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'Behind the Headlines': Palo Alto's pension problem

Transcript of City Councilman Eric Filseth's conversation with Weekly journalists

Palo Alto is facing a pension and retiree medical liability that City Councilman Eric Filseth says approaches $1 billion. How is the city going to pay for it?

Hear his conversation with Palo Alto Weekly Editor Jocelyn Dong and city hall reporter Gennady Sheyner in this "Behind the Headlines" podcast, or read the transcription below.

(Due to a technical issue, this week's episode of "Behind the Headlines" is not available in video.)

JD: This week we're going to talk about an elephant in the room, the 1,000-pound gorilla or the biggest problem that no one wants to talk about and that's the city's unfunded pension liabilities. Here to unpack that for us is the chair of the Finance Committee, City Councilman Eric Filseth. Thank you for being here.

EF: Thank you very much. Pleasure to be here.

JD: Now, it's been your goal for a little bit of time now to address this issue, to have the city get its arms around it. I was wondering if you could help us just by starting off to talk about what's the scope of the unfunded pension liabilities over time.

EF: There's an official number, which is calculated by CalPERS, which manages our city retirement investments and accounting. They are a statewide agency, and they do it for a lot of cities, and Palo Alto is one of them. And most people think that the CalPERS estimates are significantly lower in terms of liabilities than true liabilities, and we think that in Palo Alto. I think that.

With that as a preface, the official CalPERS number for Palo Alto's unfunded pension and retiree medical liabilities as of a year ago, 2016 -- because we're on a year-behind accounting cycle -- was about $550 million. Now, a lot of people think that the number is actually much higher than that. I believe the number is close to a billion.

JD: A billion dollars owed to the city's employees.

EF: I think we're close to a billion dollars. And that's a billion dollars that we owe our current and future retirees that we don't have money to cover. That's basically what that number is.

JD: Does this also include retiree medical costs?

EF: Yes. The jargon is OPEB, Other Post Employment Benefits, and retiree medical costs in Palo Alto are, you know, another 30 to 40 percent higher than pension costs.

GS: I feel like the scope of the problem is so huge that a lot of residents have a hard time getting their arms around it. When you see a number like $10 million to $15 million, you can visualize a garage or something like that. But $800 million -- when you consider it compared with the size of the General Fund -- it's almost abstract.

Can you explain a little why it's important for the city to get ahead of this problem? It's so easy to ignore it.

EF: It grows every year, right? It grows significantly every year. ... It's growing like 10 to 20 percent a year. ... A real tactical issue is we have to pay a certain amount just to service it. If you have a big, big balance on your credit card -- which is essentially what this is -- then you have to make a minimum payment, right? Turns out that the minimum payment is now approaching 10 percent of the General Fund, and that's just for the pension piece, not the OPEB.

It's now getting close to 10 percent of the General Fund and it's growing 15, 16 percent a year, which is much, much faster than any other major expense in the city and also substantially faster than city revenues, General Fund revenues, which historically have been in the 4 to 5 percent per year range. So last year they were a little bit higher, 6 percent, right? But you're looking at a big liability growing three times as fast as city revenues, right?

Basically what it means is it crowds out our ability to pay for other kinds of services: staffing, fixing potholes in the streets and so forth. And the implication from the numbers is that, as that liability continues to grow and as the cost of servicing grows, we're going to be increasingly unable to afford the level of services in Palo Alto to which we have become accustomed.

We're looking at fire services this week and then the Stanford contract and so forth. But it's not just fire services. It's sort of all of the services we're going to be (looking at), as we currently structure those services.

JD: This may be pretty obvious but there's a lot of money in the General Fund every year that's going to pay people who are retired at this point who are not contributing services -- I mean, that's kind of the definition of it. But just so people are clear, that's a lot of money.

EF: That's certainly a significant piece of it. I mean those are contracts we've entered into.

JD: Sure.

EF: And we're making good on it.

JD: Yeah. I think there was some figure that I saw that 60 percent of the contributions into the pension fund are going to retirees at this point.

EF: That's possible. Can I show a slide? (SHOWS SLIDE)

So, what you've got here: Over the last 15 to 18 years, the green line here is the revenue to the General Fund. OK? The red line is the expenses from the General Fund, which pays for most of our city services other than utilities, right? Utilities services is a separate financial operation.

And what you can see are our revenue and expenses out of the General Fund, as accounted for, track pretty closely, so, every year, we pretty much break even in the city, which is a sound way to manage your finances.

But what it doesn't account for is the unfunded pension liability, which is the blue line, here. And a lot of people don't really understand this, but this problem is less than 20 years old, and it stems back to a change made under the Gray Davis administration at the turn of the millennium, which basically gave a very, very large increase to public employee benefits, that there wasn't anyway to pay for.

And the result has been that we've ran up close to a billion dollars' debt in the last 16, 17 years ... which basically means the city's spending maybe $60 million a year more than we think they are. Alright?

There's a lot of a sort of accounting protocol and convention involved in you exactly how you relate that to revenues and expenses, but essentially it's a significant number of understated expenses. And actually, the numbers that we show -- the official number of $550 million -- the big problem is that CALPERS assumes that they are going to get 7 or 7.5 percent returns. Nobody thinks that they are going to do that well. Most people think put their estimates in the 6, low 6 percent. And that is a huge difference.

GS: I was going to ask you about that because to me it's one of the kind of difficulties in discussing pensions is that we know the number is huge but it changes, and there are so many changes and there are so many variables that it depends on the methodology that CALPERS uses and things like that, and you mentioned $550 million is official, but it could be much higher. How much higher you think it could be, and to what extent do these CALPERS assumptions affect the fluctuations?

EF: Right. So -- so, again, I think the number is around $900 million today. Maybe a little bit higher than that. There are people who think it's substantially north of that -- it really depends heavily on what you assume for CALPERS investment returns and what rate you discount the liability at, right?

