California’s local governments face a crisis of structural deficits. In cities and school districts across the state, spending growth outpaces revenue, forcing tax hikes and reduced services—from shortened library hours to fewer programs for students to slimmer public-safety workforces.
These reductions affect all residents, but especially those most in need of public services. One might expect that this fact would prompt cries for reform in a deeply liberal state. But they don’t, in part because this is a deeply liberal state. California’s blue-state brand of state and local politics, in which public-sector unions play an inordinately powerful role, creates a difficult bind for local officials.
To tackle the problem is to enter a political minefield. Growth in compensation spending—especially retirement costs, including pensions and retiree health care—is the main driver of the deficits. Yet public-sector unions have strong vested interests in maintaining those costs, and they’re among the most active groups in California local politics. They provide key endorsements and campaign funds in local elections. They sit opposite governing officials at the bargaining table, negotiating compensation and other work matters. And they can show up in force to city council and school board meetings to protect their interests.
California’s local governing boards, then, are hemmed in on all sides. Most of the politically expedient ways of dealing with the union pressure and budget dilemmas, such as offering more generous retirement benefits, are no longer feasible. Yet local officials who talk frankly about these issues and take hard votes face swift backlash and endanger their own political futures. So local governing boards continue to try to weave and dodge, even when it means barreling toward insolvency. This fiscal-political mix is toxic enough to raise questions about whether some local governments can continue to govern.
It’s only a small exaggeration to say that local government is local-government employees. Local governments are responsible for such vital services as public safety, education, libraries, parks, water, sewers, and trash collection. Providing these services means compensating employees for doing this important work.
Employee compensation thus occupies a large share of the typical local-government budget. In the working-class city of Richmond, for example, roughly 74 percent of the city’s expenditures in 2021–22 went to salaries, wages, and benefits. Further north, in Humboldt County, 72 percent of the expenditures of tiny Loleta Union Elementary School District went to employee compensation that same year.
Further, large shares of local-government employees work in occupations traditionally deemed essential. The police and fire departments account for 62 percent of general-fund expenses in Torrance, a city of about 150,000 in Los Angeles County. In El Cerrito, a small, fiscally troubled city in the Bay Area, over half the city’s expenditures go to police- and fire-department salaries and benefits. In the average California school district, 43 percent of the employees are teachers.
California local governments also have limited options for raising more revenue. Property taxes are tightly constrained by Proposition 13. Increases to other local taxes require voter approval, sometimes by supermajorities. Cities’ and counties’ sales- and use-tax rates are also capped by the state, with many already at the maximum. The difficulty of increasing revenue thus forces most local governments to contemplate spending cuts. For many, reducing spending means not only eliminating popular programs but also trimming basic services.
Joe Lopez, city manager of Modesto, recently said that his Central Valley city of roughly 218,000 had reached a critical point after years of balancing its budget by reducing positions, relying on one-time funds, and deferring maintenance. Threatened with more drastic service cuts, city voters approved a 1 percent sales-tax increase last November, which promises to add $39 million to the city’s $171.4 million general fund. That helps, but it won’t cover the city’s needs. At 210 officers, Modesto’s police department has 77 fewer cops today than it did before the Great Recession, and the city reports that its 76 parks require a combined $74 million in deferred maintenance.
Eighty miles west, in Oakland, new mayor Sheng Thao campaigned on a promise of a hiring blitz but now leads a city with a general-fund deficit of more than $200 million over the next two years. Documenting the city’s needs, from 911 dispatchers to homelessness services, Ed Gerber, former chairman of the city’s budget advisory commission, describes the situation as “a terrible conundrum” and notes that making “priority decisions in a world of necessary services and inadequate resources . . . will be incredibly difficult.”
Why have public-employee costs risen more than local-government revenues? Some observers blame the rising cost of living, or events such as the Great Recession and the pandemic. But a full explanation requires understanding the dynamics of local politics in California—and how governing officials’ old ways of handling ordinary political pressures helped generate the present quandary.
The influence of public-employee unions is paramount in local budget politics. Like many other states, California passed laws in the 1960s and 1970s that required state and local government officials to engage in collective bargaining with their employees, should they form unions. Most did, and public-sector union membership in the state grew rapidly. Today, Golden State unions of teachers, police officers, firefighters, and other workers are well organized and highly engaged in state and local politics. In city and school board elections, they endorse candidates, mobilize supporters, contribute money to politicians, and campaign for or against ballot measures. In virtually every local government throughout the state, they play a direct role in negotiating the terms of their members’ employment, including compensation. Local officials are legally required to come to agreements with them every few years, and for some groups of employees, impasses can lead to strikes—which, for the public, mean costly and unpopular breaks in service provision.
