Somewhat buried in the staff report on the current budget crisis is a rather bleak forecast that looks at the hit the city is likely to take with regards to its PERS contributions for the years 2010/11 and 2011/12. According to the staff report,
“The retirement plans provided through CalPERS are considered “defined benefit” plans such that, upon agreement on a specific benefit level, the employer and employees contribute annually funding amounts to CalPERS according to the contribution rates established by CalPERS through annual actuarial valuations which set the contribution rates for the succeeding fiscal year. CalPERS typically provides contracting agencies with their contribution rates in October for the following (July-June) fiscal year. As such, CalPERS contribution rates reflect roughly a two-year lag relative to “current” actuarial results.”
“Since implementation of this methodology, actuarial gains from favorable investment returns did not result in as large a reduction in employer rates as would have been realized under the old methodology.”
However, with the current bust, CalPERS began notifying contracting agencies that negative investment returns will result in significant increases in the retirement contribution rates beginning in 2010-11 for the state and 2011-12 for local agencies. The only good news for this, is that that is considerable enough lee-time that we can adequately plan for the fiscal hit which will not be insignificant and comes on top of the budgetary hit we are now taking.
How much of a hit are we looking at?
“On an ALL FUNDS basis, the city’s pension costs a 3% increase in the CalPERS contribution rates would result in increased costs of $967,000 in FY2011/12.”
So depending on the rate increase, our hit could be as high as $1.6 million from all-funds and nearly $1 million from the general fund.
However, much of that will depend on how future increases in retirement costs are apportioned between the City and employees.
Current labor contracts for non-safety employees include the following language specifically aimed at mitigating the City’s risk of increased retirement contribution rates:
“ Upon implementation of the 2.5% @ 55 enhanced retirement, if the employer’s contribution increases beyond the approximately 2.4% above, the ASSOCIATION agrees to cover any additional cost of the PERS employer contribution rate, up to an additional 3%, through the life of this contract. The Association will fund this by foregoing all or a portion of the COLA provided in this Agreement for the 2008-2009 fiscal year.”
“The intent of the City Council is to have employees share in the risk associated with the long term costs of adding the enhanced retirement benefit.”
However, you will note that for safety employees who receive the larger 3% at 50, there is currently no contribution from the employees.
COMMENTARY
Assistant City Manager Paul Navazio told the Enterprise in Sunday’s paper:
“Some have asked for the sessions to be conducted in public, but that would be ineffective, Navazio said.
‘There would not be one peep from these groups if there were a reporter or a member of the public there,’ he said. ‘The idea is not that it’s done in secrecy, but that we’re doing it in a way that gets the best options for the city. But we’re trying to be more transparent. It’s not an all-or-nothing thing.'”
It is not altogether clear what Mr. Navazio means by “not one peep from these groups” or whether that would indeed be a bad thing. There would seem to be a way to gain greater accountability both to the city and the council with regards to these contract talks.
Quite frankly as was mentioned last week, there is considerable skepticism about the city actually being able to hold the line on these contracts. While at times they have talked the talk about fiscal responsibility, it has been rare to see that talk acted on in very real ways.
And while it is true that at least the elected representatives of the people will be apprised of these manners, the fact that this is being done in closed session, where the public cannot view, and the fact that to a certain degree, the members of the council have been bought and paid for by one specific bargaining group, perhaps at the expense of others, gives us pause and skepticism.
While city staff continues to seem to acknowledge this problem, no solution has been brought forward to solve it. Moreover, the city remains defensive of their past practices that involved comparing Davis’ compensation to the compensation of other cities. This has been a primary cause of the current predicament not only for the city of Davis, but for all cities.
In short, all cities have engaged in a theoretical arms race that has greatly expanded employee compensation over the last decade and justified that practice based on the fact that other cities do it. Obviously no one wanted to lose the competition for good employees, but no one stopped to think as to whether this was a sustainable practice or whether we were all merely chasing each other over a cliff.
