Richmond, California, a working-class city nestled in the eastern part of the San Francisco Bay, is a prime example of what happens—and what will happen—when governments’ pension crises finally come to a head.
Retirement costs for Richmond’s public workers are out of control. Pension-related debt and costs for retiree healthcare have jumped from $25 million to $44 million over the past 5 years and are on track to consume more than $70 million, or 41% of the general fund, by 2021. In other words, Richmond is standing at the edge of a cliff.
In an effort to pull itself back from the brink, Richmond is doing what experts predict a growing number of cash-strapped local governments will soon do. It has slashed its workforce by 20%, cut after-school programs and library services, and scrapped a clean-up plan aimed at eliminating trash in city streets. It has also reached an agreement with firefighters that includes salary freezes and requires them to contribute more toward their retirement healthcare. But at the end of the day, it may all be too little, too late.
Richmond is one of at least six distressed cities that are said to be at risk of bankruptcy right now.
“I don’t think there’s any chance we can avoid it,” former City Councilman Vinay Pimple told the L.A. Times.
According to former Democratic state lawmaker and Stanford Professor Joe Nation, every new dollar the city earns in revenue over the next 5 years will go directly toward retirement costs. And that means even the slightest economic downturn could bring this city to its knees.
Then, of course, there’s CalPERS’ recent decision to lower its projected investment forecast from 7.5% to 7% per year. It means Richmond, like other municipalities, will have to dole out more cash to cover pension benefits each year. Those contributions will come on top of some of the highest public employee salaries in the state already.
This isn’t just a story about Richmond. Pension costs are easily eating up 15% or more of city budgets across the state, and they have already played a significant role in three of the four municipal bankruptcies California has seen since 2008. According to CalPERS, there are currently 1.3 workers for every retiree. In the next 20 years or less, the worker-to-retiree ratio will be 0.6 to 1.
“It’s a huge mess,” said Richmond Mayor Tom Butt. “I don’t know how it’s going to get resolved. One of these days, it’s just going to come crashing down.”