News

Guest opinion: Is retirement funding based on 'rainbows, butterflies and unicorns'?

 

A well-known financial analyst, talk-show host and Orange County's treasurer-tax collector recently described state retirement-funding forecasts as "all rainbows, butterflies and unicorns."

That beautifully poetic description appeared in an article by Chriss W. Street published in mid-January -- a blunt critique of the California Public Employee Retirement System's (CalPERS) announcement that it was slowly recovering from a catastrophic loss it suffered in 2008 from stock-market investments -- losses CalPERS passed through to local agencies.

Street used the phrase last March to describe President Obama's budget proposals, and the phrase has surfaced for decades, with origins in the late 1800s.

How that applies to Palo Alto and other agencies haunts city and school officials. Both faced major increases in retirement costs in the past decade -- with even bigger budget bites predicted.

This year Palo Alto is tackling the problem again, after three years of careful steps to improve matters. City Manager James Keene recently announced that the city will be negotiating with all its employee groups, principally the Service Employees International Union (SEIU), police and fire unions and a managers' group.

Success or failure could make a huge difference in whether Palo Alto can weather the rainbows, butterflies and unicorns that seem to be infesting public-employee retirement systems statewide. Wall Street insiders even use the shorthand "RBU" instead of the spelled-out "rainbows, butterflies and unicorns" to describe a proposal or business plan that is hopelessly optimistic, based on lovely fantasy instead of reality.

It's reality-check time. But reality is hard to come by, it seems. Each time the subject is raised it is drowned by masses of confusing financial data and projections and, often, ill-informed opinions that flood any discussion. It becomes a challenge not unlike, well, counting butterflies.

City officials got a dose of reality one year ago from relatively new Human Resources Director Kathy Shen, who joined the city 2.5 years ago after 35 years in the private sector -- where reality seems to have a firmer foothold than in public agencies.

Palo Alto's retirement plans apply to just under 3,000 current or retired employees. Retired employees would cost Palo Alto a projected $23.37 million for 2014, nearly 10 times the $2.4 million liability of 2003, Shen reported.

The city's health care costs also have ballooned, but just threefold -- from $10 million in 2002 to last year's $24 million, projected to reach nearly $30 million by 2016-17.

Statewide the deficit of mostly unfunded promises is climbing into the billions, heading toward trillions.

How did this happen? A simple, even simplistic, answer is that it's easier in tough economic times and tough negotiations to make promises for the future than to pay hard dollars in the present. And there is no law -- yet, at least -- requiring agencies to match their promises with real funding instead of, well, butterflies.

Only action by the state Legislature to loosen CalPERS requirements on local governments will improve the situation, Shen said, eliciting unanimous agreement from the council. But obtaining legislative action is not easy, especially over expected union objections in a Democrat-controlled state.

"That's a lot of people and we're going to be covering them for a long time," she said of the 2,940 individuals in city retirement plans, predicting (with some delicacy) that it will take up to 30 years for longer-time employees to pass through the system.

A big factor is that the state's retirement system itself is aging. In the century of its existence times have changed. Rather than retiring at 65, many employees today retire at 55, or even 50, and most are living substantially longer, Shen noted. Many owned their homes with paid-up mortgages, and retirement-income expectations were lower while day-to-day living was cheaper.

That's all been turned upside down, she said.

It's not that Palo Alto hasn't been trying or has been unaware of the looming crisis. In 2007, city management and SEIU agreed to swap lower health care benefits for a significant (but money-saving) boost in retirement pay. In 2008 the city adopted a two-tier retirement system that will provide lower retirement benefits for new employees.

Palo Alto generally is in far better shape than many other cities statewide, three of which have filed for bankruptcy, citing retirement and health care costs.

For all agencies, the retirement bite -- unions have real teeth in many jurisdictions -- is taking chunks out of general services for the community and schools, threatening to eat up half or more of agencies' annual budgets and services. Killer butterflies, like locusts?

There has been growing recognition of the crisis, in part due to the virtual one-man crusade conducted over several years via email by Peter F. Carpenter, a member of the Menlo Park Fire Protection District Board of Directors with a lengthy background in administration at Stanford University, in private industry and the military, where he was once a parachutist. Carpenter mainly forwards articles relating to public-employee pensions and their impact on agencies. (To get on his list, email peterfcarpenter@me.com.)

Assessing the future, it seems, really is like counting butterflies.

I once asked that question as a reporter for the erstwhile Palo Alto Times, after I noticed thousands of small yellow butterflies flitting through the Stanford campus. I found an elderly entomologist in an octagonal building behind the Stanford Museum, housed in an office that looked as if it came from a Jules Verne novel, all dark wood and brass and glass.

He asked me to help him find people "to count butterflies." How? One places a chair some distance from where one sits and counts the butterflies passing between the chairs in a given time period. Then one checks the width and duration of the migration and makes a general estimate of how many millions are migrating.

Much like government budget forecasts, watching dollars flit past.

Former Weekly Editor Jay Thorwaldson can be emailed at jaythor@well.com. He also writes periodic blogs at www.PaloAltoOnline.com.

Comments

7 people like this
Posted by muttiallen
a resident of Adobe-Meadow
on Jan 23, 2015 at 10:23 am

muttiallen is a registered user.

The "defined benefit" retirement system was phased out of private businesses decades ago in favor of 401k and similar 'defined contribution' systems. Government needs to do the same. Then if someone decides to retire at age 50, it's their own decision on how to spread out their retirement nest egg over expected lifetime. No double-dipping problem, either.


