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Pay Now to Keep Pension Costs in Check, Consultant Tells City

The city could save money and reduce its unfunded pension liabilities by finding cash to feed one of the city's pension funds, and paying off debt related to another, says actuary John Bartel.

San Leandro has essentially two options when it comes to addressing its ballooning employee retirement liability: pay more now or wait and hope the state employee retirement fund starts getting a better return on its investments.  

That was the scenario pitched to the City Council Monday night by a consultant hired to review the city’s pension liabilities.

John Bartel, an actuary and expert on the (CalPERS), warned that the amount the city contributes to CalPERS will probably keep increasing.

“We expect your contributions are likely to rise and to be particularly painful as time goes by,” Bartel told city officials.

How can the city keep those rising costs under control? Find money now to pay down a debt related to the city’s pension plan for public safety employees (police and fire), Bartel said.

Next, start paying more into CalPERS for the pension plans of all other employees, Bartel recommended. This would help reduce the city’s unfunded pension liability and, hopefully, protect against large upward spikes in the city’s yearly CalPERS contributions, Bartel said.

Last year, San Leandro contributed $7.3 million to CalPERS for employee pensions, or 10 percent of the city’s General Fund expenditures.

Local governments across the state are struggling to cope with rising pension costs stemming from a variety of factors, including huge losses in CalPERS’s stock portfolio in recent years.

The pension system lost more than $100 billion in investments between 2007 and 2009, according to CalPERS data.

The state pension system is funded by a mix of employee and employer contributions and interest generated from investments.

San Leandro, like many other cities in California, pays the required pension contribution of its employees for them. (This could change under pension reforms proposed by Governor Jerry Brown. Brown seeks to prohibit employers from paying their employees’ portion of pension contributions.)

While the city has little immediate control over some aspects of its CalPERS liabilities, there are several things it could do to rein in costs, according to Bartel.

First, it could make a concerted effort to pay off a debt stemming from pension costs for firefighters who worked for the city’s former fire department.

San Leandro began contracting out fire services to Alameda County in 1995. While the city’s main pension fund for safety employees was pooled with other agencies in 2003, the city’s pre-2003 liabilities were placed into a CalPERS “side fund” that has to be paid off by the city.

The balance of that fund owed by the city as of June 30, 2011 will be $24.4 million, according to Bartel, about half of its total liabilities for safety employees. The fund has a fixed interest rate of 7.75 percent, and according to the current payment schedule, it’s supposed to be paid off by fiscal year 2024.

However, Bartel said the city could save money by paying off that debt sooner.

“You should do what you can afford to do to pay that debt down,” he told the council. Bartel said doing so would result in a higher rate of return than most other investments the city could make.

In terms of the city’s non-safety employee pension fund (for everyone except police and fire), Bartel said the city should also try to pay more now rather than later.

The city has an unusually high ratio of retirees compared to active employees, Bartel said at the council meeting.

While the number of non-safety city employees has gone down in recent years, the number of pensioners has gone up. In 2009, there were 477 former city employees receiving benefits and just 314 employees working for the city.

The amount the city pays into CalPERS is based on a percentage of its current employee payroll. To keep down unfunded liabilities for future pensions, Bartel suggested the city start paying a greater percentage of payroll into the non-safety pension fund than the minimum required by CalPERS.

In 2009, San Leandro had about $26 million in unfunded liabilities for non-safety employee pensions, according to the city’s 2009-10 Comprehensive Annual Financial Report.  

“There is a lot of incentive, from my perspective, for you all to think about this [non-safety employee pension] plan a little more fiscally conservatively than you otherwise would,” Bartel said.

Both of Bartel’s recommendations would require the city to come up with extra cash from an already squeezed budget, or borrow money elsewhere. City staff will be discussing the pension issue further at the next finance meeting this Friday.

