Vanguard Analysis: Should Voters Trust the Council with More Money?

walletThis is a core question that Rich Rifkin poses today in his biweekly Davis Enterprise column and while Mr. Rifkin deserves a lot of credit for helping to educate the public on city budgetary problems, at times being the only voice on the Enterprise to sound the alarm, we do not entirely see eye to eye here.

He writes, “Before you vote, yes or no, on the City Council’s proposal to increase the sales tax in Davis another half-cent — from 8 percent to 8.5 percent — you should know where your money is going.

“The city figures the larger levy will generate $3.61 million per year. Most of that will go to higher compensation for its current employees and to cover unfunded expenses for retirees.”

This is a much more complex point than Mr. Rifkin has the space to write about.  While it is true that, of the $3.61 million, around $2.3 million will go to employee-related costs, most of those employee-related costs are outside of the control of the city.

Of the costs that are within the control of the city at this time, $1.06 million will go to personnel-related increases.  However, only $360,000 will go to higher compensation to employees, which is a 2% COLA (Cost-of-Living Adjustment) that the city gave to offset some employees for taking hits on pensions and medical insurance.

$447,000 of that comes from the losses the city received due to the fact that DCEA (Davis City Employees Association) and Fire Fighters held out for contracts, and $250,000 came from the removal of budget savings that came when the city filled two vacant police positions.

The other $1.24 million is outside of the city’s control for the most part.  Over half a million came from increased costs to retiree medical and medical insurance.  Another $437,000 came from increased PERS (Public Employees’ Retirement System) costs, which were actually mitigated somewhat by the city having employee groups take up more of their own share.  And $305,000 came from leave benefit funding.

None of that was in the city’s immediate control, so while Mr. Rifkin writes that the hole the city is in is due to higher compensation for its current employees, really only $360,000 of that is the case and that was again used to offset other cuts.

Mr. Rifkin writes, “The tax increase is first needed to pay for fatter salaries given away by the current City Council.”  That is a small amount of the costs (about a tenth of the tax revenue), but Mr. Rifkin does not attempt to estimate exactly how much the city saved in the exchange.  The city calculated it saved about $5.8 million during the course of the new contracts over what they would have spent; if that is true, $360,000 is largely chump change.

Mr. Rifkin continues, “The increase will help the city afford Cadillac medical plans given to employees and their families.”

As our analysis of school health insurance shows, I do not know if we can call the city’s health plan a Cadillac medical plan.  A full-time city employee’s medical insurance is around $1920 per month versus about $1600 for a teacher’s.  The main difference is that, while the city picks up much of that tab for its employees, teachers are only covered up at $952 per month by the school district.

The city might have been able to have negotiated more of that pay to come from the employee, but the problem is that the 2009 MOUs were so modest in scope, the city had to push on employee groups to take up more of the cafeteria cash outs, pensions, and retiree health.

As it was, the city had two groups hold out and had to impose last, best, and final offer.  Had the city tried to exact much more from employee groups this time around, we might have had them all hold out, which would have been politically untenable.

From our perspective, the city did what it could in this round of negotiations, and the fault lies not with the 2013 MOUs, but with the 2009 round that did not go nearly far enough.

“The increase also will cover the growing costs of pensions, including the underfunded amounts going to those who’ve already retired.”

This is true.  And while factually correct, it ignores the fact that most of these are out of the hands of the five individuals currently on council who are not responsible for past mistakes.

Mr. Rifkin continues, “The salary hikes built into the current labor deals are small compared with the big increases Davis gave its employees from 2000 to 2010. The firefighters, for example, got a 36 percent pay hike from 2005 to 2009. That was only four years after a massive salary jump and the giveaway of a new, unaffordable pension plan worth millions of dollars more for every public safety employee.”

He continues, “Yet small as they were, the recent raises were irresponsible and unnecessary. Davis did not have the money for them, no other cities were bidding away our workforce and the salary spikes have made the fiscal crisis of the city even worse.”

But Mr. Rifkin makes a tremendous calculation error here.  The city paid about $360,000 back to employees in salary increases in exchange for concessions on other issues.  Perhaps he is right, the city could have gotten more, but let us say that the $360,000 was the difference between two groups going to impasse and seven groups going to impasse.

We know that just two groups going to impasse cost the city about $11,000 a month in costs, and perhaps that is a low number.  Over the year it took for the first five groups to agree to terms, and terms being imposed on DCEA and Fire, that’s well over $1 million in costs. Let us conservatively suggest that five additional groups going to impasse would cost the city about $1.5 to $2 million in total costs.

Even $1.5 million in total costs is more than $360,000 a year over three years.   So by getting the groups to agree a contract rather than going to impasse, the city actually came out ahead.

