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.
Future Pension Costs by Risk Category
The chart shows the distribution of cities by risk designation for the future pension costs indicator.
Methodology
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:
Projected required pension contributions for
fiscal year 2024–25 divided by governmentwide revenue
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.
Raw Data
We calculated the future pension costs indicator using data in the table below: