News

Palo Alto explores new ways to settle giant pension bill

City's proposed policy would commit council to higher payments and shorter amortization schedule

Seeking to settle the city's astronomical pension bill, Palo Alto is preparing to adopt a policy that would commit the city to higher annual contributions — and possible service reductions — to reduce the backlog.

The new pension-funding policy, which the City Council's Finance Committee considered on Tuesday night, is the latest in a series of reforms that the council advanced in recent years as part of a renewed effort to lower the pension bill. Mayor Eric Filseth, a leading proponent of the effort, made the case for pension reform in his "State of the City" speech earlier this year. While the city's shift on pensions will require larger payments in the near term, Filseth argued that it will also make the local pension systems "fully secure."

The biggest issue that the Finance Committee struggled with on Tuesday was: How much short-term pain should the city inflict on itself to achieve this long-term security? Councilwoman Alison Cormack borrowed advice from yoga to explaining her position.

"You don't want to be in pain, but you want to feel it," Cormack said.

The committee considered four different scenarios for moving forward, ranging from the bare minimum required by CalPers to an aggressive funding plan that would require the city to pay about $19 million annually for pensions, which would settle the pension bill within 10 years.

Cormack said she favored a scenario with contributions somewhere between current level of $5 million and $13 million. The goal would be to pay off about 90% of the bill within 10 to 15 years.

"We're reducing the risk to future residents, employees, council and staff, who are in this room 15 years from now," Cormack said. "We're not eliminating the risk, we're reducing the risk."

Vice Mayor Adrian Fine also favored a moderate approach and said he is concerned that the city may end up overpaying if it moves too aggressively. Meeting higher pension targets would require cuts elsewhere, he said.

Fine also suggested that a 10-year timeframe for paying off the bill may be too aggressive, considering that it took the city about 20 years to fall into the current pension hole.

"We've got to be careful not to be goring too many oxen to push this one policy," Fine said.

The city's pensions were fully funded in the early 2000s, Chief Financial Officer Kiely Nose said. Since 2009, only 60% of the city's unfunded pension liability had been funded.

Some of this can be attributed to the Great Recession, Nose said. In addition, Palo Alto approved more generous benefits for employees in the early 2000s, increasing the city's obligations for future years.

The new pension policy is the latest in a series of reforms pursued by the council. In recent years, the city has renegotiated contracts with all labor groups to require employees to pick up the full share of their required pension contributions (in past years, the city had picked up the employee's share of the pension payments). Palo Alto has also established an irrevocable trust dedicated to pensions. Known as the Section 115 Pension Trust Fund, the fund now has more than $22 million.

The council also agreed last year to base its pension budget on a more conservative rate of return than the one used by CalPers, the giant state fund that administers pension programs for Palo Alto and other cities. While CalPers has recently reduced its anticipated rate of return (or "discount rate") from 7.5% to 7%, Palo Alto agreed to budget for what officials deemed to be a more realistic rate of 6.2%. That rate was based on an estimate by Wilshire Associates, a consultant for CalPers.

The change in methodology, which council members believe reflects a more realistic discount rate, had added about $6.2 million to the city's contributions to the fund in the current budget year.

Despite these steps, the city remains hundreds of millions of dollars in the hole. Under the existing 30-year amortization schedule, the city would have to pay $354 million for its public-safety employees and $523.4 million for its "miscellaneous" employees (all those not in public safety) to pay off its bill by 2046. Under a more aggressive 10-year amortization plan, the city's bill is estimated at $291.2 million for public-safety employees and $400 million for the "miscellaneous" group.

A key goal of Palo Alto's new pension policy is to fund 100% of the pension liabilities. The policy would establish the city's desired timeline to meet its funding targets and establish clear parameters to guide staff. In supporting the policy, committee members acknowledged the funding target could be difficult in economic down years. Committee members favored a policy that would require the city manager to bring forward a plan for making the necessary payment but give the council the option of rejecting or modifying the plan.

The pension policy aims to institutionalize the council's recent effort to tackle pensions, turning it from a series of ad hoc actions to an annual budgeting tool (and mandate). Finance Committee Chair Tom DuBois said he supported requiring mandatory annual contributions to the pension trust and limiting the ability of future councils to raid the pension fund to address short-term budgetary needs.

At the same time, DuBois said he is hesitant about sending CalPers more money than required. Rather, he favored requiring the council to make annual contributions into the pension trust. He and Cormack both agreed that the trust should serve a "hedge" against larger-than-expected CalPers bills.

"If we have a strong policy, I think we'd be less likely to get surprised or get hit with a large payment," DuBois said.

