Budget takes aim at pension costs in Palo Alto

City Council to cut $4 million to narrow pension backlog

Alarmed by rising pension costs, Palo Alto's elected leaders made a highly unusual move Monday night when they passed an annual budget that includes $4 million in unspecific cuts.

By a 6-1 vote, with Councilwoman Lydia Kou dissenting and councilmen Greg Tanaka and Tom Dubois absent, the City Council approved a $709.9-million budget for fiscal year 2019 that eliminates 11 positions in the Fire Department and 6.6 positions in other departments.

The budget includes a $210.7-million general fund, which pays for most basic services, excluding utilities. It also assumes that in the first six months of the fiscal year that begins July 1, the City Council will reduce expenses by $4 million and use that money to address the city's unfunded pension liability, which is estimated at more than $500 million.

In approving the budget, the council followed the recommendation of its Finance Committee, which reviewed the document last month and agreed to explore more cuts. Councilman Greg Scharff, who chairs the council's Finance Committee, said Monday that the committee made a concerted effort this year to focus on the pension problem. Every year that the city does nothing to address its unfunded pension liability, the backlog grows by $8 million, he said.

Mayor Liz Kniss compared the city's pension problem to having a credit card with an interest rate of 18 percent. The best thing to do is to pay it off as soon as possible.

"This is a sea change for us. This isn't just a small bump. This is the kind of thing we will try to continue on," Kniss said.

Vice Mayor Eric Filseth, who serves on the Finance Committee, said the budget is the first step toward keeping up with the city's growing unfunded pension liability. He called the $4 million in proposed cuts a "prudent" step to getting a handle on the issue.

"The later we postpone this, the more difficult -- and dramatically more difficult -- it would be to get in front of it," Filseth said.

The budget also reflects the council's appetite for infrastructure. It includes $133.2 million in capital spending, of which $88.9 million is devoted to the council's infrastructure plan, a list of projects that includes a new public-safety building, new garages downtown and at California Avenue, a bike bridge over U.S. Highway 101 and the completion of the Chalreston-Arastradero streetscape project.

The council was largely in agreement on the need to address the pension problem and fund infrastructure. Kou, the sole dissenter, said she was concerned about the city's failure to prioritize the projects. Tanaka left before the vote but he indicated early in the discussion that he is frustrated about the city's spending practices.

"I think for us, staying within our means is critically important," Tanaka said. "To stick with the budget rather than going to the taxpayers again and again, with more and more tax increase -- for us this should be the last resource."


Follow the Palo Alto Weekly/Palo Alto Online on Twitter @PaloAltoWeekly and Facebook for breaking news, local events, photos, videos and more.

Editor's note: This article initially misstated the council's vote on the budget because it failed to account for the absence of a City Council member. Palo Alto Online regrets the errors.


25 people like this
Posted by Resident
a resident of Midtown
on Jun 19, 2018 at 6:22 am

This is appalling.

They just gave themselves a raise! Why don't they CUT THE SALARIES OF THESE GOVERNMENT PARASITES.



Such an OBVIOUS solution!!!

Instead you fire the firefighters.

There is absolutely NO accountability. They blow all the money on worthless bicycle projects, and then they think its OK to tax the residents some more. It's inexplicable that the sleepy population of Palo Alto allows them to get away with this.

It's actually a region-wide problem. It's a California problem.

These people are so unbelievably smug and corrupt.

40 people like this
Posted by Online Name
a resident of Embarcadero Oaks/Leland
on Jun 19, 2018 at 6:47 am

Online Name is a registered user.

They're saving $4,000,000 while spending and after having spent ten times as much, $40,000,000 on traffic "calming" "improvements" and sticking bollards all over town.

They're saving $4,000,000 while raising utility rates even more when PA Utilities has siphoned off $19.500,000 from us to the General Fund this year alone.

And they're spending money polling us on which taxes are the most acceptable while leaving on the table marijuana sales tax revenues for which the voters voted.

