News

Palo Alto tries to get a grip on pension problem

City Council committee to explore different models for tallying growing benefits bill

It's a problem as vast as it is vague: an unpaid pension bill that stands at more than $300 million and keeps on growing in ways few one can comprehend, much less predict.

For Palo Alto City Councilman Eric Filseth, who chairs the council's Finance Committee, that's a major problem -- and one he and his colleagues are preparing to tackle. In a wide-ranging discussion of the city's gaping pension problem, the committee agreed Tuesday that the city needs more clearly define problem and directed staff and consultants to return with forecasting models that will help inform the difficult discussion.

The city is by no means alone in dealing with a colossal unfunded pension liability -- a problem that was exacerbated by years of lower-than-expected investment returns by California Public Employees' Retirement System (CalPERS), the state agency that manages the city pension and health benefits.

To better understand the scale of the problem and the effect it will have on the city's budget, Palo Alto officials agreed on Tuesday to team up with Stanford economic professors Jeremy Bulow and Joe Nation to develop a database that would help the city easily calculate its obligations going forward.

They also enlisted their consultant on pensions, actuary John Bartel, to develop two other scenarios, based on rates-of-return of 7.5 percent (which CalPERS has been projecting) and the more conservative 6 percent (which many deem to be more realistic).

The committee also agreed Tuesday that it needs to do a better job in talking about the acronym-laden subject with the general public, which may soon start feeling the effects of the pension crunch. If CalPERS lowers its discount rate (as its rate-of-return is known), the city would have to increase its contributions to employee pensions, leaving less General Fund money for city services.

City Councilwoman Karen Holman noted at Tuesday's meeting that city leaders also need to do a better job communicating about the issue with City Hall employees. For most, the topic is well familiar. In recent years, pension reform was a part of every new union contract, as the city added new tiers with less generous benefits for new employees.

"It's not just the public we have to bring along with what we're grappling with, it's also staff," Holman said. "Don't know the best means, but we don't want to be starting a war that's unnecessary because we haven't been communicating well and bringing people together."

Lalo Perez, the city's chief financial officer, said many other cities are now waking up to the problem of rising pension costs and looking for ways to address their obligations. In Palo Alto, the approach has included higher pension contributions from city workers and creation of a pension trust fund, which currently has $3.5 million and which could be used to soften the blow from higher-than-expected CalPERS bills.

Filseth and his three committee colleagues, Holman, Adrian Fine and Greg Tanaka, all agreed that the city needs to get a better understanding of how different discount rates will impact the city's expenses and revenues. Staff had projected that in the current budget, switching the discount rate from 7.5 percent to 6 percent would raise the city's expenditures by about $5.4 million.

Tanaka, who in June voted against the budget because he felt it didn't adequately disclose the city's pension bills, said the information about true pension costs -- including the costs that the city will incur after the employees retire -- is critical for making personnel decisions. The big question that the city needs to answer, Tanaka said, is: How big a hole are we in?

"Once we understand that, then we can figure out what is the policy decision that can be made," Tanaka said.

Tanaka argued that the city owes it to its citizens to conduct "a pretty thorough analysis" of the pension problem. Filseth agreed and made the motion directing staff to return with the different financial scenarios.

"We're doing the right thing by dealing with this proactively," Filseth said. "We are making the future much more secure. I, as an employee, would be a lot more worried if we weren't doing anything."

Read the Weekly's discussion of the pension problem with City Councilman Eric Filseth here.

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Comments

16 people like this
Posted by Bob
a resident of Downtown North
on Oct 18, 2017 at 5:54 am

Given that he was disciplined for failure to comply with campaign contribution disclosure rules, any finger wagging about disclosure from Tanaka seems comical. Despite his effort to hide their contributions from public view, his campaign was driven by large contributions from developers. Now he wants to play the part of transparency watchdog and the council’s financial conscience?Please.

With all that said, the city should indeed get a good handle on our true liabilities going forward and try to save for a rainy day as needed. I don’t dismiss the message here, but I can’t take the messenger seriously.