The bottom line is that that pressure should be over, and yet, the city continues to pump out charts and graphs showing that we are in better shape with our contracts than other cities, even as we face $3 million in defined deficit, a looming crisis with pensions, and the still not yet named or defined crisis of unmet needs.
In the end, we really are not any better off than anyone else. And here we go, doing what many warned would happen. Sue Greenwald for years warned people until she was blue in the face that our employee compensation practices were unsustainable. And she was met with rhetoric of a diminishing structural deficit and a fund balance reserve of 15%. Well, tell me, where have those practices gotten us? Sue Greeenwald was right and the council would be in far far better shape right now if they had listened to her far sooner than they will eventually be forced to do.
Once again for those who argue that we are justified in our practices because they have kept us safe with high quality public safety, just remember public safety is not merely defined by the departments we call public safety. Proper road repair is part of public safety. Proper infrastructure maintenance is a form of public safety. The ability to improve safety conditions on stretches of roads like Fifth street is a form of public safety.
And at its core, in the long term, being able to afford a decent public education is very much a public safety. On a statewide basis we have increased salaries for prison guards, expanded capacity for prisons, spent increasing amounts on incarceration all in the name of public safety. Now we face billions of cuts to education. Do you not believe that that alone will put the public in greater jeopardy than anything we have mitigated by putting more people into prisons?
We need to re-examine our priorities not just in this city, but in this society. However, we have to start with this community. As I stated last week, I simply do not trust our city to do the right thing., because they have been ignoring these problems despite repeated warnings for years. I certainly do not trust the city to do the right thing behind closed doors. The only answer to this looming problem, is public scrutiny. Let the light shine in.
—David M. Greenwald reporting
The State public employee unions are allowed to donate money to political campaigns, unlike federal employee unions. That is the reason that the unions don’t have any need to negotiate with the City; they don’t have to negotiate to prevail. Their elected employees will protect them in exchange for donations of taxpayers’ money.
The only way to stop this is to have the City declare bankruptcy as early as possible and ask a court to void the contracts. Employee unions are not going to be responsible entities trying to save the City. They are in it for their own gain and the taxpayers are not represented by anyone except those officials who are chosen by those who donate to their campaigns. This is true in the California legislature and for California state-wide office holders too.
It is sad when the Enterprise reports that “raises are unlikely” in the negotiations with City employees… amazing. We need wholesale cuts and the headline is that our brave negotiators are holding the line on raises.
The current negotiators need to be replaced by Sue Greenwald. It always strikes me as funny that the only member of the council who exerts real business sense is the lady in the purple hat from Berkeley.
I hope that Don Saylor takes notice, being “pro-business” means you can negotiate with unions and put our financial house in order.
Who exactly is going to do the bargaining on behalf of the city? Bill Emlen? The stooge of the City Council majority – the City Council majority bought and paid for by the firefighters union?
“Some have asked for the sessions to be conducted in public, but that would be ineffective, Navazio said.
‘There would not be one peep from these groups if there were a reporter or a member of the public there,’ he said. ‘The idea is not that it’s done in secrecy, but that we’re doing it in a way that gets the best options for the city. But we’re trying to be more transparent. It’s not an all-or-nothing thing.'”
It’s not done in secrecy…we’re trying to be more transparent? Just exactly how is the city trying to make things more transparent Paul? You mean like your creative bookkeeping style, that put employee benefits and road repair in the “unmet need” category, then declared a “balanced budget” to support the campaigns of incumbents Saylor and Souza during the last election cycle? How stupid do you think the public is, Navazio?
“We need to re-examine our priorities not just in this city, but in this society. However, we have to start with this community.”
You mean like deciding expensive lights/scoreboard for DHS renvovations is more important than upgrades to Emerson Junior High? Give me a break!
