Why are so many sales tax hikes on city ballots Nov. 5?

Cities all over California want more money on Nov. 5.

Ballots feature a half-penny sales tax hike here, a quarter-cent sales tax hike there — which, over time, would steer billions more into city coffers.

Why do cities need this money? The real reasons are alluded to, but not plainly spoken — sort of like whispering “He Who Cannot Be Named” instead of shouting “Voldemort!” – if you’ll forgive the Harry Potter reference.

The official ballot riff is something like this: “to maintain quality of life/ essential services, such as 911 response … preventing crime including property crimes … fire protection/prevention … retaining/attracting police officers,” and similar, unassailable functions of government virtue.

In O.C., you’ll find variations on this theme on the ballot in cities like Orange, Buena Park, La Habra and Seal Beach, which are asking voters to approve new sales tax hikes or reauthorize old ones. In Los Angeles County, Artesia, Hermosa Beach, Manhattan Beach, Azusa, Downey, Glendora, Irwindale and El Monte are among those asking the same.

Sales tax isn’t the only coping mechanism, though: Many other cities will be voting on increased parcel taxes (San Marino) or hotel taxes (Mission Viejo), while still others wait on the sidelines, eyeing yet-to-come revenue-generating measures.

It’s certainly true that the cost of most everything has gone up as of late. But at least part of what’s putting the hurt on city budgets is of the cities’ own doing: the sweetened pension promises they bestowed upon public workers, especially those in emergency services like police and firefighting, decades ago, as well as the salary hikes they’ve given since.

These are devouring ever-larger slices of municipal budgets, which leaves less money for services for you, Jo Citizen.

Going up

Over the past decade, public agencies have seen their annual CalPERS bills nearly triple ($8.8 billion in 2014 to $24.2 billion last year), while public workers have kicked an extra 50% ($3.8 billion in 2014 to $5.7 billion last year).

The pain is real. What some cities pump into the pension system just to catch up on outstanding pension debt — which is in addition to what they must pay for current costs — has more than doubled in just a few years, according to data from the California Public Employees’ Retirement System. (See the specifics of what your agency in CalPERS has to pay here.)

It requires a bit of effort to suss out exactly what cities pay in actual, real, total dollars per year, because current costs are often expressed as a percentage of payroll rather than as an actual number (while those catch-up payments are called out specifically). I suppose the powers-that-be think it hurts less that way.

But dig deep enough into the documentation and you’ll find, for example, that Fullerton’s total CalPERS bill is slated to be $22.4 million this year — almost as much as payroll itself! — and is expected to rise to $24 million next year, more than the city’s annual payroll. Ouch.

It’s much the same all over the state. And the pay raises many agencies have bestowed upon workers over the years push pension bills higher as well. Consider:

• California cities had 311,404 worker positions in 2014, and paid $25.1 billion in salary and benefits, according to data from the state controller.

• By 2023, California’s population had grown only 1%, but these cities reported 10.5% more positions and spent 48.4% more on them.

• Over that decade, inflation rose a more modest 32%, so it can’t all be chalked up to that.

(See your city’s reported positions, and what it paid for wages and perks, here. This data is reported to the state controller by the cities themselves.)

Here’s a surprise: Many cities with tax hikes on the ballot — including Buena Park, La Habra and Manhattan Beach — have seen their CalPERS bills plummet quite dramatically.

This is not miracle or magic. It’s a gamble that moves the debt from one municipal pocket to another.

Gaming the spread

These cities are hedging their bets by issuing POBs, or pension obligation bonds — essentially borrowing money to pay down pension debts at a low interest rate, and investing that money hoping it’ll earn a higher interest rate.

They’ll be repaying those bonds for many years, to the tune of some $6.6 million a year in Buena Park, nearly $5 million a year in La Habra and $5.5 million a year in Manhattan Beach, according to audit documents.

This approach is poo-pooed by the Government Finance Officers Association, which says state and local governments should not issue pension obligation bonds. “The invested POB proceeds might fail to earn more than the interest rate owed over the term of the bonds, leading to increased overall liabilities for the government,” it says.

Still, with interest rates at historic lows, California governments leaped with gusto into the POB pool. Cities, counties and special districts issued about $7 billion in pension obligation bonds in 2020 and 2021, the largest such issues in many years, according to a recent review by Pew.