4 people like this
Posted by jm
a resident of Barron Park
on Jan 23, 2015 at 12:29 pm

Yet the council has allowed the city manager, James Keene, swell his administrative ranks with one new hire after another, with what appear to be relatively high salaries. I'm not talking librarians here. Is no one looking ahead to the future retirement and health benefit costs if these hires stay until they can take early retirement? Especially as it is rare for employees to be fired in government (and educational) bureaucracies.


4 people like this
Posted by Carol Gilbert
a resident of University South
on Jan 23, 2015 at 12:32 pm

There are no rainbows, butterflies, etc., that are going to make this all work. I couldn't believe that the city was going to give salary increases again when there are such negative implications on the pension fund. Private industry absolutely does not offer these kinds of benefits any more. PLEASE TAKE STEPS TO MAKE PENSIONS FALL INTO LINE WITH WHAT CAN BE SUPPORTED BY THEIR FUNDING!!!


2 people like this
Posted by Nora Charles
a resident of Stanford
on Jan 23, 2015 at 12:50 pm

Great piece, Mr. Thorwaldson. Love the butterfly analogy!


5 people like this
Posted by David Pepperdine
a resident of Another Palo Alto neighborhood
on Jan 23, 2015 at 3:40 pm

And then there's pension spiking, the tactic of pushing all your unused vacation and sick leave to boost your pay towards the end of your tenure, thereby multiplying your retirement pay by a big factor.

Why is retirement pay based on compensation in the final year(s) of service?
Much of it was earned at lower salaries.

I would totally support a citywide shutdown to negotiate a switch to defined contribution with the unions. Of course, managers are not going to let that happen. They are on the same defined benefit plans.

Only the city council can make this change. And the citizens have to back them fully.


2 people like this
Posted by City Employee
a resident of another community
on Jan 23, 2015 at 3:51 pm

To Mr. Pepperdine,
Do some research before you write. In Palo Alto, your pension is calculated by your base pay only, for the last 3 years of your employment. Not overtime. Not sick leave. Not vacation. There is no payout for sick leave in Palo Alto and a employee can only keep 3 years of vacation on the books. So if you make $100,000.00 per year and you have 30 years with the city and are age 55, you can retire with $90,00.00 pension per year plus medical.


Like this comment
Posted by City employee
a resident of another community
on Jan 23, 2015 at 3:53 pm

That should be $90,000.00 retirement.


Like this comment
Posted by nm
a resident of Duveneck/St. Francis
on Jan 23, 2015 at 5:24 pm

Has there been any thought to putting all employees on Social Security??


1 person likes this
Posted by Marie
a resident of Midtown
on Jan 23, 2015 at 5:52 pm

Marie is a registered user.

I found a pdf response to the Grand Jury from the then Palo Alto mayor, Yiaway Yeh, regarding Palo Alto's approach to pension and retiree medical liabilities which was very enlightening:

Web Link

Palo Alto has clearly tried to address these issues, within the many limitations imposed by CALPERS and the CA legislature. There are still many issues to be debated but it does shine a light on what Palo Alto has done and can do.

One way to minimize future pensions would be to give more bonuses, that would not count towards future pensions, rather than the excessive permanent raises the city staff prefers.


Like this comment
Posted by anonymous
a resident of Duveneck/St. Francis
on Jan 23, 2015 at 7:54 pm

Thank you, Mr. Thorwaldson, for your important piece.


1 person likes this
Posted by Alphonso
a resident of Los Altos Hills
on Jan 24, 2015 at 8:56 am

Unfunded Pension Liabilities are not that complicated and too many people assume it is like counting butterflies. We got to where we are because of too much apathy and too much short-term focus - voter apathy and everyone in government (at every level) has a very limited time range focus because the people we vote for know they will be gone before the bs hits the fan. The big changes that are needed must come from the State level- Arnold Schwarzenegger took a stab and pension reform but we voted down his initiatives. Some people want to blame unions but it is the people we vote for who give away the money. Far too often our leaders use the excuse "we had to do it because some other town did it". Just this week the PA Council announced it had to raise it's own salaries because Sunnyvale was paying more - frankly the salary does not bother me but the fact that they did not discuss their pension and medical benefits does matter. Pension reform should start at the top - City Councils should not get lifetime pensions and lifetime medical benefits. Below the City Council we have allowed too much city government growth - aside from police, fire and public works the great majority of us could get by with half (or even much less) of the "services" being offered by the city.


1 person likes this
Posted by Craig Laughton
a resident of College Terrace
on Jan 24, 2015 at 2:03 pm

This post by Jay T. is a breath of fresh air, because it deals with reality...not fantasy. Palo Alto has long been about denial of reality. That's what having a lot of money can do...until the money starts running out.

Thank you, Jay.


Like this comment
Posted by vic
a resident of Old Palo Alto
on Jan 30, 2015 at 9:31 am

Congratulations Jay on your swollen pension/benefit piece. This problem is widespread and no politician or"czar" is willing and able to deal with it.

The Affordable Care Act brings new urgency. What is rapidly evolving a large class of the medical insurance poor, maybe 95%, and a new aristocracy with cheap, gold-plated medical benefits.These aristocrats will be at the head of a very long line trying to get affordable care. The solution? Single payer, uniform benefit insurance paid for by a percentage of income from EVERYONE. Yes, even our public servants.


Sorry, but further commenting on this topic has been closed.

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