It is these types of tradeoffs that the city has to factor in, that Mr. Rifkin did not in his otherwise sound analysis of the situation.

Mr. Rifkin then writes, “A bigger hit to the city than increased salaries is the growing expense for retiree medical benefits (known as OPEB). Before the 2009-10 fiscal year, the city never funded this expense.”

He continues, “Now, once a person retires from the city of Davis, the city will write a check each month to CalPERS to cover whatever it costs for medical insurance for the retiree, his spouse and his child. If he lives deep into old age, taxpayers in Davis will be on the hook for decades.”

He adds, “For the past five years, Davis has been pre-funding its OPEB expense for future retirees. This fiscal year, the funded amount will be $3.74 million. The city owes $2. 22 million for the OPEB of its current retirees. Our full bill for 2013-14 is $5.97 million.”

So for some time, the city has been working to deal with its $60 million unfunded liability on retiree health care benefits, after new accounting practices under GASB 45 (Governmental Accounting Standards Board Statement 45) showed that the city’s liability, by simply paying for the benefits as the bills come due, would push the city heavily toward bankruptcy by 2030.

Instead, the city has been trying to pay its way into fully funding the liability in advance, which for some time we have known will save the city literally tens of millions of dollars by the time we hit 2030.

OPEB-chart
Chart from 2012 that illustrates the unfunded liability

In 2012, the city was concerned that OPEB costs would soar to perhaps as high as 24 percent of the current payroll.

“Unfortunately, 20% of payroll is probably not going to cut it in the future,” City Manager Steve Pinkerton said in January 2012.  “We’ve been ramping this up, the council has been responsible and doing the right thing for the last three or four years by beginning to take on retiree medical, ramping it up each year from 6% to 8% to 10%, last year it was 12% of payroll, the original plan was to go 14%…”

“We’re recommending based on some input we got earlier this year to go all the way up to 20%,” he continued.  “The reality is that you’re probably going to see a discussion soon where we’re going to have to ramp it up eventually to closer to 23-24 percent.”

However, the agreements signed and imposed by the city have allowed the city to reduce costs on retiree health to 17% of payroll – perfect solution?  No.  But the council over the last two rounds of MOUs has increasingly shifted burdens from the taxpayers to employees.

Mr. Rifkin then argues, “The great crisis in pension costs is ahead of us. Employer rates  in 2020 will be double what they are today. If nothing changes, the residents of Davis will pay $13.2 million per year to let city employees retire young and flush with cash.”

Davis has actually done a good job of thinking ahead.

In January Mayor Joe Krovoza noted that the city budgets are already taking into account expected hits from the state on increased costs for PERS, finally directing employee shares to be picked up by the employees rather than covered by the city, as it has done for the last decade or so.

Last spring, City Manager Steve Pinkerton noted, “I think there have to be some changes in PERS, I don’t think it’s sustainable. There has to be some point in time where they’re going to have to start looking at changing the system, even for existing employees.”

At the same time, the city is limited in what it can do.

Mr. Rifkin takes on a more moderate tone in his conclusion.

He writes, “I am not ready yet to endorse a yes or a no vote on the sales tax increase. I am aware that, if it is voted down, services in Davis (including police, fire and parks) will be severely cut back. Our town will be a less pleasant place to live.”

He adds, “What I would like, if they want a yes vote, is for the people on the Davis City Council to explain two things: Tell us what mistakes they and past councils made that got us in this predicament, and what exactly they will do to fix the problem they have identified.

“If they don’t understand what they did to put us in this crisis and they don’t know how to prevent it from recurring or getting worse, why should we trust them with even more tax money?”

Here we fully agree – there needs to be a time of reckoning for past mistakes and assurances into the future.  However, we believe that the current council has done much to earn voter’s trust back with regard to finances and that we should trust them with our money right now.  Whether that holds into the future is a bigger question.

—David M. Greenwald reporting

Author

  • David Greenwald

    Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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133 comments

  1. “However, we believe that the current council has done much to earn voter’s trust back with regards to finances and that we should trust them with our money right now.”

    On 2/14 you wrote:

    “It is not the best option, but voting for the sales tax at this time puts far too much trust into the hands of the unknown – we do not know what the council or city management will look like going forward and I for one have seen too much progress to simply roll the dice right now.

    So I will be opposing the sales tax in June, and hope that things can come together in time for a parcel tax in November that solves the revenue problems for the city – while at the same time providing us with the assurances and accountability we need going forward.”

    So which is it? Lately you seem to be all over the place.

    1. I was talking about two different things. One was the trust in the current council and their record. The other is my support or opposition to the sales tax.

