension plans — one for police, one for the Fire Department, one for other employees — have a total debt of $96 million.

The money the city pays for that is in addition to the normal cost.

CalPERS took a beating in the market over the last six months, and that’s likely to be passed on to Bakersfield in a few years.

“It’s going to make the state budget look like a picnic,” said Mike Turnipseed, director of the Kern County Taxpayers Association.

Not necessarily, said CalPERS spokesman Edd Fong. It’s PERS’ condition on June 30 that matters — the state of the market this summer will determine the city’s payments for 2011-2012.

And even if the market — and thus PERS’ asset portfolio — doesn’t recover, the fund is so large that it can amortize market gains and losses over years. So the city’s rates would go up, but not in proportion to PERS’ losses.

But Ed Mendel, a reporter who follows PERS on his blog CalPensions.com,says the city’s bill could spike by a third that year, despite the fund’s “smoothing” policy.

The city could have planned for the bad times by saving money when times were good, said Steven Frates of the Rose Institute of State and Local Government at Claremont McKenna College. Some cities did that. Most, including Bakersfield, didn’t.

MEDICAL LIABILITIES

The other half of the debt is for medical benefits for retirees.

It’s a benefit that the city has already taken steps to cut — new employees haven’t gotten it for the past two years.

It costs about $4 million a year to pay for the benefit earned by employees each year, and the city now makes that payment. But it didn’t always sock away money for the future — it used to pay bills as they came in — allowing a $108 million future liability to build up.

Two years ago, the city put itself on a plan to pay that liability off over the next 30 years, writing a check for about $3.6 million each year, bringing the annual total for health care costs to $8.1 million this year.

But financial responsibility proved too expensive this year, and the City Council pulled $2.5 million out of that fund to plug holes in the city budget.

So contributions in future years, already slated to be more expensive, will cost even more.

THE SOLUTION

City Councilman Zack Scrivner doesn’t want to lower pension benefits negotiated for existing employees, saying “a deal’s a deal.”

But he would like to change it for new employees — raising the retirement age, lowering the benefit, or converting from a pension, with its guaranteed benefits for life, to a 401(k)-style plan. The 401(k) would mean the employees, not the taxpayers, bear the risk of market gyrations, Scrivner said.

Derek Tisinger, president of the Bakersfield Firefighters Labor Organization, and Bill Ware, president of the Bakersfield Police Officers Association, said the employees gave up sizable salary increases to get the pension benefits.

The city’s own figures show Bakersfield pays well less than comparable cities. It compares better when only valley cities are considered.

Stalling may work, in the long run. If the market recovers, that will take care of the unfunded liability. In the short term, the city’s rates in 2011-12 will be based on where the market is on June 30, and few people are predicting a market rally.

Here are the options:

Raise the retirement age to 55. The city brought this proposal to the police and firefighters during current negotiations. Scrivner said that would eventually save the city $1.2 million a year in today’s dollars — but the full savings wouldn’t be recognized until every current employee retires.

Both unions opposed it.

“What’s the average age of a gang member?” Ware said. “Can you imagine a 55-year-old man trying to wrestle an 18-year-old kid?”

Tisinger said firefighting is “a young man’s job” and disability retirements spike when firefighters have to work another five years.

Lower the benefit. The city did this with nonsafety employees, dropping the benefit from 3 percent per year to 2.7. In exchange, the city lowered the retirement age from 60 to 55.

And employees hired since 2006 — including firefighters — won’t get the same medical benefits when they retire as those hired before.

Ware said police officers wouldn’t stay at Bakersfield when they can get better deals elsewhere. Fresno faces that problem, he said.

Increase employee contributions. This is what the firefighters have offered. Currently, police and firefighters contribute to the pension system only in their first five years. Then the city takes over the contribution.

Under the firefighters’ proposal, all employees — those on the force now as well as future employees — would pay 1 percent of their salary into the fund. In the short term, it would be a 1 percent pay cut, or at least a reduction in their raise.

City Manager Alan Tandy said the move would, in the short term, save as much money as changing the benefit structure. But in the long term, the city would still face increasing costs.

Councilman David Couch, an investment manager, said he wants to see more hard numbers about the effects of various proposals.

“The bottom line is how much money comes out of the city’s general fund to pay for benefits, period,” he said.

But it’s encouraging that the firefighters brought the proposal forward, he said.

Convert to a 401(k)-like plan. Scrivner, Couch and fellow Councilman Ken Weir say the defined-contribution system, such as a 457(k) plan — the public-sector version of a 401(k) — is best. The risk of a market collapse would be borne by the employees, not the city and its taxpayers, Scrivner said.

But the private sector has moved to 401(k) plans largely because of the hassle of administrating pensions and because of federal laws that apply to businesses, but not to governments, said Edd Fong, a spokesman for PERS. And the professional money managers of a large pension system can produce better returns than individuals.

That resonates with Tisinger.

“Talk to anybody right now who has a 401(k) and ask if they would rather be in pensions,” Tisinger said. “I’m busy doing my job. I don’t have time to play with stocks and bonds all the time.”