We Need To Talk About Pensions

For the last decade, Hermosa Beach has told its residents a reassuring story: the budget is balanced, the reserves are healthy, and the beach town of roughly 19,000 people is living within its means. That story is starting to unravel, as the city confronts the reality of a growing list of infrastructure needs. We've heard a lot about the need for a new City Yard, the state of the Hermosa Pier and even a push for a brand new City Hall. But we rarely hear about a liability that sits on the city's books like a lien on the future — a debt of more than $58 million owed to a retirement system the city does not control, cannot easily pay down, and whose bill rises and falls with the swings of Wall Street.

That debt is Hermosa Beach's unfunded pension liability, and it is the single largest long-term obligation the city carries. In the language of the city's own audited financial statements, the number is a "net pension liability" of $58,222,968 as of June 30, 2025. It is the gap between what the city has promised its current and former employees in retirement benefits and the money actually set aside to pay for those promises. For a city whose entire general fund spends under $50 million a year, it is a debt larger than the annual budget itself.

Here is how it works, why it matters, and the questions residents should be asking as "tougher times," in the words of the city's own finance director, come into view.

The promise, and the gap

Like nearly every city in California, Hermosa Beach does not run its own pension system. It contracts with CalPERS — the California Public Employees' Retirement System, the largest public pension fund in the country, with roughly $556 billion under management. When a Hermosa Beach police officer or public-works employee is hired, the city promises them a defined retirement benefit calculated from their salary and years of service. CalPERS invests the contributions and pays the pensions.

The catch is that those promises are made today but come due over decades, and their cost depends on assumptions that keep changing. CalPERS assumes its investments will earn a certain return each year — currently 6.8 percent, a rate the fund lowered from 7.0 percent after a policy tied to strong 2020–21 returns was triggered for the first time. Every time that assumed rate drops, the projected cost of the promises rises, because the fund now expects its investments to do less of the heavy lifting. When markets underperform the target, the gap widens further. When they beat it, the gap narrows. The city is left holding the difference — the "unfunded" portion — and is billed to make it up over time.

Hermosa Beach's $58 million is that difference. It is not a bill due next week. But it is a real obligation, and the city is paying it down on an installment plan set by CalPERS, with interest effectively baked in at that 6.8 percent assumed rate.

Who earns what: the benefit formulas

Not all pensions are created equal, and the difference explains much of why the liability is the size it is. A CalPERS pension is calculated with a straightforward formula: a "benefit factor" multiplied by years of service, multiplied by final salary. The benefit factor — and the age at which a retiree can begin collecting it — is set by the retirement formula written into each employee group's contract. And Hermosa Beach's police officers, like public-safety employees everywhere in the CalPERS system, enjoy markedly richer terms than the city's general, or "miscellaneous," employees.

Under the state's 2013 pension-reform law (PEPRA), every California city now runs multiple tiers, with newer hires on leaner formulas. Hermosa's police and general-employee contracts spell the tiers out:

The disparity is stark. A veteran police officer hired under the older "classic" formula earns three percent of final pay for every year worked and can start collecting at 50; a 30-year career yields 90 percent of final salary — the CalPERS ceiling — set from a single highest year of pay, and reachable at an age when most private-sector workers are a decade or more from retirement. Officers hired since 2013 are on the leaner PEPRA safety formula, 2.7 percent at 57, but that still delivers roughly 81 percent of pay for a full career. General employees do considerably worse: a classic worker retires under two percent at 55, and a post-2013 hire under two percent at 62, topping out near 60 percent of pay and not before their early sixties. Put plainly, a career police officer in Hermosa Beach can retire up to a dozen years earlier than a general employee and with a replacement rate roughly half again as high.

Employees do now shoulder a real share of the cost. Classic police officers contribute nine percent of pay toward their pensions, and all PEPRA hires — police and general alike — pay half of their benefit's "normal cost," which for safety members runs to roughly 13 to 15 percent of salary. But the employee share covers only the cost of benefits being earned today; it does nothing for the accumulated unfunded liability, which is the taxpayers' problem alone.

None of this is peculiar to Hermosa Beach — these are standard CalPERS formulas used across California, and richer safety benefits reflect the physical demands and shorter careers of police work. But they are the single biggest reason public-safety pensions dominate municipal retirement costs. And that, in turn, is why one Hermosa Beach decision looms so large over everything that follows: by contracting its fire protection out to Los Angeles County, the city sidestepped an entire class of the most expensive safety pensions in the CalPERS system.