  2. “The city figures the larger levy will generate $3.61 million per year. Most of that will go to higher compensation for its current employees and to cover unfunded expenses for retirees. While it is true that, of the $3.61 million, around $2.3 million will go to employee-related costs, most of those employee-related costs are outside of the control of the city.

    Thanks for clarification of this, I don’t think this is generally understood.

    1. Why were people insisting so vigorously just a couple weeks ago that the council put an advisory measure on the ballot that would attempt to earmark these funds for infrastructure improvements and other non-employee purposes?

      Where did those folks expect we would get the money to pay for the employee-related costs that are “outside the control of the city”? Did I misunderstand the proposed purpose of the non-binding vote?

      1. Yes, you misunderstood. The purpose of the non-binding vote was to carry out the usual bait and switch where voters are fooled into thinking that their tax money goes to parks, social services, police etc but then it mainly goes to higher salaries and benefits for city employees.

      2. If they had gone for the higher tax increase, which they came very close to doing, then potential revenues would have been closer to 5 Million, so there would have been some money beyond what was needed to pay employee related costs in the general fund. If this is the scenario that had played out then I can see some value in adding an advisory measure, although I’m not convinced that those are very meaningful.

        As is stands now, in essence all funds generated from the lower tax rate will be earmarked for employee compensation, so an advisory measure seems completely unnecessary.

  3. None of that was in the city’s immediate control, so while Mr. Rifkin writes that the hole the city is in is due to higher compensation for its current employees, really only $360,000 of that is the case and that was again used to offset other cuts.

    So of the 3.6 million only $360,000 will go towards higher compensation?

    1. Yes and higher compensation is relative, they are taking cuts in other areas and offsetting some of those cuts with a very small 2% pay increase

    2. MM: So of the 3.6 million only $360,000 will go towards higher compensation?

      This is false. Almost every cent will go to employee compensation. (The only amount which won’t is going to pay for higher water costs.)

      David Greenwald’s piece is wildly stupid. Even dumber than what he told me it was this morning when I saw him at Cloud Forest Cafe.

      Compensation for employees is not just salaries. Yes, we have bumped up salary costs, as I explained in my column. That in turn makes pension funding more expensive. And pension funding is employee compensation.

      Yes, OPEB and medical rates are beyond the control of the City Council. But how much the City pays for these forms of employee compensation is (almost) entirely within the control of the Davis City Council.

      The most important thing to understand is that our City Council has put us in this bad position by failing to control compensation costs. And the growth of total compensation is why we are running a huge operational deficit. That is it.

      David told me today that, if the Council had followed my advice–which I have given them consistently for the past 10 years–we would have had to impose contracts on the employee groups which signed these (unaffordable) contracts, and since the imposition process would have taken longer, we would be in a worse position today.

      David is right on that. But it’s another bone-headed point.

      We signed deals with the workers we cannot pay for. If we imposed affordable deals, where total comp growth was tied to revenue growth, we would have a balanced operational budget. (We would still have a crisis with regard to long-term maintenance of roads and other infrastructure.)

      Imposing good deals, even if there was a short-term price to pay for it, is eminently smarter than accepting deals we cannot afford.

      But because we followed David’s stupid advice, we are in a crisis and we (or a bankruptcy court) will eventually have to change the labor contracts in the manner I have suggested, even if this tax increase passes.

      No one should be under the illusion that the sales tax increase will solve our labor compensation problems. In fact, with the new CalPERS numbers now out for pension funding, the problem by 2020 is going to be bad enough that we will need an additional $4.4 million in tax revenues per year simply to keep our workforce employed, assuming that medical costs don’t also increase.

        1. Even that is wrong. I don’t know the exact number. However, my best estimate for the sworn police officers is the pay increases over 3 years from 1-1-2013 to 12-31-2015 will increase SALARIES for those employees by about $600,000. That number includes all sworn officers, including the police chief, the assistant chief, the captains and lieutenants, all of whom are sworn officers and all of whom are on 3% at 50 and all of whom are paying 12% of salary now to cover a portion (less than 1/3rd) of their pension funding.

          But keep in mind, all non-sworn police employees, all management employees, all department heads, all finance employees and on and on got a BIGGER pay raise than the sworn police officer got over the same period. The only ones who did not are fire and DCEA, because they would not sign their contracts.

          Most important to understand is that a higher salary means a worse pension funding crisis for the city, because the amount we owe is based on salaries.

          If we had a Rifkinesque council, all salaries would have been reduced by at least 5%; and we would have cut back on the great amount of time we are paying city workers to not work. They get waaaaaaaay more paid vacation time than we can afford. They get triple the number of paid holidays than their equivalents in the private sector are paid not to work. Management employees and department heads, many of whom are paid far too much in salary now, get an additional two weeks of salary every year for “management leave” time.