21 people like this
Posted by Anonymous
a resident of Barron Park
on Jun 19, 2018 at 7:06 am

How does eliminating jobs address the unfounded pension problem? Pensions are a relic and choke cities. I suppose the solution is to cut jobs and raise taxes? Like the TOT tax increase proposal. This is not a solution. I would push back and vote no on that measure come election time. Seems like City Hall cannot curb its spending and seeks ways to fund its outrageously priced projects.

29 people like this
Posted by Citizen
a resident of Another Palo Alto neighborhood
on Jun 19, 2018 at 9:25 am

@resident in Midtown,

I agree with your outrage. Safety is already the last priority for City Council, the fire department should not be the first to lose staff.

Are you outraged enough to do something yourself? Because that's how things get changed. The state FPPC found that Adrian Fine "misled" the voters. They don't usually do much, they make a determination and let voters decide what to do about it. Did you start a recall petition? If you don't know how, you can ask any of the good people involved in the recently qualified office cap initiative.

Next, you could learn a little more about our City. Our City Councilmembers don't get a salary. That may seem like a good thing, until you realize that has meant traditionally very little representation from South Palo Alto even though it has half the population. Councilmembers get only a small honorarium, it's basically a volunteer position. That's why it's stacked with overdevelopment types and Palantir beholden.

You can start an initiative yourself to stop the Arastradero changes and use the funds to plug the deficit. Or restore fire department staffing. Or force the budget to undergo a public prioritization process.

You have suggested an "obvious" solution, in capital letters, that isn't obvious, because Councilmembers don't make a salary. And you haven't suggested who should do it. The way this City works, if you want something done, you literally have to do it yourself. Luckily, you have the right to do it. It's not really that hard, but it does take getting out and working with people. That can be rewarding as you realize we have the power.

Now get out there and do something to address the corruption! A lot of people will join you. If you can't do what you want, talk to other community members who just might be willing. But first you have to understand what's what (such as, that we have a volunteer Council), and you have to understand how things work (such as, when you call for something to be done, who will do it -- We the People mostly, i.e., YOU, it has to start with each person doing what they can and not figuring someone else will do it).

21 people like this
Posted by Wayne Martin
a resident of Professorville
on Jun 19, 2018 at 10:21 am

> Our City Councilmembers don't get a salary.

This is not true. The Council Members are awarded what amounts to a stipend of about $11,000 a year. Additionally, the City offers a number of benefits such as: Health Insurance, Dental Insurance, Vision Insurance, Basic Life Insurance, Supplemental Life Insurance. Some former Council Members are actually receiving a small pension.

Some Council Members are costing the taxpayers upwards of $40,000 a year when the benefits are considered.

24 people like this
Posted by JCP
a resident of Old Palo Alto
on Jun 19, 2018 at 10:55 am

JCP is a registered user.

What about re-structuring pensions going forward? The average city worker makes over $200K in compensation including benefits. Obscene.

20 people like this
Posted by Wayne Martin
a resident of Professorville
on Jun 19, 2018 at 11:06 am

I am not convinced that the City has actually done much towards solving the “Pension Problem”. The reduction in spending of $4M does not achieve any significant goals unless it is somehow marshalled against the growing unfunded pension obligations of the City.

This is not an easy problem to explain or discuss. At the bottom line, pensions are linked to salaries—which have grown to unbelievable levels here in Palo Alto. Additionally, Palo Alto is very extravagant when it comes to other benefits. Analysis of compensation records reveals that benefits vs base salary are now between 50% and 75%, depending on the bargaining unit and job title.

The City claims that the average cost-to-employee someone here in the City’s workforce is about $205,000. Police and Fire employees cost about $260,000 each. SEIU members cost about $150,000 each. The City’s long-range financial forecasts suggest a yearly increase in these costs at about 3% a year. So, over time, unless something drastic happens, this $205,000 expense will jump to about $275,000. Keep in mind that police and fire employees can retire at 90% of their exit salaries at thirty years, with a 2% COLA increasing their pension payouts for the remainder of their lives. Non-safety personnel can retire at 82% at thirty years of service.

