Future Pension Costs

This indicator measures the future financial burden of a city’s pension costs by comparing its projected annual required contributions to its pension plan(s) to its present level of annual revenue. The annual required contribution is the amount an employer needs to contribute to adequately fund its pension plan. Increasing pension costs may supplant a city’s other spending priorities and potentially cause it to curtail critical services, unless it is able to generate additional revenues to offset these increasing costs.

The chart shows the distribution of cities by risk designation for the future pension costs indicator.

We calculated the future pension costs indicator for cities participating in the California Public Employees’ Retirement System (CalPERS) using unaudited information provided by CalPERS on projected required contributions for fiscal year 2024–25 and governmentwide revenue from a city’s audited and publicly available financial statements. According to CalPERS, these contributions are based on projection techniques that differ slightly from those used in the annual actuarial valuations prepared for cities. Therefore, the projected required contributions used in this analysis are likely to differ somewhat from those provided in the actuarial valuation reports issued by CalPERS. An actuarial valuation is a type of appraisal of a pension fund’s assets versus liabilities, that uses investment, economic, and demographic assumptions to determine the funded status of a pension plan.

For cities that only have plans outside of CalPERS, such as those cities participating in county-administered plans, we allocated the same proportional share of points to this indicator as those cities earned for the pension obligations indicator. For example, if a city earned half of the available points for the pension obligations indicator, then that city also earned half of the available points for the future pension costs indicator.

For cities with both CalPERS and non-CalPERS plans, we determined which of the plans was larger based upon the size of the net pension liability. If the non-CalPERS plan was larger, we allocated the same proportional share of points to this indicator as those cities earned for the pension obligations indicator. If the CalPERS plan was larger, we used the same approach as if it was the city’s only plan. Therefore, we calculated the indicator for those cities participating in CalPERS or whose CalPERS plan was larger than an outside plan, as follows:

The future pension costs indicator estimates the future financial burden of each city’s pension costs by comparing projected required pension contributions for fiscal year 2024–25 to current revenues. We categorized 224 cities as high risk for this indicator because their projected required pension contributions for fiscal year 2024–25 are greater than or equal to 10 percent of their annual revenues.  In contrast, only 51 cities have current pension costs that equal or exceed 10 percent of their annual revenues. This demonstrates that the financial burden of pension costs on California’s cities may be significantly greater in the near future. We assigned points and corresponding risk designations for the future pension costs indicator based on the calculated percentages, as shown in the table below:

*Defined benefit pension plans provide income or other benefits to employees at or after separation from employment as defined by the benefit terms. These pension benefits may be expressed as a specific dollar amount or an amount that is based on one or more factors such as an employee’s age, years of service, and compensation.

We calculated the future pension costs indicator using data in the table below: