With all of the talk about fiscal cliffs in the media, it is important to recognize that Davis is headed toward its own. Back in June of 2011, the city council took the bold step of implementing $2.5 million in cuts to employee compensation. On a hot day with the room packed with angry city employees, the council took these first steps, making a nail biting 3-2 vote for fiscal sustainability.
Unfortunately, the city manager at that time did not buy into the cuts and City Manager Steve Pinkerton arrived in time for the September 6 water debacle and could not deal with massive employee cuts at the same time.
What we knew, coming into 2012, was that something would have to be done or Davis would risk joining the growing ranks of bankrupt cities in California. This year presented an opportunity – a united council backed a budget that called for $8 million in cuts, including $4 million through the collective bargaining process whereby all city contracts expired on June 30.
Here we are on November 30 – five months later – and we are still awaiting the results of those major contracts. Once again on Thursday, the city council again met behind closed doors trying to work out something to save the city’s future.
The problem is that most do not see the coming crisis. The governor finally was able to pass pension reform this year, but most of that does not impact current employees. The city needs to restructure these pensions because the obligations continue to grow, particularly as CalPERS (California Public Employees’ Retirement System) continues to downgrade future earnings forecasts.
The city needs to figure out a way to remain competitive, for quality city employees, without resuming the nuclear arms race of rising salaries once the current economic downturn gives way to economic growth.
The city is looking to reduce its payout through the cafeteria cash out program to employees whose spouses receive health coverage. This is an unprecedentedly generous benefit to very few employees which ends up becoming a $1000 to $1500 cash supplement to their salary. The city is looking to reduce the maximum payout to $500, which would be a savings of up to $12,000 per year per participating employee.
But the biggest fiscal cliff is the city’s retiree health care. Right now, the city owes more money to future retirees than the city’s general fund. The city has a $65 million unfunded liability on a $37 million general fund. $40 million of that unfunded liability is for existing reitrees.
The city realized under the accounting practices of GASB-45 (financial reporting provision of the Governmental Accounting Standards Board) that the way it funded retiree health benefits, by simply paying for the benefits as the bills come due, would push the city heavily toward bankruptcy by 2030. The city learned it would ultimately save millions by shifting to a fully-funded model, where they pay for the benefits each year rather than as the bills come do.
In order to buffer the budget, the city would, over the next twenty years or so, ramp up spending. But the current council has changed that trajectory and this year we will be fully funding what we need to pay in order to get us into the position to have the fund fully funded within twenty years.
However, the city is attempting to hit a moving target here. Rising health care costs are threatening to increase how much the city will have to pay in the future.
This year, the city reached the 20% level – that means that 20% of the city’s payroll is going to OPEB (Other Post-Employment Benefits), nearly all of which is retiree medical.
Currently, almost two-thirds of what we pay is going toward existing retirees.
Back in June, City Manager Steve Pinkerton warned of the fiscal cliff.
“We have some daunting obligations for the 200 plus employees who are already receiving benefits,” City Manager Pinkerton warned the city council in June.
“Unfortunately, 20% of payroll is probably not going to cut it in the future,” he said. “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.”
According to the city manager, 17% of payroll under that scenario would go toward existing retirees while another 7% would be put away for future retirees in an effort to eventually fully fund the plan.
The problem is, we are talking about nearly one-quarter of the payroll going toward funding health care for retirees.
That percentage is likely to rise as the city continues to contract payroll.
Every member of the city council, in conversations with the Vanguard, agrees that paying one-quarter of the city’s payroll to OPEB is not sustainable.
The goal in the current labor contracts is to get that 20% number in the present budget down to 16%.
In the Individual Police Management Group, the city hit that target.
“The City has proposed changing its retiree health benefits plan to require employees to work longer before becoming eligible for 100% coverage. Coverage would be calculated for the employee and one family member at the Medicare rate instead of a full family at the full premium non-Medicare rate,” the city wrote in their press release. However, in order for the changes to occur, they must be accepted by the Davis Police Officers Association, which represents all sworn officers.
The city has two primary obligations under the current arrangement. Currently, public safety can retire at 50 and non-safety employees can retire at 55. That leaves 10 to 15 years between retirement and when Medicare kicks in.
First, the city pays the full health insurance plan for retirees who are not Medicare-eligible. That means that they are under the age of 65.
