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Pension changes cloud city's budget outlook

Original post made on Dec 21, 2017

Palo Alto's budget outlook is being dampened by a growing and unpredictable pension bill, one of the first issues that the City Council will tackle in the new year.

Read the full story here Web Link posted Thursday, December 21, 2017, 9:28 AM

Comments (29)

Posted by Barron Parker
a resident of Barron Park
on Dec 21, 2017 at 10:51 am

What is really unconscionable is the use of the most optimistic (and blatantly unrealistic) forecasts. If engineers did this, bridges would collapse and airplane engines would explode!

CalPERS is unlikely to hit 6.2% over the next few years. In fact, with most stocks overpriced today, and a sharp drop likely within the next 3 years, expected returns over the next 5 years may even be negative! From the article, every 1% shortfall will affect the budget by $10 million or more. We could easily find ourselves with $30M structural deficits each year in the next few years, and getting worse after that as more pensions continue to kick in.

Likewise, holding SEIU wage increases to 2% is unreasonable by historical standards.

We are in big trouble, and most of our elected officials are avoiding taking meaningful and quick action. They are wearing rose-colored glasses covered by blinders.

Posted by Nancy Lowe
a resident of College Terrace
on Dec 21, 2017 at 11:30 am

I have been concerned in the past about the city's approach to employee's pensions, in fact it's approach to it's employees in general...the outsourcing, substituting contract employees for city workers, reducing pensions during the early years of the "austerity" reign.

Tragically, the city has lost a lot of really good people because of the way they were undervalued, and undermined, and because the trust they had placed in receiving an expected amount of money to live on after they retired was betrayed.

Posted by Concerned Observer
a resident of Old Palo Alto
on Dec 21, 2017 at 11:49 am

Keene needs to go along with the impotent city council members who can't make wise fiscal decisions and continue to waste tax payer dollars on ridiculous traffic calming measures and overpaid consultants who make every decision they were elected to make. Clearly, Keene is incapable of demonstrating common sense when negotiating labor costs.

The city says it doesn't have the money for salary increases without reducing services. Well, why not put a freeze on all city salaries for the next 2 years instead of continuing to increase staff pay every single time some other municipality tenders their employees an increase?

What's the worst thing that could happen? I'm sure there would be hundreds of job applicants to fill positions for those who leave for greener pastures. And make all new hires non-union, pay them a fair wage and have them contribute more to their health and pension plans like most every one else does.

City council has been obsessed with having Palo Alto be identified as the center of the universe for innovation on a variety of issues. Why not be the city that takes a stand on the over compensation conundrum and set the example for every city in California being held hostage by employee unions and placing many of these cities on the verge of bankruptcy. It has to start with someone. Why not show some real leadership for once?

Posted by Chris
a resident of University South
on Dec 21, 2017 at 12:03 pm

Have these numbers been updated to reflect the 2017 surge in the stock market? It’s worth 3 years of their future discounting.

Posted by David Pepperdine
a resident of Community Center
on Dec 21, 2017 at 12:03 pm

This city is in a major financial hole. And the elected officials have historically been doing the bidding of labor unions.

We need to:
a) Outsource most functions to private companies to ensure cost efficiency and reduced pension obligations.
b) Maintain minimal, well-compensated, competent supervisory staff to make sure that the work performed by private companies is held to a high standard (no short cuts).

We are not a welfare organization. Fiscal responsibility is long overdue.

Every city council member needs to get behind this concept and make it happen.