There are people, who have very conservative beliefs about the discount rate, that think our number's actually much higher than that. I think it's between 900 and abillion. I think what we need to do as a city, and it's one of the things that the council directed the finance committee to go look at is, go figure out what the number really is.

GS:You think it's possible?

EF: I actually do. Again, the major factor is, what is a realistic discount rate or investment return rate for CALPERS? So, about a year ago, CALPERS own consultants, Wilshire Associates, estimated that the proper discount rate, looking forward, would be about 6.2 percent. CALPERS took that data, consulted all their stakeholders and so forth, and said, "Well, we think maybe 7 percent's a better number," and then they gave everybody three years to get this 7 percent, plus a five-year grace period, so it's really eight years.

The difference between 7 percent and 6.2 percent, that makes a huge difference. But I think if the city were to calculate its liabilities based on a 6.2 percent rate or somewhere in that range -- it could be 6 percent, it could be 6.3 percent, it could be 5.8 percent -- I think we'd come close to the actual number .... because the real issue is "What are we going to have to pay?" We're going to need to know that before we can really get serious about a plan for how about how we're going to address it. That's the most important first step.

GS: Once you get past that first step, what kind of tools does the city have in its toolbox to deal with it, with such a huge number? I mean, we're talking about an animal shelter that might cost $10 million. This is, what, 16 animal shelters or more than that?

JD: The pension liability is a contractual obligation we can't scale that back any so the city has to come up with other means ...

EF: I can tell you how agencies across the state are looking at this. ... Lots and lots of cities and state agencies and counties have this problem and they're all looking at it. I mean the levers are cut services, raise taxes, renegotiate contracts, sell off assets. I mean these are the -- this is the toolkit. It's not a huge toolkit, the ways of dealing with it.

GS: So that's when you're going to start getting people's attention --

EF: Well -- well, they should be aware of it now. I mean, even now, just the cost of servicing liability is in general between $15 and $20 million a year (in the General Fund, which doesn't include utilities) and it's going up fast, so I mean we're already seeing -- $15 to $20 million a year, growing 15 percent a year, I mean, like you said, we could buy a couple animal shelters for that.

GS: Right. Or a (parking) garage per year.

EF: Right. It's already cutting back. It cuts away from everything we do, affordable housing, you name it. I actually personally think that this is probably the single biggest problem facing the city over the next several decades. I mean, yes, we have a lot of challenges -- housing, transportation -- but this just touches everything.

GS: Because if you can't pay for these ...

EF: If you can't pay for them, exactly.

GS: And I think it's worth pointing out that your committee has spent a lot of time digging into possible solutions. That conversation you'll be having next week -- and the prior council has also done that -- some steps have already been taken. I was hoping we could go over those in terms of restructuring of contracts, and recently you guys started putting money into a trust --

EF: Section 115 trust, yup --

GS: Specifically for this problem, can we just go over some of the things the city has done in recent years to address this?

EF: So I think some of the things that we've done is the city has introduced new tiers of benefits for new employees, a third tier. A lot of cities -- some cities only have one, a lot of cities have two -- we actually have a third one. Again, I think the issue here is not wages. I think wages are -- I think we pay well and we should pay well.

I think the issues are the pension benefits that are accruing liabilities. So we issued some new contracts for that, but again, we can't touch the old contracts, so it really applies to sort of people who come forward.

GS: So when a new worker comes in they'd be in a new tier with a different pension.

EF: Now, one of the issues with the new tier is that the state introduced a set of guidelines called PEPRA (Public Employees Pension Reform Act). ... Under PEPRA pensions are supposed to be fully funded, so a new employee isn't racking up unfunded liability for the city. But unfortunately it doesn't work because PEPRA assumed 7.5 percent or greater return. And so because the actual rate of return is very unlikely to be 7 percent, the difference gets picked up by the city.

So even a new employee that starts tomorrow is still racking up new unfunded pension liabilities in the city of Palo Alto and basically all the cities under CalPERS. San Jose, for example, is not under CalPERS and so they rejiggered their own finances differently and they're going through a lot of hardship as I think everybody knows.

GS: And now and then you hear a suggestion, like on Town Square, "Maybe Palo Alto can ditch CalPERS." But that creates a whole other huge obstacle.

EF: Yeah -- CalPERS -- they kind of don't want people to go away from them; they're like the Hotel California. You can check in but it's pretty hard to check out.

GS: Yeah, you have to pay like a huge sum to get out.

EF: Yeah, I mean basically what CalPERS does is they value your liability. When they tell you how much you have to pay, they tell you, "Your liability is based on the 7 percent investment return rate." But in order to get out of CalPERS, they want the whole thing up front, valued at the T-Bill rate, so 2.5 percent or something like that, which nobody can afford to do.

Basically, you can't get out of CalPERS. But I actually think CalPERS as a portfolio manager is probably okay.

I think as a "managing your city finances" manager, I think that's probably not a good situation for any city to be in, including Palo Alto.

And that's one of the directions we have to move, so we'll stay in CalPERS, but we have to sort of do our own accounting and our own saving, not to mention the trust. And that's one of those elements we set up a couple of years ago. It's called a Section 115 trust, which is a trust that you can put money in to save to pay down your unfunded liabilities, and we've got a few million dollars in there right now. Which is not anywhere near a billion, but it's a start, and I think that's one of the elements that healthy cities trying to get out from under this burden do.

JD: Getting back to your question about what else the city has done recently. The CalPERS contract was renegotiated recently, and the employees are now picking up some of the city's contributions. Is that correct?

EF: Yes. The way these contracts are negotiated, the costs of the pensions are divided between the employer and employee. A mix of how much is picked up by employer and employee is shifting over time. To me, the delineation -- as a finance person -- the delineation between what percent is the city's versus the employees -- to me that one seemed always to be artificial.

It's part of the contract and it's in the bucket along with everything else, with vacation time and all the other issues that go ahead with the contract. The share of pension is part of the mix. It's significant, but the delineation between employer and employee -- at the end of the day, it all goes to pay the pension.