          It is time the taxpayers of Davis own up to the fact that these goodies are too expensive. They are part of the reason our streets are in disrepair and our debts have ballooned into the hundreds of millions of dollars. The time of irresponsible City Councils needs to come to an end. Passing a new tax increase will simply push that fact back by a few years.

          I would still advocate a vote for it, however, if the Council will own up to its mistakes and explain how they plan to correct them. Up to now, our Council has never taken responsibility, and they have foolish bloggers claiming that the only ones who made bad decisions with contracts were the previous Councils. Even if those mistake were even worse, this Council is the one which has pushed us to the brink of the cliff; and we will fall over short of new revenues this year.

  4. David wrote:

    > Of the costs that are within the control of the city at this time,
    > $1.06 million will go to personnel-related increases. However,
    > only $360,000 will go to higher compensation to employees,
    > which is a 2% COLA

    Sure they only get $360K “NOW” but most of the rest of the money is reducing the hit of increased health care costs that the rest of us are paying “NOW” and funding their big pensions that they will get “LATER”. So Rich is right in that the city workers will get almost all the tax increase.

    We need signs that say “Vote for the tax increase so more city workers can retire in their 50’s with a pension of over $10K a MONTH like the former police chief” or “Get a part time job so you can afford to pay higher taxes and higher health care so we don’t need to pass any costs on to city workers”…

        1. That is your oft stated opinion, but like all opinions, simply repeating it does not turn it into a statements of fact.

          The City could have chosen to cap total compensation, or link it to increases in revenues as Rich has long argued, but chose not to. These increases have never been outside the control of the City, we just have not demonstrated the will to control them.

          1. Understood that this is a possibility, but at what cost? I estimate the cost of taking all bargaining units to impasse and beyond to be about $1.5 to $2 million. That’s a huge added cost.

          2. David, you are not thinking. The fact is that sooner or later these changes will have to be imposed for Davis to be solvent. You act as if in 2015 we can get affordable contracts through negotiations. The truth is–and you ought to know this–is that the $2 million or so you are worried about will have to be paid at that point, if we put off imposing a sensible contract.

          3. I am thinking – I simply believe we got as much as we could this round of bargaining, the next round is two years away and we will at that point need to go further than we have now.

        2. We also could make more cuts in the number of employees and in programs. (We were told that the city employees have been developing their recommendations of cuts of up to 25% need to be made. Where are these lists? I trust city workers to know where cuts would be most effective and least damaging.)

          Whether the city council can be blamed for stupid and pandering pay and benefit increases, they’re here. Citizens need to decide whether want to maintain our present level of services and/or spent more on streets and other things. If so, we need to be raising LOTS more in revenues from existing Davis taxpayers.

          We also need to quit anticipating that we can depend on our economic development initiative to bail us out of this ever-worsening dilemma.

          1. I have not seen a list as of yet. I was told that the number of layoffs with no tax would be 30. There didn’t seem much appetite for that and when I floated it as part of the plan to put a full parcel tax in November, I got push back even from the deficit hawks in City Hall.

          2. Citizens need to decide whether want to maintain our present level of services and/or spent more on streets and other things.

            This is exactly right. The contracts are in place. At this point if we want to significantly cut costs then we need to lay off employees, which translates into a decrease is services.

            People can complain all they want about employee benefit packages and salary increases, but it won’t change the current situation.

            If we don’t want to see services cut then we need to pass a sales tax this spring. If we want our roads and infrastructure maintained then we need to pass a parcel tax this fall. If we don’t pass these tax measures then we will need to live with the consequences.

          3. “At this point if we want to significantly cut costs then we need to lay off employees, which translates into a decrease is services.”

            Not necessarily. Through outsourcing we can reduce costs and maintain or even improve services while boosting local businesses. Many tasks do not need to be carried out by City employees.

          4. but that means laying off existing employees and the council and city staff doesn’t have the appetite for that. also i think a lot of people believe that while the employees have already taken their lumps, the voters have not yet. it’s their turn.

          5. “but that means laying off existing employees”

            Exactly.

            ‘council and city staff doesn’t have the appetite for that’

            Yes, as I have said elsewhere, we lack the will.

            “the employees have already taken their lumps, the voters have not yet. it’s their turn.”

            Funny, our taxes have risen almost continuously over the past 20 years or so in order to fund the City employees unsustainable compensation increases. We have a long way to go in cutting total compensation before it is the tax payers turn again.

          6. Our taxes going to things other than the city. The only tax increase we have had is the half cent sales tax ten years ago and a $49 parks tax.