by Doby Fleeman
With appreciation to the Vanguard for acceding to a follow-on Part 2 article.
Judging from sentiments expressed to yesterday’s Part 1 article on our legacy debt problems, I’m guessing those same readers won’t much like today’s message either.
But, sometimes, that’s how it goes when you describe a shared financial problem that has been decades in the making. In the end, I’m guess I’m asking all of the readers to take a long hard look in the mirror and ask themselves two questions: How did we get here anyway?, and What’s it going to take from me to help get this ship righted and back under full sail? For my part, all I would ask is your engagement and your thoughtful consideration in helping us make this transition back to full sail.
Yesterday, I discussed the issue of legacy debt obligations and their substantial impacts on our current 2014 budget. Today, I have will have an offer on the table. Fair warning, that offer does come with some conditions that I would submit for your consideration. The main consideration would be an agreement and mutual acknowledgement that the system in place today is broken, financially unsound, and sorely in need of a re-boot. It’s not about placing blame or demanding restitution or returning to our constitutional roots – it’s about being honest with our employees, acknowledging some fundamental conflicts in our existing model of governance, and a shared willingness to work together in reforming what we have into a solid, secure, and transparent model for the future.
To be fair, Davis is not alone in this mess, cities, counties and local government agencies across the country have allowed an insidious and deep-seated institutional conflict of interest to take root in the politics of local self-governance. The conflict revolves around the dual issues of fiduciary transparency and accountability. On the issue of fiduciary transparency, it is a little known fact that city council members in some jurisdictions begin to qualify for lifetime, post-employment healthcare benefits following as few as two terms in office. Following is a recent article addressing this very issue: link.
The degree of non-transparency in this instance is one issue, but the “buy-in mentality” it imparts to its recipients is perhaps the most damaging – namely, how can we expect someone who is scheduled to be receiving these benefits to continue serving as the community’s designated overseer and negotiator for this program which (in many cases) covers all of the employees of the agency over which they preside?
On the surface, these circumstances would appear to set up the potential for an irreconcilable conflict of interest in which the personal financial interest of the elected official is pitted directly against their responsibility to act as an independent, honest broker in their role as negotiator and overseer. The failure of the California Fair Political Practices Commission to acknowledge and confront this issue is a profound travesty.
And, as if the conflict over fiduciary transparency is not enough, it is the accountability side of the ledger that is perhaps even more damaging. For, it would be one thing if these elected representatives were participating in a supplemental income program of which few were aware, but where the financial integrity of the underlying program was firmly grounded and appropriately financed. But sadly, such is not the case. Adding insult to injury, the OPEB program is a defined benefit (similar to a pension benefit) which one would expect to be administered in accordance with guidelines previously established for the administration and oversight of public sector pensions. But such is not the case.
Apparently, when this benefit was added to the equation, there was no independent Board of Trustees assigned to represent the employees and charged with overseeing the financial integrity of the fund. Apparently, no provision for annual, actuarial auditing of the program was required each year to insure adequacy of the fund to support the future outgoing premium payments. Apparently no legislation was drawn to empower or require local elected or agency supervisors to fund the program on an annual basis. It appears, in fact, that none of the normal protections established for oversight of local and state level pension programs were adopted for this program. But most important of all, no provisions or requirements were ever established for prefunding of this defined benefit program. At odds with every principal, every covenant and requirement of the 1937 Act which largely governs administration of state and local public sector pension law – this program was conceived exclusively as a “pay as you go” benefit for current retiring employees only – with no thought of its future budget impacts or to how the benefits of future retirees would be funded.
This is the culture, this is the backdrop, this is the “government’s default funding model” into which we drop newly elected members of any city council, school board or other public agency. As one contemporary song goes “What’s a girl to do?” For anybody new to elective office, why would you suspect a problem with this “pay as you go” approach to government accounting – of course it would be properly funded, properly audited, properly safe and secure in every respect.
It could be a few days, a few weeks or even months, but then the reality begins to sink in – the agency, the school, the city, the county – has a major problem with one of the twin pillars of its retirement program . What are your options? Are you going to blow the whistle on a great personal benefit that you hadn’t before realized even existed? To whom do you turn to for advice – the city manager, the financial director, the city attorney – all of whom are deeply and personally committed to the continuity of this important program?
