A surge of retirements, shifting demographics and rising health care costs are greatly inflating Palo Alto’s obligations to its retirees and prompting a debate among city officials about how much money the city should set aside to meet its gaping liability.
A recent actuarial study by the firm Bartel and Associates estimates that the city should spend $13.6 million this year on medical expenses for retirees, a number that is 39 percent higher than the estimate in a prior audit. In 2009, the firm Milliman and Associates estimated that the city would have to spend $9.8 million annually to meet its obligation.
The alarming divergence between the two studies has prompted the City Council to wonder how much the city should spend this year to narrow its unfunded medical liability for retirees. The Bartel study pegs the gap at about $134.7 million. Milliman estimated it to be about $105 million. But while council members generally acknowledged at Monday night’s discussion that the city would have to increase its annual required contribution, they stopped short of accepting the new conclusions and asked staff and Bartel to further analyze the assumptions behind the latest actuarial report.
John Bartel, whose firm put the new study together, listed a wide range of reasons for the dramatically higher numbers. These include a recent study by California Public Employees’ Retirement System (CalPERS) detailing changing employee demographics: increasing retiree lifespans, decreasing retirement age and other factors that added about $8 million to the city’s unfunded liability.
Palo Alto’s recent wave of retirements, which was prompted in large part by benefit reductions, contributed another $2.7 million to the backlog, according to Bartel’s study. The retirees’ tendency to choose more expensive medical plans added another $7.7 million.
Council members on Monday questioned Bartel’s assumptions and, in particular, the firm’s methodology, which bases the estimate on a 28-year amortization period that aims to eliminate the unfunded liability. Milliman’s estimate used a 30-year period in which annual contributions would not completely pay off the liability, according to a report from Senior Financial Analyst Nancy Nagel.
The Bartel study estimated that the city’s unfunded retiree medical liability now stands at $134.7 million, 28 percent higher than the $105 million cited by Milliman.
Council members noted that if the city were to accept the report’s conclusion, it would have to take an extra $2.3 million from its General Fund and $1.5 million from its Enterprise Fund in the current fiscal year, which ends on June 30. Vice Mayor Greg Scharff called this “a huge increase” and said the change would cut into other city priorities, including infrastructure.
“You can’t absorb an increase like that. … You won’t have money to do anything else,” Scharff said.
Councilman Larry Klein also expressed skepticism about the latest numbers and wondered if the Bartel study wasn’t too conservative. He also suggested that significantly raising the city’s contributions toward retiree medical costs may not be the best use for city funds. The medical contributions, he observed, would be close to 10 percent of the city’s General Fund budget.
“That to me is freezing out various expenditures which may in fact be better for the health of our community in the long run,” Klein said. “I can make an argument that paying large sums into this may not be healthy for the community long-term financially.”
The Bartel study also projects a steeper near-term increase in the medical costs (9 percent per year until 2021) than the Milliman study (6.5 percent until 2018). This projection did not surprise city staff. Lalo Perez, director of the city’s Administrative Services Department, said Palo Alto’s medical costs have doubled over the past six years and said it’s important for the city to have discussions with its employees about the rising pension and health care costs.
In the past two years, the city added a second tier of pension for new employees and adopted new requirements for employees’ health care contributions.
“It creates difficult decisions, not just for management but for the council and the community,” Perez said. “We do plan to do outreach on this to employees in the general sense, not just in negotiations.”
The council voted to direct staff and Bartel to re-examine the assumptions in the new report and to return with more information about payment alternatives. The conversation is scheduled to resume at the Feb. 28 meeting of the council’s Finance Committee.
“You can’t absorb an increase like that . . . You won’t have money to do anything else,” Scharff said.
They’ve only just worked this out?
The Council does not seem to understand that these retiree health care costs are an OBLIGATION and therefore must be paid for BEFORE any discretionary spending. That those costs are an unwise obligation does not change the facts that they are an obligation.
A good start for fixing the problem is to make no new hires until this benefit has been removed for new hires.