27 people like this
Posted by John
a resident of Midtown
on Oct 18, 2017 at 7:40 am

This unfunded pension fraud is taking place in every California municipality. The state is effectively bankrupt.


27 people like this
Posted by Compound Idiocy
a resident of Crescent Park
on Oct 18, 2017 at 8:19 am

The current method of funding sounds like gambling: promise massive long-term benefits and then hope our investments earn enough to pay for it.

If our city proposed to fund a new police station by betting on horse races or roulette wheels, city leaders would be hauled off to the asylum. Yet, that's essentially what they're doing for the much larger cost of retirement benefits.

The article talks about current pension obligations, but what about all the obligations to come for employees working now and in the future? It's time the city switched to defined contributions plans where the cost to the city is fixed, known when we hire someone, and not based on hoping the stock market goes the way we want.


21 people like this
Posted by Get real
a resident of Midtown
on Oct 18, 2017 at 8:45 am

Rather than continued investigation & consultants for what the likely pension & health care liability is I would like the city council to announce concrete steps for how they plan to address this rapidly growing liability. I would like to seem them start with even the most optimistic estimate (about $550 million) and provide a plan based on this scenario. My guess is that the city will not even be able to ever fund this liability using the best case scenario without sacrificing key city services.

Most California cities will need to eventually explore bankruptcy as an option to escape from this liability. What a wonderful state we live in thanks to CA Democrats & Unions!


21 people like this
Posted by Tough Love
a resident of another community
on Oct 18, 2017 at 10:11 am

Have you ever heard the expression when the power-elite are structuring/negotiating the next big deal ............. "If You can’t see the Sucker in the room, you’re It"?

Well, the Taxpayers have been the "sucker" in the room for decades, being abused by the unholy relationship between the insatiably greedy Public Sector union and self-serving Elected Officials more-than-willing to trade their favorable votes on Public Sector pay, pensions, and benefits for BRIBES disguised as campaign contribution and election support. It's that unholy relationship that has resulted in the current level of ludicrously excessive pensions, which is the ROOT CAUSE of the pension mess most States and Cities now find themselves.

Reading this article frustrates me. We "tally" and "tally" and "tally" but don't attempt the difficult effort to remove the legal stranglehold (the California Rule and similar Laws, Regs, and Constitutional provisions) that prevent (or make it extremely difficult) to implement anything but financially INSIGNIFICANT pension reforms. Absolutely NOTHING (yes NOTHING) will solve this problem unless part of that solution includes a VERY (thing 50+%) material reduction in the value of annual accruals for the FUTURE service of all CURRENT workers.

And then, even when we "tally" we don't address the true expected COST of the promises made to our Public Sector workers nor the RISK to Taxpayers. Example: In this article, the alternative scenario is a valuation using 6%. That's it? Nothing more? Are you serious? Do you not realize that Private Sector Plans (regulated by ERISA and the PPA) must use MUCH lower rate in their valuations, with most Plans now using a rate near 3.5%? Do you think Large Corporations that sponsor their DB pension Plans are stupid and wouldn't fight-like-hell if the US Gov't was forcing them to use UNREASONABLY low rates in THEIR Plan valuations? Of course not. Such low rates ARE appropriate because pension Plan benefits have a very strong guarantee and a low interest rate is appropriate for discounting strongly guaranteed future payments.

Also, with the Stock market seemingly at a ridiculously high level, how about running a few scenarios with near-term reductions in equity values of 10%, 20%, and 30%. Afraid to put REAL possible outcomes in front of the Taxpayers?


8 people like this
Posted by SuperD
a resident of Community Center
on Oct 18, 2017 at 10:13 am

Glad to see that our City Council is trying to address it now, instead of kicking the can down the road like the folks in Sacramento...


Posted by Citizens United
a resident of Old Palo Alto

on Oct 18, 2017 at 10:16 am


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2 people like this
Posted by Stephen Douglas
a resident of Stanford
on Oct 18, 2017 at 11:27 am

Tough Love, with all their rules and regulations and, ostensibly NON-"ludicrously excessive pensions", how did so many private sector pensions get into this* mess with the Stock market seemingly at a ridiculously high level?

