Citizens of Bell, Calif., outraged at high pay for city officials also must pay them tens of millions of dollars more for the rest of their lives in retirement benefit promises that apparently are not funded. Officials claim 15 years of "balanced" budgets that may have used accounting tricks. Public finance experts say the situation in Bell is just a symptom of what is happening across that state and the nation.

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By Jonathan Miltimore

Franklin Center for Government and Public Integrity

A small California city that claims it balanced budgets while paying three employees more than $1.62 million a year may be flooded in red ink from unfunded pension promises, experts say.

And the problem in Bell — population 37,332, median household income $29,946 — is symptomatic of what is happening throughout California and many states and municipalities.

The city annually paid City Manager Robert Rizzo $787,637, Police Chief Randy Adams $464,000 and Assistant City Manager Angela Spaccia $376,288.

Even though they resigned, taxpayers remain on the hook for their pensions, which in Rizzo’s case may cost $31 million on top of lifetime retirement health-care costs.

According to Marcia Fritz, President of California for Pension Reform, “The conditions allowed this to happen; it is happening all across the state to a lesser degree.”

Bell’s actual budget situation is unclear. Several voice messages to the mayor’s office and the city’s public information officer were not returned Tuesday.

But according to a study by The Pew Charitable Trusts, the CalPERS pension system has $59.5 billion in unfunded retirement promises. The Government Accountability Office put the Other Post Employment Benefits debt at $62.5 billion. A recently published Stanford University study commissioned by Gov. Arnold Schwarzenegger reported state retirement promises are underfunded by as much as $500 billion based on standard accounting practices.

Mayor Oscar Hernandez defended Rizzo’s salary in a statement last week, claiming an L.A.  Times story exposing the pay presented a “skewed view of the facts.”

“Rizzo leaves Bell in a far better position than he found it 17 years ago,” Hernandez said in a statement. “A full, fair reporting of the facts would also have demonstrated that [he] delivered Bell from a $20 million shortfall to 15 years of balanced budgets.”

On Monday, Hernandez reversed course, apologizing in a public statement and calling the salaries “indefensible.”

Rizzo, Adams and Spaccia resigned last week, but the city and other California citizens will be paying the bill for years to come. Rizzo’s pension alone will likely fall between $710,000 and $800,000, with annual increases built in, according to Fritz.

“It depends on how his plan was structured, what benefits he took advantage of,” Fritz, a CPA said. She estimated the plan’s lifetime value at about $31 million.

Bell and the other 139 cities and entities in its pension pool will bear the costs, but what those costs will be anyone’s guess, Fritz said.

“Nobody knows,” Fritz said. “Neither does CalPERS (California Public Employees' Retirement System). They probably won’t know for years.”

But experts agree a “balanced budget” offers no real indication of a city’s true financial health. 

Katherine Barrett, a senior advisor for the Pew study, The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform, said a majority of cities and states are “balancing budgets” by deferring employee pensions and other post employment benefits, an untenable long-term strategy.  

“The vast majority of cities, counties and states have funded very little of what they owe,” Barrett said “Most are dealing with post employment benefits on a pay-as-you-go basis.”

These funding gaps, which the Pew study calculated as of June 2008, will have to be accounted for in future spending, Barrett said.

A report issued last year by the U.S. Government Accountability Office also based on data that predate the market downturn confirms Barrett’s claim. The GAO account, based on the comprehensive annual reports of the states and 39 local governments, reported a funding gap of at least $560 billion in these governments for Other Post Employment Benefits alone.

Latest estimate from The Franklin Center calculated pension fund investment shortfalls nationally of at least $1.3 trillion as of March 31 of this year based on fund earnings data reported last week by the U.S. Census Bureau. Unfunded benefits promises will compound that shortfall.

Barrett said governments deferring retirement fund contributions forces taxpayers and current government employees to make up the difference.

“If governments don’t pay their contributions, over time it’s a serious threat,” Barrett said.

Fritz said a lack of transparency and an affinity for closed “public” meetings have made backroom deal-making routine, resulting in deficits governments cannot maintain.   

Johnathan Miltimore is a national reporter for The Franklin Center on Government and Public Integrity focusing on state and municipal fiscal matters.