Posted by Wayne Martin
a resident of Another Palo Alto neighborhood
on Dec 21, 2017 at 12:39 pm

The following matrix of payouts provides a good estimate of what public sector pensions are worth (in this case public safety employees):

Using a COLA of only 2%, public sector retirees will receive the following payouts in the following ranges:

--------------------------Minimum Pension Payouts-------------------------
$100K--10-Years: $1.1M | 20-Years: $2.5M | 30-Years: $4.1M
$150K--10-Years: $1.7M | 20-Years: $3.4M | 30-Years: $6.2M
$200K--10-Years: $2.2M | 20-Years: $5.0M | 30-Years: $8.3M
$250K--10-Years: $2.8M | 20-Years: $6.1M | 30-Years: $9.3M
$300K--10-Years: $3.3M | 20-Years: $7.4M | 30-Years: $12.4M
$350K--10-Years: $3.9M | 20-Years: $8.6M | 30-Years: $14.4M
$400K--10-Years: $4.5M | 20-Years: $9.9M | 30-Years: $16.5M
$450K—10Years: $5.0M | 20-Years: $11.2M | 30-Years: $18.6M
$500K--10-Years: $5.5M | 20-Years: $12.3M | 30-Years: $20.6M

(A retired employee’s exit salary is in the left-most column. Moving from left to right, the total payout after ten years, twenty years and thirty years is found in each of the columns with those year numbers.)

Police and Fire Department employees are routinely drawing salaries in the larger cities in the $125K-$200K range, with pensions as much as 90% of their high salary (or more). Within a decade, it’s hard not to expect some public safety employees to routinely be paid more than $300K/year—which will obligate CalPERS and the Palo Alto taxpayers to paying these folks over $12+M in their retirement years (for example). Other municipal employees’ pensions can be as much as 82% (or more) of their exit salaries. It’s not hard to show that during their retirement years most public sector employees will be paid more than twice what they were paid during their active working years.

CalPERS claims that the average pension payout is about $36K a year. While that may be true at the moment, as the people working for Cities like Palo Alto retire, they will be paid effectively twice (2X) in their retirement years what they made in their working years. The older generation of retirees is not generally aware of the high salaries that the current generation of workers is making. So, there is a lot of resistance in this group towards any kind of pension reform. Getting the payout data into the public’s view is really important—if not critical—in my opinion.

Government employees hired after 2013 will have their pensions limited under PEPRA (California Public Employees Reform Act) to a much lower dollar value than has been enjoyed by people employed before 2013. The initial limits were about $114K (with Social Security considered) and $137K (without Social Security). These limits are increased yearly, with the average of these limits being about 1.3% over the last five years. These yearly increases will add up over the years, but it’s clear that the future pension liabilities will be lower than what the City as accrued to date.

The obvious elephant in the room is the cost of labor—which continues to grow at roughly 3% a year with no resulting increases in productivity. The City needs to recognize the large payouts from the pension fund as "deferred salaries" and include these payouts in the negotiations with labor in the future. Looking at these costs for municipal employees' labor costs vs private sector sectors needs to become a reality in all future contract negotiations.

Posted by resident
a resident of Charleston Meadows
on Dec 21, 2017 at 1:10 pm

Many articles in the papers these days on the problems related to Calpers. One today is a government district in Contra Costa County in which the vacation time not taken has been switched to sick leave to change the calculation for retirement. They are now going and reviewing and will adjust this funding issue. So whole agencies are gaming the system as to how retirement benefits are calculated. Sounds like a strategy that needs to be reviewed against all counties and corrected.
I am concerned about the overall budget of the city in which projects are stove-piped as stand alone projects and not evaluated against other projects on the list. The Ross Road issue is significant as it does not appear to be vetted correctly versus other projects like the bike bridge. How many employees are required when we have multiple projects which are not managed correctly? The whole city needs to be reviewed on number of departments, number of employees vs number of actual projects in process. We are starting to enlarge the footprint when we should be reducing the footprint.

Posted by Jh
a resident of Evergreen Park
on Dec 21, 2017 at 1:51 pm

Jh is a registered user.

"...and because the trust they had placed in receiving an expected amount of money to live on after they retired was betrayed."

