Palo Alto Weekly
News - December 31, 2010
Pension costs top list of budget worries in Palo Alto
Recent investment losses at state pension fund, CalPERS, could double Palo Alto's pension costs, despite recent local cutbacks
by Gennady Sheyner
After enduring a year of layoffs, slumping revenues and benefit reductions for city employees, Palo Alto officials are bracing for more financial pain in the coming years as pension costs continue to rise — due to bad state-level investments that could possibly double city costs.
The troubling assessment emerged at last week's meeting of the City Council's Finance Committee, where the committee closed the 2010 budget and approved the annual Comprehensive Annual Financial Report — a detailed listing of the city's funds. This year's General Fund budget totaled $143.44 million.
The committee learned that the city's belt-tightening will likely extend into future years to account for looming pension obligations and uncertainties over revenue sources.
"We do have a problem, and we do have to make some changes," Administrative Services Director Lalo Perez told the committee Dec. 21.
"We're going to need to come up with additional money, and that's going to either come from a reduction in expenses for the city operations, an increase in revenues or an increase in contributions from employees."
The biggest question looms over pension costs, which are expected to rise steeply in the next two years — in some cases possibly more than doubling — because of the recent investment losses suffered by the California Public Employees' Retirement System (CalPERS). The pension fund's investment portfolio lost about 24 percent of its value in fiscal year 2010 — a loss committee Chair Greg Schmid called "astounding."
Perez said the city's contributions could drastically shoot up if CalPERS decides to revise the projected rate of return for its investments from 7.75 percent to 7.5 percent, as the pension fund's staff has recommended. The board is expected to consider the change in February.
Palo Alto currently contributes 24 percent of public-safety employees' salaries for pensions, while the employees contribute 9 percent. The city now pays between 19 and 22.75 percent for non-public-safety employees, with contributions varying by labor groups, according to the Comprehensive Annual Financial Report.
The CalPERS change could force the city to pay as much as 33 cents for every dollar of salary for "miscellaneous employees" (those not in public safety) starting in 2013. For public-safety workers, the city's contribution could soar to between 49 percent and 52 percent of salaries.
"We're talking about major increases in pension costs," Perez warned.
The committee had discussed the pension problem in the past. At its Oct. 5 meeting City Manager James Keene characterized the pension situation as an issue that needs to be taken seriously.
"I'm in the camp that thinks there is a day of reckoning that's going to come some time in the future, and it's going to be pretty significant," Keene said at the October meeting.
He acknowledged that the problem is statewide but said Palo Alto could benefit from proper planning and building the rising costs into the city's long-term financial forecasts.
The pension problems hit at a time when Palo Alto is recovering from a particularly grueling budget year. With tax revenues slipping, the city had to close a $6.3 million hole in the middle of the last fiscal year (which ended June 30). Officials then wrestled with a $7.3 million "structural deficit" (a deficit that extends to future years) later in the year. The council closed the structural cap by laying off workers, freezing salaries, reducing expenditures across City Hall and reducing employee benefits.
The city also recently instituted a two-tiered pension system in which newly hired workers get a less lucrative pension formula than existing workers — a change that is expected to partially mitigate against the rising pension costs.
Pension costs aren't the only fiscal challenge on the horizon in Palo Alto. Perez said last week that staff continues to keep an eye on overtime costs for public-safety workers — costs that routinely exceed budget projections. Staff also remains concerned about tax revenues from commercial properties, Perez said.
On a more positive note, Perez said there have been "positive trends" in sales-tax revenues, which dropped by more than $2 million in each of the last two fiscal years. Perez said staff has lately been receiving good feedback from local businesses, particularly high-end retailers. Sales-tax revenues are projected to rise from $17.3 million in fiscal year 2010 to $18.2 million in the current fiscal year, which ends June 30.
Staff Writer Gennady Sheyner can be e-mailed at email@example.com.
Posted by pat,
a resident of Midtown
on Jan 4, 2011 at 11:10 am
More on studies:
Wayne's point is critical. The entire package (salary + benefits) has to be considered in any analysis.