Remember that most of the employees including many top brass do not live in Palo Alto – some as far away as the north East Bay, Santa Cruz, and the Valley. Their retirement income will not be returned to Palo Alto in the way of purchasing power and taxes, and also through community involvement, but rather to the communities in which they live. It would interesting to know the statistics on this. Other places thank us very much.
Palo Alto needs to start its annual budget with paying its legal obligations first, then putting funds into depreciation accounts for each of its existing capital assets and then deciding what to do with the discretionary amount that is left over.
Currently Palo Alto does exactly the reverse – it spends all of its income on discretionary items and then wrings its hands as to how it is going to pay to repair its infrastructure and how is it going to meet its legal obligations for pensions and retiree health care – crazy!
Remember folks, last week the so-called “Infrastructure Commission” announced that the City should be setting aside 35% (or thereabouts) of its general fund for infrastructure. Someone at City Hall needs to come up with a “straw-man” budget that contains all of these new charges, or at least changes.
Rational people have been saying for a long, long, time–Palo Alto can not afford itself. The City needs a good operational audit, it needs a technology plan. and it needs to consider “regionalizing”/merging some of its functions with neighboring cities. There is no reason every City needs to duplicate every conceivable “service” for populations as small as 30,000. Menlo Park and Palo Alto could merge, or Palo Alto and Los Altos. Then after a bit, when the dust has settled, another nearby town could be added, or at least its services redistributed to regional service units.
It is madness to continue down the path we are currently on.
Time to fix this issue with the current and new employees. Many companies are making their employees made more in medical costs. Palo Alto should be no different. All employees should be paying 25% of their medical costs if they are not doing it now.
Note that what Palo Alto is struggling with is NOT the medical costs fro current employees but for retired employees – a benefit that has disappeared elsewhere in the economy.
Yes, have current employees pay more or all of the medical costs.
Yes, quit paying any of the retirement medical costs for new employees.
> Palo Alto is struggling with is NOT the medical costs
> fro current employees
The ratio of benefits to salary in Palo Alto has been as high as 47%. It’s hard not to see the City struggling to pay these benefits, for so many people it has hired in the past–to provide “services”.
I assume that the comp structure has changed for new hires to include a self funded 401k type plan and a contribution to health coverage similar to what most equivalent staffed valley company provides. Clearly with the level of unemployment, basic supply and demand would indicate a strong supply of qualified individuals..
Can anyone confirm the current comp plan for our city’s finest?
This is the third illustration of where the current residents are being asked to fund prior mismanagement. The first two were unfunded retirement benefits and failure to fund infrastructure reserves. Good financial management would have fully funded obligations as they were earned.
It is a farce for the City to act surprised. Just like Infrastructure, we didn’t set aside the appropriate funds that prudent financial management would dictate. Now we are being asked to bail out the past failures of the Council from the past 20 years.
Truth is not criticism, but simply information: and what are the truthful facts pertinent to this topic?
1. Larry Klein was a Council member and Mayor during those years. Larry, where did you put the money?
2. Liz Kniss was a Council member and Mayor during those years. Liz, where did you put the money?
Either our past leaders were naive or they were deceptive, although neither reflects well on the past. Time for a change before we dig a deeper hole for ourselves. I hope those who have participated in the past failure have the dignity to offer a sincere apology and step aside.
How many years to we have to watch everyone congratulating themselves on what a wonderful job they are doing, but for the important things, the job is not getting done.
I take no joy in delivering these truthful observations, as it much easier to participate in providing accolade for smart leadership — to do that now is to participate in a lie. Time for some tough love.
Respectfully,
Timothy Gray ( Timothygray@sbcglobal.net )
One more thing:
Please don’t try to float a bond to pay for health care benefits. Silly concern you might think? Well, that is exactly what is being considered for the infrastructure deficit, so don’t be surprised if the leaders try to deny the crisis they have created and push it off to a future generation,
Tim Gray
As financial reality rears it ugly head, the instinct of politicians is to jam their fingers into their ears and go “LALALALALA”. The only thing we can be certain of is that these cost estimates vastly understate the problem.
It’s unfortunate that those who disgraced their office by negotiating these ruinous benefits at the expense of the common citizen are mostly long gone. They deserve criminal sanctions.