Second, the city supplements the Medicare plan with its own plan, as well.
The individual plans vary, but at the basic level the city pays up to $1587.14 a month for those under 65 and $833.43 for those eligible for Medicare.
The more typical rate for those under 65 is considerably lower, however. The typical premium for those under 65 is $600 for single, $1100 for couple and $1500 for family. However, some singles opt for a plan that is a little over $1000 per month.
Typical premiums for Medicare-eligible are $400 for single, $770 for a couple and $1150 for family.
Currently, the city is paying for 135 pre-Medicare retirees, which includes 52 single, 56 couple and 27 family.
The city also has 83 Medicare retirees, including 41 single, 38 couple and 4 family. Also, there are 21 retirees not on a plan. Many of those are covered by a spouse.
According to an email from City Manager Pinkerton in June, “Current 10-year projection for percent of payroll for full amortization is estimated at 23% to 25% of total payroll at stabilization. Exact number will fluctuate depending on interest return on money that has been set aside each year and in actual change in payroll.”
Clearly, this is a huge fiscal cliff. The city cannot afford to continue to pay 23 to 25 percent of payroll for OPEB. And they don’t have to if they can get the employees to agree to the collective bargaining agreement.
In conversations with employees, one of the things that has come up is that employees have planned to retire under this benefit. Clearly that is a matter of concern to employees, but there are ways around it.
One idea that the Vanguard floats is giving the employees an option. Under the pension reform plan, retirement ages for safety move up to 57 years and for non-safety to 62 years – that is seven additional years of employment. The kicker is that this is for new employees.
The idea the Vanguard has is to give the employees the option of keeping the current Pre-Medicare system if they retire at 57 (or 62). That change would cut the city’s obligation from 15 to 8 years for safety and from 10 to 3 years for non-safety.
Regardless, the city council needs to stand firm on these employee contracts and make sure that Davis does not go off the fiscal cliff.
—David M. Greenwald reporting
very concerned that city council and staff are going to let the bargaining units off the hook here.
[i]One idea that the Vanguard floats is giving the employees an option. Under the pension reform plan, retirement ages for safety move up to 57 years and for non-safety to 62 years – that is seven additional years of employment. The kicker is that this is for new employees.
The idea the Vanguard has is to give the employees the option of keeping the current Pre-Medicare system if they retire at 57 (or 62). That change would cut the city’s obligation from 15 to 8 years for safety and from 10 to 3 years for non-safety.[/i]
First, I agree that we need to increase the retirement age. It is foolish in this day of municipal fiscal cliff and advancing life expectancy that we keep giving away the pension store to city employees. We all KNOW that we are giving the equivalent of a big lottery win… a 30-40 year full-time, all expenses paid vacation. It is clearly unsustainable, it is unrealistic, and it is unfair given what the other 90% of people in comparable jobs get.
Second, we have to drop this argument that we need to maintain benefits for existing employees “because they are expecting them”. How many people had their retirement plans altered from the Great Recession? It is not some great Shakespearian tragedy that we advance the retirement age for existing employees. So, Jack was planning to retire at age 52 and had already purchased his fishing boat. Now we have to tell him that he cannot retire until he is 57 unless he wants to accept a smaller pension. Too bad, so sad. This type of thing has been happening to 90% of the rest of us for decades.
Where did this early age retirement entitlement come from? When did it develop? Why do we think we can afford it?
We need to completely revisit that mindset that we are entitled to employer-paid retirement. Historically our lower life expectancy and the lower cost of healthcare supported a retirement at the standard age of 65.
My thinking is that we should increase the retirement age and start tooling for partial retirement. For example, retire to half-time beginning at age 57 and 62 with full retirement 10 years later. This may not work for jobs that require physical labor, but frankly technological advances in tools and equipment have reduced the number of jobs and tasks that require significant physical work. So, why not expect people to work more years if they can and since we cannot afford to keep giving them early age retirement?
Good article.
When you mention “typical premium” for the various classes (single, double or family), this is based on actual data from the City?
How does ‘family’ (3 or more) apply for a retiree?
Looking at Calpers site for 2013 all the plans for single are about $670 and the majority of Medicare Supplement plans are $260.
If the City restricted the retiree health benefit to just the retiree and not spouses, and using the 183 and 85 current numbers of retirees the unfunded liability for the next 25 years, assuming 3% discount rate, is cut down to $23 million. Still a ton, but big, big savings. Something for the negotiators to consider.