There's another study by Allegretto & Keefe: The Truth about Public Employees in California:They are Neither Overpaid nor Overcompensated by www.irle.berkeley.edu/cwed/wp/2010-03.pdf
This study was another apples-to-oranges comparison. The authors dismiss the notion of comparing positions: "The idea of comparing similar positions and duties is appealing, but requires judgment in matching positions that appear comparable but may not be identical."
Apparently, they think it's better to use databases and statistics instead of making the effort to compare positions, which is really not that difficult. HR professionals do it all the time.
Some "conclusions" from the study:
"An apples-to-apples comparison, or one that controls for education, experience, and other factors that may influence pay, reveals no significant difference in the level of employee compensation costs on an annual or per hour basis between private and public sector workers."
The only way to get an apples-to-apples comparison is to compare identical jobs, e.g., lawyers, IT-professionals, clerks, HR professionals, etc. The study did not do this.
"There are too many critical occupations in the public sector, for example, police, fire, and corrections, without appropriate private sector analogs."
To leave these professions out of the picture, yet conclude that, "… the problems in California certainly could not have been caused by pensions and cannot be cured by pensions," is unconscionable. (Though I absolutely agree with firemanaj that some of the managers are seriously overpaid. They have their own "union.")
Another issue that must be considered with unionized employees is the fact that their pay is not merit-based and it is extremely difficult to fire them. All members get the same increases, regardless of efficiency, productivity, or talent.
But it's the police, fire and corrections unions that have the most power and the highest salaries and benefits. It's for this reason that some cities are farming out police and fire services.
"Educational attainment is the single most important predictor of earningsthus it plays a vital role in this analysis."
Again, an apples-to-apples comparison is needed. A person with an MS in computer science or engineering is probably going to earn a lot more than a person with an MA in history.
"Retirement benefits also account for a substantially greater share of public employee compensation, 8.2% compared to 3.6% in the private sector."
I assume the study is looking at 401K plans in the private sector, since I know of no corporations that provide pension plans similar to union pensions. Also, public sector employees can retire at age 55 or 60 and collect salaries equal to or greater (with periodic increases) than their working salaries. In addition, they have full health insurance for themselves and their families for the rest of their lives.
From the 2011 City of Palo Alto Budget: "The Retiree Health Benefit Fund manages the payments associated with and reserves dedicated to medical benefits granted to retired employees of the City. In Fiscal Year 2011, retiree health benefit expense is estimated to be $9.8 million.
"Future Retiree Medical Liability - Estimated Avg Cost per employee $ 2,663."
Also see www.paloaltoonline.com/news/show_story.php?id=16236
Palo Alto retirees cash in on 'cash out' payments
City paid $5.3 million last year to workers with unused sick, vacation days
"Union status was omitted from this study of earnings and compensation comparisons, since it has been a focal point of the compensation controversy. This means that, in essence, we are statistically comparing unionized public sector workers with all private sector workers both union and nonunion rather than with their union counterparts."
But union status is a key factor in salary/benefits differences. Instead of saying the study compares public (mostly union) with private (non-union) employees, it should say it's comparing union to non-union.
The big unions breaking the bank in California are the very ones omitted from the study: fire, police, corrections.
Database breaks down public worker salaries
"Possibly, a more important question for policy makers, rather than why highly educated public employees are unionized, is why relatively less educated and low-paid private sector employees are inadequately represented by unions."
It's a sweeping generalization to say that public employees are "highly educated" and private sector employees are "less educated and low-paid."
Which employees are we talking about? Admins and clerks? Lawyers? Janitorial services? Gardeners? Computer scientists? Auditors? Finance directors?