* Web Link


4 people like this
Posted by Tough Love
a resident of another community
on Oct 18, 2017 at 11:34 am

Stephen Douglas,

I'll answer that with the same answer I gave you yesterday when you asked me that same question here (under one of your many other Blog commentating handles S. Moderation Honesty):

Web Link

************************************

The SHORT answer is the refusal of fixed income rate to climb out of the toilet (the differences in Public/Private valuation assumptions and methodology impacting Private Sector Plans harder than Public Sector Plans).

The LONG answer can be found here:

Web Link

***********************************
And P.S. CA's Public Sector pensions are indeed "ludicrously generous" under any and every reasonable metric.


22 people like this
Posted by Fuhgetboutit
a resident of Community Center
on Oct 18, 2017 at 12:09 pm

Web Link

Palo Alto ranks 8th in the state with each household debt of >$39,000 for their city's pension. Read the above link, and it will make you feel Scott Walker had a point.
It is immoral for Government employees to have a union. Government is a benign employer, and does not need an union to ensure compliance with the law. There is an inherent conflict of interest when elected officials are negotiating with the unions that worked to elect them.


1 person likes this
Posted by Stephen Douglas
a resident of Stanford
on Oct 18, 2017 at 12:09 pm

Same response; The question was rhetorical, Fedup, Anonymous.


12 people like this
Posted by 38 year resident
a resident of Old Palo Alto
on Oct 18, 2017 at 12:10 pm

38 year resident is a registered user.

@ John......you are correct. The progressives, however, will tell you that the state is in great shape. It's a joke, yet they still believe it.


3 people like this
Posted by Stephen Douglas
a resident of Stanford
on Oct 18, 2017 at 12:18 pm

"Government is a benign employer, and does not need an union to ensure compliance with the law."

And, if you believe that, I have a bridge I can give you at a good price.


Web Link


12 people like this
Posted by Tough Love
a resident of another community
on Oct 18, 2017 at 12:27 pm

Stephen Douglas,

The gov't may not COMPLETELY be a benign employer, but it has assuredly become more and more the place for the lazy, the ineffective, the blatantly incompetent, and the marginally employable.

I'm sure that State & Local Gov't could manage quite well with 1/2 to 2/3 of the current worker-headcount. Unfortunate Civil Service (and similar) rules make it near impossible to terminate the most incompetent and insist on terminations based on last-in, first-out, etc. ...... no matter how effective the newest employees may be.

We need to get rid of the dead-wood no matter who they know and how long they have been employed.


7 people like this
Posted by 25 Year Resident.
a resident of Leland Manor/Garland Drive
on Oct 18, 2017 at 1:33 pm

We voted and petitioned to add Medical cannabis to our little city. Our council prevented Palo Alto from being 1st in this new endeavor. We have been first in many ground breaking and cutting edge forays in progress except in this instance from some closed minded fear.

I visited Oregon this past summer and witnessed a small town that is benefiting financially from the taxes collected from the sales of cannabis. Curiosity took me inside this lovely, clean, well run boutique. Just inside the door I was greeted by a gentleman who made sure I was over 21, and checked my ID in an exterior lobby, then I was "buzzed" into an interior store. Much like a fragrance boutique there were jars of flowers, glass cases of products, shelves with displays. There were experts called "budtenders" offering individual counseling. Nothing seedy nor shady. Any questions answered, products explained, thoroughly. Every sale is placed in a locked banker's style zipped bag with strict instructions. 20% of all sales are split with Oregon, the county and the town. The roads in Oregon are now well maintained, smooth with no potholes, there is money for programs, for trail building and restoration, money for schools, restoration projects of smaller towns that were hard hit by the economic downturns and fires the list goes on.
If we can open our tightly closed conservative eyes and think outsode the box a little, this could be an answer for the pension problems and other fiscal issues in Palo Alto. The council is voting these things down by what it "could be". Why don't we try giving one or two licenses and watch them carefully. Placing restrictions on where and how they conduct business. Making them boutique like in order to deter certain types of clientele. Insuring a "high end" so to speak, and not to be punny...., type stores. From what I have been reading, the opening of recreational cannabis stores have been effective in dramatically reducing Opioid dependence and deaths in Colorado and Washington. Including the growing Heroin epidemic.

