The message has already been sent, loud and clear. It was the hottest day of the year in mid-June. The community chambers, packed with 150 city employees, was unbearably hot. But despite all of that heat, three members of council held strong and voted to implement the city’s budget.Among the key provisions was the use of general funds to pay to fully fund retiree health, pensions and the city’s infrastructure.
But if the council has strong convictions, there was much working against them – upcoming elections, the threat of an employee-backed candidate which thus far has not materialized, and collective bargaining.
At the same time that the council was doing the right thing – moving toward sustainability and fiscal responsibility through reduction of unfunded liabilities – the state’s CalPERS (California Public Employees’ Retirement System) board, that runs the largest public employee pension fund in the state, has been stubbornly refusing to alter their very ambitious and optimistic future earning assumptions.
Such a resistance in the past would have formed the basis for council and staff acquiescence. Indeed, it has taken far less than that to get the council and staff to collectively bury their heads in the sand.
In 2008, four years ago, Stephen Souza and Don Saylor were in complete denial about the city’s future. They were on the campaign trail and argued that the city had a balanced budget under their watch, with a 15 percent reserve.
It was four months from the collapse of Lehman Brother and the edge of the economic precipice, but still the signs were there. The city’s fiscal ground was shaky, based on a shaky housing bubble and fancy accounting.
The budget was not balanced. The council even at that time understood that they had a $50 million unfunded liability for their retiree health program, a growing unfunded liability on pensions, and a growing list of unmet infrastructure needs.
Still the council was in denial.
Months later, well after the gravity of the economic situation had sunk in, the council and staff remained in denial. City Manager Bill Emlen balanced the budget through furloughs and attrition, as though this were a temporary setback.
The council and staff blew their first opportunity to establish a more stable fiscal situation when they failed to deliver on their round of MOUs negotiated internally, steadfastly refusing to hire an outside negotiator. Worse yet, the city allowed its HR Director to play double-agent, sitting on the management side of the bargaining table for her own group’s negotiations, a group that represented her husband as well.
That arrangement became emblematic of the problems that this city faced in attempting to address the problems.
In 2010, a new council emerged as Rochelle Swanson and Joe Krovoza were swept into office, promising fiscal reform, and subsequently installed Dan Wolk to replace Don Saylor, one of the chief adherents of the previous order.
As we have reported, CalPERS has refused to lower their earnings forecasts, despite the information that is now emerging on the weakness of current growth forecasts for the financial markets.
CalPERS has remained steadfast in not revising their earning assumptions, despite recommendations by actuaries who argue they should lower their forecast to 7.5 percent.
This would not be a small change for a place like Davis, which has calculated that for every quarter percent drop there is in future earnings, we will have to pay an additional $1 million to meet our defined benefit obligations.
Clearly, in the past Davis would have used this opportunity to shirk from the reform calendar, but the new city manager has met this challenge head on – in fact, challenging the CalPERS numbers themselves.
As we have noted, Steve Pinkerton, in early January, told the Chamber of Commerce that he strongly disagrees with the CalPERS claims “that they have enough money at the moment and that they’re not going to increase our rates over the next two years.”
He told the chamber in his State of the City address, “We think they’re wrong. We think they’re basically doing that so that they don’t have to give the state an increase in their rate this year so they don’t contribute to the state budget deficit.”
“But we think they’re in complete denial.” He said that they don’t anticipate any additional cost pressures from CalPERS at this point in time, but the city still plans to set additional money aside in case they change their mind, which he said happens “just about every year.”
“Long-term, what’s happening with CalPERS is completely unsustainable,” he continued. “There’s no way they can ever meet their obligations and so at some point in the next five years they’re going to come clean and there’s either going to be a ballot initiative or some legislative change and both future employees and existing employees are going to see some reduction in the accounting methods – it’s just not sustainable.”
He hopes this realization comes before they hit the city with a 30 to 40 percent increase in our contributions rates. “There is some point in time when the fiscal laws of nature are going to catch up with [Cal]PERS,” he said noting that non-PERS cities are having to increase their rates by as much as 70 percent.
The city has made some key changes and not just in attitude. Back in November, led by Sue Greenwald, the rest of the council made a truth in budgeting measure that will force the city to account for unfunded infrastructure and entitlement liabilities that have been hidden from previous budgets.
