A Closer Look At City’s Unfunded Liabilities –
Once again we revisit the complete failure of the city’s last budget workshop. A good amount of insight can be gleaned from the way the school district has approached their budget the last two years.
We did not see a prolonged focus on small details. That is not to say the CBO of the School District, Bruce Colby has not tried to cut all of the marginal costs he can, because he did. But at the core, most of the school district’s cost goes to employees. That is the same issue facing the city as well. And so in order to cut substantial and meaningful amounts of money to balance a budget, there are really two places to go–employee salaries and positions. Anything else is really a waste of time.
And while we can certainly criticize Mayor Asmundson and Mayor Pro Tem Saylor for their discussions that amounted to pennies on the dollar, a large share of the blame has to fall on the shoulders of City Manager Bill Emlen and Finance Director/ Assistant City Manager Paul Navazio. Not only did they fail to re-direct the council toward more fruitful discussions, the City Manager’s memo actually set the stage for this discussion to occur.
So let’s back up.
The city of Davis faces an immediate deficit of $3 million per year which is compounded by long-term structural problems caused by rising costs for pensions, retirement health care, and $13 million in unmet needs which includes critical road repair and infrastructure upgrade.
In the past decade we have seen employee compensation costs rise by more than 250%. Increases in retirement health care costs mean that we have at least $42 million unfunded liability. The city currently has 72 employees making over $100,000 per year in salary and overtime. And we are paying public safety retirees 3% of their final salary for each year they have worked when they retire at age 50 and the rest of our employees 2.5% when they retire at age 55. For many that means we are paying them more than 90% of their final salary upon early retirement.
And yet the city manager defends this structure. City Manager Bill Emlen’s memo to council demonstrates a fundamental failure to understand the problems the city currently faces.
“There is no doubt that salaries and benefits afforded local government employees have significantly increased over the past few decades. The City of Davis employees are no exception; our compensation package is generally competitive with comparable local government entities. Conversely, the data and information provided at our October compensation workshop show that overall salaries and personnel costs are well within the range provided in similar cities in our region.”
Councilmember Greenwald has been warning the council for years that these issues are coming down on us. To date the council has not done nearly enough to address critical issues.
One issue that needs to be looked at more closely is that of the city’s unfunded liability.
To illustrate how long this issue has been going on, we look to a September 2007 staff report from Finance Director Paul Navazio to illustrate the magnitude of the problem.
Beginning in 2004, the Government Accounting Board (GASB) issued new rules relating to the accounting and reporting of liabilities. The city’s liability is known as OPEB (Other Post-Employment Benefits) and includes all benefits, other than retirement benefits–that are earned by employees but not paid out until the employee has retired.
GASB 45 requires reporting to ensure that public agencies accurately reflect the cost of providing municipal services as these costs are incurred rather than when the benefit is actually paid out.
The city estimates the current liability is betwen $42 to $65 million. Currently the city pays these liabilities as they go, to the tune of roughly $1.8 million. To fully fund the program would require annual contributions equal to 16 to 23 percent of payroll which works out to $4.3 to $6 million annually. In the long run, fully funding these will reduce costs greatly, but in the short term, well do the math.
As Mr. Navazio said in his assessment of the fiscal impact:
“Were the City to modify its funding approach from pay-as-you-go to an actuarial-based funding methodology, the City would incur significant increases in annual contributions, ranging from $4.3 million to $6.0 million, as compared to the current funding level of $1.8 million. This increased cost would be spread across all funding sources that support current staff costs, with roughly 60% accruing to the General Fund.”
The suggestion has been to gradually shift to a “pre-funding” approach, but the bottom line is that we are going to have to take a short-term hit of some sort to provide long-term savings.
This really gives one a sense for how this works. First of all, if we move to pre-funding we take a huge initial hit, the costs will more than double initially over the existing plan and only by 2022 will they even out. But that approach allows us to really contain costs following 2030.