Paul Garza April 13, 2011 at 02:38 PM
First of all the only city employee making $200,000 a year is the city manager. The second highest paid is the police chief. The rank and file employees ie; your tree workers, street workers, library staff, park staff etc make far less than that around $50 to $60 thousand a year. It is the management that make the six figure salaries. Also one would have to work 40 years receive 100% of their salary. It is years of service X 2.5%. Public safety is 3%. So your average worker making let's say $60,000 a year that works lets say 20 years would receive 50% of their pay upon retirement. Try to remember it is the management and the public safety employees, lots of overtime for them, that bring home the big salaries not the rank and file employees that actually provide the services.
David April 13, 2011 at 03:39 PM
1) You are only looking at salary. There are 40 employees making $100k+ as base. When you count total comp, it's 120. http://www.contracostatimes.com/public-employee-salaries 2) Rank and file? How much do tree trimmers make in the private sector and how many have pensions? 3) Let's not say they work 20 years. No one else in the private sector considers retiring at 55 a "right." Furthermore, let's say you're a 51 year old median SL worker, making $58,000/year in the private sector. Your Social Security benefit (when you retire in FIFTEEN years, compared to your public sector buddy who's ready to go in 4) will be approximately $1557 (if the government doesn't reduce it, which again brings up the point that Congress can cut Soc. Sec. at any time for us private sector workers, but taxpayer-funded pensions for government workers are sacred?!) http://socialsecurity.gov/estimator/ So to recap, a government-employed "rank and file" can retire after 20 years, and receive MORE per year than a private sector slob who's been working 40 years. Do you now understand why people question how much we're spending on gov't worker compensation??
Jill Replogle April 13, 2011 at 03:50 PM
FYI, the average annual pension benefit provided by the city for service was $22,000 in 2009 for non-safety employees. For safety employees, Bartel said you could multiply that number "somewhere in the neighborhood of 2-3" and could be a little higher, but he didn't know exactly what the average was. As I reported on Monday, you can see the top pension earners in San Leandro here: http://database.californiapensionreform.com/database.asp?vtsearchname=&vtsearchemploy=san+leandro&vtquery=1&vttable=calpers. The group that puts together this database said they'd be updating it soon.
Paul Garza April 13, 2011 at 05:02 PM
Yes I understand your point of view. Everyone makes a choice on where they work for the most part. Former US Labor Secretary Robert Reich as well as a Rutgers University Study both concluded in January of 2011 that when you compare public sector and private sector employees with similar education levels private sector employees earn more EVEN with considering total compensation. If you want to have quality services one needs to pay for them. Maybe we should just go to the local home depot and hand out orange shirts and shovels and chainsaws and let them work on our city streets, trim your trees over our homes, provide library services etc. It is easy to point fingers at public employees and say "they are the problem". People want to outsource services fine. Try getting a response from a contractor for a single pot hole, downed street pole or anything else. It would be more appropriate to show your anger at the Wall Street criminals that screwed up our economy got bailed out and are back to making their profits and handing out million dollar bonuses while not hiring people and figuring out ways to find tax loopholes to earn even more money. I did not hear much of this talk when the economy was doing well. I only used the 20 year term for simple math. As Mr. Bartel stated the only folks that retire at an early age are usually people making six figures since they can afford to much more than someone making far less.
David April 13, 2011 at 05:17 PM
$22,000 is what the city pays into Calpers per employee or that is what the average benefit received is? If the latter, it's a bogus number because it counts in all the employees who only worked a few years.
David April 13, 2011 at 05:28 PM
1) When the economy was doing well, is when Gray Davis set up the problem by jacking up the pension multipliers and lowering the retirement age. 2) If that were true, why are public employees so afraid of opening up projects to all-comers? Instead they straitjacket competitors with Davis-Bacon union rules etc. 3) It isn't true. http://reason.org/news/show/public-sector-private-sector-salary When you adjust for actual hours worked, public sector compensation is higher. In addition, there is much greater job security (which is worth something, considering the time and costs of being unemployed even a few months every 3-5 years). Reich etc also underestimated (as we continue to see) the actual, likely pension liabilities/costs 4) Getting mad at Wall Street is a classic straw man. I am not defending the crooks on Wall Street, I'm stating that public sector workers are compensated at unaffordable levels. You should talk to the guy I'm sure you voted for, Obama, about bailing out Wall Street, and the continuing bailouts. I am on record in numerous venues as stating bankrupt banks should go bankrupt (and car companies). 5) You really think that in this day and age, people are turning down work? I hired a couple guys for about 3 days of work to spruce up a rental unit. They immediately returned my calls and were there the next day, did quality work for a reasonable cost. Do you have any handle on how tough it is in the private economy?
