Vanguard Commentary: City Manager Skirts Real Issues and Papers Over Real Problems

The reality is that the city has a long way to go to even begin addressing the long term problems.  They have shown that now twice first with the firefighters MOU and now with the management MOU which goes much further in addressing the issues of the cafeteria payout and possibly even the pension crisis, but fails to adequately deal with the looming $42 to $65 million unfunded liability for health insurance.

The city has discussed the issue at length and they have found they can reduce the costs over a twenty year period by shifting to a “fully funded” model rather than “pay as you go.”  Okay makes sense.  But that only deals with a portion of the issue.

The problem is created in the first place not only by the failure to fund the health liability, but because of the retirement age of city employees is either 50 in the case of public safety or 55 in the case of everyone else.  Thus the city has decided to fund the health insurance of its retired employees for ten to fifteen years until they are covered under medicare.

One then has to wonder, how much the city would save if they shifted the retirement age by 5 years?  One has to wonder how much the city would save if a portion of that liability were picked up by the employees over the course of their employment.  Remember this is a finite benefit rather than an open-ended commitment by the city.

So far the only solutions offered in the MOU has been the creation of a vesting period.

For fire the deal is beginning at five years with the City or any other PERS agency for at least ten, the city covers 50% of retiree medical and upon 20 years of service, that amount increases to 100% of the benefit.  The city argues that will provide long-term savings, but how much?  They never breakdown how long the average firefighter in the city of Davis works.  And while this is an improvement over the existing system which offers full vesting at five years, I believe, how much will it actually save?

The management group MOU is similar:

“The MOU proposes to implement the standard CalPERS vesting for current and future employees for retiree medical benefits. Once an employee has ten years of service with a PERS agency or agencies, a minimum of five of which must be with the city of Davis, then the employee receives 50% of the benefit level. The percentage paid by the City increases 5% with each year of service after that, until the full benefit is attained at 20 years of service with a CalPERS agency/agencies, at least 5 of which must be with the city of Davis. This benefit is in line with the standard state CalPERS benefit. In addition, benefit levels will be determined based on the employee and their dependents, rather than defaulting to the highest cap amount. Currently, there is no vesting period for retiree medical benefits if an employee is already vested in the CalPERS retirement system. The proposed change allows employees to earn additional retiree medical benefits based on years of service with the city of Davis.”

Again, this is a $42 to $65 million issue and the city manager failed to discuss it in the state of the city.  The current MOUs only deal with it on the margins.

“I will not deny that public employees’ retirement system is very generous.  It’s evolved over the years.  It cracks me up when I see folks trying to pin it on any one public entity or public agency or council.  The reality is that the whole system evolved over around two and a half decades.  Some of the benefits became quite costly particularly in the public safety area.”

Now he is correct that this is not an exclusive problem to the city, but actions taken by the council could have prevented this problem and actions that could be taken by the council could correct this problem.

He does admit that there is a problem and that the system is unsustainable, but he suggests that the problem is being taken care of.

I quote here at length:

This gives you a little bit of an idea of some of the realities that we saw when we went back and looked at our current retirees and what they make.  You can see the actual salaries that they are getting and the age that they’re retiring.  The ages are higher than sometimes is publicized [note the public safety was 51.5 instead of 50 and the non-public safety 57.1 instead of 55] and secondly the salaries are less.  I will also for purposes of accuracy say that this will probably change over the next five years as we see some of the folks retiring out now.  These numbers will go up.  There’s no denying that.

That’s been one of the focuses of the city council as we’ve been dealing with our labor folks over the last year now, talking about the system that we have, the fact that it really has evolved to the point where it unsustainable and working with them to try to come up with a more sustainable system.  Many of you probably saw the contract that came out with the fire union recently.  You’ll see another contract in the next two weeks with our management group.  If you look at the focus of those contracts and where we’re heading with those, basically it’s cost avoidable particularly on the retirement side.  We’re trying to cap out how much we’re going to contribute to things like public employees retirement system (PERS) as well as controlling the retiree medical benefit costs that we have right now.

The city council was very deliberate last year when they developed some principles of the negotiations for this set of contracts.  I think they were also trying to set a threshold for and principles that transcend this contract and future contracts because it’s going to take a number of years to make the adjustments to the system that we’ve had in a way that is fair to the employees and also fair to the public that pay the taxes that fund the services provided.  It’s easy to get into this as sort of a divisive issue.  I think it’s one that constructive debate and discussion is important.  I know that we’ve been engaged in that very much so through the process and we will continue to do so in the next few months.

We have additional negotiations coming up with our police officers, their contract ends in July.  We would expect to see at the same type of things in their contract as we’re looking at the current groups we’re working on now.”

The fire MOU does not address this issue hardly at all.

“The City will contribute a total of 1.5% Total Compensation Increase for fiscal year 2010-2011 and 2% for fiscal year 2011-2012 to cover CalPERS retirement benefit and medical increases.  Any unused portion will be applied to the retiree medical unfunded liability.  The Union will not receive any of this compensation in salary.  Any increases in total compensation beyond these percentages will be paid by employees.”

However, the real increases are likely to occur outside of the three year period of this MOU as PERS is attempting a rate-smoothing plan that will create its own unfunded liability.

Unlike fire, the management group has the nucleus of change embedded into it, but it is vague and indistinct.