GS: I think in the past, the city picked up 100 percent of its own share and the employees'.

EF: Yes. That was the full share at 7.5 percent, plus the unfunded share -- the "don't ask don't tell" share of what the difference was ... what it would really cost, assuming it's 6 percent.

By the way, I have another slide with an explanation of how we got into this problem. (SHOWS CHART) What you're looking at here is: Over the last 50 years, interest rates and CalPERS projected return rates. I think everybody knows there is a correlation between interest rates and "risky assets" return rates like stocks and real estate and stuff like that.

Stocks have to be a higher return than the T-Bill rate because the T-Bill is no risk, and if they were the same no one would buy the risky things because they'd just (get) T-Bills. But they track. They go up and down together. Certainly, those of us whose parents had adjustable rate mortgages in the '70s , when interest rates were 15, 16, 18 percent -- the interest rates and stock returns used to be a lot higher. Those were the days of oil shocks, and stagflation and Vietnam War and stuff like that.

And so what happens is in '80s and '90s, state agencies in California were actually running small surpluses on pensions. In about 2000, under the Gray Davis administration, Sacramento and CalPERS got together and said, "We're making all this money, looks like we'll have huge investment returns for the indefinite future -- 8 percent, 10 percent and so forth" -- and they made a deal to vastly increase the value of pension benefits based on the assumption that they'll make these huge investment-return rates.

But what happened was that interest rates were already falling at that time. Any one looking at that should have looked and said, "Hmm, I'm not sure we can really project stock returns, real estate returns and all the other stuff CalPERS invests in. Might not be a good idea to project those things will stay high forever." But they did and they basically doubled pensions everywhere. And then what happened since then is interest rates continued to fall, asset return rates continue to fall and what you can see here -- and this is a chart from Stanford professor Jeremy Bulow -- CalPERS never lowered the discount rate.

And the difference between what CalPERS projected as an investment rate and what we and all other agencies in California base our contracts on versus what they're really making -- that's the result of basically everything you see here. It all comes back to that. It's actually simpler than it looks.

GS: It's wishful thinking by CalPERS on a very long-term basis, even with changing conditions, it sounds like. But I want to ask about two big-picture ways to possibly deal with the problem No. 1, the Fire Department and No. 2, Utilities. Every now and then we get comments, "Why doesn't the city just outsource these services? Fire can go to the county, utilities can go to PG&E for most of them." Is that something you see the council even considering in the next couple of years, as it tries to get a grip on pensions?

EF: First of all, outsourcing things doesn't do anything about your existing commitments, but it may help you not pile up future commitments. I wouldn't want to single out any particular agency. I would think outsourcing things is one of the tools in the toolkit.

It's a little bit wrong-headed because in the private sector, most people outsource things they don't consider to be their strategic core competency. Anything that's a strategic core competency they would keep in house.

In public-sector economics, the crazy world of CalPERS, pensions and retiree benefits—it means that it pushes you to outsource stuff that you would consider to be your strategic competence in the city. It's completely upside-down. But that's where we are. Ultimately, there's only so much money and we have to figure out how to use it.

GS: Sounds like the conversation must happen. It is in the toolbox.

EF: It has to be. I don't think Palo Alto's ... Obviously there've been some other cities in the news, you know, that have come up with pretty drastic solutions -- Stockton and so forth. I don't think Palo Alto's in that boat today, but if we don't take action. we could potentially get there. These are very, very large numbers. The whole state problem maybe approaches a trillion dollars. I can't imagine how the whole state is going to pay a trillion dollars.

You know if you read (Thomas) Piketty, every major western nation that ran up a big war debt never paid it off -- they all defaulted or inflated, with one exception: Britain paying off the Napoleonic wars in the 19th century.

So if you read your Jane Austen -- you're supposed to marry someone with a big income, right, Mr. Darcy and Mr. Bingley. That's where it went: It was invested in British government debt. They paid it off over a hundred years. Everybody else defaulted.

JD: To Gennady's question: There was an interesting comment on Town Square related to the fire department downsizing, which was, "Is the city really charging Stanford, for example, for the pension liability (for fire personnel) or are they just paying for the salaries and other compensation?"

EF: That's a really good question. I am not intimately familiar with the discussion with Stanford. ... They are certainly not paying for the unfunded pension liability. And probably they should be. They're not paying for the blue line (on the chart, indicating unfunded liability).

GS: Are other cities paying for the blue line when it comes to the animal shelter -- Los Altos, Los Altos Hills -- or the Regional Water Quality Plant, there's various cities participating in that?

EF: No, because we don't account for it.

GS: But it's Palo Alto shouldering the blue line costs? Is that something you're interested in the future asking East Palo Alto, Mountain View, others in the sewage plant (consortium) to contribute to the pensions?

EF: That's one of the things that the council directed the finance committee to look at in its assessment of what are the numbers here. And yeah, we need to know. In fact it's on the agenda for Tuesday -- I don't know how far we can get (in the agenda) -- what are the true costs, including the unfunded liability. And yes, it applies to both to external agencies, and you're right, Stanford's not the only one, there are other districts we deal with.

JD: I wanted to toss one question your way: If we have an employee who is working for Palo Alto but they previously were working for the city of Mountain View, what is Palo Alto's portion of this pension liability?

EF: It's proportionate to how long they worked in Palo Alto versus how long they worked in Mountain View.

JD: OK, that's pretty straightforward.

GS: So Palo Alto's just got to marry a rich city.

EF: There is one thing that came up in the (Town Square) discussion of fire (staffing) that I thought was interesting ... Some of the points of discussion, like about response time, that are of the interest in the community are being discussed in the meet-and-confer process, which is basically closed. There was some commentary that, "Geez, there are major interests of the community discussed in a closed-door environment. Is that really the right thing to do?" And I wonder about that. I think that's something we need to think about.

JD: Nothing comes out of meet and confer? There's no report to council?

EF: No, it's a closed door.

GS: I would love to know what goes on in there. I totally support your opening the doors of every closed-door negotiation.