David, it is cruel to publish detailed PERS related articles during tax season, no matter how relevant they are. I defy even the mind numbing text of the current IRS publications to compete with phrases such as the following:
“Since implementation of this methodology, actuarial gains from favorable investment returns did not result in as large a reduction in employer rates as would have been realized under the old methodology.”
I did win at buzzword bingo, however!
[i]”It’s not done in secrecy…we’re trying to be more transparent? Just exactly how is the city trying to make things more transparent Paul?”[/i]
I got the answer to this question a few days ago, and, while not perfect, is a very big improvement over the past practices. Paul Navazio told me that he wants to institute a 30-60 day sunshine period, after the contracts are agreed to by the negotiators but before the city council votes on them. In that sunshine period, there would be time for full analysis by the people and by reporters like David Greenwald. Additionally, I have been in touch with Johnannes Troost, the chair of the Finance & Budget Commission. I asked him — prodded by a reader of my column — if the FBC could put on its agenda the contracts, with the intention of doing a full, public analysis of how each deal fits into the larger budget picture over the next four years. There are going to be 5 separate contracts, this year, and so that will take some work. But the people on the FBC are experts on this stuff, and I think their work, holding hearings on the contracts, will provide valuable information to the city council and the public.
In the past, once the contracts were signed, they were put on the city council’s consent calendar rather quickly, with no sunshine, no public analysis, no commission hearings, and (usually) no open debate by the council. That will all change this year, and hopefully that sets a precedent for the future.
From the City Staff Report ([url]http://cityofdavis.org/meetings/councilpackets/20090407/05 Budget Workshop.pdf[/url]): [i]”As of January 31, 2009, the investment returns on the CalPERS investment portfolio, for the fiscal year beginning July 1, 2008, stood at -26.56%. The ultimate determinant of the employer rate impact for Fiscal Year 2011/12 will be CalPERS’ fiscal year investment earnings as of June 30, 2009.”[/i]
From CalPERS ([url]http://calpensions.com/2009/01/12/calpers-warns-of-rate-hike/[/url]): [i]”If the investment loss is 20 percent for the full fiscal year, CalPERS estimates that contribution rates could be increased by 2 to 5 percent of payroll. [u]If the loss is more than 20 percent, the increase would be even higher[/u].”[/i]
The CalPERS loss is now over 30%. It is reasonable to assume that the increase for its member agencies will be at least 5% of payroll.
What has me confused is where the city staff came up with the numbers you show above (which are in their report): a 5% increase would cost the City of Davis only $1,610,000?
Unless I am missing something or making a math mistake, the actual number will be far higher than $1.6 million. (I got all of my numbers from Paul Navazio, including estimates going forward.)
The PERS rate in 2007-08 was 13.24%; in 08-09 13.17%; in 09-10 13.00%.
The (base salary) payroll for Davis in those years was: 07-08 $52.1 mil.; 08-09 $57.2 mil.; 09-10* $62.6 mil.
The payments to PERS: 07-08 $6.9 mil; 08-09 $7.5 mil.; 09-10 $8.1 mil. The City’s share of the payments: 07-08 $6.1 mil; 08-09 $6.6 mil.; 09-10 $7.2 mil. (The difference is the amount paid by safety employees.)
Based on a $62.6 million base salary payroll in 09-10, an increase equal to 5% of payroll from 09-10 would be $3.1 million. That is almost double what the staff report claims. ($3.1 million equals a 43.5% increase in the city’s bill that year!)
Keep in mind that by state law, the employee rates are capped, based on the formulas that each employee group operates under. Safety employees (who in Davis do pay their full employee share) are capped at 9%, based on their 3%@50 formula. Non-safety employee share is capped at 8%, based on 2.5%@55. Therefore, the full amount of the rate increase will fall on the agency.
In Davis, the non-safety share is paid entirely by the City. Thus, if the contracts are changed — as I have recommended — the non-safety employees could begin paying their employee share. However, they cannot be required to pay more than 8% of their base salaries. That means that the marginal increase in rates is picked up by the agency share.