Has anyone working for many years for the city had their pension calculations changed? I thought it was based on about 90% of their final year salary, plus excellent medical benefits such as paying for Medicare premiums and a supplemental plan. For instance, for Medicare Parts B and D, plus a plan to fill in the gaps, I pay nearly $400 a month. Plus my prescription co-pays which can still be really high if the medication is not yet generic, at one point another $100 a month. Since city workers can retire after 30 years, which could be as young as early fifties, does the city pay for a medical plan until Medicare kicks in. A friend of mine in her early sixties has to spend about $800 a month until covered by Medicare. Do retirees get dental expenses covered or offered a good dental plan that doesn't just cover the basics of two cleanings a year, a few x-rays, and very minor dental work? Podiatry, vision? I ask these questions because I have always understood the retiree medical plan was very generous. Has that been cut back? A low cost long-term care policy? I really don't know but I would be interested to find out.

I say "working long term" because younger employees have time to plan ahead whereas those closer to retirement do not. Or has the retirement age changed so that a city employee counting on retiring in their 50's now has to wait until the same age as everyone else to retire?

Posted by Fiscal Sanity
a resident of Barron Park
on Dec 21, 2017 at 2:16 pm

The "California Rule" which protects public workers from ever having their future pension forumlas changed, is about to go down in court. Even Jerry Brown filed a brief against it.

Once this happens, the city needs to shift all future work to 401K, with a generous matching contribution equivalent to what a good private sector job would offer. This will let us finally "stop digging" and chip away at the giant deficit without growing it.

We'd all like to be guaranteed bloated returns on our retirement savings, but between CALPERS and the public unions, the system is completely unsustainable, unfair, and one downturn away from implosion.

Posted by john_alderman
a resident of Crescent Park
on Dec 21, 2017 at 2:39 pm

john_alderman is a registered user.

@Chris - "Have these numbers been updated to reflect the 2017 surge"

That's the thinking that got us into this mess in the first place.

Posted by Eric Filseth
a resident of Downtown North
on Dec 21, 2017 at 3:36 pm

Alas this is pretty wonky stuff.

But just to be excruciatingly semantic here, when the CalPERS board claims it “has chosen not to adopt the 6.2 percent rate, mindful of the fact that doing so would significantly raise the pension obligations of cities throughout the state,” this is not exactly correct.

In fact, the City’s pension obligation depends on what CalPERS return rates =really= will be, not what CalPERS =estimates= they will be (currently 7.0%). So if CalPERS lowers its discount rate, it’s really only changing its =estimates= of the cities’ obligations. It does not actually change the obligations themselves, or what current pension benefits actually cost the cities each year.

Some people have suggested that CalPERS may may face pressures which incentivize it to make overly optimistic estimates of cities’ pension obligations. But the crucial point is that the City’s actual pension obligation is independent of CalPERS’ =projected= investment returns; it is what it is. The only thing the projections change is the amount of the debt paid now vs passed on to future generations.

This was why the city commissioned an independent actuarial analysis based on 6.2%: in order to understand how much money its current pension benefits are actually costing the city each year, if in fact CalPERS' estimates of its own investment returns are not accurate, and that 6.2% represents CalPERS’ =true= expected return rate.

Posted by Online Name
a resident of Embarcadero Oaks/Leland
on Dec 21, 2017 at 4:04 pm

Online Name is a registered user.

A reminder that most of us are going to be paying WAY more in taxes since our SALT is capped at $10,000. It would be real special if the city tried paying down the unfunded pension debt instead of wasting all those million of OUR tax dollars on the ridiculous and dangerous road barriers.

I'm tired of seeing arrogant and unresponsive "public servants" continually ignore and dismiss OUR concerns and complaints.

Why do they all get maximum raises when they lack the basic common sense to test drive their $10,000,0000 road hazards/ barriers/ furtniture in SUVs and vans used by all the gardeners and construction folks?