David April 13, 2011 at 05:33 PM
Furthermore, I certainly agree that you need to pay for quality services. Now ask yourself, with the 5th highest tax burden in the country, why are California roads ranked around #45, schools #48 or so, but we rank #1 in teacher salaries, and near the top in $$ spent per person by the government. We're paying for top-notch services, and not getting them. You should ask why. Locally, we're spending 70% more than we did 10 years ago on government. In return, we have the same # of cops, school quality has declined, roads are worse, and many city services (i.e. permits) appear to open maybe 3/4 of the typical work week. We're paying more for less. Again, do you understand why people are unhappy with this? it shouldn't be that difficult.
Jill Replogle April 13, 2011 at 06:51 PM
$22,000 is the average annual payout to pensioners for service (not for disability). So yes, that includes people who only worked a few years.
Paul Garza April 13, 2011 at 08:18 PM
First of all the large projects in town are open to bids to outside contractors. And yes I do have a handle on how tough it is out there I am self employed. I would think it a safe bet we are ALL spending more than we did 10 years ago. No I did not vote for Obama and I don't think that a company is "to large to fail". If a bank, car company or whatever goes bankrupt oh well they should fix it themselves or go out of business. Hiring cops is very expensive, as we have found out. The roads in SL need work yes but they are not that bad, except E14th which is state owned. When the city cut it's staff 20% things are going to suffer.As far as schools goes teachers can only do so much, it all starts at home. If you have parents that have no expectations of themselves or a solid work ethic what do you think happens to the kids. Let's be honest hear the demographics of SL has changed, and not for the better. Every time I have called the city for whatever reason I actually talk to a person a get a timely response. The permit turn around can be better but they only have so many people, I have hadto let people go as well which affects my business as well.
David April 13, 2011 at 08:36 PM
The median income of San Leandro and US households dropped relative to inflation over the past 10 years, the spending and tax revenues have increased. Again, we need to ask ourselves why hiring cops and teachers is so expensive, etc--for example, NYC cops start at rates $20,000/year lower than SL cops; it is only after 5 years on the job that they finally get up to starting cops' salaries here. So again, we're paying for top-notch services and not getting it. Finally, are those bids open to NON-union contractors?
Steve April 13, 2011 at 10:37 PM
Hi Jill, I think it's refreshing that a reporter comments on a story and actually provides additional content. Regarding the 22k number which you partially addressed in a post, that number includes people that have only worked for five years, people that retired 20-30 years ago, and most of which retired under very different pension formulas than what we see today. This 22,000 dollar number sounds like something that came from the minimalist organization known as CalPERS (when it suits their needs), and nobody should trust any number that comes from this taxpayer unfriendly organization. I think the most recent numbers for CalPERS retiree's is about 58K for people that retired with 25 years of service. Twenty five years is hardly a career and that would mean that they also receive some level of Social Security on top of their pension. And the 58k is substantially greater than what a private sector worker receives from social security for 40+ years of contributions. The 58K is also more than a little bit misleading because the pension formulas have been dramatically increased over the past 10 years, and the retirement age has also been reduced which adds quite a bit cost to the pension plan. If you add in the value of lifetime medical benefits for an employee and spouse, beginning at age 50-55 (about 12k per year and climbing), for just 5 years of service - most bay area cities have done this, then the OPEB cost increases dramatically.
Steve April 13, 2011 at 10:41 PM
Hi Jill, I think it's refreshing that a reporter comments on a story and actually provides additional content. Regarding the 22k number which you partially addressed in a post, that number includes people that have only worked for five years, people that retired 20-30 years ago, and most of which retired under very different pension formulas than what we see today. This 22,000 dollar number sounds like something that came from the minimalist organization known as CalPERS (when it suits their needs), and nobody should trust any number that comes from this taxpayer unfriendly organization. I think the most recent numbers for CalPERS retiree's is about 58K for people that retired with 25 years of service. Twenty five years is hardly a career and that would mean that they also receive some level of Social Security on top of their pension. And the 58k is substantially greater than what a private sector worker receives from social security for 40+ years of contributions. The 58K is also more than a little bit misleading because the pension formulas have been dramatically increased over the past 10 years, and the retirement age has also been reduced which adds quite a bit cost to the pension plan. If you add in the value of lifetime medical benefits for an employee and spouse, beginning at age 50-55 (about 12k per year and climbing), for just 5 years of service - most bay area cities have done this, then the OPEB cost increases dramatically.