The State passed a pension constraint law in 2012, called PEPRA (California Public Employees' Pension Reform Act of 2013) which limits the amount of salary that can be applied to future pensions. At the moment, the PEPRA limit for government employees not participating in Social Security at about $147,000. The PEPRA limit is linked to CPI, so it typically increases yearly. Over time, Palo Alto’s pension obligations will diminish due to PEPRA, but this is years in the coming.

According to documents produced by the City previously, the accrued liability of the City where future pensions are concerned is almost $400M, with an “Unfunded Liability” at about $145M. This “Unfunded Liability” is the difference between the “Unfunded Liability” and the “Market Value of Assets”, which is directly linked to the value of funds invested in bonds and equities.

In addition to pensions, the City also has promised post-retirement health care benefits, which also is seeing costs increase yearly.

It’s not clear to me how many of the current Council have a comprehensive understanding of the current compensation package offered by the City, particularly where pension costs and funding are concerned.

For years, Cities around California (and the country) have ignored this problem. With an election facing us in the Fall, hopefully, the question of City salaries and pensions will have a seat at the table—unlike previous years.

9 people like this
Posted by Mama
a resident of Crescent Park
on Jun 19, 2018 at 11:17 am

Mama is a registered user.

There are thousands of talented retirees in our city. How about putting them to work as volunteers in our city offices. Let’s just eliminate many of those looking for the pension gift down the road.

12 people like this
Posted by sunshine
a resident of Barron Park
on Jun 19, 2018 at 11:22 am

Some years ago the local large companies converted their pension plans to 401k plans. The city should follow suit. At an average of $200,000 per year for full time city employees certainly they can afford to contribute to their retirement and health plans. It's only the electronics companies that pay as much as the City does. Other companies pay less as an average, yet their employees must pay for health care and if they have any retirement plan it is a 401k.

4 people like this
Posted by Resident
a resident of Midtown
on Jun 19, 2018 at 11:25 am

Wow, thanks for the enlightenment, Mr. Citizen!
Honestly, I don't live in Palo Alto anymore, I don't know why I keep posting on here. Maybe it's the strange positive feedback loop of getting "Likes" on my posts even though most of the discussion in these comments sections is venting, trolling, and inconsequential discussion with lots of censorship.

I'm saddened and angered by what happened in the Bay Area over the past 3 decades. This was such a quiet and peaceful town not so long ago, before the explosive growth of Google and Facebook which has basically strangled the region.

I knew Adrian Fine when I was growing up. I actually like the guy. We had some adventures together... I won't reveal any more details on a public forum.

And I really need to stop visiting this website, period. Palo Alto is so small in the grand scheme of things.

16 people like this
Posted by Annette
a resident of College Terrace
on Jun 19, 2018 at 11:27 am

Annette is a registered user.

I think Mr. Martin's comments should be printed out for future reference. Late last night we heard Cory W. say something along the lines of "you asked us to address the unfunded pension liability issue and we are". No doubt he will crow about that during his campaign. While it is good that the issue is finally seeing daylight, what is being done is a START. The problem is still in the HUGE category and dependent on a healthy market.

12 people like this
Posted by Limit Overtime
a resident of Another Palo Alto neighborhood
on Jun 19, 2018 at 11:43 am

A big part of the salary budget is overtime. The reports from the Daily Post show that a few city employees make a lot of the overtime, sometimes over hundred thousand dollars of overtime for one employee. Is it possible to limit the amount of overtime from any one employee to, say, 10% of salary or a fixed dollar amount? Since pensions are based on last year of income, excessive overtime right before retirement, can lead to pension spiking. I know that problem was addressed in a law by then State Senator Simitian, but I don't know how that affects upcoming retires who have worked for a city a long time and are approaching retirement. Why not focus overtime on those who are making less and are not about to retire? That would be cheaper anyway.

10 people like this
Posted by Wayne Martin
a resident of Professorville
on Jun 19, 2018 at 12:05 pm

The Fire Department’s use of overtime is about 36% of base pay. The Police Department’s overtime use is about 13% of base pay.

