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.