The city will not be able to claim a balanced budget when they are facing tens of millions in unfunded liabilities for retiree health and pensions and $10 to $20 million in deferred maintenance. They can no longer do that.
But the city cannot simply change everything unilaterally.
To that effect, however, the city has taken seriously the recommendations that it is difficult to, on the one hand, rely on city employees for critical work and, on the other hand, have to face those same employees at the bargaining table.
Between the round of MOUs and this year’s council election, this will be a critical time for the future of this city. However, the good news is that it appears that we are moving in the right direction.
Now if we could only get CalPERS to follow suit.
—David M. Greenwald reporting
In case people missed it, the Congressional Budget Office released a very helpful report yesterday comparing the compensation of federal workers with those in the private sector. While it does not provide information on state or local governments the results most likely transfer. Not surprisingly perhaps, in the aggregate, differences between public and private employees compensation are driven by higher benefits in the public sector, most notably in [b]defined-benefit pension plans[/b] those in the public sector receive.
Below is a quote from the report, which can be found at: http://cboblog.cbo.gov/?p=3178
I am assuming that fairly soon defined benefit (as opposed to defined contribution) plans will disappear from the public sector.
[quote]The cost of providing benefits—including health insurance, retirement benefits, and paid vacation—for public and private-sector employees differed much more than wages.
Average benefits for federal employees were 72 percent higher for those with no more than a high school education and were 46 percent higher for those with just a bachelor’s degree. Among employees with a doctorate or professional degree, by contrast, average benefits were
about the same in the two sectors.
On average for workers at all levels of education, the cost of hourly benefits was 48 percent higher for federal civilian employees than for private-sector employees with certain similar observable characteristics, CBO estimates.
The most important factor contributing to differences between the two sectors in the costs of benefits is the defined-benefit pension plan that is available to most federal employees. Such plans are becoming less common in the private sector. CBO’s estimates of the costs of benefits are much more uncertain than its estimates of wages, however, primarily because the cost of defined-benefit pensions that will be paid in the future is more difficult to quantify and because less-detailed data are available about benefits than about wages.[/quote]
“I am assuming that fairly soon defined benefit (as opposed to defined contribution) plans will disappear from the public sector.”
As it should.
Ok, Rusty… let me get this straight… you believe that public employees should have no defined benefit… so they should not be eligible for social Security (?)… should public employers pay as much as what they would pay for SS… or less? Should public employers pay anything towards a defined contribution system? Should public employees be paid at or below their private sector equivalents (salary)? Should public employees receive only the same or less in medical, dental, etc. benefits than the lowest public sector equivalent? After all, perhaps we should truly treat them as public servants.
next to last line… error… “private” sector empolyee
Now think about this – if public employee pensions are headed in the direction of 401(k)s, think about that. 401(k)s do only as well as the stock market, and can take a nose dive when the country goes into a recession. Suddenly seniors are horrified to note their investments/pensions they had counted on for medical costs and to live on for basic needs plummet in value. If the country is headed for the idea of 401(k) type pensions for gov’t workers, then we need to seriously reform Wall Street and how it operates. From where I sit, Wall Street seems to benefit the wealthy, but not the retirement plans, that really take a hit in the economic recession…
As David Greenwald knows, I have been bringing up the spector of lowered rate of return and ensuing fiscal fiscal crisis for years — in fact, from the time I attended a CALPERS conference during my first term on council. I did so in the face of substantial derision by my colleagues.
While I do not believe that we can budget for a decreased rate of return and pension rate increase at this time, we certainly have to position ourselves for this contingency, which I believe that this council will take action to do.
[quote]While I do not believe that we can budget for a decreased rate of return and pension rate increase at this time, we certainly have to position ourselves for this contingency, which I believe that this council will take action to do.[/quote]
As they should…
I want the Fire Fighters to return the $500,000 that they received in 2005 from the sales tax increase that my CC voted to put on the April 2004 ballot: for Parks and Community Services programs. Saylor and Souza ripped it off and gave it to the employees who walked precincts for them and donated huge amounts of money.
Your point is understood, Mr Harrington… and people in hell want ice water…
“
“I am assuming that fairly soon defined benefit (as opposed to defined contribution) plans will disappear from the public sector.”
