Most Richmond property owners don't realize they're paying a hidden annual tax to help fund city employees' pensions.
In addition to the standard base rate of 1 percent of assessed value of a property, owners pay more than 20 other items listed on their tax bills. One, misleadingly labeled "City of Richmond," is actually a levy solely to help fund the retirement plans for workers and retirees.
It's hefty. For every $100,000 of assessed value, it adds an additional $140. For a $300,000 home, that's $420 a year, just for pensions.
It's not new. It has appeared as a separate item on Richmond tax bills since 1978, when state voters restructured property taxes by passing Proposition 13. According to the League of California Cities, Richmond is one of only 25 cities statewide that impose a separate charge for pensions.
Oakland residents pay a similar tax. But there's a key difference: Oakland's tax is dedicated to paying off the debt of an old pension plan for now-retired police and firefighters, and it's set to expire by 2026. Richmond officials consider their tax permanent. This fiscal year, it will bring in about $13 million.
There is no indication on the tax bills where the money goes. Asked if he knew the purpose of the $632 charge on his bill, Contra Costa Supervisor John Gioia, a Richmond resident who understands public employee pensions well, had no idea. He had assumed it was for general city expenses.
I discovered the levy while preparing a recent analysis of East Bay tax bills, which showed Richmond property owners pay the highest rates in Contra Costa. While the West Contra Costa school district's exorbitant school bond costs are the biggest driver of Richmond tax bills, the pension charge adds another large levy.
Its origin stems from charter amendments approved by city voters in 1936 and 1938 that first established a retirement plan for firefighters and police, and then for the rest of the city's workers.
In those days, local government leaders were free to raise taxes to pay municipal expenses. Then, in 1978, state voters passed Proposition 13. It limited annual property taxes to 1 percent of the assessed value of a home, but it allowed for additional levies, called "overrides," for voter-approved debt obligations.
Richmond added an additional charge for the previously approved pensions. The charge fluctuated for the first seven years before leveling in the 1985-86 fiscal year at the rate of 0.14 percent of assessed property value.
The rationale for the override, supported by court rulings, is that by approving the pension plans back in the 1930s, voters were committing to pay the obligations that come with them. But that stretches the definition of debt.
Keep in mind that annual pension payments have two components. First, there's the ongoing amount calculated by actuaries that, when combined with investment earnings, theoretically should cover future pension payments. It's not debt, it's merely an obligation to be paid as part of workers' total compensation, just like salaries and other benefits.
And then there's what's commonly referred to, in the pension world, as the debt. It's the shortfall when forecast investment earnings or actuarial assumptions don't pan out.
Courts have ruled that the tax override could be applied not only to the pension debt but also to the ongoing cost. There is a caveat: That ongoing portion is limited to the price tag for the pension benefit levels that were in effect in 1978, not to the additional cost of benefit enhancements since then. Another twist: The tax can be used to pay for the pension costs of current and future employees, not just to those who were working in 1978.
Richmond currently uses the tax to cover its pension shortfall. But if that debt is paid off, the city could redirect the annual tax income to ongoing pension costs, says John H. Knox, an attorney who represents the city.
Thus, this is a permanent tax. And it's not just any tax, it's a pension tax, so it should be labeled as such on tax bills.