The committee also rejected some of the most aggressive policies on the table, including a "Fresh Start" approach in which the city signs a formal agreement with CalPers committing it to higher payments and a faster amortization schedule. Instead, it favored exploring "Fresh Start in concept," a process in which the city would voluntarily pursue a faster schedule without making firm commitments with CalPers

The council will consider the new pension policy later this year.

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Comments

20 people like this
Posted by Barron Parker Too
a resident of Barron Park
on Oct 16, 2019 at 11:10 am

Barron Parker Too is a registered user.

If you're confused by financial options outlined above, you're likely in good company. Consider these statements:

(1) We can dig ourselves out of the pension hole by paying $19M each year for 10 years. (this is called "aggressive"!!)

(2) At the current rate, we need to pay off $354 + $523 = $877M by 2046. (That comes to $32M/year on average.)

What does "fully funded" actually mean? Here are the moving parts:
(1) an assumption about CalPERS return (6.2%, 7%, ...)
(2) the fund currently under management by CalPERS (note: this amount is never stated)
(3) the rate at which people start collecting pensions and stop collecting pensions

An economic downturn, where CalPERS does poorly (likely loses money) will adversely affect (1) and (2). But Palo Alto must cover it, whatever happens. That's because this is a DEFINED BENEFIT plan, a very poor idea that hasn't been used in the real world of commercial enterprises for 30 years!

We need to get ourselves out of the defined benefit pension business ("fully funded" or not) entirely. Look to the way non-governmental pensions are handled.


22 people like this
Posted by What Will They Do Next
a resident of Old Palo Alto
on Oct 16, 2019 at 11:19 am

What Will They Do Next is a registered user.

Cities all over the country are being strangled by union negotiated pension plans and until something is done to sever ties with these organizations, we'll be seeing city after city filing for bankruptcy.

Unions served their purpose decades ago. Time to let them die.


18 people like this
Posted by Green Gables
a resident of Duveneck/St. Francis
on Oct 16, 2019 at 11:28 am

Green Gables is a registered user.

When City of Palo Alto Managers cash in their vacation time, and that vacation money is added to their salary (i.e., $100k salary, $20k vacation money equals $120k) the City sends the retirement funds for the total ($120k) to CALPERS. Every city seems to be doing this. No City Council member wants to stop this sham because city staff will not be cooperative with the Council members. City Council in EVERY town does their kiss-up dance for staff cooperation. WHY bother to talk about this? Just pay the money unless a Council member is willing to sacrifice. No one is willing.


7 people like this
Posted by Novelera
a resident of Midtown
on Oct 16, 2019 at 11:38 am

Novelera is a registered user.

Employees in some cases probably took jobs with the City in the first place because, unlike with private employers, they would have security in their old age. Any welching on these pensions is completely immoral.


27 people like this
Posted by Pied Piper
a resident of Gunn High School
on Oct 16, 2019 at 12:01 pm

Pied Piper is a registered user.

@Novelera
Here's what's even more immoral:
Busting the city budget because unionized staff blackmails the city to keep heaping benefit upon generous benefit. All while city resources are impacted and community benefits are cut back. Year after year. After year.

Over-compensated city staff are welcome move to another "more moral" city any day of the week.

And don't let the door...


8 people like this
Posted by Green Gables
a resident of Duveneck/St. Francis
on Oct 16, 2019 at 12:21 pm

Green Gables is a registered user.

Everything starts with the Managers in the City of Palo Alto (and other cities) and there is a trickle down to the union employees. To top it off before the benefit of paid for life medical insurance was discontinued for City of Palo Alto employees, some were being hiring (family and friends of City employees) and quiting after they were funded. Also, older City employees use to be able to collect a LARGE chunk of money when retiring; that has been discontinued and so have paid for life medical insurance. It was costing the City big bucks; I know, what a surprise. HONESTY is just another word in the dictionary..


17 people like this
Posted by Online Name
a resident of Embarcadero Oaks/Leland
on Oct 16, 2019 at 12:48 pm

Online Name is a registered user.

Speaking if the city manager -- who was the only candidate the city council bothered to consider in their rush -- maybe another look could be taken at his contract which awards him another full year of salary and vesting if he's fired.

More generally, maybe employees who ARE fired should lose some of their lucrative benefits.

Why should the residents/taxpayers be the only ones to "feel the pain" when we've got the most highly paid municipal employees in the state who don't mind spending OUR money on CYA expendiutres like the Ross Road consultants to tell 3,000 of us we're not experiencing the problems we're experiencing or Ms. Kniss's use of consultants after the "no traffic problems here" out -- that is when they bother to respond to us at all. We can all cite recent examples of city employees and concil members stonewalling us -- the Zach Perron probe, the medical emergency incident..