Speaking the as a cancer survivor my self and former caregiver for a parent whom passed from cancer and needed Medicinal Cannabis for comfort, nausea and appetite, when it was not available 20 years ago. For my Parent we had to purchase THC capsules from Stanford, out of pocket, one month supply was over $1000. Barely effective and 20 years ago that was a lot more money that it is now. They have gummies and chocolates, caramels, cookies and things that are super effective, actually precise in the measurement of MGs, and effectiveness.

just a thought


8 people like this
Posted by Gale Johnson
a resident of Adobe-Meadow
on Oct 18, 2017 at 1:33 pm

Gale Johnson is a registered user.

Thanks to Filseth and his committee for tackling this very important issue in a direct way. From just sitting on the sideline and reading the article and all the comments, tho, I'm not very optimistic that any significant solution can be found, even after our consultants do their job. If we're locked in by union contracts and regulations (local, state, federal) there probably isn't much wiggle room on it. I would just say to the current and future city retirees, however, "Would you please just thank us taxpayers for helping you buy your RV's, boats, pay for vacations and cruses, and for you to be able to retire so young to enjoy all those things?" A totally different world than private sector employees' benefits. My $17k pension, after working for a company 27 years, doesn't go very far, especially since the group health insurance premium comes out of that automatically every month. Not much left over for fun stuff. And I pay taxes on it in addition.


8 people like this
Posted by Tough Love
a resident of another community
on Oct 18, 2017 at 2:18 pm

Gale Johnson,

I understand your frustration, but I'm not willing to throw in the towel and accept that there is nothing we (Private Sector Taxpayers) can do to right-the-wrong perpetrated upon us by the unholy/collusive relationship between the Public Sector Unions and out Elected Officials.

Aggressive efforts must be made (with a ferver no less than that exhibited the insatiably greedy Pubic Sector Unions/Workers in demanding to be paid in full and on time , and with a taxpayer-be-damned attitude) to RENEGE on the 50+% of the now-ludicrously-excessive promised pensions that assuredly would NOT have been granted in the absence of that unholy Union/Elected-Official relationship.


2 people like this
Posted by Stephen Douglas
a resident of Stanford
on Oct 18, 2017 at 2:31 pm

Mr. Love,

Thank you for your opinion, anecdotal though it may be. Actually, empirical studies seem* to agree with you:

"Based on a nationwide survey of state and local government employees in 43 of 50 states, Gallup found that 71 percent of the work force was “disengaged” or unenthusiastic about their jobs – and unwilling or incapable of improving their output."

*Although...

"More broadly, employee disengagement across the economy costs the U.S. economy roughly $500 billion a year, which suggests that the problem is just as prevalent -- or more so -- within the private sector."

just as prevalent --
or more so --
within the private sector.

It may be that we did "get rid of the dead-wood"; by shipping them to the private sector.

Most public employees are not really public employees at all. They are merely private sector employees on one of several different jobs they will hold through their career. Only about twenty percent of retirees are "career" employees (30 years or more). The average job tenure for public employees is about eight years.

Time to get your hubris in check.

Web Link


7 people like this
Posted by Annette
a resident of College Terrace
on Oct 18, 2017 at 3:09 pm

Annette is a registered user.

"a problem that was exacerbated by years of lower-than-expected investment returns by California Public Employees' Retirement System (CalPERS)"

It's the "for years" part of the above that I want to understand. Who is in charge of CalPER investing? And for how long has that person or team had that responsibility? Given the impact of poor investment returns it seems to me the guardian of that responsibility should be changed if the returns are consistently lower than expected. The consequences are too great to do otherwise. Or is this political, too?


11 people like this
Posted by @PAFreePress
a resident of another community
on Oct 18, 2017 at 3:40 pm

Plundering of the general fund has quietly begun right under your noses and in some cases behind closed doors - Pension Trust Supplemental Funds Web Link You can look for more plundering in the future to support city worker underfundedpension liabilities


6 people like this
Posted by Joseph E. Davis
a resident of Woodside
on Oct 18, 2017 at 9:51 pm

Defined benefit pensions should be made illegal as the government is clearly unable to fund them in a prudent manner. All employees should transition to defined contribution pensions.


