Sacramento is flush, but cities and school districts can’t keep up with rising public
By Allysia Finley from the Wall Street Journal
Nine years into a bull market, housing prices in California have reached record highs.
Investors are enjoying soaring capital gains, which in turn has created a windfall for the state budget. California is now sitting on $16 billion in budget reserves while many states struggle to balance their budgets. But beneath this patina of prosperity, many cities are careening toward bankruptcy. Schools are laying off employees and slashing programs. Some districts complain they are having trouble retaining teachers. What gives? California property taxes, which fund local governments, are capped by the state constitution’s Proposition 13 at 1% of a home’s value and can’t rise by more than 2% annually. So although housing costs have soared since the recession—the median home price in San Francisco is $1.6 million—cities and school districts aren’t rolling in the dough.
At the same time, municipalities are getting socked with big bills from the California
Public Employees’ Retirement System and the California State Teachers’ Retirement
System, known as Calpers and Calstrs. For years the two funds overestimated their
investment returns while underestimating their expected payouts. This helped keep local-government and worker pension costs low for a while, but now the state, cities and school districts are having to play catch-up.School-district pension costs have more than doubled since 2013, and the state legislative analyst’s office predicts they will climb another 30% over the next two years. For every dollar cities spend on worker salaries, they have to pay 32 cents to Calpers. This effective payroll “tax” charged by Calpers will increase to nearly 50 cents on the dollar by 2024. Retirement costs already equal 44% of teacher pay in San Francisco.“Cities want to make it clear that our foundation is rocky at best,” Dane Hutchings, a representative of the League of California Cities, told the Calpers Investment Committee last month. “It’s crunch time, and quite frankly, we simply cannot stand another market slowdown or substandard returns.”
Mr. Hutchings warned of impending municipal bankruptcies and urged Calpers to shoot for higher investment returns to forestall layoffs and cuts to public services. Schools last year issued thousands of pink slips. Hundreds more have gone out this year. Many are laying off secretaries and support staff to pay for teacher raises and pension benefits that have been collectively bargained.Meanwhile, California’s high cost of living is making it harder for districts to recruit and retain teachers. A Sacramento Bee analysis found that about 18,000 teachers left the state between 2003 and 2016, with the biggest losses occurring during the housing-price peaks. A third of the teachers went to Texas, where the average teacher salary is $53,167, compared with $81,126 in California.
Golden State teacher salaries are the second highest in the country after New York and about $13,000 above the state’s median annual household income. A midcareer teacher in an affluent district can earn six figures. But even then, many will struggle to afford a home. Thanks to local zoning and state environmental regulations, which have restricted the housing supply, home prices have soared. The median home price in Orange County—which encompasses high-poverty areas like Santa Ana and Anaheim—is $714,000. Good luck finding a house for less than $1 million in the Bay Area. A condemned home in Fremont—about 30 miles south of Oakland—sold for $1.2 million in April.
School districts are raising pay to improve teacher retention, but their budgets are
simultaneously being squeezed by increasing pension costs. In 2008 San Francisco voters approved a $198 parcel tax to “recruit and pay teachers a living wage so they don’t keep leaving.” Parcel taxes are a uniform surcharge on each home that lets school districts circumvent Proposition 13’s limits because they are not based on the property’s value. Between 2012 and 2017, teacher salary costs rose by a healthy 23%, but retirement costs soared 106%.
In June, voters approved another $298 parcel tax to cover a 16% pay raise so that,
according to the referendum, school districts can “increase the salaries of teachers and paraeducators, and . . . increase the compensation or benefits of other school district employees.” But Reeta Madhavan, chief financial officer of the San Francisco Unified School District, said the second parcel tax was necessary because pension costs are rising by about $5 million each year.“Think about it: if we had that $5 million each year, we could put that towards teacher salaries versus paying it out in increased Calstrs contribution,” Ms. Madhavan recently explained.Meantime, higher salaries are pushing up pension costs. That’s because teachers’ annual pension benefits are linked to their salaries—typically, final compensation multiplied by 0.02 multiplied by the number of years they worked. Calstrs contribution rates are also set as a share of total payroll. So when teacher salaries increase, so do district pension bills.Local officials are typically loath to tell voters that they need to raise taxes because pensions are squeezing out services. To sell a $620 parcel tax in 2016, Davis Joint Unified School District in Yolo County warned: “Without the parcel tax, we could not sustain the enrichment and choice that other districts no longer can afford.”But the local teachers union complains that the parcel tax burdens school employees, who are being priced out of the area. State Sen. Bill Dodd, a Napa Democrat, has introduced a bill to exempt Davis school-district employees from the parcel tax. The bill passed the state Senate in May and is currently being considered by the Assembly.“This bill would provide an additional incentive for public educators and school staff to live in the community in which they work, despite the severe shortage of affordable housing,” a legislative analysis says. Behold California’s house of cards, propped up by subsidies and exemptions for Democrats’ special friends, while taxpayers pay the mortgage. Ms. Finley is a member of the Journal’s editorial board.