As it should. “
I have a 70 year old relative who I think summed this issue up rather well from her right of center point of view. She hates all things associated with the government …. Except of course her social Security, her Medicaid, and her relative’s veterans benefits. When asked about these government programs, she said of course they should be continued, but then added in the same breath that the government should cut only the “wasteful” ( read some one else’s) benefits.
What I see as the take home lesson is that neither the private nor the public sector is perfect in establishing a balance in providing for the short and long term needs of workers. I would favor a warmer, more caring approach to those who have played by the rules, done everything that can be asked of one in life and then, through no fault of their own, find themselves in financial crises. I know that some of you think that makes me a socialist. I see it as a matter of treating others as we would wish to be treated in similar circumstances. Overall, I think the public sector, rather than the private has this one closer to ” right” than does the public sector known all too well for laying people shortly before anticipated retirement and other ethically if not legally challenged practices.
[quote]What I see as the take home lesson is that neither the private nor the public sector is perfect in establishing a balance in providing for the short and long term needs of workers. I would favor a warmer, more caring approach to those who have played by the rules, done everything that can be asked of one in life and then, through no fault of their own, find themselves in financial crises. I know that some of you think that makes me a socialist. I see it as a matter of treating others as we would wish to be treated in similar circumstances. Overall, I think the public sector, rather than the private has this one closer to ” right” than does the public sector known all too well for laying people shortly before anticipated retirement and other ethically if not legally challenged practices.[/quote]
I don’t think this view makes you a “socialist”. A middle of the road approach makes a lot of sense to me. Unfettered capitalism doesn’t work very well, and neither does unfettered gov’t. If the country is headed towards defined contribution plans, then the gov’t had better clean up the abuses of Wall Street first. Many seniors found the value of their defined contribution plans tanked in this economy, and therefore would not provide for their basic needs. Some defined benefit plans actually went belly up, and paid nothing. I also read that companies that provide 401(k) plans tend to pay workers less to make up for the employer contribution required. No plan is perfect – all have their up sides and down sides.
[quote]I have a 70 year old relative who I think summed this issue up rather well from her right of center point of view. She hates all things associated with the government …. Except of course her social Security, her Medicaid, and her relative’s veterans benefits. When asked about these government programs, she said of course they should be continued, but then added in the same breath that the government should cut only the “wasteful” ( read some one else’s) benefits. [/quote]
Very insightful…
I had a defined benefit plan that went belly up. The company subsequently switched to a 401K plan that has done quite nicely thank you. Once the money is put in a 401K it’s yours. It doesn’t matter how the company does, that money will always be yours to invest how you want within the parameters of the plan you’re in. Stocks go up and down, but over time historically stocks have done better than most other investments. But if you’re afraid of stocks, almost all 401K plans have safer alternatives. As far as public defined pensions, we’re already seeing how hard it is going to be to honor them in the future. If public employees were in 401k’s, the money all goes in up front and no worries about how the government is going to fund them.
[quote]It doesn’t matter how the company does, that money will always be yours to invest how you want within the parameters of the plan you’re in. Stocks go up and down, but over time historically stocks have done better than most other investments.[/quote]
The problem is you may be a senior citizen and in need of the funds in your 401(k) at the very time the worth of your stocks is way down because the economy tanked. This has happened to many seniors. It is all about the inconvenience of timing if the market is down…
“The problem is you may be a senior citizen and in need of the funds in your 401(k) at the very time the worth of your stocks is way down because the economy tanked. This has happened to many seniors. It is all about the inconvenience of timing if the market is down…”
As you get older you’re supposed to align your portfolio so it is less risk adverse. In other words, when you’re in your 40’s you might have a mixture of 40% bonds and 60% stocks, in your 50’s you might go to a 50/50 mix, in your 60’s you might go to 80% bonds and 20% stocks and so on. You can do this yourself or most 401k plans have funds that do this for you according to your age. Either way, the money is yours, no company that you work for can take it away or lose it. ERM, tell me how are we going to honor the public defined pension plans of the future. Are we going to tax the hell out of everyone in California?
For those of you who think the city manager and council are being fiscally responsible, why don’t you ask them how much the city hall “reorganization” is costing us tax payers. This is money that we could have used for unmet needs. Oh, by the way, check out this “reorg” sollution they’ve come up with. [url]http://www.ralphandersen.com/jobs/davis_gm_utilities_dev_and_operations.html[/url]
Just another over paid suit to swallow up my tax dollars.
Plus they paid a consultant to do the recruitment.