6 people like this
Posted by Marie
a resident of Midtown
on Oct 18, 2017 at 11:05 pm

Marie is a registered user.

This is a far more complex problem than presented above. For example, this year, the CALPERS return on investment is tentatively 11.2% for the year ended 6/30/2017. It is not at all clear that 7% is too high when the period being averaged is I believe 30 years. In addition, we have been in an historically very low interest period for a number of years, which has definitely depressed earnings. That could easily change with a new Fed Chairman.

One problem in the past has been that when investments have done really well and, believe it or not, the pensions have been overfunded, the reaction of politicians has been to improve pension benefits rather than give raises. This is one of the main reasons that we are in such a fix today. When times are good, Palo Alto has to resist using improved pension benefits instead of raises which has come back to haunt us when results are bad.

It is time to go back to basics and get the pension benefits under control. Commonly, pensions are based on the last 5 years of earnings, not just one year which encourages pension spiking. Furthermore, pensions are not supposed to provide the same salary or more than when working. Palo Alto pays up to 90% of final earnings. I don't think that is sustainable. More typical in the past has been 60-70%. Most people's expenses do in fact go down in retirement.

So the problem is twofold: benefits need to become more standard - and not be used as a ping pong ball depending on variable investment results. And we need to have a little more confidence in the long term economy and CALPERS ability to invest its resources accordingly.

Another thing that should be done is to overhaul the organizational structure of the City of Palo Alto's staff. What is the manager to worker ratio? One theory says there should be at least 7 reports for each manager. Also, how many layers are there? If you flatten the organization and have the majority of the employees actually working as opposed to managing, the salary structure is reduced.


7 people like this
Posted by Math 01
a resident of Charleston Meadows
on Oct 19, 2017 at 6:37 am

Simple math. More money going out than coming in. I would go bankrupt if I let this happen in my household. Ridiculous contracts signed with greedy unions years ago led to this problem. Too late to fix it.


2 people like this
Posted by Midtown Guy
a resident of Midtown
on Oct 19, 2017 at 12:27 pm

Got to ask, is this like saying that my mortgage, which is payable over 30 years, would bankrupt me if it suddenly has to be paid all today? I just cannot comprehend the scare tactic of looking at future obligations , based on periodic payments, as suddenly being converted to on demand debt that must be paid now, in cash. Surely I am missing a simple something?


6 people like this
Posted by Tough Love
a resident of another community
on Oct 19, 2017 at 1:14 pm

Quoting Midtown Guy ...............

"Got to ask, is this like saying that my mortgage, which is payable over 30 years, would bankrupt me if it suddenly has to be paid all today? I just cannot comprehend the scare tactic of looking at future obligations , based on periodic payments, as suddenly being converted to on demand debt that must be paid now, in cash. Surely I am missing a simple something?"

Good question, and one that is often misunderstood.

The LIABILITY for a pension Plan at any given point in time is the present value (meaning future anticipated payments discounted with interest to the calculation date) of already accrued pension credits for PAST service. Essentially, it's the CASH you should have in hand TODAY in order to meet these future payment obligations.

When a Plan has an UNFUNDED LIABILITY it means it has lees cash in hand TODAY to be able to pay for ALREADY ACCRUED pension credits for PAST service.

Having a UNFUNDED LIABILITY is analogous to being BEHIND in mortgage payment due in PAST months.


Like this comment
Posted by tougher love
a resident of Evergreen Park
on Oct 19, 2017 at 1:53 pm

Always seems like the proponents of "tough love" invariably involve goring someone else's ox, with no sacrifice by the alleged fan of "tough love".