19 people like this
Posted by DTNResident
a resident of Downtown North
on Oct 16, 2019 at 12:55 pm

Unfunded pensions are an immoral way for one generation to make the subsequent generation pay for their city services. Surprise, the bill is now coming due and you're the sucker.

The unions take full advantage of this: allowing the city to pay employees 0.0001% less than they would without a pension, and then tossing in an enormous pension that won't be funded until many years later, so the current council is happy to approve it.

It's nothing other than a means to introduce corruption into a city. Salaries should be adjusted to a fair level and the city should hire financial planners to allow their employees to fund their own retirement plans from the salaries being paid. If the salaries can't fund the cost of living and the retirement needs, salary increases, not pensions, are the appropriate response.


1 person likes this
Posted by Anon
a resident of Another Palo Alto neighborhood
on Oct 16, 2019 at 1:45 pm

Although -clearly- (go look at the actual numbers) firemen make too much money, I still don't buy most of what people are posting here. First of all, just because business has been able to shed its contractual pension obligations, often cheating employees, doesn't mean that the public sector should follow suit. Contrary to what people are writing, -everyone- needs (access to) a pension, whether they know it or not. People who worked all their lives should not be forced into near-homelessness just because they got old. Secondly, let's look at the "astronomical" comment:

Posted by Barron Parker Too, a resident of Barron Park
>> Consider these statements:

>> (1) We can dig ourselves out of the pension hole by paying $19M each year for 10 years. (this is called "aggressive"!!)

>> (2) At the current rate, we need to pay off $354 + $523 = $877M by 2046. (That comes to $32M/year on average.)

OK, if we can figure out how to do it, let's do it. There are 26,493 households in town. Let's add a $1226/year parcel tax for the next 27 years, pay down the debt, and put it behind us. Even I can afford $1226/year.

The main problem may be that CalPERS doesn't allow or encourage participating cities to be good financial planners. Perhaps CPA should -phase- new employees over off of CalPERS to another, more financially sound, system. OK, if it makes sense, let's do it. But, gee, is $1226/year actually "astronomical", or, are people just enjoying playing "ain't it awful"?


12 people like this
Posted by Joe
a resident of Another Palo Alto neighborhood
on Oct 16, 2019 at 1:59 pm

> Unfunded pensions are an immoral way for one
> to make the subsequent generation pay for their city services.

This is only partially true. The problem for us in CA is that the gift to the labor unions in 1998 when the stock market was booming, and our elected officials agreed to increase the pension benefits without having any financial modeling to back up their largess. Sadly, we can’t charge these people with fiscal “criminality” like we might be able to do with people doing similar things in the private sector.

Once the problem was known, we also can look to a generation of “elected officials” who ignored the problem.

Until a generation of people with fiscal knowledge can be elected, people with the courage to fight the unions to end "defined benefits" .. then this problem will continue.

However, it’s very clear that the bill is coming due.


18 people like this
Posted by Joe
a resident of Another Palo Alto neighborhood
on Oct 16, 2019 at 2:13 pm

> Contrary to what people are writing, -everyone- needs
> (access to) a pension

Contrary to this claim—everyone needs to make a personal, life-long financial plan that includes his/her retirement years. This plan would include all the sources of money that would be needed to fund such a plan. The idea that everyone should expect some other person, or entity, to provide them with all of the funds they need to survive their retirement years does not really make much sense. Keep in mind that pensions are a promise of “free money” that must come from somewhere—and historically, that money was not contributed by those expecting to receive a pension.

Anyone following the pension debacle here in CA knows that many people are receiving as much in their retirement years as they did during their working years. All this money needs to come from somewhere. Clearly people who believe that everyone has a right to a pension do not have a clear vision of how much money a pension for everyone in the US would be.


Like this comment
Posted by Anon
a resident of Another Palo Alto neighborhood
on Oct 16, 2019 at 2:34 pm

Posted by Joe, a resident of Another Palo Alto neighborhood

>> > Contrary to what people are writing, -everyone- needs
>> > (access to) a pension

>> Contrary to this claim—everyone needs to make a personal, life-long financial plan that includes his/her retirement years.

Most people actually aren't capable of doing that, and, I still don't want them to be homeless. But, you're missing the point if you think that is all there is to it. When you retire, you might die within a year or two, like one extended family member of mine, or, you might live into your 90's, like another such family member. You don't know. Adequately funding your own self-contained retirement to live into your 90's and possibly beyond would be a really bad idea for "everyone"-- you wouldn't spend nearly enough on yourself and your children and their education and etc. in your 30's, 40's, 50's.