During 2017, at least two individuals in the Fire Department racked up over 100% in overtime wages. Virtually everyone in the department worked overtime, resulting in wage increases of 20% to 90%.

The other departments don’t show much use of overtime.

8 people like this
Posted by Online Name
a resident of Embarcadero Oaks/Leland
on Jun 19, 2018 at 12:19 pm

Online Name is a registered user.

Limit Overtime is absolutely right about the need to limit overtime, esp. for salaried employees already making big salaries. Why isn't the CC and city management forcing this issue with the unions???

Also, how close to retirement are the firefighters being let go and exactly how much is the city saving in their retirement benefits?

10+ years ago I read that the police night dispatcher made over $300,000 and I used to joke that she must have gotten a rudeness bonus because she kept arguing with me that a loud 3AM street fight in front of my house had been resolved hours before when we both could still hear them going at it.

The private sector classifies low-paid regular employees as "managers" to avoid paying overtime.

Here we go the other way.

3 people like this
Posted by Wayne Martin
a resident of Professorville
on Jun 19, 2018 at 12:32 pm

For 2017:

Management Bargaining Units use of overtime:

--Council Appointed Officers: $0
--Fire Chief’s Association: $27757
--Management: $31442
--Police Management: $0
--Utilities Management: $4431

It would seem that “managers” are not being paid very much in overtime wages.

2 people like this
Posted by Annette
a resident of College Terrace
on Jun 19, 2018 at 1:54 pm

Annette is a registered user.

In the private sector exempt employees are not eligible for overtime pay. I am not sure how broadly that rule applies in the public sector.

2 people like this
Posted by Rajiv Bhateja
a resident of Los Altos Hills
on Jun 19, 2018 at 1:59 pm

Let's thank LaDoris Cordell for her generous contribution to this disaster -- with our tax dollars:

Web Link

13 people like this
Posted by senor blogger
a resident of Palo Verde
on Jun 19, 2018 at 3:58 pm

I smell pension reform. Time to cut the pensions for new hires.
We spend almost as much as the budget on pensions.
What are we ? A City or a Retirement fund?

7 people like this
Posted by Mary
a resident of Old Palo Alto
on Jun 19, 2018 at 5:03 pm

We need a bigger fix than just tinkering with the overtime and other formulas that spew out tax dollars like water out of a broken water main. We even need more substantial reform than putting our growing gang of $200,000/yr public "servants" on 401k programs like the rest of us. Many if not most city functions could be outsourced to private contractors at a fraction of the cost we're paying now and likely with better results. (And we could more easily get rid of those not doing a good job than we can with the union sinecured workforce we now have to put up with).

A lot of cities outsource fire protection - a source of much of the pension abuse here in Palo Alto. Police are another matter as there are legal reasons that uniformed officers need to be government workers - but even within the police department, there are functions that could be easily undertaken by contracted labor.

Another city function ripe for reform would be the utilities department: no reason we have to have underperforming employees there who are so poorly supervised that a few years ago, some felt comfortable running a plumbing contracting business out of the department yard using city equipment on city time to do work for homeowners in Menlo Park and other cities. (They got fired....and then hired back 6 months later when the furor died down....A lot of them are now collecting lifetime pensions courtesy of the tax payers).

We need to think boldly if we are to avoid the pension tsunami on the horizon.

5 people like this
Posted by Resident
a resident of Another Palo Alto neighborhood
on Jun 19, 2018 at 8:04 pm

No city that is a member of CalPERS can legally establish a 401k plan for employees, because CalPERS does not allow it. Also no city with an unfunded pension liability can ever leave CalPERS, because CalPERS then requires the entire liability to be paid off immediately, at absurd valuations. Loyalton, a tiny town in the Sierras, tried it last year. CalPERS crushed them.

11 people like this
Posted by Resident
a resident of Midtown
on Jun 20, 2018 at 11:52 am

$8.7 Million WASTED on changes to Midtown streets that pose safety risks for bicyclists; make it hard for buses, trucks and emergency vehicles to navigate streets; and, are EXTREMELY unpopular with residents. WOW, I know the city keeps telling us South-siders how ignorant we are, but it seems to me we could have saved some money here.