“When you mention “typical premium” for the various classes (single, double or family), this is based on actual data from the City?”
That is correct, that info came from the city.
“How does ‘family’ (3 or more) apply for a retiree?”
We are talking about people retiring at age 50 or 55. At 55, for example, I’ll have a 17 year and probably a 15 year old. And I believe when kids stay in college, they are covered until 25 under parents insurance at present. So if I’m interpreting your question correctly, that’s a bigger class than you think.
“If the City restricted the retiree health benefit to just the retiree and not spouses, and using the 183 and 85 current numbers of retirees the unfunded liability for the next 25 years, assuming 3% discount rate, is cut down to $23 million. Still a ton, but big, big savings. Something for the negotiators to consider. “
I think you may be conflating cost and unfunded liability. We are fully funding new employees and so within 20 years, there should be no unfunded liability. There will be a considerable cost, but keeping it to 16% rather than 25% makes a huge difference.
Meanwhile on the national fiscal cliff..
GOP ideas:
[quote]Higher Medicare premiums for the wealthy, an increase in the Medicare eligibility age and a slowing of cost-of-living increases for programs like Social Security, more tax revenue through simplifying the tax code and elminating many deductions and credits that primarily benefit the wealthy.[/quote]
Democrat proposal delivered yesterday by Timmy Geithner:
[quote]No cuts, $1.6 trillion tax increase, $50 billion in infrastructure spending in 2013 and new power to raise the federal debt limit[/quote]
If you voted for these blue clowns, time to start floggin’ yourself in private.
Jeff: back to the local issue (the topic of this article). The council needs to get leverage in their bargaining situation and one of the keys will be for the councilmembers to fight the temptation to get some middle ground here. The numbers are such that a middle ground is not going to work. Thoughts?
But Jeff, don’t worry, the Democrats promised to make cuts later if the GOP will just sign on now. LMAO
This comment has been moved to our Bulletin Board: The fiscal cliff ([url]/index.php?option=com_kunena&func=view&catid=2&id=945&Itemid=192#945[/url])
[i]”Back in June of 2011, the city council took the bold step of implementing $2.5 million in cuts to employee compensation.”[/i]
Please correct me if I am wrong, but I thought that vote was not an “implementation,” but rather a matter of “budgeting.” If it had been the former, it would have had meat on the bone. If the latter, it served more-less as a goal to shoot for.
And since the goal was not met, the bone turned out baren.
[i]”This year presented an opportunity – a united council backed a budget that called for $8 million in cuts, including $4 million through the collective bargaining process whereby all city contracts expired on June 30.”[/i]
Likewise, this was budgeting, not implementation.
I do not mean to be critical of the Council for that. The question before them was how much to budget and they budgeted what you said they did. But until they implemented measures to reduce labor comp or cut the number of city workers, the budget could not be implemented.
[i]”The city needs to restructure these pensions because the obligations continue to grow, particularly as CalPERS (California Public Employees’ Retirement System) continues to downgrade future earnings forecasts.”[/i]
The City of Davis cannot lawfully restructure its pensions (in a meaningful way*) with its current employees. It can, however, fix the situation for future hires with a second-tier plan. The City has had this on the table for at least five years (when I proposed it should be done). The City has never made any second-tier amendment.
(*Note: the City did change its formulas from final year of salary as a basis to final 3 years average, in order to prevent spiking. This doesn’t save any real money.)
The three things Davis can do, which affect its pension costs, for current employees is: 1) require employees to pay a larger share of the funding. This process began in the 2010 contracts, and has been ramped up this year in the one new deal; and 2) reduce salaries. The amount a pension costs to fund is directly tied to how much an employee makes in salary. The higher the salary, the higher the cost to fund the pension. Alas, the City has not made any movement in this direction; and 3) outsource jobs. There are, obviously, some jobs (like police and fire) which cannot be outsourced. There are others, like parks maintenance and a lot of public works jobs, etc., which can be outsourced. Pinkerton clearly moved in this direction with regard to tree maintenance. The City will not have to pay any pension funding for those 9 positions which were cut. However, I don’t see the will on the Council to move in this direction. I think the outsourcing on trees was done because the DCEA was recalcitrant.