You don't know how long you will live. That is why "everyone" needs a pension-like, insurance-like vehicle for retirement, which might be one year, or, 40 years.


16 people like this
Posted by Santiago
a resident of Barron Park
on Oct 16, 2019 at 2:39 pm

It is asinine to keep digging the hole as we try to fill it.

We need a ballot initiative -- no pensionable raises can be offered to city employees until the pension obligation is fully funded. If an increase is merited, compensation to employees would simply be one time non-pensionable cash bonuses. This would at least slow the rate that we're digging.

Even better would be forbidding the city from offering anything but 401K type defined contribution for any new workers, and, if and when the "California Rule" goes down in flames, the same for future work performed.


1 person likes this
Posted by Joe
a resident of Another Palo Alto neighborhood
on Oct 16, 2019 at 2:55 pm

>Most people actually aren't capable of doing that,

And that’s why people engage financial planners.

> "everyone" needs a pension-like, insurance-like
> vehicle for retirement, which might be one year,
> or, 40 years.

Well, the target is changing. One word for a “pension-like”/insurance-like vehicle is an annuity, which generally are discouraged by financial planners. However, the promise of these vehicles is that of a continuous payment flow until death—unless the company goes broke. While we don't know exactly how long we are going to live, the current mortality in the US is about 78 years for men, and a few years longer for women. Couldn't hurt to plan around those numbers.

We are seeing just how hard it is to fund a small pension plan here in Palo Alto. Now, think about scaling up this sort of promise to the full US, including people who have refused to work most of their lives or who immigrate here late in life for the free money.

In the United States in 2015, 14.9 percent of the population is 65 or older. In 2050, 22.1 percent of the U.S. population will be 65 or older. [says Wikipedia].

Let’s just use these numbers: 380M Americans, with 15% over 65. This comes to 57M people. If we were to promise everyone just $50,000 per retiree—then this would come to a mere $2.85T a year. Now, some of this money might come from current Social Security funds, so the cost would not be quite so much the first year. But doubtless there would be “universal pension advocates” who would want to increase the yearly payment as well as add in COLAs.

It would take a little more work to come up with more realistic numbers than presented here. But given how quickly Medicare has grown, it’s hard to believe that a “pension” guaranteed by the government, or some other agency, would not struggle to generate these funds--even if the "rich" were taxed into oblivion.


2 people like this
Posted by Paul
a resident of Charleston Meadows
on Oct 16, 2019 at 4:06 pm

I rode my bike down to California Ave on the weekend and had a tea at Printers Cafe. After awhile sitting there, the owner came out and spoke loudly over my head to someone out in the street. It turned out a retired firefighter came there regularly for breakfast, a younger lady (wife, daughter, caregiver, who knows?) carried his oxygen apparatus. We had a lovely talk and I learned the Palo Alto Firefighters make a hot sauce they sell, all profits to their charity. I'm so glad we didn't have to discuss our city weaseling out of its pension obligations.

These people risk their life for us, and some pay the price with long term health impacts and people dont want to give them a proper pension. Two years ago, my uncles life was saved by a quick trip to,the Stanford ER (heart attack)

Isnt the stock market right now at an all time high? (Well maybe it was two weeks ago). Havent you seen that the tax burden on income via labor just exceeded the tax burden on income via investment for the first time in our nation's history?

Anyway, I'm just hoping the majority in this city are not a sour minded as the few that come to comment on this article.


6 people like this
Posted by Green Gables
a resident of Duveneck/St. Francis
on Oct 16, 2019 at 5:09 pm

Green Gables is a registered user.

I'm not talking about fire fighters or policemen. I am talking bout CITY HALL MANAGERS who cash in their vacations which is added to their salary so that their salary goes up not because of raises but because their vacation pay has been ADDED to their salary. Then the percentage of salary PLUS vacation pay is added to their retirement.


5 people like this
Posted by mickie winkler
a resident of Midtown
on Oct 16, 2019 at 5:29 pm

To reduce pensions START WITH PUTTING A MORATORIUM ON HIRING NEW STAFF. Every year we add staff, and every year we exacerbate our pension obligations.


8 people like this
Posted by Unrealistic
a resident of Midtown
on Oct 16, 2019 at 5:38 pm

6% !!
Where are they going to get 6% ??
Please let the rest of us know so that we can put our money there, too!
And though it does 'pain' me, let's pay this off sooner rather than later. And in the meantime, work on getting us out of the pension business.