JD: So, the finance committee is going to talk about pensions this week.

EF: We're going to talk about it this week; (and) I expect the discussion to continue. Our focus right now is we need to understand what the numbers really are. I mean, there's a couple of variations: There's the normal cost and interest costs.

GS: So it's either an elephant in the room or King Kong in the room.

JD: Get out the scale and figure out what it is! Well, Eric Filseth, thank you so much for joining us for this discussion on pensions.

EF: Thank you very much for having me.

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28 people like this
Posted by Fredrick
a resident of Palo Alto Hills
on Oct 13, 2017 at 5:54 pm

Start by "dumping" the Stanford fire contract. If they are not paying for their share of the unfunded pensions, then let them find some other fire department to staff their fire station!

7 people like this
Posted by Bill
a resident of Barron Park
on Oct 13, 2017 at 6:42 pm

> Start by "dumping" the Stanford fire contract. If they are not paying for their share of the unfunded pensions, then let them find some other fire department to staff their fire station!

Yep, it's not a completely crazy idea. But what happens with Stanford's Station 6 and the 16 (8 daytime and 8 nighttime) firefighter and operator positions supporting Station 6 if PAPD leaves? More PAFD jobs would be need to be cut. In addition, Station 6 has Palo Alto's ladder truck and a training tower, so there isn't an easy exit from Stanford.

Maybe the best plan is forget about the new public safety building near California Avenue. That site is better suited for housing. Recast the new public safety building design with a Central Fire Station. Build it at the current PSB site on Forest Avenue. Merge the old Station 1 into the new Central Fire Station.

Encourage Atherton to leave MPPFD since they are unhappy. Atherton could be the rich uncle that Councilman Filseth seeks. Atherton's contribution to MPPFD is enormous with little to show for it. Up until the mid-1970's Palo Alto, Menlo Park and Atherton police worked together, sharing a common radio dispatch channel. At the time, Stanford Fire got dispatched by Mountain View on one of Santa Clara County's radio channels. Let Stanford have fun trying to squeeze Santa Clara County or Mountain View.

24 people like this
Posted by Neil
a resident of Professorville
on Oct 13, 2017 at 7:29 pm

Did you read the same article that I did? It's about the city employees unfunded pension liability, not fire stations.

33 people like this
Posted by Tough Love
a resident of Evergreen Park
on Oct 14, 2017 at 8:54 am

City Councilman Eric Filseth really seems to understand the issues and approaching this correctly.

Being well versed in pension design and funding I have a big warning and suggestion.............

NOTHING you do will "solve" the problem unless you STOP digging the financial hole you are now in deeper every day, and doing that will require more than putting NEW workers in less generous pension tiers.

There are NO "solutions" that will work without VERY (think 50%) reductions in the value of future year pension accruals for the future service of all CURRENT workers. That can be accomplished by lower formula-factors, higher full/unreduced retirement ages, appropriate (i.e., not subsidized) early retirement adjustment factors, and ending (or materially reducing) COLA increases.

And yes, I am fully aware of the "California Rule", the CA Constitution, and the Laws, Regs which make such changes possible.

I suggest that Palo Alto get together with like-minded Cities and develop a strategy to accomplish this ............. again, because NOTHING else will work.

33 people like this
Posted by Jack
a resident of Midtown
on Oct 14, 2017 at 8:58 am

Palo Alto is bankrupt just like California. These growing unfounded liabilities are crowding out other essential spending. Sure path to decline.

3 people like this
Posted by Stephen Douglas
a resident of Stanford
on Oct 14, 2017 at 10:52 am

Eric Filseth says 

"they basically doubled pensions everywhere.” ?

No sir. Not even close. The usual claim is, "They increased pensions by fifty percent." Also not true.

Most of what we are paying for now is the forty percent loss of assets in the Greatest Recession, and the ensuing declining revenue due to massive unemployment. The pension system can tolerate normal economic cycles, and actually helps to share the costs over generations. 2007 was not normal. It created crises not just in Palo Alto, not just California, not just the U.S., not just in public pension systems. It was/is a global crisis. SB400 did not cause that.

45 people like this
Posted by Voter
a resident of Charleston Meadows
on Oct 14, 2017 at 11:14 am

The current pension system is the definition of "moral hazard:" incurring risk without owning the consequence of that risk. Unions bribe feckless politicians for unsustainable benefits, knowing 1. The politician won't be around when the bill comes due and 2. Any shortage of funds can be addressed later by siphoning from government services or supporting ever increasing taxes.

The California rule may not be around much longer in it's current form. A just recently ruled against some public employees who argued that new anti pension spiking rules violated their vested right to spike, saying only a reasonable pension was guaranteed. The case is bound for the CA supreme Court. If this is upheld, the city could switch all future accruals to a 401k with a match, as defined contribution plans do not accrue future liability by definition. These are"reasonable" for the private sector and the public unions will have a difficult case arguing otherwise.

If the CA supreme Court rolls back this ruling and allows the current precedent to continue, the only option is to start outsourcing as much government work to the private sector as possible, where market efficiency can do it's work and the bloated pension liability won't be fed.

The unions could be offered first crack at the work at the outsourced rates, but it's unlikely they would agree to a pay decrease to market rate (note salaries might even increase in some cases but the pension would be 401k like the rest of the non government class).

This isn't a policy problem. It's simple math.

24 people like this
Posted by Eric
a resident of Downtown North
on Oct 14, 2017 at 11:36 am

The Federal Govt, in a rare display of fiscal good sense, recognized that the 100% defined benefit pension they offered Federal employees for many decades was going to be a fiscal disaster moving forward, and changed their pension system in the early 80's. Even today, most currently retired federal employees are covered by the old more generous pension system, which is very similar to the 2% pensions currently offered to many state and local govt employees. However, as time marches on, more and more Federal employees will be covered by a defined benefit pension that offers benefits that are approximately 1/2 of those of the older pension. The rest of those Federal retirees retirement income comes from Social Security and a 401k saving program, both of which employees contribute to. The cost to the govt for Federal retirees will eventually decrease as more and more of the retired work force is covered by the 'new' system. Why states and local govt did not follow a similar plan decades ago would suggest purely selfish motives by those in charge, who knew that they would be the beneficiaries of their decisions as elected or appointed govt 'leaders'.