Steve April 13, 2011 at 10:54 PM
I consider CalPERS a big part of the problem for a number of reasons. Here is just one example of what I'm talking about, and this comes from the CalPERS website under the heading of CalPERS Responds (to criticism). From CalPERS: Myth: Government workers don’t contribute to their pensions; taxpayers are on the hook to pay those costs. January 12, 2010 Fact: All government workers contribute to their CalPERS pensions. For state employees, the range is five to eight percent of their monthly earnings; for public agencies it is five to nine percent. While the vast majority pay five percent, firefighters, peace officers, and the CHP pay eight percent. Read it on their website: http://www.calpersresponds.com/myths.php/myth-Government-workers-dont-contribute-to-their-pensions A bigger issue regarding calPERS is their smoothing policy. The industry standard is to smooth losses over a five year period. CalPERS is smoothing losses over 15-30 years which grossly understates the true cost of current pensions. It is the equivalent of purchasing a car with less than five years of useful life remainging, with zero scrap value, and financing the thing over 15-30 years.
Steve April 13, 2011 at 10:55 PM
Pension expert Girard Miller writes on the topic of CalPERS smoothing policy in Governing Magazine. Here is an excerpt: "How high will this flood crest? Local employers are now skeptical that they have been told the full truth about how high their pension costs will ultimately surge. Unlike the vast majority of public pension funds, CalPERS uses a 15-year actuarial smoothing process that camouflages the genuine economic impact of market fluctuations. I have no issue with normal industry-standard actuarial smoothing periods of 5 years, in light of the average length of a business cycle — which is 6 years based on 14 recession cycles in the past 84 years. But the CalPERS process is opaque and flunks the transparency test that taxpayers, public managers and municipal bond investors are entitled to expect. As I have explained before, such extraordinary "smoothing" practices deserve SEC investigation as an "artifice and device" to conceal relevant financial information from the investment community — as well as the employers who must now bear the financial brunt of unsustainable pension benefits." www.governing.com/colu...
Steve April 14, 2011 at 12:25 AM
Bankruptcy isn't so much a solution as it is a last resort. The first step is to quit approving taxes without solid reform as a condition. There are several ways to reduce the pension burden, none of which include throwing more money at the problem, but the community needs to pressure the city council if it is to happen. It is also important to elect council members that aren't beholden to the public safety unions.
Marga Lacabe April 14, 2011 at 04:42 AM
Well, I looked it up and apparently pension liabilities remain after a bankruptcy. At least according to the CAlifornia Constitution .
Steve April 14, 2011 at 05:27 AM
Marga Lacabe wrote: "Well, I looked it up and apparently pension liabilities remain after a bankruptcy. At least according to the CAlifornia Constitution ." Marga, can you show me where the CA constitution says that? I did some research regarding Vallejo and it appears that the the city never even challenged the pension issue. What they have done is reduced their unfunded retiree health care liability by over 100 million dollars by limiting the retiree health benefit to a flat 300 dollars per year. They also are requiring some groups to contribute 25% to healthcare, and are also requiring the FD to pay 13.4 percent toward their pension. That is much better than the 9% some departments contribute, and 13.4% better than the departments that rely on taxpayers to cover the entire tab.
Marga Lacabe April 14, 2011 at 05:51 AM
Steve, here is an article discussing the issue of pensions in municipal bankruptcies in California: http://www.voiceofsandiego.org/government/article_0418be36-1aa3-11df-840f-001cc4c03286.html
Leah Hall April 14, 2011 at 06:16 AM
Massachusetts Governor Deval Patrick explains the success of education, health care reform, and balanced budgets in Massachusetts (an outlier state and leader ) 07:40 minutes http://www.thedailyshow.com/watch/tue-april-12-2011/deval-patrick
Steve April 14, 2011 at 06:43 AM
Marga, Nice article but it is over a year old (Feb 2010). Much has changed since then. If you want to believe that you can't do anything to correct a problem that is affecting every taxpayer dollar you spend, for services you should expect that includes education, youth programs, senior assistance, and even street repair, then you don't have any chance of making a difference. If you are OK with what is happening then why are you posting? Why should SL be paying the highest pension contribution rates in the state, while paying the highest sales tax in the state, and be happy about anything other than the highest level of service possible?
David April 14, 2011 at 01:29 PM
You're kidding, right? http://www.bostonherald.com/business/general/view/20101021budget-buster_pensions_could_add_1b_to_state_deficit_as_pols_clash_over_solutions/srvc=home&position=also The state’s $2.5 billion budget deficit could swell by nearly another $1 billion next year as taxpayers face the prospect of making up for losses in the pension system. “This is a real crisis that will have a long duration,” said Michael Widmer, president of the Massachusetts Taxpayers Foundation.
Fran April 14, 2011 at 01:48 PM
