In mid-July, Don Saylor became Mayor of the City of Davis. Shortly thereafter, the council met for a goal-setting session. Among the top goals were to “maintain a sustainable budget that buffers the city from state and county fluctuations,” and “consider methods to reduce and/or eliminate unfunded liabilities, such as investing contract savings into unfunded liability.”
To date, the council has done what to meet those goals? Nothing. We have had the Magical Mystery Tour that has sought to remake the city in Don Saylor’s six month term as Mayor, but the most important issue has seen zero progress.
And yet, despite our revelations earlier this week about the lack of candor and truthfulness on the part of the city on the issue of the Zipcars, the most pressing issue facing the City of Davis is not Zipcar, not liability of the Zipcar contract, but something much more serious and insidious – the unfunded liabilities that the city owes to its workers upon their retirement. Unfunded, meaning we have not currently budgeted what we will owe them.
As Rich Rifkin wrote earlier this week, “This council is sitting on its hands, doing nothing” about city contracts and the unsustainable pension formulas we have codified into law.
He cites language from the recent management contract, “The employees acknowledge 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 language continues, “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.”
Writes Rich Rifkin, “July 1 was more than four months ago. Our council has still not acted. Mayor Don Saylor has expressed no interest in putting this on the agenda.”
I have expressed the dilemma as a matter of a ticking bomb and have assigned the fiscal year 2014-15 as the witching hour. This based in part on a number of factors, including the bill for retirement health care coming up, where we have a $65-million unfunded liability as well as the increases in PERS (Public Employees Retirement system) costs that will start coming due.
It is alarming because we have acted like we have more time than we do. We just signed away three-year MOUs that put off the serious reforms now until 2012-13, at the earliest. That means we would have the fix the problems in one fell swoop, in a single MOU.
We have one employee union balking just at the provisions of the current round of contracts, which does basically nothing. How are they going to accept the kinds of changes we are talking about?
Ed Mendel runs a site called Calpensions.org. He spoke with a CalPERS board member who estimates that “Annual rates paid by some of the 2,000 local government plans in the giant California Public Employees Retirement System could soar roughly 55 percent over the next three years.”
Mr. Mendel reports, “Tony Oliveira, who also is president of the California State Association of Counties, made the calculation this week when a CalPERS workshop received new data on the impact of investment losses and a forecast of lower CalPERS investment earnings.”
“Oliveira, a Kings County supervisor, got general agreement from Alan Milligan, the CalPERS chief actuary, when he used knowledge of his county’s retirement system to estimate that investment losses would boost the rate 35 percent in the next three years,” wrote Mr. Mendel.
Mr. Mendel continued, “Then Oliveira added the impact of lowering the forecast of annual average investment earnings. The board chose an investment portfolio during the workshop likely to lower the current earnings forecast, 7.75 percent a year, to 7.5 or 7.25 percent.”
“If you take the previous 35 percent increase we are going to have because of the loss,” Mr. Oliveira to Ed Mendel, “dropping the discount rate from 7.75 to 7.5, Kings County would look at a 55 percent increase in employer contributions over the next three years.”
This is a key point, as dropping the earnings forecast from 7.75 percent year to 7.5 or even 7.25 will lower the estimated growth and thus require more taxpayer money to shore it up.
When will we know? The new CalPERS rates are scheduled to go out around the end of the month and they are going to be the first to reflect huge losses in the financial markets crash from two years ago.
According to Mr. Mendel, “The government employer is obligated to increase contributions to cover the losses in public pension funds, not the employee. Many local government workers have not been contributing to their pensions.”
Now, the good news for Davis is that in the last round of MOUs, it stipulated that the employees would cover up to 3% of the increases and for the first time required city employees to begin picking up their share of the contributions.
The bad news is that 3% is small amount compared to the type of hit the city will take with its PERS rates, and that, while the employees have begun to pick up their share of the contributions, those were offset by salary increases.
As Mr. Mendel writes, “In this era of deep government budget cuts, a common change sought in contract talks with public employee unions, in addition to lower benefits for new hires, is an increase in employee pension contributions.”
Unfortunately, neither will save us. The problem with the two-tiered system is that there will not be sufficient numbers of new employees in the next few years to ward off disaster. Aso, those two-tiered systems are inherently unsustainable as you may be able to impose a lower pension system on new employees, but try keeping it in place throughout the tenure of the average employees who will live through between 10 and 15 collective bargaining agreements during their tenure in state and local government, each one with the potential to undo the agreement.
Critics point out that pension hawks have overblown the crisis, calling it a fiction to suggest that the CalPERS system is hugely underfunded. They point to the average rate of return on investments over the past 20 years that have exceeded 7.5%, which would be enough to fund most of the current obligations.