Local candidates and officials are loath to upset public unions. Many were helped into their positions with union support or recruited by unions outright. Not being accommodating can mean facing a union-backed challenger in the next election. Union-endorsed candidates in California have high electoral success rates.
But governing is different from campaigning. During campaigns, candidates can promise more staff, better pay, and better services. Once they’re governing, however, they must manage a budget, keep spending in line with revenue, and ensure that services work. This pulls them in different directions. The people who ensure that services keep humming—the employees—push for staffing and pay boosts, but it’s precisely these employee costs that constitute the bulk of local-government spending. Large or frequent expansions in staffing and compensation can threaten a government’s balance sheet.
For years, many local officials solved this puzzle by raising public-employee compensation in the form of fringe benefits. Since salary increases show up on the budget right away, it seemed cheaper and easier to give local employees generous health benefits. Fast-forward a few decades: health insurance is anything but cheap, but unions resist rolling back the benefits that members have long enjoyed. Consider Sacramento City Unified School District (SCUSD). Decades ago, the district committed to paying 100 percent of the health-insurance premiums for teachers, most other government employees, and their dependents for life, including in retirement (when they’d be eligible for Medicare). In the 1990s, the district also put a specific health-insurance plan into the contract, sometimes referred to as a Cadillac plan because of its price tag. These health-care commitments later became a massive challenge for the district’s budget. By one estimate, SCUSD spends 22 percent of its budget on non-pension employee benefits; most of that is health care.
A similar move contributed to Stockton’s bankruptcy in 2012. There, in 1996, city officials agreed to pay the full cost of firefighters’ health care in retirement, believing that doing so would be easier and less expensive than granting the salary increase that the union was requesting. When other city employees wanted that same provision, they got it. Decisions like this greased the wheels for negotiations, helped the city and its unions reach agreements, boosted police recruitment and retention—and left the city with a $417 million liability.
This pattern is visible beyond California. In a study that I conducted with political scientist Terry Moe, we examined more than 1,000 cities across the country between 1992 and 2010, comparing those that required collective bargaining for police officers and firefighters with those that did not. We found that cities with collective bargaining spent 4 percent to 9 percent more per capita on those employees’ salaries (including supplemental forms of pay, such as overtime), but they spent 17 percent to 25 percent more per capita on health-, hospital-, disability-, and life-insurance benefits.
Pensions are another whopper for just about every California local government. As in other states, California local-government workers are eligible for defined-benefit pensions. Most local governments participate in the major state-run pension funds, CalPERS and CalSTRS, though some local governments run their own. The funding for the benefits comes from employer and employee contributions, along with investment income: the funds invest these contributions, and the resulting pot of money pays benefits to retirees. Yet a series of bad decisions over the years has resulted in a catastrophic scenario for California’s local governments.
First, in 1999, state legislation let local governments expand pension benefits. As the economy boomed and pension-fund investments thrived, the legislature created an option for local governments to improve the benefit structure for public-safety employees, to the tune of 3 percent of their final average salaries at a minimum retirement age of 50. Most local governments, eager to please employees, took the option. But while good economic times come and go, public pensions are forever. The so-called California Rule stipulates that public-pension benefits cannot be reduced over the course of a worker’s employment without equivalent compensation, even for years that the employee has not yet worked. Once granted, those benefits were locked in.
Second, the state and its local governments have consistently contributed too little to their pension funds, so that today, CalPERS, CalSTRS, and many locally administered pension funds are short of the funds necessary to pay the benefits earned by employees. This, too, is a story deeply rooted in politics. Though the governing boards of the state’s major pension funds have a fiduciary duty to the trust, they also have political incentives to keep contributions low. After all, the boards comprise political appointees, state officials, and employee and retiree representatives (often with strong union ties). By disguising the cost of public pensions and keeping contributions low—usually by assuming that pension-fund investments will perform extremely well—they not only maintain the illusion that the benefits are affordable but also free up local government money for such purposes as salaries, health benefits, and more staff. This shortsighted policymaking is having devastating effects on government budgets.
In 2017, with some board members finally acknowledging the underfunding problem, CalPERS took a small step toward addressing the shortfall by lowering its expected rate-of-return assumption from 7.5 percent to 7 percent. The CalSTRS board did the same a month later. Many experts said that a larger change was needed. But even this minor alteration triggered big increases in participating governments’ required contributions.