Palo Alto, be a leader, change the pension system. Employees that don't like it are free to go. I would predict that other cities would follow your example. A modest pension that forces employees to save for their own retirement makes much more sense than the exceptionally generous benefits currently offered where the tax payers, who are not at the bargaining table, are always left holding the bag.

31 people like this
Posted by Daniel Pellissier
a resident of another community
on Oct 14, 2017 at 11:39 am

Stephen Douglas conveniently ignores the 270% stock market gains (S&P 500) during the seven years since the bottom of the Great Recession. Instead of setting actuarial assumptions to pay-off their unfunded liabilities, CalPERS has used a minimum payment strategy that has left the system and its contracting agencies very vulnerable to the next inevitable recession. Local government officials have been happy to make the minimum payments and use the money needed to pay off their pension debts for other purposes.

Tough Love is right. The problem cannot be solved without substantially reducing the cost of benefits earned by current employees and using those savings to pay down the unfunded liabilities. The math is relatively simple. It is the politics that is hard, though eventually the very ugly math wins.

2 people like this
Posted by Stephen Douglas
a resident of Stanford
on Oct 14, 2017 at 12:07 pm

No, Stephen Douglas did not forget. It is not just a public pension problem.

Web Link

S&P 500's largest corporate pension funds status almost exactly matches CalPERS experience: overfunded in 1999, 18% underfunded by 2002, fully funded again by 2007, at which time the bottom dropped out, and ushered in the GLOBAL pension crisis. And it is still here, globally.

"Local government officials have been happy to make the minimum payments and use the money needed to pay off their pension debts for other purposes."

Absolutely. In 2008-09 and later, all government revenues were in decline due to massive unemployment. Which means welfare and other costs were increasing. A double edged sword. Certainly CalPERS could have increased contributions at that point, but at what cost?

17 people like this
Posted by Tough Love
a resident of Evergreen Park
on Oct 14, 2017 at 1:49 pm

Quoting Stephen Douglas ..........

"S&P 500's largest corporate pension funds status almost exactly matches CalPERS experience: overfunded in 1999, 18% underfunded by 2002, fully funded again by 2007, at which time the bottom dropped out, and ushered in the GLOBAL pension crisis. And it is still here, globally."

Stephen Douglas, do you ever intend to stop with misleading comments?

Based on your many YEARS of commentary, you are clearly understand that the assumptions an methodology REQUIRED (by the US Gov't) of Private Sector Plan valuations is MUCH MUCH more conservative than that routinely used by PUBLIC Sector Plans. To knowingly ignore that is dishonest in the extreme.

The average funding ratio of single-employer Corporate-sponsored PRIVATE Sector DB pension Sector Plans is now in the lower 80% range. For a Public Sector DB pension Plan to be EQUALLY strong, it would (using the ultra-liberal assumptions & methodology ROUTINELY employed by Public Sector Plans) have to have a funding ratio of about 110%. Most Public Sector have funding ratios about 1/2 to 2/3 of that percentage, a level SO POOR, that if they were Private Sector Plans governed by ERISA, the gov't would (for MANY PUBLIC Sector plans) disallow any further pension accruals.

[Portion removed.]

10 people like this
Posted by Mary
a resident of Old Palo Alto
on Oct 14, 2017 at 3:19 pm

You guys are being much to pessimistic. There's plenty of money in the budget to pay pensions to our hard-working municipal employees: we just have to be a little less generous with the overly extravagant services we give to our residents. For example, many cities make residents responsible for the street and sidewalk maintenance of paving in front of their houses. We could do this and also eliminate street sweeping making residents take care of that too. Same for streetlights and traffic signs and signals. We could do the same for the city owned utilities: no reason residents can't be responsible for the water, sewer, gas and electrical lines that cross in front of their properties. Palo Alto currently offers way more benefits to residents than other towns. Can't we eliminate a few of them like the Children's Zoo, the municipal swimming pools and close a couple of parks? We can charge residents for using the dog runs too. Finally, Palo Alto has a revenue generator that few other cities do: city owned utilities. We could double utility rates and we'd still be only a little more than PG&E. It would be somewhat of a sacrifice to be sure. But don't our valuable employees deserve it?!

2 people like this
Posted by Stephen Douglas
a resident of Stanford
on Oct 14, 2017 at 3:57 pm

Nobody likes me?

Yes, the assumptions and methodology are not the same. Nor need they be. The point is, like public pensions, the private S&P500 pensions recovered handily from the dot com crash, as they would from any normal economic cycle. But not from the 2008-09 crash. It was a game changer for public pensions, private pensions, and global pensions; no BS.

"To knowingly ignore that is dishonest in the extreme."

The biggest problem Palo Alto, like most other state and local governments, has, is negative amortization from the huge losses in the last recession. Yes, Daniel Pellissier, the S&P 500 has gained 270%, but those earnings were on the very reduced assets after 2008, and not all of Palo Alto's (or any other pension system) are invested in S&P 500. The other problem, illustrated in the chart above, is extremely low bond rates. The city is obviously aware of these problems.

Tough Love and Mr. Pellissier seem to come from the same school of thought: pension reform = pension reduction. That may be a part of the answer. Like other local governments, Palo Alto has reduced pension formulas and increased employee contributions. But they also have a duty to provide services to the city, which means sufficient compensation to attract and retain a qualified workforce.

Mr. Filseth, perhaps I spoke too soon. I did not specifically study Palo Alto pensions before and after 2000. In the case of state misc pensions, formulas went from 2%@60 to 2%@55. At a normal retirement age of 62-65, this amounts to about a 3% pension increase. The most misrepresented increase is the infamous CHP 2%@50 which was changed to 3%@50. This is NOT a "fifty percent increase" except for those who actually retire at fifty. The 2%@50 was/is a graduated formula which increases to 2.7%@55.