A number that moves on its own

One of the most important — and least understood — features of pension debt is that it is not stable. Hermosa Beach's net pension liability has moved around in recent years, driven far more by financial markets than by anything the City Council decided:

• $59.4 million as of the June 30, 2022 measurement date
• $63.3 million as of June 30, 2024
• $58.2 million as of June 30, 2025

The roughly $5 million improvement in the most recent year was not the result of local belt-tightening. It tracked a strong investment year at CalPERS, which posted a preliminary 11.6 percent return for the fiscal year ending June 30, 2025 — comfortably above its 6.8 percent target. That single good year lifted CalPERS's overall funded status from 75 percent to roughly 79 percent, and Hermosa Beach's share of the system's debt fell accordingly.

This is the uncomfortable truth at the heart of municipal pension finance: a city can do everything right and still watch its pension debt balloon in a bad market year, or shrink in a good one, with almost no connection to its own management. The $58 million figure that looks like progress today could reverse in a single down market. Residents reading a headline about an improving pension picture should understand they are reading, in large part, a stock-market report.

What it costs the city right now

The long-term liability is one thing; the annual cash bill is what actually squeezes the budget. Each year the city must send CalPERS two kinds of payments: the "normal cost" of benefits earned by current employees that year, and a separate payment toward the unfunded liability — the catch-up on past shortfalls.

That second payment is where the pressure shows. The city's 2025–26 budget flags an added CalPERS unfunded-liability payment of $1,162,506 — money that buys no new services, hires no new officers, and fixes no streets. It simply services debt for benefits already promised. And that is only one slice of the total pension cost the city carries each year.

To put the scale in perspective, the city's general fund spends roughly $49.8 million annually. The pension liability of $58 million exceeds a full year of general-fund spending. The city also reports $17.1 million in pension-related "deferred outflows" against $3.7 million in "deferred inflows" — accounting mechanisms that spread the gains and losses from those market swings across future years, and a sign of just how much volatility is being smoothed over time rather than resolved.

The squeeze the city is now quietly warning about

City officials are not hiding the problem, though they are not exactly shouting it either. In its most recent financial report, the city acknowledged in plain terms that "avoiding a deficit in upcoming years will be challenging with Los Angeles County Fire negotiations, labor negotiations, and increasing pension costs pending as City expenditures are projected to outpace City revenue growth."

Administrative Services Director Brandon Walker has named "rising CalPERS, and pension liabilities" among the city's central fiscal concerns, alongside rising insurance premiums and litigation costs. His summary was blunt: "We've been beneficiaries of a balanced budget the last few years. Tougher times are coming."

By the 2026–27 budget, that warning had stopped being a forecast and become the city's working reality. Hermosa Beach's newly adopted 2026–27 general fund carries a deficit of roughly $3.2 million, and its five-year outlook now projects a cumulative shortfall of about $19.3 million — set against general fund reserves of only $10.6 million. Crucially, the escape hatches the city had used to stay balanced are gone: the prior year's budget was squared away with one-time money — leftover federal pandemic relief, savings from unfilled staff vacancies, and deferred capital spending — and those sources are now exhausted. City Manager Steve Napolitano put it plainly: "Doing nothing is no longer an option."

The arithmetic is unforgiving. The city's recurring costs are rising an estimated 4 to 6 percent a year while its revenues grow only 2 to 4 percent — a structural gap that compounds with time. The named drivers read like a list of obligations the city cannot easily refuse: the Los Angeles County Fire contract, rising 26 percent over three years and adding roughly $1.8 million; labor costs climbing about 3 percent annually; police overtime near $1.18 million; and a looming beach-services cliff, in which the county wants Hermosa Beach to absorb the full $4.9 million cost of lifeguard and beach maintenance it now subsidizes for about $400,000 a year. Layered beneath all of it sits roughly $160 million in unfunded capital improvements — deferred maintenance with no identified funding source. To close the gap, the council is weighing new revenue measures: legalizing and taxing short-term rentals, a local sales-tax increase, and higher, dynamically priced parking.

Pensions do not sit at the top of that list of drivers, and it would be misleading to blame them alone; in the newest budget, CalPERS costs are largely folded into that steadily rising labor line rather than called out separately. But they are the one pressure the city has the least ability to control, because the terms are set in Sacramento by CalPERS, and the bill arrives whether the local economy is booming or not. The 2025–26 budget had at least made the figure visible — that added unfunded-liability payment of about $1.16 million. As the recurring gap widens, a fixed, non-negotiable pension bill like that one claims a growing share of a shrinking margin.

What Hermosa Beach has — and hasn't — done

An investigation into any pension liability has to ask not just how big the debt is, but how the city is managing it. On that score, Hermosa Beach's record is mixed, with at least one genuine structural advantage and some notably conservative choices.