They believe within a few years, the taxpayer contribution to the pensions will be back where it has been historically, at around 12 cents on the dollar with the rest coming out of earnings and employee contributions.
Personally, I think we have created a very risky situation where the pension obligations to public safety workers who will retire at 50 years of age along with the huge obligations to management making over $100,000 are putting the entire pension system at risk, along with state and local government who cannot wave a magic wand and get out from under their obligations.
A city like Davis taking a $3- to $4-million hit in a single year – even if it is temporary – is a disaster of monumental proportions. Think about how you would cut that much from spending, and then imagine the real hit by 2014-15 when combining pension obligations, unmet needs, and retirement health at $10 million over what we are paying now, within a budget that will grow at less than 3% per year.
Where is that money coming from in the short-term? No one is paying attention to the fact that we will have declining city services, decaying road conditions, and other cuts. The bulk of our budget goes to employee obligations (71% of the general fund), but it is worse than that, as we will have to choose between parks, fire, and police, which is where most of the money goes – and much of what goes to parks is locked in with the parks tax.
Where are the 15-20 stories in the Enterprise on this? Where are the multi-day workshops with the business community on this issue? Where is the council on it? All I hear is silence right now.
—David M. Greenwald reporting
dmg: “Where are the 15-20 stories in the Enterprise on this? Where are the multi-day workshops with the business community on this issue? Where is the council on it? All I hear is silence right now.”
There has not been silence from the Davis Enterprise on this issue. Rich Rifkin has been very vocal about it in his column. Why do you find it necessary that it be covered by Bob Dunning as well, or by a regular reporter? Rich Rifkin has done an excellent job of explaining the situation.
dmg: “Writes Rich Rifkin, “July 1 was more than four months ago. Our council has still not acted. Mayor Don Saylor has expressed no interest in putting this on the agenda.”
Nor is Don Saylor likely to undertake such a weighty and thorny issue during his tenure. Why would he, since he will be leaving in January? Whatever he starts he cannot finish, so why start?
For one thing, Rifkin while doing a great job on this issue, only publishes one every other week. Dunning can produce a drumbeat whereas Rifkin can only bang the gong.
Ping.
“Nor is Don Saylor likely to undertake such a weighty and thorny issue during his tenure. Why would he, since he will be leaving in January? Whatever he starts he cannot finish, so why start?”
ERM, Saylor has sure undertaken some other “weighty and thorny” issues during his short tenure. I totally agree with David, “We have had the Magical Mystery Tour that has sought to remake the city in Don Saylor’s six month term as Mayor”. I feel he’s ramming through as much as he can while he can.
However, a search of the archives finds that there is no Bob Dunning article when mentions the term “unfunded liability.” How can that be?
Dunning usually likes to take a lighthearted attitude in his articles. This topic doesn’t lend itself to that tone. But the Enterprise could still run staff editorials on the topic. Interesting that they don’t, at least that I can remember.
I haven’t followed city council politics as closely. Does the passage of Prop. 22 (Prohibiting states from raiding local funds) improve the fiscal situation for the City of Davis?
[i]”He cites language from the recent management contract …”[/i]
My intent in quoting the exact language from the contract–which calls for lower, sustainable pension formulas for all new hires–was [u]to alert the public[/u] that the City and the unions [b]already agreed[/b] this change is needed.
People like Don Saylor and Paul Navazio and Melissa Chaney are well aware that these words are there.
It’s thus shocking to see the City and the Council continue to do nothing. It’s shocking that Saylor wanted to be our titular mayor, yet did not want to do his job. It’s shocking that Ro and Jo ran for office, won their elections and have decided to do nothing.
I realize that 2% at 60 for non-safety and 2.5% at 55 for cops/fire only for new hires WILL NOT make too much of a difference for the next 5-10 years. It only applies to new hires. However, it is a crucial change for our long-term fiscal health, and the City and the Council and the employee groups have explicitly conceded that by stating that our current formulas are not sustainable.
To my mind, the most important thing about changing the formulas is the actual dollars saved that the City pays out in pension contributions. But a second, important reason why changing the formulas is crucial is it will take away the very strong incentive for early retirements.
It is a fact that if someone retires younger than 65 from the City of Davis, his post-retirement medical insurance is at least twice as expensive to the Davis taxpayers compared to once he reaches the age of qualification for Medicare.
Our greatest fiscal problem in the City of Davis is going to be how we pay for retiree medical. We have a $65.5 million unfunded debt (though, in truth, the City has been holding that steady by funding it enough so that the number does not grow worse). As such, we need a mechanism to solve our retiree medical crisis, and I think a sound solution is to encourage people who do desk work and the like to stay on the job until they are at least 65 years old. (I suspect most cops and firefighters are healthy enough to work until they are 60.)
