Retirement, health insurance costs to put pressure on future Baker City budgets

BAKER CITY — Baker City’s budget approval process was relatively smooth this month, but City Manager Barry Murphy said the road ahead could be bumpier.

And he’s not talking about potholes.

A major concern, Murphy wrote in his message to the budget committee, is rapidly rising costs for the Oregon Public Employee Retirement System (PERS) and for workers’ health insurance.

“Healthcare costs have increased at double-digit rates for several years in a row now, and Oregon PERS costs have increased dramatically over the same time period,” Murphy wrote in the budget message. “In fact, some entry level positions now have total benefit costs that are nearly equal to the entry level position salary. This budget reality is not sustainable over the long term.”

The situation is particularly concerning in the police and fire departments, the two largest departments in the city’s general fund. Combined, they accounted for about 67% of the general fund — $3.14 million for the police department, with 19 employees, and $1.9 million for the fire department, which has 11 employees.

The city’s PERS bill for the police department has risen about 20% in the past four years, to an estimated $506,000 for the fiscal year that starts July 1, or about 16% of the department’s budget.

The PERS cost for the fire department has nearly doubled over that span, to an estimated $320,000 for the upcoming fiscal year, or about 17% of the department budget.

Healthcare costs, meanwhile, have risen by about 63% over four years in the police department, to an estimated $454,000 for the upcoming fiscal year, and by 81%, to $191,000, for the fire department (part of the increase is due to a larger staff than was the case four years ago).

The city can potentially curb healthcare costs by negotiations with the two unions that represent firefighters and police officers, although the escalating costs in the healthcare market make that challenging.

But PERS, the rates for which are set by the state, is a different matter.

“There’s no way to avoid that,” Murphy said.

PERS rates for cities, counties and the state have risen largely because the system guaranteed some retirees rates of return on their accounts regardless of the PERS portfolio’s actual gains. The legislature changed the system more than a decade ago, but many employees are still working, or receiving retirement pay, based on the older, more generous plan.

One problem, Murphy said, is that the city’s main revenue sources for the general fund have increased much more slowly than the PERS and healthcare costs.

That includes property taxes, the largest single source of money for the general fund, but also one that is limited, in growth, by state law to no more than 3% annually for existing accounts (that doesn’t include new construction, so a spate of building can potentially increase property tax revenue overall by more than 3%). The city is projecting to collect about $3.8 million in property taxes for the fiscal year that starts July 1. Other significant revenue sources include franchise fees from utilities that use city rights-of-way, totaling about $1,050,000, the public safety fee the city council imposed in 2024, $325,000, and state revenue sharing, about $290,000.

The city council did vote earlier this year to cut the public safety fee in half starting July 1, to $5 per month for residential customers and $10 for businesses.

The public works department is different in that both the water and sewer departments operate mainly on revenue from customer bills, not property taxes.

The street fund is something of a hybrid, with its two largest revenue sources being property taxes, about $876,000 for the upcoming fiscal year, and the city’s share of state gas tax collections, totaling about $820,000.

Salary raises have been much smaller than the PERS and healthcare increases.

Fire union members will get a 3% increase for the upcoming fiscal year, public works employees 2.6%. The city is negotiating a new contract with the police union.

Murphy emphasized that the situation is not dire now.

The city council, in addition to cutting the public safety fee in half, also agreed not to increase water or sewer rates for the upcoming fiscal year.

Cutting the public safety fee was possible in part because the city, starting July 1, 2025, has been collecting lodging taxes, after withdrawing from a 2006 agreement with Baker County.

Guests at motels, vacation rentals and other lodging businesses pay the tax, which is 7% of the rental rate.

The lodging tax generated about $200,000 for the general fund for the current fiscal year, and the city is budgeting $240,000 for the upcoming year. Murphy said that amount should increase in future years, as the Oregon Legislature in March passed a bill, which takes effect Jan. 1, 2027, that allows cities to spend up to 50% of lodging taxes — up from the current 30% — for purposes other than tourism promotion.

Nonetheless, Murphy wrote in his budget message that “it is critical that Baker City closely monitors its personnel expenditures – both salaries and benefits – moving forward. Health and retirement costs are not going to decrease anytime soon, so it is very important to maintain focus on trends in this area.”

The budget board, which consists of the seven city councilors and seven residents appointed by the council, approved the proposed budget for fiscal 2026-27 on May 19.

The city council will adopt the budget — the final step — before June 30.

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