The advantage: Hermosa Beach does not run its own fire department. Fire protection has been provided by Los Angeles County since December 2017. Because firefighter pensions — with their early retirement ages and rich "safety" benefit formulas — are among the most expensive obligations a California city can carry, contracting the service out means Hermosa Beach has removed that direct liability from its own plate. Its CalPERS obligations cover general "miscellaneous" employees and its police safety plan, but not fire. Many peer cities are not so lucky, and it partly explains why Hermosa's $58 million, while large relative to its budget, is smaller in absolute terms than some neighbors'. Of course, LA County looks to pass on that cost to Hermosa when it negotiates its fire services contract, just like a landlord might want to pass on a rising mortgage cost to a rental tenant.

The city has also shifted pension costs onto employees over time. For years Hermosa Beach paid the employees' own share of pension contributions as a negotiated benefit; that practice has been unwound, with employees now paying their own contributions — a meaningful, if incremental, structural saving.

What the city has not done is take the more aggressive — and more controversial — route both of its immediate neighbors chose: borrowing on the bond market to pay off its CalPERS unfunded liability in one stroke, a bet that the interest cost of the bonds will stay below what CalPERS effectively charges. Hermosa Beach has declined that gamble, sticking with the standard CalPERS amortization schedule. Whether that caution looks prudent or like a missed opportunity is best judged by setting Hermosa beside Manhattan Beach and Redondo Beach directly — which is where the comparison turns next.

The city has also taken a step it deserves credit for, and one with a longer pedigree than its size might suggest. Hermosa Beach has maintained a Section 115 trust since 2007, when the City Council first established one — administered for years by Public Agency Retirement Services (PARS), with U.S. Bank as trustee — to prefund retiree medical benefits, or OPEB. A Section 115 trust is a dedicated, legally irrevocable fund a city can build up in good years and draw on to cushion its retirement bills in bad ones; because its assets sit outside the conservative investment rules that govern a city's general pooled cash, they can be invested for higher returns. In January 2025 the Council restructured the arrangement into a combined Multiple Employer OPEB/Pension 115 Trust and moved its administration to Shuster Advisory Group, a switch staff projected would cut annual fees by 51 percent and save roughly $632,000 over ten years. The 2025 action also did something new: it added a pension-stabilization component to what had been an OPEB-only trust, funded in the spring with about $1.02 million in retirement-stabilization money the city had set aside years earlier but stopped feeding during the pandemic, with a further $829,060 from a police "side fund" payoff awaiting council approval to deposit.

But proportion matters. The pension side of that trust held roughly $1.08 million at June 30, 2025 — a buffer equal to under two percent of a net pension liability exceeding $58 million. The city plainly knows how to use the tool: its OPEB side, holding about $21 million, is more than fully funded, at over 169 percent. It has simply begun applying that same discipline to pensions far more recently, and at a far smaller scale. Newly seeded and thinly funded on the pension side, the trust is best understood as a prudent beginning rather than a solution — the open question is how quickly, and how consistently, the city intends to feed it as budgets tighten, because a stabilization fund only stabilizes if there is money in it when a down market arrives.

How Hermosa stacks up against its neighbors

To judge whether Hermosa Beach's pension picture is better or worse than average, the natural place to look is next door — to Manhattan Beach and Redondo Beach, the two other South Bay beach cities that share its labor market, its housing values, and its cost pressures. The comparison is revealing, but only once an accounting sleight of hand is stripped away.

On the surface, Hermosa looks like the laggard. Its net pension liability of about $58 million towers over Manhattan Beach's roughly $20 million and Redondo Beach's roughly $42 million. But those smaller numbers are largely an illusion created by borrowing. Both neighbors took the aggressive route Hermosa declined: they issued bonds to pay off their CalPERS unfunded liabilities, converting "soft," market-linked pension debt into "hard," fixed bond debt. Manhattan Beach sold about $91 million in pension obligation bonds in May 2021 and still owes roughly $77.7 millionon them. Redondo Beach went dramatically further, issuing about $226 million in taxable bonds through a city financing authority in 2021 expressly to retire its CalPERS shortfall in one move.

Add the borrowing back, and the ranking inverts. Counting both the remaining CalPERS liability and the bonds issued to pay for pensions, Manhattan Beach carries on the order of $98 million in pension-origin debt, and Redondo Beach roughly $250 million — against Hermosa's $58 million, every dollar of it still owed to CalPERS rather than to bondholders. Scaled to population, the three cities very nearly converge: Hermosa's pension-origin debt works out to roughly $3,000 per resident, Manhattan Beach's to about $2,800, and Redondo Beach's to roughly $3,500. (The underlying liabilities are measured on slightly different dates across the three cities' reports, so these figures are approximate — but the gaps between the cities are far smaller than the raw net-pension-liability numbers imply.) Hermosa Beach, in other words, sits squarely in the middle of the pack: neither the outlier its bare $58 million might suggest, nor meaningfully lighter than its neighbors.