The problem is even using the pre-funding approach we are still looking at $10 million in costs by 2030 as opposed to the current payments where it is $1.8 million.
So while it is true that changes to our funding mechanism is clearly the right way to go, what we have really done with current budget and financing is saddle the future taxpayers with a huge amount of liability that has not been funded and will have to be paid down the line.
That is what Councilmember Greenwald is talking about when she says we have a $42 million unfunded liability. And this is above and beyond our PERS hit, it is above and beyond the current unmet needs and it is above and beyond the current budget deficit.
The amazing thing about the graphic is the explosive nature of this problem that is not evident at the present time. We will be paying the consequences for what has happened with employee salaries and benefits for many years.
The distressing aspect of all of this was last week’s council meeting. We did not address these issues at the council meeting. We talked about small monies, small costs, things that sure we can do, but they are not going to change the picture in the slightest.
Hey if you want to cut out all council expenses, do it. They can bring their own meals, cut out travel expenses and any reimbursements. Big deal. Discuss the things that are actually going to make a difference.
—David M. Greenwald reporting
In a crisis it is interesting to see who tries deal with it head-on, and who talks about trivia and wishes someone would change the subject…
Anyone hoping to have a political future on the council should be judged by how they cope with this situation.
Adopting Rifkin’s list would be a very good start.
Our city’s future fiscal health rests on the ability of our City Council to confront the “pink elephant” in the room, i.e. the salaries, benefits and retirements for our city workers. The unsustainable pay, benefit and retirement agreements made over the past years between city management and individual employee bargaining units are surely going to bankrupt the city. Sue Greenwald deserves alot of credit for trying to address this issue for many years now. But she is only one vote.
Comments made at last week’s CC meeting by Mayor Ruth Asmundson and Mayor Pro Tem Don Saylor focused on small expenses and completely avoided facing the hard choices that must be made to avert a catastrophe. But then again, both Ruth (who has been on the CC for 7 years) and Don (who has been on the CC for 5 years) have condoned the past practices that have brought us to the edge of the cliff. It will be interesting to see if they reverse course and try to undue the fiscal disaster they helped create.
President Obama said today “We cannot rebuild this economy on the same pile of sand.”
By the same token, City Management and the City Council cannot restore our city to fiscal health by doing the same as they have done before.
The REAL question is: Not if but when we face bankruptcy, will we rebuild this city on the pile of useless CC members(Ruth and Donny-boy??). But even worse than that, will we still be plagued by Emlen and Navazio(how in the HELL did he go from Budget knothead to Asst.CM(aren’t there THREE of those??) Looking forward to voting on new taxes to bailout this cast of fools and their deception, greed and incompetence.
While I think we are being irresponsible, I don’t think we are facing bankruptcy right now or even in the foreseeable future. More likely we are facing higher fees and taxes and people who have struggled to make ends meet being increasingly stressed and forced to leave the city. It is ironic that the individual who defends growth due to his perceptions about elitist Davis is nevertheless nonplussed by fiscal policies that will force many people currently residing in the city to have to leave.
Because PERS costs falls on cities, businesses and personnel taxes accross California, retirements will be met. It enables little cities like Davis, which nowhere near brings in enough revenue to actually afford its high salaries, to not only pay their employees excessively, but when those employees start their retirements, they are paid out of the PERS pot into which all other entities have been contributing. The fact that the high salaries are robbing other city funds in order to afford them is what the city should be seriously looking into.
[b]” I don’t think we are facing bankruptcy right now or even in the foreseeable future.[/b]
This morning I learned of a new development, which has a local twist. An assemblyman from southern California, Tony Mendoza (who, not surprisingly, has received thousands of dollars in campaign contributions from public employees, mostly fire and government nurses), has introduced AB 155 ([url]http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_0151-0200/ab_155_bill_20090327_amended_asm_v98.pdf[/url]), which would make it far harder and far more expensive for municipalities for file for Chapter 9 bankruptcy. The obvious intent of Mr. Mendoza and his co-signers of this odious piece of legislation is to protect the overly generous pensions promised to firefighters and cops, and (I think) to stop school districts from using bankruptcy to reduce teacher pay. The Vallejo situation has these groups frightened, fearing they might lose in court what they have won by buying off members of school boards, city councils, county supervisorial boards and the state government itself.
