Contra Costa County's finances resemble those of a family that ran up astronomical credit card debts by spending beyond its means.
It's not a unique story. Local governments throughout the East Bay face similar problems. Contra Costa leaders deserve credit for starting to adjust their spending about five years ago, earlier than many other public agencies.
They began trimming employee salaries, reducing benefits and significantly cutting the size of the workforce. These were painful, but essential, cuts critical to bringing annual expenses in line with income. For next fiscal year, county officials feel confident they have a balanced budget that doesn't pull from reserves.
"It's important to recognize the significant progress that's been made," says Supervisor John Gioia of Richmond. "But walking forward we can still fall off a cliff if we have a misstep."
Moreover, while the budget will be balanced, it includes only minimal payments on the credit card debt. The liability, for employee pension and retiree health care benefits, totals a staggering $2.4 billion. That's roughly equal to five years of base salary for county workers. It works out to about $2,300 for each county resident.
So, while county officials feel understandably proud that they've balanced the budget, no one should pop Champagne corks. The county will be suffering a fiscal hangover for decades because of past excesses.
It's very important to
Rather, the retirement debt is akin to credit card obligations for the vacation and steak dinners consumed years ago. It's for labor that's already been provided.
Each year employees earn salaries and benefits, including additional future retirement benefits. They collect their paychecks at the time they work. Similarly, sufficient money should be set aside in investments to pay for those future retirement benefits.
Unfortunately, inadequate amounts were set aside, and the money that has been invested hasn't earned the projected returns. As a result, the county's retirement funds have fallen way behind. The shortage means future generations will pay the bill for past labor.
To their credit, county leaders have aggressively attacked one part of the debt, retirement health benefits. By capping how much the county will pay, they have reduced the county's unfunded liability by more than half, leaving a balance of about $850 million. Much of that savings could be undermined by legal action filed by current retirees who now have to pay more for their health benefits.
Meanwhile, unfunded pension liabilities have approximately doubled in the past five years, to more than $1.5 billion, due to investment losses and actuarial changes.
Some caveats: None of these numbers include the separately budgeted Contra Costa County Fire Protection District, which is in much worse financial shape.
Also, the unfunded liabilities are probably more than $2.4 billion. The separately run county retirement system uses unrealistically high assumptions about future returns on investment of pension funds. And the county uses a similarly optimistic forecast when calculating retiree health benefit liabilities.
In both cases, the optimistic predications lead to understatements of how much money should be set aside.
Going forward, county leaders have much more work to do. They should begin by using more reasonable assumptions about future investment returns. Let's acknowledge the full magnitude of the debt.
In addition, there is still room for savings through elimination of absurdly generous vacation and leave policies for current workers that not only drive up current labor costs but lead to larger pensions. Next, if revenues begin to increase, those extra funds should be diverted to paying down the debt.
Finally, there will be huge political pressure to scale back current plans to pay down the retiree health care liabilities. Supervisors must not cave. It's bad enough that we're making future generations pay for past transgressions. We must not increase their burden.