I am not aware of any local government which doubled their pensions.

11 people like this
Posted by Sheldon Cooper
a resident of another community
on Oct 14, 2017 at 4:06 pm


Is that sarchasm?

1 person likes this
Posted by Online Name
a resident of Barron Park
on Oct 14, 2017 at 4:40 pm

What is going to happen more frequently, and is happening right now is outsourcing in the labor market. The problem with outsourcing is that we get a lot of companies from out of state doing the work. These companies come in for a service contract . These companies pay nothing to their employees with little to no benafits, and sometimes hire undocumented workers. This is not how our tax dollars should be spent. The work should go to Californian legal residents.
If managerial side wants to keep doing this we should outsource them too. It is only fair.

14 people like this
Posted by Tough Love
a resident of another community
on Oct 14, 2017 at 5:05 pm


I read your comment with interest, and I certainly don't disagree that we COULD find many currently-provided services to reduce or eliminate, and likely could transfer many financial responsibilities that are now paid for by the City to the taxpayers .......... but should we?

If we were doing this (and assuming the reduction or loss of those services were reasonable and agreeable to the majority of the City's residents) in a way that would benefit ALL of the city's residents equally (for example by a reduction in taxes), that might be a justifiable rationale for doing so. But that's not what you're suggesting, because you want all of the savings to be used only to prop-up the underfunded Public Sector pensions.

Not to misunderstand my position, finding a way to honor a contractual obligation (in this case, Public Sector pensions) is normally a good thing. But should we not FIRST be sure of what is the ROOT CAUSE of our (and most other City's) pension mess before throwing more money at it, and especially when raising that incremental money involves transferring service currently paid-for by the City to the Taxpayers?

By education, training, and experience, I understand the design and funding of single-employer Corporate-sponsored and Public Sector pensions very well, and if you compared the generosity of typical-Public to typical-Private sector pension, here is what you would find......

Public Sector pensions are ROUTINELY 2 to 4 times (4 to 6 times for CA Safety workers) greater in "value upon retirement" than that typically granted private Sector workers (in jobs with comparable risks and requiring comparable education, experience, skills, and knowledge) who retire at the SAME age, with the SAME wages, and with the SAME years of service. VERY generous per-year-of-service pension formula-factors, VERY young ages at which UNREDUCED pensions can begin being collected, and COLA-increases after retirement (unheard of in Corporate-sponsored Private Sector Plans) do NOT come cheap.

How did these EXTRAORDINARILY generous Public Sector pensions come about? Well, I believe that it is due to the unholy relationship between the Public Sector Unions and our self-interested Elected Officials with the former BUYING the favorable votes of the latter (on Public Sector pay, pensions, and benefits) with BRIBES disguised as campaign contributions and election support .............. and I believe MANY observers agree with me.

We also need to keep in mind that while the "blame" for this mess lies primarily with our self-serving Elected Officials and secondarily with the insatiably greedy Public Sector Unions, isn't it the Public Sector WORKERS (i.e., the Public Sector pension Plan participants) that are the financial beneficiaries of this Union/Elected-Official collusion ? Of course they are.

So should we (the Taxpayers) "reward" those who have effectively cheated us (and I haven't even brought up the HUGE detrimental impact of the RETROACTIVELY-APPLIED pension increases that resulted from SB400 and similar laws) by picking up MORE City expenses simple to free up funds to pay for excessively generous pensions that were never necessary or justifiable in the first place?

I don't think so. And while I am aware of the California Rule, and CA's Constitutional and legal impediments to do so, I believe CA Cities would be best served my getting together with other like-minded Cities and aggressively advocating for changes (Constitutional if necessary) that will allow very material (50+%) reductions in the value of FUTURE Service accruals for the FUTURE service of all CURRENT workers. Whatever "savings" are so achieved (as well as the savings that would be realized by reducing Public Sector retiree healthcare subsidies all the way down to the level typically granted Private Sector workers by their employers) could be applied to PAST service unfunded liabilities.

15 people like this
Posted by Tough Love
a resident of another community
on Oct 14, 2017 at 5:14 pm

Quoting Stephen Douglas..........

"ough Love and Mr. Pellissier seem to come from the same school of thought: pension reform = pension reduction. "

Yes, BECAUSE CA Public Sector pensions are so ludicrously excessive, that when added to wages and other benefits, results in Total Compensation MUCH MUCH greater than that of their Private Sector counterparts, is IS indeed appropriate for pension REFORM in CA to = pension REDUCTION.

14 people like this
Posted by Resident
a resident of Midtown
on Oct 14, 2017 at 5:30 pm

I have heard the same story since I moved here 20+ years ago! That is what we get if we keep electing our government or legislature representatives primarily by party affiliation (mostly so called progressive Democrats) and not by their qualifications. Admittedly, the choices in the other side (namely Republicans) are nothing to write home about either! So we are stuck!

22 people like this
Posted by Eric Filseth
a resident of Downtown North
on Oct 14, 2017 at 6:53 pm

Well, technically, if you’d started work before SB400, but after 1991 when Pete Wilson closed the old system, you were in “Tier 2,” which was 1.25% at 65. If you were in Tier 2, which SB400 abolished, your pension more than doubled; but Tier 2 employees had also been allowed to get Social Security, which complicates the arithmetic. Anybody really interested in the legacy can find one detailed account of it here Web Link, though it’s not a happy read.

What I really want to address, though, is this “bad day at the stock market” narrative, since it’s been a staple CalPERS argument for many years, and some people continue to repeat it (btw most of these accounts include the dot-com recession of 2001-2003, because the rapid pension-liability climb started well before the Great Recession). But it’s hard to look at Dr. Bulow’s chart above Web Link and not see a steady and systematic decline in investment returns over 25 years, together with a turgid response. CalPERS projections followed the market on the way up, but somehow never got round to following it down. Some people may look at this data and instead see some hard-luck Black Swan event buried in there; I can’t. I think that narrative is a bunch of malarkey. Obviously some will disagree, but I suspect not many.