It’s worth repeating: http://www.vanityfair.com/business/features/2011/11/michael-lewis-201111.print
“By 2014, Reed had calculated, [San Jose], the 10th-largest city in the United States, would be serviced by 1,600 public workers. “There is no way to run a city with that level of staffing,” he said. “You start to ask: What is a city? Why do we bother to live together? But that’s just the start.” The problem was going to grow worse until, as he put it, “you get to one.” A single employee to service the entire city, presumably with a focus on paying pensions. “
Here’s the nut job that got us into this mess:
http://www.paloaltoonline.com/weekly/story.php?story_id=3299
And here was my rant at the time:
http://www.paloaltoonline.com/weekly/story.php?story_id=3328
Let’s ask Ms. Cordell what she thinks we should do now.
Rajiv,
LaDorris Cordell was a disaster for the city of Palo Alto. She wasn’t the only one, for example Larry Klein, but she led the charge in favor of unmitaged union demands and contracts. She had her own agenda, and it did not include the majority of PA citizens. The majority is now paying the price.
Good post, Rajiv.
The LHC report is also a fun read: http://www.lhc.ca.gov/studies/204/report204.html
“[cities] face the prospect of increasing required contributions into their pension funds by 40 to 80 percent of their payroll costs for decades to come. It is practically enough money to fund a second government, and it will – a retired government workforce.”
The LHC was seriously flawed and misleading. Here’s what the State Treasurer had to say:
http://www.scribd.com/mobile/documents/50566430/download?secret_password=1xy546o1oiqk99l55buo
The 40 to 80 rise is a complete lie.
You misunderstood LC’s comment about health benefits and casting the first stone. That comment was directed towards her fellow Council members only, not you. Council members, like Klien now, will receive lifetime medical benefits. While she was on City Council it only required 5 years and 50 years old to get the benefit.
If I remember correctly, LaDoris turned down the life-time benefits.
And the Grand Jury report reaching the same findings are also seriously flawed? http://www.scribd.com/doc/32084199/Grand-Jury-Report
Time to return Cubberley to the School District and get our $6.1 Million annual donation to the PAUSD back.
> Cordell turned down the life-time benefits ..
Not exactly. She didn’t qualify–
The following article appeared in the SJ.Mercury:
—–
Posted on Sun, Oct. 16, 2005
Cordell, who said she learned of the perk only recently — almost two years after she was elected — also accused the city of deliberately keeping the program quiet. “It’s been very secretive,” said Cordell, one of the only city council members who won’t qualify for the perk after a 2003 rule change assured no future council members will receive the benefit. “Nobody’s been saying anything.”
She did not qualify then,she does not qualify now,then what the heck this topic involves her.
And nobody on council knew that they were digging the city into this kind of hole? Oh, come on. They all knew. They just figured they wouldn’t get caught.
We’re going to be bankrupt in about five years. Think Vallejo. The numbers show it. Guys like Klein and Keen will jump ship before it happens, but it’s happening
I’ve got to think Scharff was holding back laughter when he said what he said.
With bankruptcy, us property owners will be stuck with a lein for the debts the city has rolled up, regardless of the city’s attempts to discharge them. The way I calculate it is that the city’s 24,000 property owners will owe about $97,000 each. I could be off one way or another, but it will be a lot of money to cover those pensions for cops who retire at 50 and get 90% of their pay every year for the rest of their life. And librarians who get 70% of their pay for the rest of their lives. Who do us, in the private sector, pay our public servants way more than we make?
> She did not qualify then,she does not qualify now,then
> what the heck this topic involves her.
Cordell ran for City Council (as do all the rest) claiming, in essence, to be better educated than the rest of us, to be smarter than the rest of us, to know more about the management of large organizations than the rest of us. But all Cordell did, once elected, was to constantly try to increase the cost of running the City by increasing the cost of labor, as this snippet of an article about the incident illuminates–
The following article appeared in the SJ.Mercury:
—–
Posted on Sun, Oct. 16, 2005
—
FREE HEALTH INSURANCE: SOME COUNCIL RETIREES GET IT, BUT TEMPORARY WORKERS DON’T:
By Dan Stober
Mercury News
For years, it’s been a nice perk for many Palo Alto City Council members: free health insurance for life after just five years in office. Some past and present council members defend the quietly touted benefit, which costs the city at least $4,800 per year for each retiree who signs up.