Funding ratios and investment-return assumptions can seem abstract, but the consequences for local governments are real and painful. In SCUSD, in 2013–14, the district paid $457 per student in pension contributions. By 2019–20, it was paying $1,200. Modesto’s pension costs have doubled since 2011, going from $20 million per year to $40 million. Cities like Anaheim, West Covina, and Torrance are typical, with pension-contribution hikes of 44 percent, 41 percent, and 40 percent, respectively, over the period from 2019 to 2022. On pension underfunding and rising contributions, former Richmond mayor Tom Butt told the Los Angeles Times, “It’s a huge mess. . . . I don’t know how it’s all going to get resolved. One of these days, it’s just going to come crashing down.”
Local officials must navigate the same maze that their predecessors did, but most of the old exits, such as sweetening pensions and health-care benefits, are closed off. Current escape hatches tend to include denial, debt, and patching structural budget holes with one-time funds.
Budget denialism is widespread, especially when it comes to pensions. “The truth is that there are cities all over the state that just aren’t owning up to all their problems,” San Bernardino’s former city manager, Mark Scott, told the Los Angeles Times. Local officials who do take steps to cut spending risk accusations of fabricating a crisis, as in SCUSD, where a labor representative called the district’s situation a “phony budget crisis.”
The debt strategy takes the form of pension-obligation bonds. A government issues bonds, uses the revenue to pay its pension contributions, and then hopes that the return on investment of those funds will exceed the interest rates that it’s paying on the bonds. At best, this gambit is risky; at worst, it’s irresponsible. It has backfired in spectacular fashion in several cities, including Stockton and Oakland. Political scientist Rod Kiewiet calls it “one of the most reckless of all budgetary ploys available.” Yet many California local governments have taken this route. Examining the pension arrangements of 12 of California’s largest county governments, I found ten with a history of issuing pension-obligation bonds.
Finally, of late, local governments have also relied on federal Covid-relief funds to help plug deficits. In Torrance, for example, in addition to issuing bonds in 2020 to pay down its CalPERS obligations, the city used $12 million from the American Rescue Plan Act to help fill the $16.8 million deficit in its general-fund operating budget in 2021–22.
Avoiding such approaches and actually doing something to address growth in employee-compensation costs is harder. Pension-contribution hikes are mostly out of local officials’ control. Changes to salaries and health care must be negotiated with the employee unions and are major points of contention. Usually, disagreements between local officials and unions revolve around whether salaries are being boosted enough. Local officials will often agree to salary increases in order to avoid strikes and other unpleasantries, even when they don’t know where the extra money will come from.
In 2017, for instance, SCUSD barely dodged a teachers’ strike by agreeing to salary increases and other changes funded via deficit spending, forcing $15.6 million in spending cuts elsewhere. Five years later, it faced a strike anyway: its teachers and classified employees walked out for eight days over concerns about wages, understaffing, and benefits, including the future of the district’s Cadillac health-care plan. Among the teachers’ union arguments was that the district could afford its pay demands, thanks to the influx of federal Covid-relief funding. The district’s response: one-time funds are just that, whereas salary raises will persist. Regardless, the eventual resolution to the dispute involved compensation increases that added $16.1 million in ongoing costs.
True, unions’ claims of lower staffing levels are not imagined. That’s because with retirement costs rising and salaries growing, staffing reductions have been one of the only viable levers available to governing officials for controlling employment costs. Moreover, when reductions are done incrementally and in a way that doesn’t directly affect current employees—keeping positions vacant, for example, or eliminating frozen positions—they can, for a time, avoid the ire of unions and residents.
“Staffing reductions have been one of the only viable levers available for controlling employment costs.”
Even these reductions add up. Between 2008 and 2017, for instance, Richmond cut about 200 jobs, or 20 percent of its workforce. During the SCUSD strike last year, the vice president of SEIU 1021, which represents the district’s classified employees, noted that the district was saving millions of dollars by leaving more than 500 positions vacant. And staffing reductions do translate into fewer services. Union City has reduced its library and community-center hours, closed an underused fire station, cut back park maintenance, and ended community policing services. In school districts, staffing reductions can mean fewer support employees for students and the loss of summer learning programs.
Furthermore, staffing reductions can stay under the political radar for only so long. If employment levels get low enough, or if reductions have to be made suddenly and in a way that affects current employees, the reaction is usually fierce.
A case in point is West Contra Costa Unified School District (WCCUSD), a Bay Area school district that serves roughly 27,000 students across Richmond, El Cerrito, Pinole, and San Pablo. The district’s finances are in such poor shape that its interim chief business officer, Robert McEntire, has said, “We basically have to turn over every rock we can and say, ‘What’s 100 percent essential, legally required and benefits students?’ And if it doesn’t fit those criteria, can we stop doing it?”