Eventually, and particularly for those interested in higher political office, the natural inclination is to leave well enough alone – secure in the knowledge that you didn’t invent the system, it seems to have been working fine for all these years, the Governmental Accounting Standards Board has identified it as just another footnoted problem to eventually be resolved, and that hopefully you will be long gone by the time the problem becomes a real issue.
And, when the matter arises of what your agency can do about finding additional savings in its existing programs, what are you going to do then? You have cut staffing to the bone. You’ve pared back on important community assistance programs. You’ve watched as some cities around you have begun to seek bankruptcy protections from their unsustainable debt loads. You’ve even seen some cities completely dissolve and eliminate their OPEB programs in their entirety.
Now you are faced with further pressures for budget cuts on the one hand, or significantly increased taxes on the other. Do you bring up these examples of what’s happening in other communities? Do you dare suggest consideration of program revisions, restructuring or modifications that might still preserve the integrity of the program – with certain compromises in benefits? Do you push aggressively to implement new programs covering all new hires as the old guard phases out? When is it the right time, when is it the safe time, to begin exploration of these questions? What will be the position of the unions? How will the employees react? How will the community respond?
Frankly, this is not way for our elected leaders to be running a government. Neither elected nor appointed officials should be finding themselves with such conflicts. Politics may be a messy business, but I draw the line when decision makers are forced to endure this type of personal conflict.
At a personal level, if you want to work for an outfit that categorically refuses to put its money where its mouth is, if you want to work for an employer who thinks it’s perfectly OK to make promises to its employees but doesn’t’ have the means or the will to properly fund those promises, then that is the employee’s choice. Or is it? Will the next argument be that the employer is actually bullying the employee and that the employee is powerless to influence the policies and outcomes of its employer? Somehow, that doesn’t ring true – particularly when the employee is represented by paid, professional union negotiators and equally well paid labor mediators. It sure seems like the employee should have every right to have their voices heard.
But, what it really gets down to is that I don’t want an elected official coming into this decision making role carrying the burden associated with being a current or future recipient of this broken system and then feeling they are compromised in their abilities to speak frankly about the problem or the policies that have gotten us into this mess. Flat out, candidates with this burden should be conflicted out of the vote on these and related matters – related matters being anything that touches upon the subject or issue of employee current or deferred compensation or benefits. Is that clear enough?
And, while we’re at it – and towards the goal of transparency – I think that any candidate or official seeking to represent the public should be required to follow the full intent of California’s Form 700 disclosure. No longer should candidates hailing from a public sector employment background be exempted from reporting full particulars of the employment and earnings history – as they are today. It’s discriminatory and disparate treatment to require this information only from candidates with private sector employment. By the same token, all candidates should be required to fully disclose the nature of their financial investment and investment holdings. The idea that current or former public officials should be allowed to hide behind that status and be exempted from reporting the full value of their pension and benefit earnings, together with the present value of these assets, does a disservice to the achievements of the candidates and fails to expose the full magnitude of any potential financial bias they may harbor in defense of the system as it is.
As I suggested at the introduction, I have an offer to make. If you will join me in supporting calls for a fundamental reform of the system, one which respects the rights and honors the interests of our public employees as well as those of our taxpayers, and one which puts an end to this intolerable conflict for our elected officials – then I would invite you to join me in support of additional tax measures which realistically address our need to fund the legacy debt obligations of our generation. We have delayed, for too long, this conversation about the fundamental need for reform. Likewise, we have delayed and denied for too long the fundamental relationship between a healthy, growing economy and our ability – as a community – to afford the essential costs of local government which helps to foster and insure a more prosperous and better tomorrow for ourselves and our children.
The elected OPEB is something I’ve had a vague awareness of, but not in detail. I still don’t have much detail; it’d be nice if someone would determine the specifics of Davis’ benefit and then put it into context, i.e. the average number of beneficiaries per year and the annual (current and projected) cost of each beneficiary.
Jim,
I agree, the more details stats would be helpful. Suffice it to say that the current unfunded liability for the city is roughly $55,000,000 – more than mere budget dust. The city is working to pay up the account to a fully funded status over the next 30-40 years. The required payment to accomplish that is roughly $5.8MM per year. Of that, we are paying approximately $3.8MM per the current budget – in other words, we’re not actually paying the baseline mortgage payment we have set as a “target goal”. At the present rate, it is one of those special things our kids will be inheriting.
Thanks again Doby….