But few California cities offer the pricey privilege. And the council’s lifetime benefit was news to Rebecca Swanson, a part-time teacher at the Junior Museum and Zoo who has been trying to unionize the city’s 300 temp workers, who get no benefits at all.
“I find that somewhat appalling, considering they can’t even provide their employees with health care,” she said. “I’ve been working for the city for almost 10 years now and I’ve got nothing.”
City council member LaDoris Cordell agreed. “I think its unconscionable. We’re not employees in the same sense that the city workers are employees,” she said. “It makes no sense to me. Particularly when we have temp workers who have been with the city for years and still don’t have benefits.”
—
In/around the same time, the City ended up providing health care benefits to part time workers. The impact of this expenditure, and possibly future expenditures, such as post-“retirement” benefits for part-time employees, was never considered. If Cordell had been doing the job that needed to be done, at a minimum, she (and the others) would have demanded to see a cost/impact analysis for such a “benefit” over a thirty-year period (at least). As it is, all we got was some twaddle about “fairness and equity” for part-timers.
Cordell was a disaster as a City Council member. She had no idea what an organization was, or what kinds of management frameworks needed to be in place. She was not alone is being a disaster, however. There also was Jim Burch, Peter Druckmeier, Dena Mossar, Judy Kleinberg, and Larry Klein, to name a few.
There is no such thing as a free lunch. The majority of those working for the City, and those elected to Council–don’t seem to get that fundamental point.
Hey, just give us ANOTHER utilities rate hike to pay for it. At this rate it’s going to equal non-government retirees ENTIRE month Social Security payment.
Why are we paying for dependent/family medical for active or retired employees? In addition to costing twice as much, it discriminates against single employees.
….and so the incompetence of the palo alto city council continues. Take the low bid, fund for the low bid, and then when the real numbers emerge, claim ignorance, and blame the employees. Jeez, who woulda thought inflation would figure into retirement costs. The large exodus of current employees can be blamed on an incompetent city manager with no people skills and who considers employees as a liability, a city council that goes above and beyond to belittle current employees value, and a Director of Administrative Services who is basically a “yes” man with no financial skills who was hired by council and city manager to put a negative spin on every expenditure that involves employees. Palo Alto continues to hoard taxpayer money away in reserve funds all the while claiming deficit budgets. Truly a ship of fools!
“Currently Palo Alto does exactly the reverse – it spends all of its income on discretionary items and then wrings its hands as to how it is going to pay to repair its infrastructure and how is it going to meet its legal obligations for pensions and retiree health care – crazy!”
As Peter carpenter knows, Menlo park operates the same way. They budget to spend every dime the expect top receive each year, then run for the hills when extraordinary events occur.
Why in the world are we paying any health benefits for retirees?– much less a huge portion of our city budget– Defined benefit pensions and lifetime health benefits are a scam.
The Democrats running this city have stolen from the residents for decades– but on the other hand since most residents seem to be too ignorant to throw the bums out, its hard to argue they aren’t getting what they deserve.
Too bad the rest of us have to pay dearly for our neighbors stupidity.
MP1 (a Menlo Park resident) gloats that he and Peter Carpenter (an Atherton resident) have it all figured out how the Palo Alto budget works. Never mind that retirement health benefits for Palo Alto employees were never funded and retirement benefits were underfunded by past and present city council’s and city managers. MP1 and Carpenters message is to promote negativity and blame the problem on employees. Guess they must be running for city council positions in their respective jurisdictions. Politicians claiming ignorance to contractural obligations and agreements seems to be the new scapegoat for this illterate breed. Still waiting for the Palo Alto print media to investigate the “skyrocketing” and “unsustainable” amount of taxpayer money that Palo Alto hoards away each year to put in multiple reserve funds and the current amount of these collected “reserve” funds.