Posted by Wayne Martin,
a resident of Fairmeadow
on Jan 5, 2011 at 11:16 am
> There you go again, printing projections for pensions of over
> $100,000 a year when you know that applies to less than
> 1% of retired public employees
This thread was about Palo Alto "Pension Woes", not the bulk of the CalPERS retiree base. Here is the $100K club for Palo Alto:
BENEST, FRANK $14,578.88 $174,946.56 PALO ALTO
BRIGGS, PATRICIA $11,073.92 $132,887.04 PALO ALTO
BROUCHOUD, ROBERT $9,390.10 $112,681.20 PALO ALTO
COSTA, JOHN $10,247.55 $122,970.60 PALO ALTO
CWIAK, ROGER $10,537.74 $126,452.88 PALO ALTO
DAULER, RICHARD $8,488.05 $101,856.60 PALO ALTO
DURKIN, CHRISTOPHER $9,229.96 $110,759.52 PALO ALTO
EAGAN, PAUL $8,661.48 $103,937.76 PALO ALTO
FISCHER, TORIN $10,240.34 $122,884.08 PALO ALTO
FLEMING, JUNE $12,393.79 $148,725.48 PALO ALTO
GONZALES, KENNETH $8,368.86 $100,426.32 PALO ALTO
HARTNETT, DONALD $9,238.22 $110,858.64 PALO ALTO
HEISER, DAN $9,945.62 $119,347.44 PALO ALTO
HEITZMAN, WILLIAM $9,112.30 $109,347.60 PALO ALTO
HERNANDEZ, JONATHAN $8,728.00 $104,736.00 PALO ALTO
IGNOFFO, PHILLIP $10,162.81 $121,953.72 PALO ALTO
JACKSON, MICHAEL $9,876.79 $118,521.48 PALO ALTO
JAMES, RICHARD $13,472.72 $161,672.64 PALO ALTO
JOHNSON, LYNNE $15,201.35 $182,416.20 PALO ALTO
LEVY, MARY $9,880.72 $118,568.64 PALO ALTO
LIKENS, GAYLE $9,865.58 $118,386.96 PALO ALTO
LINDSEY, DANIEL $11,368.71 $136,424.52 PALO ALTO
LOQUIAO, DONATO $8,345.27 $100,143.24 PALO ALTO
MCKENNA, KATHLEEN $9,517.73 $114,212.76 PALO ALTO
MERSON, THOMAS $10,369.85 $124,438.20 PALO ALTO
MIKS, WILLIAM $13,047.51 $156,570.12 PALO ALTO
MRIZEK, EDWARD $11,832.24 $141,986.88 PALO ALTO
PIANA, DONALD $9,562.17 $114,746.04 PALO ALTO
REISERER, RUSSELL $9,843.03 $118,116.36 PALO ALTO
ROUNDS, JAY $11,002.64 $132,031.68 PALO ALTO
THILTGEN, PAUL $12,697.45 $152,369.40 PALO ALTO
WEINREICH, GARY $8,462.37 $101,548.44 PALO ALTO
WETZEL, RICHARD $10,652.78 $127,833.36 PALO ALTO
WILLIAMS, DANIEL $8,836.90 $106,042.80 PALO ALTO
WILLIAMS, SYBIL $8,500.56 $102,006.72 PALO ALTO
YEATS, CARL $10,691.47 $128,297.64 PALO ALTO
YORE, MICHAEL $10,065.49 $120,785.88 PALO ALTO
ZOOK, BRADLEY $8,963.94 $107,567.28 PALO ALTO
It's not clear how many people are currently retired from the Palo Alto City Government, so this list needs the less than 100K group to be totally accurate.
However, the point that I (and all of the Pension Reformers) am making is that the current level of salary, with the short period of service required for retirement, and the very high pension multiplier (% of salary) will crush City governments throughout the Country. This article about Palo Alto's post-retirement budget costs being an example of what we will see in the future.
Using the 2009 Salary data (link posted earlier), there were over 20 employees who retired in 2009 with salaries greater than $100K. These former employees will start with $100K pensions (or will see them in a few years as the COLAs move them into the $100K zone).
These pensions are guaranteed by the City of Palo Alto, and must be paid for via taxes/fees/fines, etc. by the residents and businesses of Palo Alto.
Ultimately, we have to ask: "what did these people do when they worked for us to justify $100K-$200K/year pensions for life?"