Posted by Barron Parker
a resident of Barron Park
on Dec 21, 2017 at 4:15 pm

@Eric Filseth

Thank you for clarifying that the CalPERs estimates in no way affect the obligations of future generations to pay for our debt.

My point, and that of most of the people who take time to comment here, is that CalPERs uses these unrealistic estimates to make it appear that the unfunded pension mandate is under control. And Palo Alto city government (with the notable exception of you!!) has generally played along with the Ponzi game and pretended everything was fine, while we continue to dig ourselves deeper in debt to CalPERs.

And it's partially the fault of the citizens here, who have not understood that this is the one big issue -- an unsustainable fiscal policy that runs up a huge debt that ultimately crushes any city, even a wealthy one like Palo Alto.

Thank you for your efforts to educate the populace and to activate your colleagues on the City Council to get city workers off these pensions and onto 401K savings plans, like everyone in the private sector.

Posted by the_punnisher
a resident of Mountain View
on Dec 21, 2017 at 7:10 pm

the_punnisher is a registered user.

Some easy and not so easy solutions:

File bankruptcy like the City of Vallejo did; that causes re-negotiation of pension obligations..

Do more with less people; robotic solutions don't require pensions. Most of the people in City Hall can be eliminated. It is easy to bribe the CC, hard to bribe a robot. Or have a robot join a union to demand better pay and benefits. Just say NO, most (un)Civil already are programmed to say that already.

Put all existing and pension related people on Coumadin/Warfarin medication. By the time their pension benefits kick in, they will be dead. That is how the US is curing the Social Security problem. You cannot collect SS benefits if you are dead.

Use the benefits of living in California to reduce pay and benefits. No more high heating bills, no more defrosting your car to get to work. No block heaters needed. Sell this idea instead of salary/pension benefits.

Abolish (un)Civil Servant Unions. Since TAXPAYER pay their monies, they must control their money and if (un) Civil Servants do not like that, they are free to find another job. There is the door, don't let it hit you where the good lord split you.

Good Luck. You will need it.

Posted by Marie
a resident of Midtown
on Dec 22, 2017 at 2:40 am

Marie is a registered user.

Do remember that the estimated rate of return is for the next 30 years! Calculating this is real guesswork. For example, the 2016-2017 preliminary return is 11.2% Without seeing detailed assumptions, it is unclear whether the appropriate estimate is 6.2% or 7% or even 7.5%. There was a time that some companies, when times were good, jumped to 9%, after a couple good years (not a good decision). And as others have noted, the actual returns do finally impact the expenses, no matter what the estimates are (the calculations are esoteric).

Web Link

However, even with a 7% estimated rate of return, pension and retiree medical expenses are going up far faster than inflation. Until unions are willing to reduce some of their benefits, I don't think Palo Alto should be giving any raises, only bonuses that do not increase pension benefits. Small adjustments could make a big difference - such as basing pension payouts on the final five years of earnings, rather than the final year, which encourages salary spiking, particularly by high earners. Palo Alto needs to take a much stronger negotiating stance.

Palo Alto has been outsourcing lower income jobs, essentially depriving those former employees of any pension, and increasing the number of employees earning more than $200K, who don't need 90% pensions. Another approach is to flatten the organization. Lets have more workers and fewer overpaid managers. The number of associate and assistant city managers seems very high. Much reform is needed.

Posted by @PAFreePress
a resident of Midtown
on Dec 22, 2017 at 10:01 am

Wake up Palo Alto city council is planning to move huge amounts of money from the general fund to bolster Calpers shortfalls Web Link right under your nose...

Posted by Just Saying
a resident of Professorville
on Dec 22, 2017 at 10:28 am

When you have hundreds applying for 4 firefighter positions, you can reduce the retirement pensions.

Posted by Anon
a resident of Another Palo Alto neighborhood
on Dec 23, 2017 at 5:22 pm

I'm not any happier about the pension funding situation than anyone else, but, I find it a little sad that people can't find more to celebrate in the fact that people over 60 are much healthier and live longer than than back in the 1930's.