Incidentally, a number of observers also take CalPERS to task for switching to riskier investments once they started losing ground. I personally am not one of those. For me, transparency about their expected return is the root problem, not picking apart their portfolio strategy.

Interestingly, at the same Stanford conference last month where Dr. Bulow presented his slide, there was a speaker from CalPERS who presented essentially the same data in an almost identical slide, but with an entirely different point. That speaker's point, and I paraphrase here, was: “look, everybody’s returns have sucked wind, not just ours.” So perhaps even CalPERS may be backing away from the market-crash narrative.

If I understood Dr. Bulow’s own commentary on this data, it was basically: “all this was foreseeable, somebody should have been watching more closely.” Others in the audience had less charitable interpretations.

2 people like this
Posted by Stephen Douglas
a resident of Stanford
on Oct 14, 2017 at 8:54 pm

Thank you, Mr. Filseth, this is why I said, perhaps I spoke too soon. I did not specifically study Palo Alto pensions before and after 2000.

All pensions are not alike. There is a variety of formulas, both within CalPERS and in the various independent city and county systems. And not all took advantage of the increased formulas. I was under the impression that the second tier was only, or at least primarily for state miscellaneous employees. Which was much of the impetus for SB400. Tier 1 state employees were working side by side with workers earning double the pension, and both were inferior to most local governments which had a 2%@55 formula. Although all was not lost. Another feature of tier one was no employee contribution. Leaving 5% of pay which ...could... be invested in CalPERS 457 program (no state match).

It is my understanding that CalPERS made several formulas available, but it was up to the individual city to choose which ones to adopt. What were Palo Alto's general and safety formulas before 1999?

So difficult to compare pensions when some agencies with similar formula have employee contributions and others don't. Some also have Social Security, while others don't. Some have clearly adopted higher pensions as compensation for lower wages.

All pensions are unequal, but some are more unequal than others.

2 people like this
Posted by Stephen Douglas
a resident of Stanford
on Oct 14, 2017 at 8:58 pm


"Another feature of tier *two* was no employee contribution."

15 people like this
Posted by Tough Love
a resident of another community
on Oct 14, 2017 at 9:28 pm

Quoting Stephen Douglas ..........

"So difficult to compare pensions when some agencies with similar formula have employee contributions and others don't. Some also have Social Security, while others don't. Some have clearly adopted higher pensions as compensation for lower wages. All pensions are unequal, but some are more unequal than others."

LOL ........... pensions sure are "unequal".

While there may be quite a variety of tiers, formulas, provisions and such within the envelop of PUBLIC Sector Plans, one thing is CERTAIN ........... ALL of them (yes ALL of them) are MUCH MUCH more generous than those typically granted COMPARABLE SITUATED Private Sector workers in large Corporate-sponsored DB Plans.

And especially in CA (with their LUDICROUSLY generous level of DB pensions and benefits), don't embarrass yourself by even THINKING of suggesting that lower cash pay justifies it.

2 people like this
Posted by Stephen Douglas
a resident of Stanford
on Oct 15, 2017 at 5:25 am

Thank you for your input, Mr. Love.

Mr. Filseth seems to come at this from two directions. First, they have reduced pension formulas and increased employee contributions.

Second, they have set up a trust to put money in to save to pay down their unfunded liabilities, 

I can see now, with 20/20 hindsight, that, had CalPERS decreased their discount rate 25 years ago when the treasury rate dropped below 8%, it would have strengthened the system going forward. But 25 years ago, I believe (1990-92) was when Pete Wilson was "borrowing" from CalPERS and requesting CalPERS to increase the discount rate, to lower contributions, during the huge budget deficit at the time.

Looking at the charts, it is easy to see the need to reduce discount rates, but I don't know if we could fault them at the time for not predicting Treasury rates would fall so far and remain there.

And if it was so obvious to everyone (except CalPERS), in order to protect themselves, why did not Palo Alto, or any other city or county, set up a trust fund twenty years ago, rather than wait till a few years ago?

In the entire state, only the city of Fresno is (ostensibly) one hundred percent funded.

13 people like this
Posted by Tough Love
a resident of another community
on Oct 15, 2017 at 6:23 am

Stephen Douglas,

Setting up a Trust Fund to accumulate (in addition to that annually called for by CalPERS) money to deal with the large and growing unfunded liability may be a good thing, but it does NOTHING to address the ROOT CAUSE of the Public Sector pension mess ........ the ludicrously excessive level of CA's promised Public Sector pension benefits ........ that are routinely MULTIPLES greater than those typically granted comparably-situated Private Sector workers. And nor does (in any financially "effective" way) only implementing reductions for NEW employees, thereby allowing existing workers to CONTINUE to accrue excessive and unaffordable pension benefits for the balance of their careers, for some, an additional 25 years.

While in some cases it is likely ALREADY too late to avoid pension reduction even for those ALREADY RETIRED, without taking one "NECESSARY" step to get this pension mess under control ........ that being VERY materially reducing pension accruals for the future service of all CURRENT workers .......... assuredly, many MORE Cities will join the aforementioned group.

3 people like this
Posted by Pension mtg 7pm Tuesday
a resident of Community Center
on Oct 16, 2017 at 9:11 am

Everyone should write in to city.council@cityofpaloalto.org and show up at 7pm on 10/17 (Tuesday) to demand action from the City Council on this.

3 people like this
Posted by SeeSawJunior
a resident of Green Acres
on Oct 16, 2017 at 12:22 pm

I love how Mr. Stephen Douglas and Ms. Tough Love duke it out on a daily basis on the pension scam. You two are my hero's. Imagine the dinner conversations if you two ever became an item :)

30 people like this
Posted by Rajiv Bhateja
a resident of Community Center
on Oct 16, 2017 at 1:09 pm

The Los Altos Hills town charter explicitly calls for running the town for the benefit of residents. Palo Alto's charter doesn't have a similar clause, which enables unions to bully politicians into generous retirement benefits.