But to understand your offer: agree to taxes that will reform the system? Agree system needs reform, in fact the elected officials benefit from the same monetary and retirement benefits that the employees enjoy; is that a conflict?
As a businessman you have had I am sure, occasion to lay off employees if business or revenue decreased; not a good situation but all of us in private businesses have seen or felt this. Why is the public sector such a sacred cow? Again I ask how the attrition decrease in the city employee workforce has impacted the organization: have departments been reorganized and shifted to accommodate? What about all the supervisors of supervisors we saw on an old org chart which Don Saylor described?
“Supervisors of supervisors”… fair comment, as well as looking at “managers” who supervise either temp part-time employees, or no one. Part of the problem is the civil service system, where it’s nearly impossible to do ‘pay for performance’. As a result, people who are very talented, and competent in their field, have to be promoted to supervisory/management positions to compensate them to market and retain them… even if they have neither the skill sets, nor inclination to be supervisors nor managers.
DJUSD has about 20 steps in their pay schedules, at 2.5 percent per year, and pretty much automatic if they keep on the straight and narrow. Yet, a truly excellent teacher, with the same years of service, are compensated the same as those who just squeak by meeting bare minimum criteria.
Davis employees have 5 pay ranges, with 5% increments. For many positions, particularly professionals, the City has had to offer 3rd or 4th step, in order to land the most promising candidate.
IMO, the compensation issue is not simple.
Actually, the point I meant to make is that we need public sector incentives to reward the star performers, and let them do their thing, without promoting them to their highest level of incompetence .
Soda,
Thanks for your comments. I’ll take your comment “elected officials benefit from the same monetary and retirement benefits that the employees enjoy; is that a conflict?” and assume it to be a question.
No, I don’t believe that elected officials participating in the same program as their employees presents any basis for a conflict. Where I do see the potential for a conflict involves three aspects of that equation:
1) Does the benefit in question constitute a form of current or deferred compensation and is the elected official charged with overseeing the fiscal integrity of the program?
2) Irrespective of question no. 1 – Is the program appropriately funded and properly administered?
3) Is the benefit clearly identified and reported on the official’s Form 700 or elsewhere on the agency’s website designed for such purpose?
Comply with all three and I see no problem.
Thx Doby,
If I understand it, city councilpersons are entitled to medical and retirement benefits from their service on the CC? Can you or someone else verify and/or expand on that?
If so, I DO think there is a potential conflict in that they are charged with overall approval of MOU benefits…..
And excuse me, but I do not see the ‘fairness’ of giving medical and retirement benefits to a CC.
In the private sector unless you retire from the company (and this was mainly in the old pension days) you did not retain medical and retirement other than whatever the company and more and more the employee would pay into the fund.
Interested in your comments….
Soda,
It appears that I am not alone in these concerns, see following link:
http://www.mercurynews.com/salary-survey/ci_24798591/former-part-time-pols-bay-area-reap-medical
Assemblyman Kevin Mullin (D-San Mateo) in January submitted Assembly Bill 1448 which would put an end to participation in post-employment benefits for council members effectivr Jan 2015. How this loss of benefit would be compensated is not addressed. See link below:
http://asmdc.org/members/a22/news-room/press-releases/legislation-will-ensure-that-part-time-elected-officials-cant-grant-themselves-lifetime-healthcare-benefits
I think removing OPEB from the equation would be the cleanest solution. If the bill passes, it’ll be interesting to see how this affects the candidate pool. I’ve always thought that a place like Davis could attract plenty of talent without any compensation beyond modest job-related expense reimbursement.
Clarification question. Candidates must disclose information regarding employment history and earnings received from private sector jobs, but not public sector jobs?
Michelle, you must have filled out a Form 700 upon becoming a commissioner, but to clarify, you only have to report private-sector earnings during the reporting period. A complete history isn’t required.
Correct I did not have disclose the income I receive as a substitute teacher for DJUSD, but I did have disclose half of my husbands income because he works for a private company based in Davis.
Michelle is absolutely correct.
My question, and I just wanted to clarify before I asked it, is why the distinction?
Why do I have to report income from a private sector job and not a public.
If you work/serve for multiple public entities, you do have to report it. If you, or a spouse have the potential of gaining financially from recommendations/decisions you make, you have to disclose it. Form 700 is a form of transparency. A friend of mine has had to do them for years, even they were squeaky clean. They are also used to determine who needs to recuse themselves from certain actions.
