In my last two columns, I discussed the continuing, deadly financial crisis posed by public employee pension contributions, pension obligation bonds, unfunded liabilities and underperforming pension plan investments. I asked: Have our elected officials done anything significant about the crisis?
The answer is not surprising but might be more easily understood in a different context. Let’s say you woke up and discovered you had $100,000 of credit card debt and massive monthly payments. This debt accumulated over a number of years because of escalating standard-of-living demands made by your children. They point out all the stuff their friends have and demand what they call “comparable” treatment. You hesitate to do anything differently and, while you waffle, the debt grows to $200,000. Your accountant, who’s been warning you about the debt for years, begs you to take action. Oddly, you decide to wait another few years, during which increasingly higher credit card payments really mess up your life. Then, reluctantly, you begin negotiating with your children about modest cost adjustments. Some changes occur, but mostly only with respect to any children you sire or adopt in the future. Your ongoing monthly payments may eventually be reduced by 5 percent. You congratulate yourself until your accountant points out that your debt will continue to grow by 10 percent per year based on costs for your existing children. Oops. You realize that, in terms of solving your biggest problems, the action you took is not significant.
Now let’s look at the situation in Santa Rosa, which has a problem similar to the one faced by many other cities in California: steeply rising pension costs and big unfunded liabilities under the CalPERS system.
Required pension contributions have been shooting upward, squeezing the budget for other city services, especially during the recent recession. The biggest squeeze on the budget is funding for police and fire services. This cost has shot from 40 percent to 60 percent of the General Fund budget. In this regard, the Golden Goose for police and fire is a 1996 voter-approved measure granting them binding arbitration with comparable pay and benefits with a group of comparison cities. At the time it passed, the police chief and fire chief opposed the measure, saying it would unnecessarily cost Santa Rosa millions of dollars.
It did. From 1996 to 2009, total police department pensionable wages went up 119 percent and total fire department pensionable wages went up 187 percent. City pension contributions for police officers went up more than 500 percent and pension contributions for firefighters went up more than 800 percent. The unions point out they never went to binding arbitration over wages and benefits. The answer is they didn’t need to. The city had lost all bargaining power, knowing that the result of (always expensive) binding arbitration would be a foregone conclusion.
Why didn’t the city council take action, like asking the voters to repeal binding arbitration? Voters overwhelmingly approved repeal in Vallejo, Palo Alto and San Luis Obispo. The answer here is politics. Many city council members were elected with specific backing of police and fire unions. Our mayor for the last two years was a retired Santa Rosa police officer, and we’ve had a four-councilmember majority with police and fire union connections. When the financial situation finally became dire and painfully apparent to voters, the mayor convened a Pension Reform Task Force and the council convened the only-every-10-years Charter Review Committee. But, with a majority of members connected to unions or appointed by the council majority, the Pension Reform Task Force voted down repeal of binding arbitration and the Charter Review Committee (after “conferencing” with police and fire unions to see what they’d support) voted for minor changes to binding arbitration. The key components—arbitration and comparable pay and benefits—were retained.
Separately, the dire fiscal situation led the city to negotiate with its eight bargaining units for a lower pension formula applicable to new employees. Once again, this is a political situation. Voters notice nonworking streetlights, deferred park maintenance and capital improvement projects and fewer service personnel. People clamored for pension reform and unions responded with what might be called minimalist concessions. Employees hired after July 7, 2012, will have a Tier Two pension formula.
On top of this, the state legislature passed some pension reforms at the very last minute of its session. The law deleted more pivotal, sweeping provisions of Governor Brown’s original proposal. Union influence? You bet. The changes almost all apply only to employees hired on or after January 1, 2013. Confusingly, this will create a third tier of benefits for eventual city of Santa Rosa employees.
I could write 20,000 words attempting to cover all of the fine points of pension changes. But the key point is that almost all of the changes apply only to future employees. That means Santa Rosa has 1,200 employees working under the old rules, and almost no employees working under the new rules. Yes, this will gradually change as employees retire. Meanwhile, the unfunded liabilities and required contributions to pay them down will continue to increase.
Some frightening numbers: According to an October 2012 actuarial report, Santa Rosa’s unfunded pension liability (using “actuarially adjusted” plan assets) is $127 million. When compared to the actual market value of plan assets (let’s call that “reality”), the unfunded liability is $197 million. Will those numbers go up? Yes, if only due to the aging population of potential retirees. They’ll go up if the invested funds fail to meet a 7.5 percent assumed rate of return. They’ll go up if credit rating agencies such as Moody’s question the creditworthiness of cities with Pension Obligation Bonds and demand a lower assumed rate of return and a faster pay down of debt and unfunded liabilities. They’ll go up substantially when Government Accounting Standards Board (GASB) rules kick in after June 2014, requiring government entities to report as current liabilities the cost of benefits actually earned-to-date by employees. Right now, the CalPERS actuaries amortize what’s owed now over decades into the future. This is the “For a hamburger today, I’ll gladly pay you Tuesday” approach.
When we see this continuing crisis on the near horizon, are the actions taken to date significant?