“In effect, the governments engaging in this strategy have collectively made an outsize bet on the financial markets to help bring down pension costs,” it said.

It’s not just cities with sales tax hikes on the ballot.

Some 88 different public agencies in California — including the cities of Bellflower, Buena Park, Carson, Commerce, Corona, Covina, Downey, El Monte, El Segundo, Gardena, Hawthorne, Huntington Beach, Inglewood, La Habra, La Verne, Manhattan Beach, Maywood, Montclair, Montebello, Monterey Park, Ontario, Orange, Paramount, Pasadena, Pomona, Riverside, San Bernardino, San Fernando, Santa Ana and Whittier; the counties of Riverside and Santa Cruz; and various sewer, fire, library, mosquito and recreation districts — have issued POBs since 2019 hoping to tame pension debt, according to data from the Municipal Securities Rulemaking Board.

(See if your local agencies are among those issuing POBs here.)

Over the long term, these borrowings can generate significant savings — so long as investment earnings exceed borrowing costs over the life of the bond. “But such savings are by no means guaranteed,” Pew noted.

Calculations

In 2021, Buena Park issued $96.4 million in pension obligation bonds “bearing one of the lowest interest rates in California to refund all of the City’s pension obligations owed to CalPERS,” its annual audit says.

It will repay $118.8 million in total when they’re retired in 2044, or about $6.7 million a year.

“It is anticipated that refinancing the pension obligation will significantly reduce the City’s pension costs in the form of future annual debt service payments year over year,” the audit said. “Retirement benefits remain the largest liability for most municipalities, but it is important to note that the payment of this liability extends over decades.”

When the bonds were issued, Buena Park’s debt service payments on unfunded pension liabilities totaled $177 million through 2046 (at a discount, or interest, rate of 7%), said City Manager Aaron France.

“Due to historically low interest rates, the city was able to issue the POBs at a true interest cost of 2.36%,” he said. “Over the same period, the city is projected to save $47 million, in net present value savings, for its UAL debt service payments.”

Buena Park Finance Director Sung Hyun said that, since the city used the POB proceeds to “pay off” its unfunded liabilities with CalPERS, “as long as the discount rate at CalPERS doesn’t fall below 2.36%, this investment risk is minimized.”

The story is much the same in nearby La Habra.

On Jan. 26, 2022, La Habra issued $72.4 million in pension obligation bonds to cover its unfunded liabilities to CalPERS. It will repay $96.5 million when the bonds are retired in 2042. That amounts to some $4.8 million a year for the next few years, according to its audit.

And in Orange, too.

On March 3, 2021, Orange issued $286.5 million in POBs. Interest ranges from 0.291% to 2.82%, and is payable in annual installments of $7.7 million to $12.5 million, scheduled to mature in 2044, according to its audit. 

Fingers crossed!

Grandkids will pay

Critics of these moves often raise the generational equity issue — how unfair it is to make tomorrow’s grandchildren pay for our overspending today (and, well, yesterday).

That’s a common consideration of all long-term debt — will future generations benefit? With the likes of bridges, roads, schools, etc., one could make a good argument that they will. Here, though, not so much.

To refresh your memory about how we got here, it goes back to the super-generous pension formulas approved by lawmakers at every level of California government in the halcyon days after 1999.

Remember? The markets were booming. Retirement systems were “super-funded.” Actuaries said governments could boost retirement benefits for workers — and even take a timeout on contributing to pension systems! — and it would cost hardly anything.

They were wrong, of course. But pension promises are like radioactivity. Our nerdy high school chemistry teacher (upon whom we had a terrific crush), made us chant (in unison) “Nothing, nothing, nothing, never, ever, ever, changes half-life.” He was talking about radioactivity but if you replace “half-life” with “pension benefits for public workers,” you’ll understand the legal conclusions of California courts. Nothing nothing nothing, never ever ever, can change promised retirement benefits once they’ve been granted.

So here we are. We have to pay somehow.

Orange’s Measure Z would raise some $19 million a year. Buena Park’s Measure R would raise $20 million a year. La Habra’s Measure V, $15.6 million a year. Seal Beach’s Measure GG, $3 million a year.

More modest pension formulas, pushed through in 2013 by then-Gov. Jerry Brown, promise to shrink the burden — eventually. Until then, folks in cities all over California may be paying more at the cash register.

VOLDEMORT! There. We said it.