Ironically, now all public employees have to have their salary/benefits on-line, but Doby. Jennifer, Frankly, et al, in the “private sector” do not. Guess that’s why they call it the “private” sector.
People in the private sector have the right to advocate for government to fund them, in the way of contracts, etc. Public employees (management) are precluded from participating in decisions that might uniquely benefit them.
So maybe private companies that contract work from the government should have to disclose their financials in the same way public entities have to?
I think that Doby makes an interesting argument that public sector employees can also benefit financially from recommendations/decisions they make. Is it not appropriate that they then too should have to publicly make similar disclosures? Or is it necessary for them to do so on a form? From what you are saying it sounds like this information is publicly available on-line.
No… no prior history is required unless there is still financial consideration in the present, and even then, there are a lot of exemptions to that, particularly pensions. Go to the Secretary of State’s website and see Form 700 for yourself. “the truth will set you free”.
fppc.ca.gov/forms
To clarify… form 700 makes no significant differences between public nor private sector history. Doby makes some good points, but was flat-out wrong on the Form 700 part.
Michelle,
Thanks for your question. Yes, you are correct, there are different reporting standards for candidates seeking public office and prospective commission appointees as between those from the private sector and those from public sector. Following is a link to the form:
http://www.fppc.ca.gov/forms/700-13-14/Form700-13-14.pdf
In essence, the Fair Political Practices Commission is seeking to remove bias and personal economic interests which result in a conflict of interest in our elected and appointed public officials.
You can think of the examples – the RDA director whose wife is seeking a loan for their new office building, the city council members whose construction company is bidding on the new high school, the county supervisor whose law firm has as its largest client the developer who owns all the land around the city – those types of things.
So, literally, the candidate from private sector employment, and their spouse, are required to detail their employer, the amount of compensation received, the names of any business client representing more than 10% of their volume, the stocks they own, any real estate investments they have. You get the picture.
For the candidate from public sector, as I interpret it (and I assure you I am no expert on this issue) exempted from reporting their employer and an information concerning their compensation, pension income or benefits (likewise their spouse would be similarly exempted if also in the public sector). While the public sector candidate is required to delineate any and all investments on a comparable basis, they likewise exempted from reporting the “value” of their pension investment and other associated defined benefits.
Please understand, these are merely my interpretations.
It is solely my conclusion that the FPPC must view that the compensation package and retirement investment assets of the public sector candidate, and their spouse, do not result in any circumstance of personal economic conflict or bias that might otherwise affect their judgment in the impartial execution of their duties.
I am merely asking if that is a reasonable basis for exempting all candidates from the same disclosure requirements.
Got it. I think you have made a thought provoking argument why the FPPC may be flawed when making this assumption.
Err on the side of caution.
Doby… we can take this off-line if you wish, but public employees have EXACTLY the same disclosures as do private sector folks. Your “facts” are either wrong or mis-informed. See form 700.
Need to re-clarify, public employees that have significant recommendations/decisions on behalf of the agency have to file. “Rank and file” employees do not.
hpierce,
Thanks for your comments. Clearly, you are far more versed on this issue than I.
To respond, however, I am not addressing my comments to employees. I am addressing them to those who would serve in positions of elected office or appointed office – serving on behalf of “the people”. Or at least that’s how I perceive the role of our elected officials to be serving.
Don’t know if that is a distinction that would make a difference in your comments.
Second point, I don’t get the part about why Form 700 excludes candidates or elected officials from reporting their public sector compensation and source/s of public sector compensation. Do you have any background on this issue?
Thirdly, I guess I would consider a “pension” as a form of long-term investment. While a pension asset may not present immediate conflicts of interest on matters influenced by local decisions – like land use or specific program funding priorities – but it does seem legitimate for the public to know the magnitude of a candidates “investment in the status quo” when it comes to oversight of agency employee compensation and benefits packages. After all, aren’t our elected officials charged with the oversight of the budgets which help fund and support these very investment programs?
Theoretical…if a retired city emploee was elected to the CC, they would not, have a financial conflict of interest in increasing or decreasing city employee salaries and/or benefits UNLESS such a decision directly affected them, or theirs, different from the general population.
hpierce
I don’t see that we really need to speak theoretically in this instance. There is ” the general population” and there is the “general population of CalPers pension recipients”. An action (negotiated agreement) that might be beneficial for “general population of pension recipients”- such as a COLA adjustment or multiplier adjustment – could easily become a major burden or unfunded liability for the general population.