To address the district’s yawning deficit, the school board was asked in March 2022 to vote on a package of $34.8 million in spending cuts. Part of that package was a proposal to end more than 93 full-time-equivalent teaching positions and 107 classified positions. The superintendent explained that this was reasonable, given the circumstances: along with the district’s budget woes, an equity audit had revealed that some middle school and high school teachers had few students.
When staffing reductions mean layoffs, they don’t go over well. Teachers, union leaders, and residents urged the board to keep the cuts away from classrooms. About 300 people attended the special board meeting in which the trustees were scheduled to debate and vote on the proposal. During the public comment period, speakers urged trustees to consider salary cuts to administrators and outside contractors instead of teacher reductions. McEntire’s blunt response: “You could release every single management person in the central office, and you wouldn’t get close to $38 million.”
The WCCUSD trustees voted down the proposal, three to two. The board later passed a 2022–23 budget of $485.6 million that ran $16 million into the red. In the fall, one of the two trustees who voted for the staff reductions came up for reelection and found herself facing a union-backed challenger. The county board of education, meantime, notified the district that it “is no longer fiscally healthy and is unable to meet its financial obligations.”
While the county board’s determination cited the district’s “large multi-year structural deficit,” it also noted another problem complicating fiscal challenges in school districts throughout California: “a history of declining enrollment while not reducing staffing to match.” Declining public school enrollment isn’t limited to California, but it is making things harder for districts already strapped for cash. State education funding is tied to enrollment, so lower enrollment automatically means lower district revenue. Reducing staffing, however, is anything but automatic.
Oakland Unified School District, for example, enrolled 37,049 students in 2017–18 but only 34,446 in 2021–22. In February 2022, the district tried to implement its plan of closing or merging several underenrolled schools. The response? Widespread outrage. Two educators went on a hunger strike. Activists occupied a school. In a concession to end the hunger strike, the district lowered the number of schools flagged for closure. When the fall election brought new officials to the school board in January 2023, it reduced the number even further.
Staffing reductions have come for California’s police departments, too. Some progressive city council members point eagerly to the cuts as evidence that they’ve defunded the police, but the more common sentiment is concern. In Stockton, where homicides were up more than 120 percent annually as of April 2022, the police department was down to 381 sworn officers by last fall—more than 100 positions short of what the city considers “fully staffed.” The city’s police force has seen a wave of retirements. Nearby cities like Tracy actively work to recruit Stockton’s officers. And in cities, as in school districts, these dynamics can cause a downward spiral: as staffing shrinks, the remaining workers get stretched thin, and recruitment and retention become harder.
Local officials seek new sources of revenue where they can, but options are limited and require voter approval via ballot measures. Getting the requisite voter buy-in usually requires a careful political dance: the ballot measures are typically framed as needed for maintaining popular services, presumably because more voters are willing to open their wallets for education and public safety than for shoring up pensions. Successful cases in recent years include Torrance, which increased its sales tax, and Union City, where voters approved a new tax on marijuana businesses. But passage of these tax increases is uncertain, and failure can leave local officials in a lurch. In fiscally troubled West Covina, for example, right after the city agreed to a 12 percent salary bump for its firefighters, the measure to increase the city’s sales tax went down at the polls, leaving the funding source for the new spending undetermined.
California local governments are in a bind. Retirement costs are rising. Prospects for new revenue streams are few and uncertain. Viable options for controlling spending are limited.
Local governing boards are, ostensibly, elected to provide services to the public and keep budgets in balance. It’s not clear that they can all do the job. Many local officials got into their positions with union backing. To have a good chance of staying there, they need to maintain that support—but that usually means leaving the compensation spigot open, even at the risk of insolvency.
Some local governments have managed to square this circle with successful tax measures. In Modesto, governing officials warned of drastic budget cuts in future years at the same June 2022 city council meeting that approved firefighter pay hikes costing $1.4 million over two years. A sales-tax increase, passed in November, provides some respite.
Others are struggling to govern. WCCUSD, for example, could be insolvent next year. After the trustees voted down the proposal to close the deficit, the CEO of the California Fiscal Crisis and Management Assistance Team had harsh words for the trustees: “Board members, you’re not doing your job. . . . As trustees, you have a fiduciary duty to ensure that your financial condition is stable and is able to support your core mission for students. As the governing board, you are ultimately responsible.”
Many local governments are choosing political self-interest over good governance. Californians should be worried, indeed, about the governing boards tasked with providing their key services. In the words of Union City’s city manager, Joan Malloy: “At this point, it’s truly a matter of public choice . . . regarding what type of community the residents want to have.”
Photo: Unions have stymied efforts to reduce the cost of services in California, such as Oakland’s attempt to close or merge underenrolled public schools. (CARLOS AVILA GONZALEZ/THE SAN FRANCISCO CHRONICLE/GETTY IMAGES)
