Pension rates, salary increases will continue to stretch city budget, leaders say

Ballooning costs for retirement benefits for city staff and salary increases for unionized employees will continue to eat away at Salem’s financial health for the foreseeable future, likely resulting in tax hikes and layoffs down the line if more revenue is not secured. 

That’s according to the city budget committee’s Vice Chair Andrew Cohen who pointed out the elephant in the room during the committee’s first meeting of the current fiscal year on Wednesday. 

The city is now in a period of relative financial stability after voters in May approved a five-year property tax increase to avoid deep cuts to city services. But city leaders, including City Manager Krishna Namburi, have cautioned that the money only buys Salem more time to develop longer-term solutions. 

The cost of providing city services continues to rise faster than tax collections, largely driven by escalating pension and wage costs. Cities across Oregon, as well as school districts, are facing the same issue.

The state body in charge of investing Oregon’s $100 billion pension fund has missed its benchmarks by a significant margin, and appears to be pursuing the “highest returning assets without respect to risk-return considerations,” Cohen said citing an article published by the Oregon Journalism Project. 

Salem’s pension obligation for former employees this year was around $40 million, including $25.6 million in the general fund. That figure was about $11 million higher than city leaders had projected following a rate hike last fall.

Early in the meeting, Namburi said the committee’s two goals for the next few months will be fine-tuning the city’s services by finding cost savings and efficiencies, and to solidly identify the city’s revenue issues. 

That alone is likely not enough to secure the city’s long-term financial health given forces outside of the city’s control, as city officials have spelled out in the past. 

A large chunk of the city’s finances are subject to the volatility of financial markets given that retirement benefits are mandated by the state and the city has no choice but to pay the amounts a state board sets. 

“When we look in the future at our budget and when we talk about revenue some of this is going to have to be about telling our constituents that the reason that we are going to ask for more in taxes is because the people in charge haven’t done their job,” Cohen said. 

Cohen also pointed out that consistently increasing salaries and cost of living adjustments for unionized employees is also going to continue to take a significant bite out of Salem’s finances. He said at some point the city will have to make some tough decisions on where to pull back to remain solvent. 

Last year Salem city councilors approved increased salaries and benefits for most city employees which cost the city about $25 million over three years. The negotiated contract with the American Federation of State, County and Municipal Employees, the union representing most city employees outside the police and fire departments, included an immediate 7% cost of living increase. Employee wages will then be increased by 4% in the second and third year of the contract. 

The city will by 2027 be in open contract negotiations with four separate unions including the unions representing police officers, police sergeants and firefighters, according to Chief Financial Officer Josh Eggleston.

“Budgeting is people and stuff…As we’ve done lots of cutting of stuff, that leaves people,” Cohen said.“That is putting upward pressure on all cities, counties, school districts, to the point where we are going to have to choose if we want to continue having COLA increases or salary increases, or lay people off.”

Eggleston also said future retirement benefit rates are already expected to be higher than the city’s current projections. The state board overseeing those will give cities an advisory rate in December that’s intended to help plan for 2028 and 2029.

NEWS TIP? Contact reporter Joe Siess at [email protected].

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