If you are in a household on the receiving end, and depending on which receiving end, might not you have a different perspective on the matter at hand?
hpierce,
Having not heard from you in several days, I am disappointed. Flippant though it may have been, I had actually anticipated you would want to further explore my previous reply.
Needless to say, all of us recognize that our community is very much positioned on the positive receiving end of this equation – so much so that many describe Davis as a wealthy community. Somehow, that isn’t quite the adjective I might choose, but that is actually one of the arguments I heard from a prominent legislator as to why Davis shouldn’t be whining about our new water rates.
Wealthy or not, we are indeed a fortunate community. Collectively, however, that fortune is about to be put to the test as the full measure of our city budget shortfall comes into focus. In part because of our community’s good fortune, I am confident that our businesses, local civic leaders and many dedicated residents will respond in equal measure by supporting and crafting a combination of sustainable financing and economic strategies which will insure the necessary balance in our social and cultural underpinnings while fostering a vibrant and promising pathway for our future.
Candidate, no. The requirements are for those taking office, serving, or leaving public employment.
See instructions for Form 700.
http://www.fppc.ca.gov/forms/700-13-14/Form700-13-14.pdf
from .pdf page 8:
General
Q. What is the reporting period for disclosing interests
on an assuming office statement or a candidate
statement?
A. On an assuming office statement, disclose all
reportable investments, interests in real property, and
business positions held on the date you assumed
office. In addition, you must disclose income (including
loans, gifts and travel payments) received during the 12
months prior to the date you assumed office.
On a candidate statement, disclose all reportable
investments, interests in real property, and business
positions held on the date you file your declaration of
candidacy. You must also disclose income (including
loans, gifts and travel payments) received during the
12 months prior to the date you file your declaration of
candidacy.
hpierce,
I’m guessing the candidate reporting requirement may have been introduced fairly recently. I’m only going by what I read.
I guess that’s my point. At face value, and before you go into the details of what is to be reported and what is to be excluded, it appears that all candidates would be required to disclose “all reportable
investments, interests in real property, and business
positions held on the date you file your declaration of
candidacy.”
The catch term is the word “reportable” and that’s my beef with the FPPC.
Understood. Your cites appear good, re candidate disclosure. Was not familiar with the nuance, but in all the years I filed 700 forms, I was never a candidate for elective office. Therefore, skipped reading about them.
Good point. I didn’t have to fill out the form until after I was appointed to the NRC, not before.
I’m assuming this applies to candidates as well. They only have to fill out the form if they get elected.
Nuance… you were “appointed”, thus serving at the will of the “electeds”. Even if candidates for elective office are not REQUIRED to file the form 700, I believe they should VOLUNTEER to disclose the same info.
BTW, am pretty sure that Swanson & Allen have 700’s on file, and will have to update them before April 1st. Not sure about the other two announced candidates, but would bet an IHOP breakfast that Davis does have one, as well.
“It’s not about placing blame….Are you going to blow the whistle on a great personal benefit that you hadn’t before realized even existed? To whom do you turn to for advice – the city manager, the financial director, the city attorney – all of whom are deeply and personally committed to the continuity of this important program?”
Well, maybe it is about placing blame. Or, dropping a little innuendo.
The fact that city council members are eligible for defined benefits isn’t a surprise to those of us who follow Davis politics and hardly could creep up to surprise councilors months or years after they’re elected.
That a thorough briefing of new council members by the city attorney and other staff isn’t a routine process would surprise me, given all the ethics issues, Brown Act considerations, etc., that guide municipal work.
That our city council and staff are so lacking in integrity as to encourage conspiracies to keep “great personal benefits” secret from everyone else would surprise me. As would the idea that such a public service/employment benefits would drive decisions facing those who end up on our city council.
It’s difficult to comment on the disclosure issues presented here. The article and comment claims about what’s actually required is too confusing.
In any case, it sounds as though changes are needed both in public disclosure requirements and in the benefits we offer up to or city employees and leaders.
IG –
Typing on my phone is not optimal. One more important point. I don’t refer to any conspiracies, however, I am clear that is unfair and unwise to put electeds in positions of personal conflict.