“One of the City’s Council’s objectives during the negotiation process was to explore differential compensation packages for future employees. Included in the MOU for the Individual Management Employees is language that acknowledges the City’s intention to implement a reduced second-tier retirement benefit for new employees, as early as July 1, 2010. The City expects to engage in discussions with other cities within the region which have an interest in implementing standardized, sustainable retirement plans for their local government employees. The City anticipates taking steps to establish a reduced retirement benefit formula, with minimum required employee contributions, for all new non- safety employees during the term of the contract.”

Here’s the actual language in the MOU, it seems a bit vague in specifics:

“The EMPLOYEES acknowledges the City’s intention to implement a reduced second-tier retirement benefit for new employees, as early as July 1, 2010. The City expects to engage in discussions with other cities within the region which have an interest in implementing standardized, sustainable retirement plans for their local government employees; provided, the City may move forward to implement a second tier retirement benefit notwithstanding any decisions on the issue reached by other cities within the region..

The City anticipates taking steps to establish a reduced retirement benefit formula, with minimum required employee contributions, for all new non-safety employees during the term of the contract. This provision does not affect the City’s rights to pursue a second-tier retirement plan for new employees and the parties understand that the city is not required to meet and confer regarding implementation of a second tier retirement benefit for new employees.”

Why was this not done for fire?  This is at least a nucleus of a change, with new employees having reduced benefit possibilities.

The bottom line here is that the city has not really addressed this point despite the City Manager’s claim to the contrary.

Again the Cafeteria payouts are a huge issue that the city manager did not address, whether he ran out of time is another question that can be raised.  But then again, he did not attempt to put out his State of the City Address to the public in the form of a press release, so perhaps this was not a high priority if it was originally included.

“One is the surface water project… the city is working with the city of Woodland, we actually have a joint powers authority…  We are working with them to basically bring surface water to Davis.  Why is that important?  I think most folks who are out there recognize that using groundwater from the groundwater aquifer forever and ever is not going to happen.  It’s just not sustainable.

We’re reading reports right now in the San Joaquin Valley where aquifers are failing.  We don’t want to get to the point where we’re basically not able to pump enough water to serve the residents of the community.  Councils over a twenty year period now have been working to bring surface water to the city which involves piping water from the Sacramento River and bringing it to our area through a water treatment plant up in Woodland, a joint effort.  On that point, I also want to say joint efforts between governmental entities are one of the trends that I think we’re going to see in the upcoming years because resources are scarce and we have to combine resources.  That’s an example of one of those.

Another project that’s out there is the waste water treatment plant upgrade.  The issue there is the waste water that we currently discharge into the delta is not of the level that the state water quality control board deems is adequate.  We are under order to improve our wastewater treatment.  That process has been underway for awhile as well.  We are continuing to look at options, the council has been very deliberate on that one knowing that the costs of these two projects is significant.  We’re working with other potential partners out there trying to minimize those costs and we’ll see how that one continues to play out.”

Again, there are critical issues that he failed to address.  First, he failed to talk in specifics about the cost.  Second, he failed to point out to the audience that this would result in water rates at least doubling in the next five years and possibly going up three to four fold in a short period of time.  This will heavily impact residents, but it would also be devastating to businesses that rely on the use of water.  It would greatly increase the overhead for restaurants and other such businesses.  But no mention of that and no one in the audience asked this question.

Furthermore, he failed to point out the considerable debate on the need for surface water and whether the city could get by for the time being with other means. 

He also failed to failed to mention the possible pitfalls with a surface water project if water in the Sacramento River in the future becomes more problematic.

The truth is that the city has not gone nearly far enough in addressing the issues that he did address.  They have barely scratched the surface on the fiscal matters and put off the most difficult questions for future councils.  If one did not know better of course, one would think that the city had challenges, most of these were due to the economy, and that things were in pretty decent shape.

He concluded:

“We have maintained the level of reserves in the city budget at about $5 million or 15% despite all of the bad stuff that’s been going on.   That tells you that the city is not going broke, but we have things looming out there that could certainly further stress our budget which is why I think the council has been proactive in trying to deal with the employee compensation, whether its retirement, retiree medical as well, are all things we are proactively working on right now.  I do think that the next budget that we have we will probably see more structural changes we’re going to have to look at.  We simply cannot continue to sustain some of the levels we have plus priorities change over time.  We have mentioned the sustainability efforts that we have going on and we may have to transition some functions to others as those priorities change over the years.”

In fact, a $3.5 million deficit was never going to make the city go broke.  The question is what happens when future pensions and retirement health benefits come due.  How much will the city’s pension obligations increase by in the next decade?  How much will the liability increase?  These are issues that have not been addressed in the current round of MOUs which means they have essentially been punted for the next three years.  At some point, we actually could face the prospect of going broke. 

The sad part is that he seem to understand that things are unsustainable but lacks the ability to solve the problems.  And that is the real state of the city.  We face the shortage of political leadership, vision, and fortitude to tackle the tough problems.  The City Manager may be in a tough spot given the leadership in council, but he does us no favors by attempting to whitewash and paper over huge deficiencies in the process.

We learned this when the city proposed the battalion chief model.  Given budget realities we cannot afford new expenses, however, suddenly they were able to find cost-cuts to balance out a $400,000 additional expense.  Except for one thing, they were cost-cuts that were already being proposed and in the works.  In other words, we will have to make cuts to other programs and departments to pay for this expense, one that we simply do not need at this time.  The fire department has proven to be reliable and effective under existing command structures, so why change now during times of crisis?  It makes little sense, but that is the state of the city, lack of leadership and lack of common sense.

—David M. Greenwald reporting