The Town of Los Altos Hills has minimal staffing and outsources most services. Since most work is handled by the private sector, they know exactly what it costs to fix a pothole. In contrast, Palo Alto won't know the true cost of fixing a pothole, until decades after the people who fixed it retire.

That makes planning and budgeting so much harder.

In addition to CALPERS and the generous state, the root cause of many of these problems is the fiscal fecklessness demonstrated by former city council members, of whom Ms. LaDoris Cordell is the most egregious example.

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Posted by Tough Love
a resident of another community
on Oct 16, 2017 at 2:11 pm

Quoting ..........

"The Town of Los Altos Hills has minimal staffing and outsources most services. "

Given current legal restraints on EFFECTIVE pension reform, OUTSOURCING is indeed the way to go .......... for EVERYONE but Police.

Sandy Springs Georgia is the MODEL of outsourcing. Google it, astonishingly successful, while all the surrounding towns/Cities are suffering under the weight of grossly excessive pensions & benefits and the associated unfunded liabilities.

15 people like this
Posted by WakeupTime
a resident of College Terrace
on Oct 16, 2017 at 2:19 pm

You can only kick the can down the road so far and then reality sets in. The residents of Palo Alto are in for a rude awakening....Increased taxes, reduced services and layoffs. There's just no way around this ugly mismanaged mess.

7 people like this
Posted by You're not alone
a resident of another community
on Oct 17, 2017 at 12:24 am

I recently calculated the MPCSD employer match with state and local contributions factored in to be in excess of 7X the private sector average. Palo Alto is not alone in this crazy pension burden. They further compound the problem with salaries well above the county average which then get multiplied by the pension contribution rate. Insanity.

16 people like this
Posted by Sanctimonious City
a resident of Barron Park
on Oct 17, 2017 at 6:47 am

Sanctimonious City is a registered user.

One score and seven years ago our politicians brought forth on this state, a new benefit plan, conceived in avarice, and dedicated to the proposition that not all pensions are created equal.

Now we are now engaged in a great fiscal war, testing whether that pension, or any pension so ill conceived and so dedicated, can long endure.

From these honored deficits we take increased devotion to that cause for which the taxpayers gave the last full measure of devotion.

-- that we public sector employees highly resolve that these sacrifices to support our lavish retirements shall not have been given in vain nor will ever changed

-- that this city, under God, shall have a certain death in bankruptcy

-- and that

A government of the unions, by the unions and for the unions shall never perish from the earth.

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Posted by Tough Love
a resident of another community
on Oct 17, 2017 at 3:53 pm

Quoting You're not alone .............

"I recently calculated the MPCSD employer match with state and local contributions factored in to be in excess of 7X the private sector average."

With the PRIVATE Sector employer match at about 3% of pay, 7 times 3% = 21%.

This may be what Palo Alto is now CONTRIBUTING, but keep in mind that the ultra-liberal PUBLIC-Sector assumptions & methodology used to calculate Plan liabilities and to determine annual contributions materially UNDERSTATES the TRUE expected cost of these extremely generous Public Sector pension Plans.

For full (30-year) career CA Public Sector workers the following are REALISTIC estimates of the TOTAL (employer + employee) cost of the promised pensions, expressed as a level annual % of wages:

For misc workers .......... 30% to 40% of pay

For Safety workers......... 40% to 60% of pay

Subtract from the above what the workers ACTUALLY PAY and the balance is the level annual employer (i.e., Taxpayer) cost.

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Posted by Tough Love
a resident of another community
on Oct 17, 2017 at 5:23 pm


Where I stated above...
"For Safety workers......... 40% to 60% of pay"

It was supposed to be .............
"For Safety workers......... 50% to 60% of pay"

11 people like this
Posted by sunshine
a resident of Barron Park
on Oct 18, 2017 at 8:53 am

Most companies have switched from old fashioned pensions tp 401K retirement accounts where retirees pay for the company subsidized health accounts that retirees contribute to. Also the retirement payout is set a the time of retirement--retiree pensions do NOT increase as the cost of living does.
Why does the City still pay cost of living pensions and for healthcare?
City employees with less education that many tech employees earned less than city employees.
What a cushy number City employees have.
It's time to stop this leaky faucet.
Put City employees on 401K plans and insist they contribute to healthcare.
No more free rides.

7 people like this
Posted by Carol Muller
a resident of Duveneck/St. Francis
on Oct 18, 2017 at 9:28 pm

Thank you to Eric Filseth and to the Palo Alto Weekly for providing this detailed explanation of the pension issues. All organizations, including the City of Palo Alto, express their values and priorities through their budgets and financial management, and I wonder if too few of our leaders have really understood the complexities of the financial realities presented here, or if some are choosing to disregard them, given their own self interests. They may think they can concentrate on other shorter-term priorities, but these issues will make or break what the City can do in the future. It seems imperative to start some kind of accrual based accounting not yet in place to truly put the City's financial commitments in perspective. As a resident, while I appreciate much that the City and its extensive staff and contractors do and support, I also see waste here and there. And despite the wealth of many, often including those who can afford the time and resources to run for office and serve on the City Council, not all who live in Palo Alto can easily afford significant tax increases.

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Posted by Oh well
a resident of Old Palo Alto
on Oct 20, 2017 at 2:06 pm

Same issue comes up by "concerned" newbie council members at every employee contract negotiation. Blah,blah,blah. I think Mr. Fileseth needs to educate himself on city finanances and past contractual agreements instead of listening to some Stanford self proclaimed "expert" on government finances. Eric, take a look where the current city employee highest salaries and pension packages begin and end and then get to work.

2 people like this
Posted by Arvin Winkleman
a resident of Palo Alto Orchards
on Oct 20, 2017 at 3:17 pm

There is another “tool” in the toolkit that is alluded to. Default.

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