Over the years I have been told by multiple CC menber they are “uncomfortable” with the exemption on Form 700 for reporting of OPEB benefits. I have also been told by others that the value of the lifetime benefit was what pushed them to a second term. I don’t know how Assemblymember Mullin proposes to replace that bendefit value – but make no mistake it is of value and I don’t want to renege on that deal.
Sorry, I read in “conspiracy” in its most general form–where the suggestion is that city council members wittingly or unwittingly are in league with “the city manager, the financial director, the city attorney – all of whom are deeply and personally committed to the continuity of this important program….”
In spite of my confusing about the reporting requirement issues, I’m with you on nailing things down for full disclosure and on looking at public service benefits that now appear overly generous and/or unsustainable.
IG –
Thanks for clarifying on the confusing part.
Again, my point on the oversight issue is not to suggest a conspiracy, it’s simply to ask who is going to keep an eye on the program. It surely has the appearance of the “fox guarding the henhouse” as matters are presently arranged.
And, to clarify, I’m not asserting the program is necessarily too generous. Palo Alto manages a much more “generous” package BUT STILL MANAGED TO END ITS 2013FY with $36.3MM in its general fund account, representing 23.8% of its general fund expenses for the entire year.
The question is what’s wrong with our model?
P.S. – Palo Alto’s Auditors Letter for their recently completed Fiscal Year is dated Nov 8, 2013. Here in Davis we haven’t even seen last fiscal years annual report, much less the Auditors Letter and its February 7, 2014.
IG,
I see the problem now – you’re an iPdGuy and I’m an Android-wintel guy. That’s got to be it.
As for blame – I squarely blamed The System. As for innuendo, I’m not clear on your issue. I am not in denial about human nature. I only criticise the employees if they feel powerless to speakup. I empathize with any employee whose employer is not delivering on their promises.
I have shared citations (above) for Soda. Soda didn’t seem to be real aware of the benefits. Assistant Speaker Pro Tempore Mullin appears to think there some problems with existing arrangements.
If I included more confusing information please let me know. I don’t intend to be confusing with my comments.
Doby – thanks for taking the time to develop these articles and share them. One area of confusion for me concerns the difference between pensions and OPEB in terms of the certainty of payout. I hope I can articulate my question. Basically, contributions to CALPERS for current employees are based on formulas that include inflation, life expectancy at retirement and expected returns on investments that will fund the payouts going forward. What is known, with certainty, is that there will be a payout each and every month to a retiree.
Medical care is different because there is an additional model parameter which is some combination of the probability of needing care (and that in turn is based on individual health characteristics which are not captured) and the severity of the illnesses incurred by the individual retirees.
So my question is, how does a government entity go about pre-funding such a plan? Is it a matter of using probabilities built around specific parameters? If it is, how effectively does such modeling work? Also, health care inflation has been running far ahead of general inflation so how is that dealt with? For employees that are part of the current workforce, companies often adjust the amounts of deductibles and co-pays and co-insurances and in many cases employee contributions to the monthly premium. How does that work in the OPEB world?
I am not calling into question the logic of your argument but merely calling out (perhaps inarticulately) what I see to be as a challenge in implementing a sustainable program for health care.
Thanks
Robb
Thanks for your ??s. They are really good and right on point.
Sadly I’m stuck with this Smartfone tonite. For every word I type I lose about 3 more with screen jjumps, etc.
Appreciate if I could reply in the morning. Hope you understand.
Robb,
Ok, back at my wintel.
First off, there are a lot of people here in Davis who are much more qualified than I to address your question. Many of them may disagree with my premise, and more yet may fundamentally disagree with my logic and methodology – particularly from a technical fund-accounting standpoint.
So, if you’ll bear with me, I’ll try my basic approach and see if that helps.
The fundamental distinction I see between a pension benefit and a lifetime healthcare benefit is the distinction in the methods employed for funding of these programs. Parameters for pension accounting are well defined and the actuarial science them is well established. Moreover, the fundamental commitment to actuarially determined accounting standards was codified in the 1937 Act specifically to address the needs of public sector employees. The act provides for trustee oversight of the funds, annual actuarial auditing (if required), provision for annual review regarding fund adequacy and provides authority to elected officials to assess the amounts necessary to keep the fund in actuarially sound balance between current fund investment assets and projected lifetime payouts. That’s the format for pensions.
Unlike in the case of pensions, employee healthcare was never established as a defined benefit type of program. It was established, seemingly rather ad-hoc, perhaps as an extension of the employer-paid arrangement during the employees period of employment. This is definitely where somebody else could take over the history and explain the transition from a no lifetime healthcare program to a full lifetime coverage.