Another point that gets lost in these discussions is the reason for -pensions-, as opposed to saving/investing. Ask yourself a simple question: How long are you going to live?

Don't know the answer? That is the reason why some kind of pension system makes sense. Sure, the top 1% can invest enough money to live off the proceeds and leave the remainder to their children. It is -illogical- to expect that every working person can actually do that. (Until robots take over 100% of production of everything, including personal services.)

Given that we need a pension system for public employees, the real issue is whether or not what we are doing now is sustainable, and, how to fix it.

Posted by Online Name
a resident of Embarcadero Oaks/Leland
on Dec 23, 2017 at 6:02 pm

Online Name is a registered user.

How sustainable is this?


Menlo Park Police Chief Robert Jonsen will cross the southern city line in January to take charge of the Palo Alto Police Department, Palo Alto officials announced Monday afternoon.

Jonsen has spent most of this 30-year career in southern California before getting tapped as Menlo Park's top cop in 2013....

Pending the City Council's approval next month, Jonsen will receive a salary of $260,000 salary, along with a housing rental stipend of $3,000 per month for 18 months. According to the city, the stipend was included in the compensation package to allow him to "maximize the time on the job and to fully immerse himself in the Palo Alto community as he builds relationships that are key as he assumes this new position."

The hiring of Jonsen came after what officials called a "nationwide search" which, at the end of the day, led Palo Alto to the city immediately to the north."

Well, let's see how serious the CC is about reining in costs!

Posted by Online Name
a resident of Embarcadero Oaks/Leland
on Dec 23, 2017 at 6:09 pm

Online Name is a registered user.

Sorry. Here's the right link:
Web Link

Posted by Joe Public
a resident of Mountain View
on Dec 24, 2017 at 7:50 am

[Post removed.]

Posted by New guy
a resident of Midtown
on Dec 24, 2017 at 8:51 am

When you have hundreds applying for 4 firefighter positions, you can reduce the retirement pensions...

and the usual response is that over 99% are not “qualified”... Love the legal HR term to justify further their exclusivity. Bet most applicants were more than qualified and/or already firefighters from lower paid areas...

Posted by Keith
a resident of Community Center
on Dec 25, 2017 at 8:23 pm

Defined benefit pensions are no longer economically sustainable, and tremendously unfair to the tax payers who fund such pensions, the vast majority of who have no pension at all, except for Social Security. That the city manager declares some fiscal mumbo jumbo a 'structural fix' is exactly that, mumbo jumbo. Bottom line, residents pay more and more for city employee pension benefits while receiving less and less city services. Who works for who here? It is time to move toward a defined contribution retirement system, like the vast majority of working people, where the tax payor isn't on the hook in perpetuity to fund Keene's, and his successors, very generous retirement packages.

Posted by Eric Filseth
a resident of Downtown North
on Dec 26, 2017 at 2:09 pm

@Barron Parker, thank you very much for your kind words. But I can tell you that as we’ve unwound this issue, it has become a concern for the entire council, including my colleague Greg Tanaka who has been a strong driver of this. It isn’t just me.

I think of this more as a system gone awry, that now applies perverse incentives to many of the people involved in it, than a den of scoundrels. To the extent there are truly bad agents, I think they’re outside Palo Alto; for example, those who have sponsored statewide legislation specifically intended to increase the public opacity of the problem.

Reforming this system will take sustained effort, possibly including (regrettably) by the public at large, but at least the whole issue is actually not as complicated as it looks. It seems that way because of the layers of procedure and jargon around it, along with some unfortunate law. But at its core it’s pretty simple. So the first step is transparency. It’s said that you can’t fix what you can’t measure, but in fact this is measurable.

Posted by stephen levy
a resident of University South
on Dec 26, 2017 at 3:58 pm

stephen levy is a registered user.