Like this comment
Posted by resident
a resident of Midtown
on Oct 19, 2017 at 3:16 pm

The city council from 2006 caused alot of the pension problem:

Web Link

excerpt:

"On October 10, 2006, the City Council approved a 38 month agreement effective May 1, 2006 through June 30, 2009 with employees represented by Service Employees’ International Union (SEIU) Local 715. The SEIU agreement included a change from the current retirement formula, 2 percent at 55 Full Formula, to an enhanced formula, 2.7 percent at 55 Full Formula, which increases the monthly pension benefits for all employees aged 50 and over retiring after January 6, 2007. This change was a result of the City’s continuing efforts to contain escalating healthcare costs for existing employees and future retirees while retaining a competitive market position. The City will reduce the maximum payments of medical premiums paid to current employees and future retirees in return for providing a more competitive retirement benefit. Nine of eleven labor market cities have enhanced or are in process of enhancing their retirement formula beyond 2 percent at 55 within the last several years. This benefit change will affect not only the 589 SEIU employees, but also the 254 non-safety management and professional employees who are also combined in the Local Miscellaneous employees group as established by
CalPERS.


5 people like this
Posted by Tough Love
a resident of another community
on Oct 19, 2017 at 5:26 pm

Quoting "tougher Love" (noting that that's not me "Tough Love"):

"Always seems like the proponents of "tough love" invariably involve goring someone else's ox, with no sacrifice by the alleged fan of "tough love"."

------------------------------------------

Since you weren't specific, I'm guessing that "goring someone else's ox" refers to my advocacy for material reduction in future service Public Sector pension accruals for all CURRENT workers.

I very clearly DO support such reductions because by any and every reasonable metric, Public Sector pensions are LUDICROUSLY EXCESSIVE when compared to those typically granted comparably-situated Private Sector workers (i.e., Private Sector workers who retire with the SAME wages, with the SAME years of service, and at the SAME age.)

You may choose to call such advocacy "goring someone else's ox", but I call it ...... trying to eliminate a HUGE, unnecessary, unjust, unfair, and VERY VERY costly public Sector ADVANTAGE.

And as to the latter part of your quote ...... "with no sacrifice by the alleged fan of "tough love"" ....... while the current (ludicrously excessive) pension promises are materially underfunded, a thorough analysis would show that Taxpayers' actual pension contributions over the years (including the investment earnings thereon) were MORE than sufficient to FULLY FUND (100%) of a pension EQUAL in generosity to the pensions typically granted comparable workers in large Corporate pension Plans.

Public Sector workers never "deserved" more, their Unions simply BOUGHT more from our self-interested Elected Officials with BRIBES disguised as campaign contribution and election support.

That being the case, Taxpayers have indeed "sacrificed" ...... more than enough already.


1 person likes this
Posted by Far Far Away
a resident of another community
on Oct 19, 2017 at 9:21 pm

You'll just have to get your wallets out Palo Alto folks.


6 people like this
Posted by Concerned
a resident of Old Palo Alto
on Oct 20, 2017 at 1:16 pm

@resident
Your information or understanding of the 2006 pension is incorrect. It would take a whole page to explain to you so I won't.

So maybe the bigger problem is that the current city manager is hiring his friends and acquaintances at high six figure incomes who will each receive pension and medical plans far exceeding of any budget capabilities. The current senior city management team salaries and benefits package approved by the city manager and city council are incredibly ridiculous and beyond belief. Maybe a better idea would be to rein in the unsustainable cost of employing the high cost management "team" that our city council has regrettable allowed to expand.


2 people like this
Posted by Palo Altan
a resident of College Terrace
on Oct 21, 2017 at 5:27 pm

It's about time that the city officials deal with city employees pension. Almost all private employers have ditched defined benefit pensions already. None of us who live in Palo Alto gets it unless you happen to retire already from Lockheed, Stanford, IBM, public schools, state, city and local governments.

City employees need to be compensated as fairly as the citizens they serve. Move them out of defined benefit pension and put them in 403(b) or 401K just like the rest of us.


2 people like this
Posted by Tough Love
a resident of another community
on Oct 21, 2017 at 8:26 pm

Yes Palo Altan, and they need to make that DB to DC switch not just for NEW workers, but for the future service of all CURRENT workers.


Like this comment
Posted by Supply & Demand
a resident of Green Acres
on Oct 22, 2017 at 12:28 pm

More outsource for non key positions!!!


Sorry, but further commenting on this topic has been closed.

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