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!

> 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.

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

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.

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

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.

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.

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.

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.

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?

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.]

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?!

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.

Mary,

Is that sarchasm?

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.

Mary,

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.

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.

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!

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.

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.

Correction...

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

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.

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.

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.

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.

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 :)

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.

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.

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.

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.

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.

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.

Woophs........

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"

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.

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.

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.

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