Be that as it may, the program was handled as a “pay as you go” basis – meaning that the benefits of current retirees would simply be paid out of each year’s ensuing budget – without regard for creating any associated long-term investment fund or asset. Somewhere along the line, there had to have been a determination made as to when somebody became eligible for this lifetime benefit – years of service perhaps. Somehow that number settled on 5 years in some jurisdictions.
The bottom line, from an accounting standpoint, is that a major tenet of the accounting profession is the concept of match of revenues and expenses and of timing of those associated revenues and expenses. For the pension program, those standards are met. The annual contributions which impact each year’s budget are designed to deliver those future promised benefits (assuming people don’t monkey too much with the COLA adjustments, don’t allow spiking, don’t change the vesting formula, etc).
When it comes to the post employment healthcare component, by definition these are expenses that don’t kick in until after the employee is gone (and no longer delivering service to the current population of taxpayers.) From an expense standpoint, therefore, the expenses of this program become the expenses of a future period budget. It’s all well and good for the current budget cycle, but for the next city manager or the next city council, those expenses will begin to show up – minus the services of the employee with whom they are associated. So, now you have a new employee, with the same expenses as the old, so now you have two expenses to cover – whereas if you had set aside the premium funding during the period of the retired employees working career, you would only be faced with the ongoing premium for the current employee. And, that’s how it works with the pre-funded pension program where expenses are matched with service years.
To go back to the analogy of a departing city manager, who provided five years of service to the city before retiring at age 55, he worked for the city for a period of 5 years, but the city will be writing an insurance premium check each year for the next 30 years. This approach violates both accounting principles of matching and timing. If we had been following these guidelines, the lifetime benefit would have been amortized over a period of 5 years – or $120,000 per year (assuming a lifetime present value of $600,000 for the benefit) for each of those five years. Then all that funding would accrue to a pre-funded deferred benefits account and be paid out accordingly over the subsequent 30 years – never again impacting the current year’s budget.
So, a big difference when we consider how much did that Manager actually cost the city during his/her term of service. That, in a nutshell, why accountants favor principles of matching and timing.
Addressing the other important components of your question, yes it is much more difficult to predict the future costs of medical care – all we know is that it has been rising far more rapidly than inflation or COLA. So, indeed, it is a much worse benefit to let go as an “unfunded liability”. It’s expected rate of growth without continuing tweaking of the co-pays, deductibles, etc. is anybody’s guess.
Yes, there are tools available to better manage these programs. The city has been in proactive discussions with various consultants on this very issue. And yet it remains a very real problem for our current budgets in the form of a legacy debt. Today, we are not making any headway on legacy portion of that debt – we are simply moving it from the footnotes of the financial statement to the balance sheet – where it will sit as a future bill for future generations.
Generational equity is a rapidly emerging topic. How and when we choose to address the problem will be a defining legacy for our community.
Three final points:
1) We have a very exceptional community. Much of what makes us exceptional are the countless and untold contributions of our many residents who have dedicated their careers and their lives in public service and service to this community. As a businessman and fellow neighbor in this fine community, I clearly recognize and embrace this heritage and will do everything within my power to insure that we honor this tradition at every turn in the road.
2) I am will willing to advocate for changes necessary to insure the high qualify of life, culture and opportunity we have come to know in this community. I strongly embrace the notion of fair-share when it comes to sharing the costs necessary to maintain and enhance what we have come to know. And, because of the traditions and deep roots of our community – its dedication to public service in particular – I suspect that the vast majority of my fellow business owners and residents will likewise agree to step up and shoulder their fair share.
3) As mentioned at the outset of the Part 2 article, however, I have offered a proposition – a proposition which I feel will help us move beyond the current dysfunction, lack of transparency and fiscal accountability. I feel strongly that the changes proposed would serve the best long term interests of our city employees and community taxpayers alike. Despite the seeming lack of enthusiasm for these points (based on the lack of response to this article), I am still hopeful that some in the community will choose to engage these issues and join in the conversation – offering their constructive recommendations and encouragement for a brighter Davis tomorrow.
Robb, I wish you best of luck with your campaign and will be there to support any initiatives you put forward to increase community understanding of the challenges and opportunities ahead, and to help in advocating for increased taxes as appropriate to help bring these issues to some resolution.