California Cities Have a Revenue and a Spending Problem

Yesterday morning, I saw a presentation from Tom Tait, the mayor of Anaheim, California, on fostering economic development in a time of fiscal stress. He presented two charts that reinforce the fact that California's cities have both a revenue problem and a spending problem.

The first chart shows Anaheim's total compensation costs per employee, which rose about 70 percent from 2001 to 2012 (more than 30 percent after adjusting for inflation). Real wages per employee were flat over this period; the entire inflation-adjusted increase is attributable to benefits, which grew by 130 percent per-employee. This is Anaheim's spending problem: It's spending too much on employee benefits.

Health care inflation is a problem, and now Anaheim spends about $20,000 per employee on health benefits for today and in retirement. But that cost driver is secondary to pensions. As the California Public Employees' Retirement System's investment portfolio got battered over the last decade, Anaheim's required annual contributions to the system rose from 7 percent of payroll to 30 percent.

A government faced with this problem ought to have a variety of options. It could raise taxes. It could cut employees' pay or benefits, like many private firms that have closed pension plans and scaled back health insurance. It could beg the state for money. It could cut non-compensation expenses, though it is important to remember that a majority of the typical local government budget goes to compensation. Or it could reduce headcount.

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