There's also a lawsuit pending somewhere in the midwest. It's a teacher suing because instead of the yearly 3% cost of living increase promised, they knocked it down to 2%. That may set some kind of precedent. There's also that town in Alabama who simply stopped sending checks to retirees. I saw that on 60 minutes.
Marga Lacabe April 14, 2011 at 03:57 PM
Steve, legally much has not changed in a year. The CA constitution has not been modified, and I don't think any city has tried to discharge pensions in bankruptcy. Being willing to accept the status of the law as it is does not mean agreeing with it, btw.
David April 14, 2011 at 10:03 PM
And that's the kind of in-depth analysis I expect from you. Two questions: 1) Do you believe that the government exists to serve you, or that you exist to serve the government? If the latter, why have the middleman of the government? Let's just go straight back to slavery. 2) Do you believe that the money you earn is yours, or that it's the government's to distribute as it sees fit? Again, if the latter, let's just go straight to Cuban-style communism. The question is, since the government cost structure is too high, and will come down, do you first run through essentially a government bankruptcy and default, like Argentina/Russia/Greece etc, and then reduce costs or do you reduce costs first and avoid the pain of a bankruptcy/default.
Leah Hall April 14, 2011 at 11:12 PM
darn delete button! 1) Neither - The government is for that which we decide to do together 2) Neither - Oh boy, now I'm going to be called a communist again? Oh well, perhaps that's better than stupid or slow ;) My deleted post, as I recall: Re: Do you now understand why tea party members question how much we're spending on gov't worker compensation?? Nope. Here's a moment of clarity http://www.youtube.com/watch?v=ASRDb12D-M0 Now do you understand why progressives question hard line conservatives?
Jill Replogle April 15, 2011 at 05:18 AM
Steve: San Leandro pays the highest pension contribution rate of payroll for safety employees only. It's basically because the city began to contract with the county for fire services. The city still has pension liabilities for former city firefighters, but the contribution rate is now based on a payroll that only includes police, thus it looks a lot higher. As for other options for pension reform, tell us about 'em. Obviously there are options at the state level, but what do you see as options for contributors? Immediate options, that is. That's what Monday's discussion was really about. The city already implemented a two-tier system for new employees a few years ago. That's not likely to make any difference for a loooong time because the city isn't really hiring.
Leah Hall April 15, 2011 at 08:28 PM
A joke for you, David: "Remember when teachers, public employees, Planned Parenthood, NPR and PBS crashed the stock market, wiped out half of our 401Ks, took trillions in TARP money, spilled oil in the Gulf of Mexico, gave themselves billions in bonuses, and paid no taxes? Yeah, me neither." Enjoy the weekend!
Steve April 15, 2011 at 11:18 PM
Thanks for the comments, Jill. There are options to reduce the overall cost of the pension plans without reducing the 3@ pension formula. Unfortunately, I don't have time to get into them at the moment. Stay tuned...I'll try to get to your question over the weekend. If not then, because I have a busy weekend, I'll post my thoughts on Monday. The reason for the delay is that I want to provide some links that substantiate my claims. I need to dig them up. You mention that SL still has pension liabilities for firefighters. CalPers, and the calPERS smoothing plan, has much to do with that. Most pension plans require funding levels that cost the plan as it goes, only smoothing losses over a five year period. That doesn't happen with CalPERS, which has a smoothing policy of 15 years and is actually smoothing 2008 market losses over a 30 year period. Some people are calling that "intergenerational theft" because these costs, for workers that are retired, are being transfered to future generations. I'll put it this way, If calPers smoothing policy was an indudtry standard 5 years the SL cost for Safety would probably be approaching 70% of payroll. I'm sure we could all afford to make payments on the luxury car of our dreams if we could extend the payment plan out 15-30 years.
David April 16, 2011 at 03:44 AM
Remember when the government wiped out GM bondholders (including millions of retirees) to hand a huge portion of the company over to the UAW, who had no secured claim to the company? Oh yes, that was just a couple years ago. Remember when the government kept on hiking property taxes despite property value declines in order to pay outlandish pensions? Oh, still happening. Remember when the government is paying $115,000 for a person to write a twitter account for some department? Happening right now. Remember when I ever supported the bailouts of the UAW AND the banks? Me neither. You continue to post up straw men. I do not, nor have I ever defended the bank bailouts. You are not effectively defending outlandish government spending by pointing out outlandish government spending. Do you realize that?
David April 16, 2011 at 03:51 AM
1) The government is not a kumbaya circle. The government is either your servant or master. Decide. 2) Again, there is no middle ground. Do you earn your money, or is the government's to dole out? If the former, you contribute to a government that provides services, if the latter, you are a slave. Leah, sometimes you're entertaining, but honestly, you could use some clarity of thought.

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