It is possible, though, that the contracts could include cuts in pay, based on the increases in CalPERS charges. In other words, in order to absorb the increased amounts owed to PERS, salaries for employees would be cut by some amount.
*2009-10 figures are Navazio’s estimates.
I wish Paul Navazio, Bill Emlen and the city council would just hire an independent negotiator. They have shown us that they cannot negotiate with the unions that are bringing out city towards bankruptcy.
I was so disgusted with the interview in the Enterprise yesterday. Does Navazio think that we are going to buy his “we want transparency” line? Their actions do speak louder than their words. We are an educated community and we can see through the BS. Do your job or bring someone in to do it for you. I’m a tax payer who is tired of hearing about the “unmet needs” of the city. How about the unmet needs of the taxpayer, voters of Davis?
I read the Enterprise article and was confused by one thing and wondered if Chief Rose actually stated that a fire at a house was considered a crisis that would trigger overtime. Medical aid seems to be what the focus is and when there is a fire, the staffing levels are still too low to respond without incurring extra cost – even with the assignment of 4 fire fighters to each crew. Could it be that when there is an actual fire, it is so exciting that everyone responds and people have to be called in to provide coverage for the rest of the City? Or is the fire treated as an opportunity to provide on the job experience for as many people as possible? I just wonder if the writer quoted the Chief accurately, because it just doesn’t sound right.
It is common for cities and employers to hire independent negotiators. A City Council and Manager define their goals for their negotiator, and let the negotiator do his/her job. Negotiations can be rough. Independent negotiators can ask the hard questions and make the necessary demands, and when they are done, they leave. The difficult negoations conclude without creating personal animus between the unions and city management.
Why this city with its abjectly dismal performance in negotiations with its unions would continue to handle the negotiations itself is beyond me. Unless one realizes that the city is run by the employees for the employees, and not for those of us paying the bill — which BTW goes up each year. (I can’t wait to see my water bill when that new plant goes in . . . ) I am not against hardworking city employees. I am against the cozy and opaque relationship between the city manager’s office and the city unions.
“I was so disgusted with the interview in the Enterprise yesterday. Does Navazio think that we are going to buy his “we want transparency” line? Their actions do speak louder than their words. We are an educated community and we can see through the BS. Do your job or bring someone in to do it for you. I’m a tax payer who is tired of hearing about the “unmet needs” of the city. How about the unmet needs of the taxpayer, voters of Davis?”
“Why this city with its abjectly dismal performance in negotiations with its unions would continue to handle the negotiations itself is beyond me. Unless one realizes that the city is run by the employees for the employees, and not for those of us paying the bill — which BTW goes up each year. (I can’t wait to see my water bill when that new plant goes in . . . ) I am not against hardworking city employees. I am against the cozy and opaque relationship between the city manager’s office and the city unions.”
I couldn’t agree w these two statements any more! City staff are all in it together, to promote city employee increases in salaries. For Bill Emlen to be involved in negotiations is a conflict of interest.
[i]”What has me confused is where the city staff came up with the numbers you show above (which are in their report): a 5% increase would cost the City of Davis only $1,610,000? Unless I am missing something or making a math mistake, the actual number will be far higher than $1.6 million.”[/i]
[b]O-O-P-S-![/b]
It turns out I was wrong. My bad!
I made an mistake on my spreadsheet and accidentally double-counted the base salaries of safety employees. Corrected, the results I get are almost exactly the same as in the city staff report, and (because they have likely adjusted their assumptions some since I got the source numbers and because they are much less likely to make the kind of error I did) I would trust their numbers more than mine. That said, these are the increases I calculate Davis will have to make, based on the various increases by CalPERS, beginning July 1, 2011:
Rate — Rifkin est. — City est.
2%–$646,764–$644,000
3%–$970,145–$967,000
4%–$1,293,527–$1,288,000
5%–$1,616,909–$1,610,000
My apologies for posting incorrect info above.