Thanks Eric and Greg Tanaka for pushing the city to use a more reasonable expected rate of return of 6.2%. I would also be interested in looking at a 5.5% expected rate of return as the economy is sure to slow over the next decade and beyond.

To me the problem is not so much realizing that current retirement benefits for public employees (pensions and health care) are growing as a share of city budgets. My take is that the holdup in finding solutions is getting agreement on who should bear the costs of bringing benefits and contributions onto a sustainable course.

If as you argue Eric and I agree, there are no "bad agents" in Palo Alto, then it seems to me that some kind of shared solution is appropriate as I think you are suggesting..

I am interested in what ideas you and Greg and the finance committee and council will propose and discuss. I don't think blaming one group or another is the path to solving the problem.

Posted by Anon
a resident of Another Palo Alto neighborhood
on Dec 26, 2017 at 3:59 pm

Posted by Keith, a resident of Community Center, wrote:

"Defined benefit pensions are no longer economically sustainable, and tremendously unfair to the tax payers who fund such pensions, the vast majority of who have no pension at all, except for Social Security."

It may be that the current Palo Alto pension structure (and that of many cities) is not economically sustainable, but, that doesn't prove that no such pension plan could be very viable.

And, I have to point out two things: First, nobody knows how long they are going to live, and, Second, a 401k-type plan that is aggressive enough to last until someone is 116 years old is simply not possible for everyone. Defined-benefit plans have the huge advantage that people can live within known limits until they die.

I think what everyone is really after is that a plan that assumed that the average person would die at age 72 is in trouble if the average person lives to age 78. That doesn't mean that defined benefit plans don't work, just that people are living longer than they used to, and we need to build that in to the plan finances.

Posted by Bad Negotiators
a resident of Another Palo Alto neighborhood
on Dec 26, 2017 at 6:29 pm

Bad Negotiators is a registered user.

I can't help but think that those in the know, would know enough to not allow for things like giving Palantir use of public space for a corporate tent and parties, basically for nothing.

If the City is or will be in a hole, why is the focus on allowing businesses to make a corporate campus out of it, and say...not contributing more to the infrastructure costs? Palo Alto has been core to the success of many companies yet doing something for this town is probably not even on a list for philanthropy from these companies. They expect the residents to subsidize everything.

This town cannot - cannot be a "City" - and until it gets its act together, it must be downsized to what the residents can maybe sustain. Maybe, big maybe.

Posted by musical
a resident of Palo Verde
on Dec 26, 2017 at 7:20 pm

I guess everything goes up 2 percent next month. Minimum wage, Social Security checks, postage stamps. And probably all our restaurant menu prices. City retirees get their pension adjustment in May? Is that also 2 percent? Annual 2 percent going forward 30 years is over 80 percent from today. Can we assume this is baked into the 7 percent annual discount rate, or are we climbing a wall that keeps getting steeper? Good thing we don't use a more realistic CPI.

Posted by Productivity
a resident of Old Palo Alto
on Dec 28, 2017 at 8:02 am

One aspect of this mess is that we are lacking a macro-level view of city employees, costs, services, and income.

If our city income is expected to grow 1-2% due to property taxes, and inflation at 2%, that leaves only 2% growth available for all past and current employees (the problem with pensions is you pay for all past mistakes well into your future). ALL expenses. In present dollars.

Likely we find there a gap in funding.

Now imagine productivity increases - if it were possible. The rest of us tax paying citizens are expected to do more each year for the raise we get. It is growing productivity which outpaces inflation - that is the source of an improved standard of living.

City employees seem exempt from this reality, instead extracting an improving standard of living through negotiations, opaque laws, and corrupt/broken systems like CalPERs.

So comments like “we should have a shared solution “ really sound unfair until city workers show productivity gains outpacing their costs.

As long as their costs continue to outpace their productivity, it is simply theft of our future city services. No shared solution.

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