MP1 and Peter Carpenter are advocating responsible fiscal practice.
The pensions and benefits the city offers are way out of line with the private sector that pays for them. The city should be reducing staff and outsourcing to the private sector as much as possible, instead of, as they recently did, hiring more overpaid city workers to bail out underperforming staff (see the chronically slow, expensive, difficult to deal with planning department).
Either that, or greatly lower city salaries to compensate for the out-of-market benefits.
I certainly don’t blame the employees who have been given excessive wages and pension benefits – I blame the elected officials who approved those wages and benefits.
And I am NOT running for office in my jurisdiction – in fact, I just ‘retired’ after serving 9 years as a Director of the MPFPD. Those 9 years were a harsh education into the problems of excessive wages and pension benefits and the reason why I have long been outspoken on this issue:
http://www.paloaltoonline.com/weekly/story.php?story_id=10050
The Fire District’s firefighters have gone without a labor agreement and any wage increases since 2008 because I and my fellow Board members refused their demand for an 11% wage increase.
So Liz Kniss wants to honor us with her presence again by running for City Council, and Joe Simitian wants to take her place on the Board of Supervisors….and Anna Eschoo still doesn’t plan to retire which fouled up Simitian’s long time plans to go to Washington. So we are in danger of getting the retreds, who helped get us into a lot of trouble in the first place, playing political musical chairs. Next thing you know Jim Baer will be City Manager and Peter Drekmeier will become Parks and Recreation Manager or maybe Public Works.
I wanted to ask the firemen about their pensions at Starbucks, but my husband said “don’t bother them, there on their coffee break”.
Dana
Your husband was absolutely right. YOU were inappropriate….that was not the forum for you to start a political discussion with the firefighters.
BTW, when they are resuscitating someone in your family or putting out a fire in your neighborhood, it is also not the time or place for you to — excuse the expression — grill them.
Let’s all remember…we will never be able to make everyone happy. No decision will be the perfect one on all sides. However, there are solutions but they require compromise. While there is an “Obligation” to provide these benefits; times, health plans, costs, funding,and options have changed. Everyone needs to be open to change. There are options available but it requires reasonable minds that can recognize that continuing to do the same thing and expecting different results is truly insanity. It’s time to do what is necessary and having worked on solutions like these I know it’s not easy, but change is necessary.
…”A surge of retirements, shifting demographics and rising health care costs are greatly inflating Palo Alto’s obligations to its retirees and prompting a debate among city officials about how much money the city should set aside to meet its gaping liability.”
The “surge” is largely because the City of Palo Alto drove out workers and management because the employees who retired did not want to have to pay increasing healthcare costs during retirement.
AND many managers knew that because there was little succession planning that they COULD retire with full retirement, and healthcare -AND return to work 1000 hours a year…so called the “double dippers”
who were then rehired by City of Palo Alto City Management.
Palo Alto had the greatest number of “double dippers”(retirees returning to work 1000 hours)last year according to the Santa Clara Grand Jury regarding numbers of “double dipper” employees per city in Santa Clara Coiunty. See the Santa Clara County Grand Jury Report on this topic.
Where was the succession planning? How much money does the city now lose on inexperienced employees and managers? How would you even know?
WHY if the city can band togetherer in the “League of Cities” to attack employee benefits and drive out employees…(“surge”) – Why can’t the “League of Cities” lobby the healthcare providers?
The Weekly is a reflection of City of Palo Alto Press releases and not investigative journalism.
We all know this would happen. We have to change the law to everyone including the new hires, only benefit would be 401K. No more free money. the Federal Employees already have that and are doing fine. Cities and the State of California need to abolish the pension system, but that is not enough, also cut prop 13 benefits to Commercial buildings.
@Sorry Rajiv:
Here’s what Rajiv did not take out of context. Cordell was asking taxpayers to foot the bill on ever-increasing benefits which Rosenblum warned about. She used the pretext that Rosenblum was one of the beneficiaries of the system to justify her advocacy of ill-affordable, unsustainable benefits (read: made matters worse, not better). Good attorney, negotiating for her client (labor union). Not a steward of our city’s fiscal health.