8 people like this
Posted by Citizen
a resident of Community Center
on Oct 16, 2019 at 6:04 pm

Stop digging a bigger hole. No more salary increases. No more pension increases. Reduce health care benefits. Set the money aside and pay it. Otherwise it all comes back to us property owners and believe me, if I get the chance, I'm going to call all of you out as much as possible for your profligate spending and ignoring the needs of taxpayers to overcompensate city public employees. And yes, that means police, fire (the lowest salary is $139k!), etc, everyone! Don't like it? Too bad.


2 people like this
Posted by Simple Solution
a resident of Woodside
on Oct 17, 2019 at 8:23 am

Simple three part solution:

** New employees go into 401(k)-style defined contribution plan.

** All current employees earn the same reduced PEPRA benefits as those first hired in 2014.

** Retirees stop getting COLAs.

It would take a statewide initiative to change the California Rule, but the reforms would eventually reduce cost by 40%.


Like this comment
Posted by musical
a resident of Palo Verde
on Oct 17, 2019 at 8:57 am

^ Help me with the math. Can cost be reduced by 40% without reducing benefits by 40%?


Like this comment
Posted by Anon
a resident of Another Palo Alto neighborhood
on Oct 17, 2019 at 9:22 am

Posted by Joe, a resident of Another Palo Alto neighborhood

>> And that’s why people engage financial planners.

Who -could- be legally obligated to act on behalf of clients best interests, but, aren't. But, that is another story.

>> > "everyone" needs a pension-like, insurance-like
>> > vehicle for retirement, which might be one year,
>> > or, 40 years.

>> Well, the target is changing. One word for a “pension-like”/insurance-like vehicle is an annuity, which generally are discouraged by financial planners.

Strange how the lure of quarterly ROI and get-rich-quick has warped what used to be a reasonable vehicle. It wasn't that long ago that you could purchase an annuity at retirement and get an actual reasonable rate of return, and, the companies got a reasonable rate of return. Until "people" who thought that the financial markets would take care of themselves. Remember this? "Flaw in the model that I perceived is a critical functioning structure that defines how the world works, so to speak."? Once-upon-a-time, people thought that a -secure- real rate of return 3-4% above inflation was decent. We could still have those vehicles if we could police the markets.

>> However, the promise of these vehicles is that of a continuous payment flow until death—unless the company goes broke. While we don't know exactly how long we are going to live, the current mortality in the US is about 78 years for men, and a few years longer for women. Couldn't hurt to plan around those numbers.

That is correct. Actuaries know what the distribution of lifetimes is perfectly well.


2 people like this
Posted by senor blogger
a resident of Palo Verde
on Oct 17, 2019 at 9:36 am

First, Let's have an outside auditor look at the entire pension fund program and prepare a comprehensive report, including the CALPers


8 people like this
Posted by Cover up culture
a resident of Community Center
on Oct 17, 2019 at 11:37 am

This fiscal mismanagement is a result of public employee union support for city council candidates who will support their out of control spending, on current consumption that we cannot afford, over generous salaries, pensions and other benefits. Not all those City Council members who poo pooh the idea that we need to pay down the pension debt as quickly as possible. Those are the ones to toss out. They are the ones not looking out for residents, but looking out for their next political office, which the public employee unions will help them get. They are looking out for themselves, at our expense. Take a look at the state of Illinois, where property values are sinking due to the overhang of outrageously large public employee pension debt, voted and approved by their crony elected officials they put into office. Residents are fleeing, but can't get value out of their homes due to the fiscal mismanagement of the state, city and county elected officials and the rapacious public employee unions. Same thing here. The lowest paid fireman is paid $139k --- not including overtime and benefits. The average tech worker makes $122k.


2 people like this
Posted by Online Name
a resident of Embarcadero Oaks/Leland
on Oct 17, 2019 at 3:26 pm

Online Name is a registered user.

3 points: 1) Our city manager should have been honest about the circumstances of the officer's departure. 2) Allowing him to collect almost $120K a year is outrageous and shouldn't be allowed to happen again in similar circumstances by cutting or eliminating retirement benefits. 3) it would encourage good government AND reduce the damages the taxpayers get stuck paying.

Web Link
"Faced with a federal lawsuit and intense public scrutiny, former Sgt. Wayne Benitez retired from the department on Sept. 30 and began collecting a monthly pension of about $9,866 — earning him an annual retirement package of $118,638, according to Amy Morgan, information officer for the California Public Employees’ Retirement System."


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