Growing pension obligations have the city of Montclair digging into its piggy bank.

Late last month, the City Council approved transferring $265,110 from Montclair’s reserves to cover a projected general fund deficit in the fiscal year that began Monday, July 1.

The shortfall in the city’s general fund, which pays for operational expenses from personnel to pencils, is the result of ongoing annual increases in California Public Employee Retirement System rates, including unfunded pension liabilities, according to City Manager Edward Starr.

“These cumulative annual pension increases are now outpacing the city’s ability to produce new revenues to fully meet pension liabilities and maintain an expansive program of services for the Montclair community,” Starr wrote in a report presented to the council on June 17.

CalPERS represents 1.9 million public employees. Cities throughout the state are struggling to keep up with payments to the retirement system. The city of Upland, for example, was taken to task last week by the San Bernardino County Grand Jury for not having a plan to deal with its unfunded pension debt.

According to Stanford University’s Institute for Economic Policy Research, government agencies statewide may owe more than $1 trillion to CalPERS, depending on investment returns.

In addition to transferring money from reserves to cover the shortfall in its $30.8 million budget, Montclair officials considered – and rejected – the possibility of cutting vacant positions to save money in the coming year, including 11 vacancies in the Police Department.

“Un-funding positions as a means to balance the budget, even on a temporary basis, would not provide in the proposed budget the correct level of staffing needed for the Police Department to effectively accomplish its duties,” Starr wrote.

City officials believe Montclair will see a $1.9 million increase in revenues this fiscal year, which runs through June 30, 2020, for a total of $45.9 million. But that may not be enough to keep up with growing pension demands.

Pension costs will “significantly harm and erode” city services, infrastructure and park improvements, and the city’s ability to pay competitive wages and benefits to attract quality employees, according to Starr. And, of course, increased pension debts will make it difficult to balance budgets in future years, officials say.

“In general, dipping into reserves is a bad idea — it leaves a city without enough of a cushion,” Marcia Godwin, a professor of public administration at the University of La Verne, wrote in an email. “However, if a government consistently underspends compared to its budget and has healthy reserve levels, there might be a bit of leeway to budget some one-time expenditures out of reserves.”

According to Godwin, many cities, including Montclair, have adopted reserve goals of up to 25% of their respective general funds.

By the end of the fiscal year, Montclair officials expect the city to have only about 20% of its budget in reserve.

“It is easier to think of that level as having three months of savings in the bank to guard against a natural disaster or financial downtown,” Godwin wrote. “Many cities in the Inland Empire adopted these types of policies after the downturn in the 1990s. After the Great Recession, cities that dipped into reserves have been building them up again.”

Meanwhile, Montclair staffers are studying possible tax increases to offset pension debt, Mayor John Dutrey said Tuesday.

“Obviously, it’ll have to go back to the voters” sometime in 2020, if the council agrees to that increase, Dutrey said.

Montclair wouldn’t be alone in asking voters to shell out more: Claremont will seek a 0.75% sales tax hike on a special election ballot later this year.