That "middle of the pack" result is itself the sharpest finding. Both Manhattan Beach and Redondo Beach run their own fire departments, carrying the expensive fire-safety pensions — the same rich, early-retirement safety formulas that make police pensions so costly — that Hermosa avoids entirely by contracting with Los Angeles County. All else equal, skipping an entire class of the priciest pensions should leave Hermosa dramatically lighter per resident than neighbors who shoulder fire. It does not. That Hermosa's per-capita pension burden merely matches theirs, despite having no fire pensions at all, points straight back to the structural cost of running a full-service government for a very small population.

What genuinely sets Hermosa apart is the kind of obligation it holds. Its $58 million is flexible: it shrank from $63 million in a single good market year, and it will swell again in a bad one, but it carries no fixed repayment schedule, no bond covenants, and no debt owed to a lender. Its neighbors have traded that flexibility for certainty — and for leverage. Redondo Beach in particular made a large, one-directional bet: if CalPERS's investments outrun the interest rate on its $226 million in bonds, the city comes out ahead; if they lag, it owes on both the bonds and a re-accruing CalPERS balance at once — and its net pension liability has already climbed back to $42 million since the 2021 payoff. Manhattan Beach made the same wager at a smaller scale. Hermosa made no wager at all.

So is Hermosa's picture better, worse, or simply different? Mostly different. It is not clearly better — its per-resident burden is unremarkable, and arguably ought to be lighter given the absence of a fire department. But it is not clearly worse, and in one respect it is more transparent: Hermosa's pension debt sits in plain view on the CalPERS books, not repackaged as bonds that make the pension line look artificially small. The city has kept its options open and its balance sheet unleveraged — at the price of retaining full exposure to CalPERS's market swings.

The bigger picture

Hermosa Beach's situation is not unique, and that is precisely why it is worth understanding. California's local governments collectively carry pension debts that, by some estimates, run into the hundreds of billions of dollars, part of a public-pension shortfall that analysts have pegged well over $1 trillion statewide. CalPERS's own funded status — the share of promised benefits actually backed by assets — sat at 71.4 percent in 2023, improved to 75 percent in 2024, and reached roughly 79 percent in 2025 on the back of that strong investment year. Even at its improved level, that means nearly a fifth of the promises made to public workers across the system are, on paper, unfunded.

Yet if the problem is not unique, Hermosa Beach's exposure to it has a distinctive shape — one rooted in size. This is a city of roughly 19,600 people packed into just 1.43 square miles, and it has chosen to govern itself as a full-service municipality. It runs its own police force, public works crew, community-development and planning shop, parks and recreation program, finance and human-resources operations, city clerk, city treasurer, and city manager's office, with department heads atop each. Only fire has been handed off. All told, the city employs on the order of 150 full-time workers.

That is a genuine civic choice, and many residents value it: a small town that answers to itself rather than contracting its services out to the county or a neighbor. But it carries a cost that is easy to miss. Every one of those positions — every department head, every planner, every officer — is a CalPERS pension-bearing job, and the retirement promises attached to them do not scale down just because the city is small. A full command structure has a fixed overhead, and in Hermosa Beach that overhead is spread across a population smaller than a single neighborhood of Los Angeles. The result is that the burden of funding a complete municipal government's pensions falls on a comparatively tiny tax base. Cities that "contract out" more of their functions — the so-called contract cities that buy policing, planning, or public works from larger agencies — push much of that pension risk onto someone else's balance sheet. Hermosa Beach, by keeping its government close, keeps the pension bill close too. Local control and pension exposure are, in this sense, two sides of the same coin.

For Hermosa Beach, the practical stakes are these. Pension costs are a rising, largely non-negotiable claim on the general fund, arriving at the same moment that fire-service costs are set to jump, labor contracts come up for renewal, and $160 million in deferred capital needs sits unfunded. The city's reserves once provided a cushion — but with the 2026–27 budget drawing on roughly $10.6 million in reserves against a projected $19.3 million five-year shortfall, and the one-time fixes that balanced past budgets now spent, that cushion is thinning fast. If CalPERS has a bad market year or two, or if the fund lowers its assumed return again, Hermosa Beach's $58 million could swell, its annual payments could rise, and the "tougher times" its own officials have warned of would arrive not as a forecast but as a bill already on the table.

None of this makes Hermosa Beach an outlier or a city in crisis. It makes it a normal California city carrying a large, market-sensitive debt that rarely makes the front page precisely because it never comes due all at once. But for a city of our small size, with a pier that is crumbling and a substantial list of other deferred maintenance, it's a heavy burden that may get harder to bear.

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