5 people like this
Posted by Ryan
a resident of Professorville
on Jun 20, 2018 at 6:07 pm

Is there anyway city of Palo Alto could outsource the Fire department? Pay an annual fee and the city would not have to worry about overtime, medical and pension costs. I hear more cities are starting to do this like the cities of Morgan Hill and Campbell,

7 people like this
Posted by Random Resident
a resident of Another Palo Alto neighborhood
on Jun 20, 2018 at 6:20 pm

You folks whining about the cost of road improvements do realize that they're partly funded by state and federal grants, right? And that money cannot be repurposed to whatever harebrained schemes you think would be better for us.

4 people like this
Posted by Jim
a resident of another community
on Jun 20, 2018 at 7:30 pm

Overtime is not used to calculate final compensation for retirement purposes. Some specialty pays, allowances, shift differential and other compensation which is narrowly defined by law can be added to base pay. PEPRA, as explained by Mr. Martin above, made signifcant changes to retirement compensation which should allow cost savings in the future as employees hired before the law went into effect leave or retire from city employment.

13 people like this
Posted by Eric Filseth
a resident of Downtown North
on Jun 20, 2018 at 9:30 pm

PEPRA is indeed an improvement, but unfortunately not as large as its designers intended. Because like everything else it relies on CalPERS distorted investment projections, in reality even PEPRA plans are still underwater; that is, even PEPRA plans continue to add brand new pension debt each year, which piles onto the existing debt and grows with interest over time.

I expect some utter disbelief at this next statement, but: IMO the step we took this week and really over the past year, was one of the most radical pension reforms ever done in the state, at least within the CalPERS tent. We really did two things: first, we recalculated our pension expenses independently of CalPERS, using realistic investment return rates. This sounds obvious, but it isn’t easy, and to my knowledge no other city in California has ever done it. Second, we focused not just on our accumulated debt, but explicitly on the annual expense of current employee pensions, the so-called “Normal Cost.” This recalculated expense - that $8M gap in the General Fund for FY2019 - doesn’t have the same visceral impact as the $500M or $750M of existing debt; but it is where that debt came from, amplified by the magic of compounding over time. So the combination of recalculation and the focus on current year's costs really cuts to the root of the problem: you cannot get out from under your debts while still adding new ones.

The Council decided to cut half that $8M/yr expense gap this coming year. $4M/yr sounds pretty modest in a $210M budget, and it is, but you have to remember that our trusty pension-system manger CalPERS is still happily, and wrongly, telling us that our budget is balanced, and we don’t need to save that $4M, let alone the whole $8M. For a CalPERS-managed city to decide it needs to save more than CalPERS requires, figure out how much more, and exercise the discipline to cut expenses accordingly instead of just writing more implicit IOUs, is nearly unheard of. Yet it is foundational if we - and other state agencies - are ever to escape this trap, not to mention make sure we can keep the pension promises we’ve made to employees.

I know this is pretty dry stuff; it took me a couple of years to really understand it all. My wife keeps complaining that nobody ever puts it all into a reasonable explanation that people can easily understand. So one of my projects for the summer council break is to actually take a shot at that. If anybody is interested in this (and if I ever really get it done), please send me an email and I’ll send it to you. If you do, please put “PENSION” in the title … I get a lot of email, and that will make it easier to sort.

13 people like this
Posted by Online Name
a resident of Embarcadero Oaks/Leland
on Jun 20, 2018 at 9:43 pm

Online Name is a registered user.

Eric, thanks for replying. Given all the complaints about "traffic calming" and other road "improvements" that Lydia Kuo reported total $40,000,000, isn't there some way those projects could be stopped and the unspent funds used to reduce pension liabilities our interest carrying charges?

$4,000,000 seems like a drop in the bucket vs these dangerous and mostly unwanted traffic "diets" at a time when there's so much more traffic due to the increased number of commuters?