[i]”The city is looking to reduce the maximum payout to $500, which would be a savings of up to $12,000 per year per participating employee.”[/i]
One thing to keep in mind here: In 2010, the City did reduce the maximum payout to $500 per month per employee for all new hires. As such, the change in this direction for veteran employees simply puts them on a level playing field with the new hires in that respect.
[i]”The problem is, we are talking about nearly one-quarter of the payroll going toward funding health care for retirees.”[/i]
The best solution is to give all current and future employees a strong incentive to retire at an older age. If, starting today, we required new retirees to pay the full cost of their own health care (less the legally requisite $115/mo. paid by the City) until they reached at 65, the cost of retiree healthcare to the City of Davis would drop by about 75 percent. Having to pay their own way, employees would have a far stronger incentive to wait to retire.
A second part of the solution should also be to require current retirees to pay a percentage of the amount it costs the City for their current benefits. (I have been reliably told this is legal.) If we did this, I would favor making it contingent on the total dollar amount the retiree is getting in his pension. Those current retirees who have pensions of $8,000 or more per month should get no subsidy from the City for their health benefit. Those who have pensions of $4,000 or less per month should continue to get a full subsidy from the City for their health benefit. And those in between $4,000 and $8,000 should get subsidized on a sliding scale.
[i]”In conversations with employees, one of the things that has come up is that employees have planned to retire under this benefit.”[/i]
Save those whose pensions will be quite small and those whose health truly does not permit them to continue working, I am not sympathetic to those plans. People who worked for Hostess likely planned on working there for many years to come. But due to bad management and an intransigent union, those workers have no jobs at all. Life can get in the way of plans for all of us.
[i]”Under the pension reform plan, retirement ages for safety move up to 57 years and for non-safety to 62 years – that is seven additional years of employment.”[/i]
Why 57 and 62? There is no reason for desk workers to have an incentive to retire younger than 65. For some cops and non-executive management in fire and a few non-safety who do physically demanding jobs, 60 seems reasonable.
[i]”The kicker is that this is for new employees.”[/i]
In that case, it will do no good for another 25 or 30 years. That does not make your idea bad. But it makes it meaningless for a long time, and that may be too late to matter.
Saw 4 crew on two trucks today.
This CC is all talk, no action.
And they swallowed the City Attorneys advice that the Second Street Crossing does not have to be submitted to the voters.
Political negligence.
“Saw 4 crew on two trucks today. “
No new CBA yet
[i]”No new CBA yet.”[/i]
The City can change the staffing plan for the fire department without a new collective bargaining agreement (or MOU). One does not affect the other.
However, the City is not ready to change the fire staffing model. The fire chief just recently presented his report to the City Council discussing (not really advocating one way or the other) what changing the staffing model would entail. Due to the late hour, the Council asked almost no questions of Chief Kenley and no one member of the Council was prepared at that meeting to advocate this change.
My belief is that the Council needs to hold a special open session meeting focused entirely on improving the efficiency of emergency services response. In that meeting, they need to move ahead with dropping the Davis-UCD boundaries for first response to fire and medical calls; they need to debate staffing changes at the DFD in order to save money; and they need to make progress on Rochelle Swanson’s idea* to have the City bill medical insurance companies to pay for the City’s costs responding to medical emergencies, save cases where the patient is uninsured. Perhaps some secondary issues could also be discussed, including how to make better use of community volunteers in fire response, whether police personnel could be trained to better assist fire personnel in a structure fire and whether we should stop sending full-sized fire trucks to medical calls and replace them with civilian vehicles in those cases, in order to save wear and tear on the expensive fire trucks and to save fuel and to reduce the impact on residents of Davis every time there is a medical call.
Once the Council publicly debates these issues, hears from affected employees, hears public comment and makes a declarative vote on how the Council wants the City to move forward, only then can the changes come about that Mr. Harrington and I and quite a few others believe need to be done. Those changes in policy will either happen or not. But they are not in fact dependent on achieving a new fire contract, as David seems to think.
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*I first heard this ‘bill the insurer’ idea from Rochelle. Joe Krovoza was also at that meeting with me. As was Chief Kenley. I assumed it was Rochelle’s idea. It may have been someone else’s. Regardless, I think it is a good one. The City is providing a billable service. There is no reason the taxpayers should not be compensated for that.