If someone feels like he needs 75% of his final salary as his pension, under the 2.5% at 55 formula, he can reach that after 30 years on the job. That is, if he started working for the City of Davis (or some other agency affiliated with CalPERS) at age 27, he will reach 75% at age 57.
For the rest of his life he will have his full pension (plus COLA) and his full medical package. And if he has ambition, he can make another full salary working as a consultant for as long as he desires. From age 57-65, his retiree medical (which covers him, his wife and a child) will be a great burden on the taxpayers of Davis. Its cost will fall subtantially once he qualifies for Medicare and his kid is over age 22.
By contrast, if that same person were on the 2% at 60 formula, he would have to work 37.5 years to reach 75%. If he also started at age 27, he would hit the 75% mark when he was 64.5 years old. From the taxpayers’ perspective, that is a dramatic difference in cost.
[quote]… at least twice as expensive to the Davis taxpayers compared to once he reaches the age of qualification for Medicare. [/quote]
Assuming the employee qualifies for benefits based on their or their MARRIED spouse’s record. The feds don’t recognize gay marriages nor domestic partnerships. There are a significant number (not necessarily percentage) of government employees who will NOT be qualified for Medicare.
[quote]My intent in quoting the exact language from the contract–which calls for lower, sustainable pension formulas for all new hires–was to alert the public that the City and the unions already agreed this change is needed. [/quote]
Not necessarily so… what it means is that those groups weren’t having their personal “ox gored” and acknowledged that any employee not ‘on-board’ was not within their representation, and the City has the right to change rules for those not currently employees… to go farther than that is speculation unless you were actually a party to the negotiations… were you? Were members of any of the negotiating teams feeding you information?
[quote]If someone feels like he needs 75% of his final salary as his pension[/quote]… as I understand it 80% is necessary, particularly if a mortgage on your home is still involved. If you actually have a spouse who doesn’t have their own “rich” pension, and you want to provide that they will have the same pension benefits if you pass, you’d need ~ 86% to get 80% (PERS plan 2-W). If you take the ‘unmodified allowance’, the pension payments die when you do (unlike SS).
[quote]For the rest of his life he will have his full pension (plus COLA)[/quote] Fact: for the City of Davis, the MAXIMUM COLA is 2%, no matter how high inflation may run. Think 1970’s, early ’80’s, when inflation was double digits.
[quote]And if he has ambition, he can make another full salary working as a consultant for as long as he desires.[/quote] Yeah, right… how many maintenance workers, secretaries, etc. are consultants, particularly in this economy?
[quote]From age 57-65, his retiree medical (which covers him, his wife and a child) will be a great burden on the taxpayers of Davis. Its cost will fall substantially once he qualifies for Medicare and his kid is over age 22. [/quote] You must travel in different circles than I do… last child @ 35 or older? Yes, happens, but the “norm”? I think not.
[i]”.. the City has the right to change rules for those not currently employees …”[/i]
The contract explicitly states that the City has that right.
By contrast, state law prohibits a formulary reduction by a public agency for its employees, once they have a given formula in place.
However, the new system in Davis–at least insofar as it applies to certain contracts–is to cap total compensation growth. What that means is that the rising CalPERS rates and rising medical costs will be borne on the margin by employees, lowering their salaries.
[i]”Were members of any of the negotiating teams feeding you information?”[/i]
Yes.
[i]” … as I understand it 80% is necessary, particularly if a mortgage on your home is still involved.”[/i]
I don’t know what percentage of current retirees have a pension of any kind outside of Social Security. However, my guess is it is less than 15%. So to state that city workers [b]must have 80%[/b] of their final salaries strikes me as strange, particularly given that Davis employees are paid salaries much higher than most American workers and thus should have higher than average nest eggs.
[i]You must travel in different circles than I do… last child @ 35 or older? Yes, happens, but the “norm”? I think not. [/i]
It’s not all that surprising that a 50 or 55 year old retiree would have a minor child. Say a cop got married for the first time at 32 and started having kids with his 28 year old wife 3 years later. And say they had 3 children: the first when dad was 35, the second when he was 38 and the third when he was 40. So when he retires* at age 50, that cop has a 10 year old, a 12 year old and a 15 year old. Nothing at all unusual in that. He will be able to claim a minor dependent on his medical plan until he is 62.
The cop say started work at age 20 and worked for 30 years in the CalPERS system, so he gets 90% of his final salary in pension. He could then, also, go to work say as a DA’s criminal investigator in Orange County, where they don’t have CalPERS, and make a full salary plus earn 15 more years toward an OCERS pension ([url]http://www.ocers.org/[/url]).