9 people like this
Posted by Eric Filseth
a resident of Downtown North
on Jun 20, 2018 at 9:56 pm

Yes but it's $4M =per year=, which a common rule of thumb suggests you could use to fund about $40M of capital projects. In practice it should get saved to pay pensions - and if we save it, it will grow over time just like pension debt does. That's real money. But once you start compounding, all these sums get big.

An interesting wrinkle is, what about the other $4M? Well, we're spending it now and committing to pay it back in the future, with interest. In private sector accounting, we would have to explicitly accrue that amount as new debt. But government accounting doesn't work that way, or at least isn't required to work that way; we are allowed simply to ignore it, until it shows up later in our unfunded liabilities. That's not wise.

5 people like this
Posted by Eric Filseth
a resident of Downtown North
on Jun 21, 2018 at 1:03 pm

I want to make one more post, before this thread disappears completely from PA Online.

I believe what we did this past year was pretty important. You cannot pay off your existing debt while you are still adding on new debt. Again, the formula we have applied is:

1. Recalculate our pension expenses (not easy) using realistic investment returns, independent of CalPERS.

2. Focus on the INCOME STATEMENT, not the Balance Sheet - because that is the true source of the problem. The way you get to a $500M deficit is through years of $5M deficits, each itself then compounded over years or decades.

3. Right-size our expenses in (2) to reflect (1). We started that this week.

I want to acknowledge the key roles played in particular by our City Manager Jim Keene and our then-Mayor Greg Scharff, who recognized instantly the significance this, as well as its potential for controversy. They were on board from Minute One, and it would not have happened without their support, as well as that of our retiring CFO Lalo Perez, and also Budget Director Kiely Nose who drove the actual work. I applaud these peoples’ civic commitment and effort. This is municipal governance at its best.

7 people like this
Posted by Resident
a resident of Midtown
on Jun 22, 2018 at 3:43 pm

Random, we don't endorse ANY harebrained schemes for road projects, most especially the harebrained schemes that the city has forced upon us. However, while this may seem wild and crazy to you, it might be nice to fix some of the pot holes on El Camino Real. I know that is a terribly boring thing to do with taxpayer money, and does nothing to force people to give up their cars and use their bicycles, but for the VAST majority of us who use evil, internal combustion vehicles to get to work every day... it would be nice.

6 people like this
Posted by Anonymous
a resident of Duveneck/St. Francis
on Jun 22, 2018 at 6:06 pm

@Resident, I think you’ll find the jurusdiction for ECR is the county or state...
Isn’t a SR or something (state route) -
They takes masses of our taxpayer dollars and provide little in return here.
I am speaking of the County of Santa Clara and the State of California.
I do wish our city leaders, officials and staff would better advocate fior us on these simple, basic but important matters. See also: the clever re-routing of massive, low-flying commercial air traffic over Palo Alto in recent years from other local areas with better advocacy.
At least cut the tinder dry and unsightly weeds at our highway cloverleafs. It never ceases to concern me - risk of fire and shame me - this is the gateway, the entrance to the vaunted city of Palo Alto!? Take a look in the vicinity of 101, for example...overseas visitors and some US visitors from other areas are stunned. This is a rich area, but the shameful gateways don’t reflect basic pruning, weeding, trash-collecting. Sometimes one cannot see when exiting 101 because of the tall weeds. Potholes on El Camino Real don’t surprise me one bit, with all this context. Claiming lack of funds doesn’t wash as an explanation. Mismanagement, more likely.

3 people like this
Posted by spending spree
a resident of Downtown North
on Jul 5, 2018 at 11:00 pm

My own theory is that recent street"improvements" like the many irritating, expensive bollards that mess up Middlefield traffic are the City Manager's payoffs to his supporters, and the companies that former employees run (like a former traffic manager). The Manager is retiring and is on a spending spree. He's even asking for more $$ for the overdone (big screens) lobby.

Small example, in August he is re-introducing a project to teach "energy conservation" and increase neighbor friendliness, a thinly disguised subsidy to Palo Alto Forward. PAF supports his development goals. He said he's putting it on a Consent Calendar on a crowded agenda. It looks like a modest sum but it is planned to grow.

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

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