The local twist is that one of Mr. Mendoza’s co-signers is our very own Mariko Yamada. The California Professional Firefighters gave Yamada $4500 for her general election campaign; the CTA $7200; classified school employees $4000; AFL-CIO $7200; operating engineers (govt employees) $2000; AFSCME $7200; CNA $1000; professional engineers govt PAC $1000; AFSCME Local 2620 $1000; Cal Fed of Teachers $1000; CTA “better citizenship” $7200; faculty assoc. of community colleges $500; CDF firefighters $2000; and classified employees PAC $6200.
Those “campaign contributions” were for the general election only. Many others I left out from other state labor organizations and business PACs which greatly benefit from government spending. Yamada does not deserve to be singled out — I’m focusing on her only because she represents Davis — because every member of the legislature, Democrat and Republican, is financed by groups and individuals who cash in from government spending, often at the expense of the commonweal.
Davis is not alone in its mismanagement. The finances of numerous public agencies will all be crumbling in the coming years. As a result, the laws will be changed and the promised pensions and benefits will never be paid. Tomorrows voters and taxpayers just won’t stand for it. So municipal workers who are trying to steal from the next generation may find themselves in an unpleasant place.
“While I think we are being irresponsible, I don’t think we are facing bankruptcy right now or even in the foreseeable future. More likely we are facing higher fees and taxes and people who have struggled to make ends meet being increasingly stressed and forced to leave the city. It is ironic that the individual who defends growth due to his perceptions about elitist Davis is nevertheless nonplussed by fiscal policies that will force many people currently residing in the city to have to leave.”
This is exactly right.
“As a result, the laws will be changed and the promised pensions and benefits will never be paid. Tomorrows voters and taxpayers just won’t stand for it. So municipal workers who are trying to steal from the next generation may find themselves in an unpleasant place.”
I think this is a very real possibility.
All these poor priced out homeowners can sell out and rent instead of leaving just like those who choose to live here but refused to pay the overpriced bubble real estate costs created by creative financing and restrictive housing policies. Unless they bought in the bubble years they still should have a great deal of equity if the other costs become too much. If they are getting old I believe they can get a break on their taxes and assessments. If they bought a long time ago they are already paying reduced taxes under prop 13. If they bought recently and can’t afford the marginal costs of services they are probably casualties of the financial collapse and will lose on their investment anyway. The sooner they face the music the better off they will be in the long run.
You decry fees that make a difference on the margins while complaining about wages that are truly livable for public employees. If people think they don’t want to pay for services they can vote no on school, parks, open space and library assessments. Yet these things seem to pass in almost every case so it seems that its really whining by the few that resonates in the echo chamber of the Vanguard. As for building more homes it will lower prices making them more affordable and in the end reducing costs for those who buy making these marginal services costs also more affordable in total.
Interesting graphic. It looks to me like the area between the curves to the left of the 2023 intersection is greater than the area between the curves to the right of the intersections. In present value terms, that would definitely be true. Given that, I don’t get the point that pre-funding is “definitely” the way to go, other than using a cost payer/cost causer type argument.
“If they bought a long time ago they are already paying reduced taxes under prop 13. If they bought recently and can’t afford the marginal costs of services they are probably casualties of the financial collapse and will lose on their investment anyway. The sooner they face the music the better off they will be in the long run.”
That is being pretty cold blooded. You would sit back and watch old folks lose their lifelong home, just bc the City refuses to be fiscally responsible? Give me a break!