I have never filed a PRR as to what percentage of Davis retirees have minor children. However, I was told verbally (by the human resources director, M. Chaney and by someone lower down in the finance department) that “most” recent retirees claim both spousal and minor dependents for their retiree medical. That is a significant point for Davis, because under-65 retirees’ medical plans cost Davis taxpayers on average 40% as much as our average cost for those over 65.
The difference comes from 3 sources: 1. fewer dependent children; 2. Medicare; and 3. lower percentage with a living spouse.
TYPO: [i]”under-65 retirees’ medical plans cost Davis taxpayers on average 40% [s]as much as[/s] [b]more than the[/b] [s]our[/s] average cost for those over 65.
Source ([url]http://articles.sfgate.com/2008-06-15/living/17161946_1_father-children-dads-first-child[/url]): [quote]In 2005’s “The Male Biological Clock,” Harry Fisch wrote that the number of first-time fathers over 35 increased by 50 percent from 1970 to 1999, and the number of first-time fathers between the ages of 30 and 34 increased by 37 percent. There was an 18 percent decline, he added, in births to men younger than 30.[/quote]
[quote]It’s not all that surprising that a 50 or 55 year old retiree would have a minor child. Say a cop got married for the first time at 32 and started having kids with his 28 year old wife 3 years later.[/quote] Not “surprising”, but not the ‘norm’… as usual, you posit situations only to ‘prove your point’.
[quote]number of first-time fathers over 35 increased by 50 percent from 1970 to 1999, and the number of first-time fathers between the ages of 30 and 34 increased by 37 percent. There was an 18 percent decline, he added, in births to men younger than 30.[/quote] ok, if the number of first time fathers between the ages of 30 & 34 had been 20%, a 37% increase would mean less than 28%, which is still not even close to the norm. Figures don’t lie, but…
[quote]The cop say started work at age 20 and worked for 30 years in the CalPERS system, so he gets 90% of his final salary in pension. He could then, also, go to work say as a DA’s criminal investigator in Orange County, where they don’t have CalPERS, and make a full salary plus earn 15 more years toward an OCERS pension. [/quote] Ok.. an out-lier… I posited secretaries, field workers… I’ll concede that an engineer could “retire” to consulting, but you originally implied that the majority (or significant minority) of public employees could turn to consulting in retirement (and I suspect it would be a rare “cop” who would be hired as a consultant… maybe a Chief)… you have no basis, and it is incredulous, to think that even 40% of public employees could have second careers as ‘consultants’, unless you consider Wal-Mart greeters to be consultants… be honest.
[quote]”Were members of any of the negotiating teams feeding you information?”
Yes. [/quote] Interesting… may I ask on which side of the table?
[quote]So to state that city workers must have 80% of their final salaries strikes me as strange[/quote] No… read Kiplingers, the Economist, Suze Orman, whatever… the “base” seems to be 80% for ANYONE… particularly if you still have a mortgage, you had a ‘stay at home’ spouse (or, are you saying that all families HAVE to have two ‘strong’ incomes?), or you plan to live long… you ignored my point that the 2% COLA won’t last very long in an inflationary period.
You posit that public employees shouldn’t retire until age 65. Facts:
the 2%@60 formula reaches the maximum rate at 63. Convenient omission. At age 63, under that formula, the rate is 2.418% per year of service. Contrast that rate to a maximum of 2.5% for any age of 55 or above in the current arrangement in Davis. Yeah, HUGE savings…
[quote]By contrast, if that same person (if he started working for the City of Davis (or some other agency affiliated with CalPERS) at age 27) were on the 2% at 60 formula, he would have to work 37.5 years to reach 75%. If he also started at age 27, he would hit the 75% mark when he was 64.5 years old. From the taxpayers’ perspective, that is a dramatic difference in cost. [/quote] You speak an untruth (I word it that way to avoid being deleted by Don… who I have great respect for)… a retiree, age 64.5, after working 37.5 years would get ~90% percent of highest compensation, with the highest, unmodified benefit.
But, I have come to realize that certain people won’t let facts inconveniently get in the way of their arguments…
BTW… if a public employee under PERS, unless it is ‘co-ordinated’ with SS (in Davis, it is NOT), works for 40 years, 20 in SS & 20 in PERS only, they will have their SS benefit reduced, dollar for dollar, by their PERS pension payment. Thanks, Ronnie R. May you rest in peace.
rusty49: “ERM, Saylor has sure undertaken some other “weighty and thorny” issues during his short tenure. I totally agree with David, “We have had the Magical Mystery Tour that has sought to remake the city in Don Saylor’s six month term as Mayor”. I feel he’s ramming through as much as he can while he can.”
Weighty and thorny issues that fit his agenda. The pension issue does not fit his agenda/will not get him marks w his campaign contributors.