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Healdsburg facing ‘bleak’ public pension outlook

By CLARK MASON
THE PRESS DEMOCRAT

Healdsburg city officials learned Tuesday that they face a $26 million gap for funding public employee retirements, a situation described as “bleak” and “grim” by City Council members.

In what Mayor Gary Plass said was a painful, but necessary exercise, the council heard the analysis by Joe Nation, a Stanford professor and former North Bay assemblyman, whom they invited to scrutinize city’s pension plans.

Nation described the $26 million as a “big number” considering the city’s general fund budget is only about $8 million annually.

“As grim as the news is, we’re somewhere in the middle of the pack,” City Councilman Jim Wood said of Healdsburg’s comparative ranking.

“The economic meltdown of 2008-09,” Wood said, “was the first tsunami that hit. What we’re seeing here is a delayed tsunami.”

“Everyone has to be educated on how complicated, difficult and miserable the problem is,” said Councilman Tom Chambers.

Nation, who has raised the alarm about public pension financing through studies at the Stanford Institute for Public Policy Research, said state budget contributions to CalPERS, the state employee retirement system, have risen dramatically the past dozen years.

Even if the state’s three biggest public pension plans achieve their objective of average investment returns of 7.75 percent over the next 16 years, the state’s funding shortfall will be $142.6 billion, according to Nation’s projections. That’s equal to $12,000 for every California household.

If investment returns fall short of that, and achieve merely a 6.2 percent rate of return, the researchers project the shortfall will be $300 billion.

“It’s clear it’s a mess. We still have a lot of people who don’t acknowledge the severity of the problem,” Nation said. “Everyone’s looking for an easy out. There is no easy out.”

A number of factors have contributed to escalating pension costs, including decreased investment earnings for pension funds and market downturns.

“It’s completely obvious we had a great run,” Plass said. ”We cannot sustain what we had. It’s a hard pill to swallow.”
More generous pensions have been granted to police and fire employees and retirees are living longer.

Healdsburg’s contributions toward employee pensions jumped 16 percent this budget year — from $2.4 million to $2.8 million — even though the city’s 100 or so employees last year began contributing more toward their retirements.
The city has been forced to dip into its reserves to fill the gap.

Nation said the $26 million unfunded liability represents the difference between the assets and liabilities for the retirement costs of retirees and current employees.

CalPERS, which administers the Healdsburg plan, assumes an investment rate of return of 7.75 percent annually, an amount that Nation believes is too high and should probably be closer to 6 or 6.5 percent.

Currently, the city’s contributions to the retirement system are equal to about 37 percent of the annual salaries of police officers and firefighters each 24 of other employees’ salaries.

To avoid going higher, Nation said the community needs to highlight the problem and recognize that minor fixes won’t work.

Even before Nation produced the sobering number for Healdsburg, city officials acknowledged the seriousness of the pension liability issue.

“The City Council is taking the situation we’re in very seriously. We have taken steps and will continue to take steps to lower our costs,” Mayor Gary Plass said prior to the meeting.

He said the city will be negotiating a two-tiered system of retirement — less generous benefits for future workers — and will seek more concessions from employees beginning with police and fire department workers whose labor contracts are up for renewal this year.

But in his presentation Tuesday, Nation said new tiers for new employees won’t matter much, especially if the city is not hiring.

Employees and employers will have to contribute much more.

Avoid issuing debt, he told city officials and don’t expect the market to save you.

A hard fix, he said, is to decrease compensation costs through collective bargaining and require employees to pay a larger share of contributions.

Councilman Steve Babb said it is a serious issue and “we all need to come to the table and talk in good faith with each other. Hopefully we don’t end up like Vallejo where we have huge layoffs.”





20 Responses to “Healdsburg facing ‘bleak’ public pension outlook”

  1. Money Grubber says:

    Jim:

    I would say that the “system” as you call it has already begun to implode.

    The government people that I know are a bit nervous.

    Average American wages have just been documented to have fallen for the first time in decades. Less money = less taxes.

    BUT WAIT. Jerry Brown is desperate to raise taxes upon the lower wage private sector. Gotta keep the public thinking we actually need all their so called “services.” lol.

    Oh, yeah. They also want that brand new cutting edge Santa Rosa Court House. Raise your own taxes you fools. The government demands your money.

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  2. Union Guy says:

    Fish,
    You wrote, “When businesses start losing money and closing the doors and the public sees a rapidly deteriorating education and public service/safety sector they will start to recognize the primary root causes for the demise, :unions and illegal immigration.”

    I have another news flash, businesses are already losing money and leaving this state, education and public services have, and continue to deteriorate. People who have been watching have seen it. In addition to my “Public Sector” job, I used to run 3 businesses. Now there are 2. I closed one last month in response to legislation that went into effect January 1, 2012, that heaped new fees and expensive regulation on that industry. Unions had nothing to do with its demise, it was gov’t getting bigger and going after business money with a fury. Now I am down to my job, and 2 businesses. I have positioned them for maximum protection, but new regs could be right around the corner to choke out some more businesses.
    I do not agree that unions are bad, obviously, and I won’t even touch the illegal immigration issue here.

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  3. Union Guy says:

    Working Fish,
    Here is a news flash. No organization can give more than $2500 to any politician. If you think they can be bought for that, there is no hope for logic here. Liberal democrats have always been more pro-labor than conservatives. Is that a mystery why they support labor? I am saying that the voting public can not help themselves but to vote for the party line. In California that means liberal democrats. Even though I, personally am a republican, and cast my votes on priciple, I am not blind to the side of my bread that is buttered, and I devote personal time to support candidates that I think will help protect wages and benefits. Anything less and I would have no business in union leadership. If I don’t support my member’s interest, then I don’t deserve their support.

    By the way, the little stab at the education angle was a cheap shot. My work section has 25 people. 17 have a B.A. and 9 have a Masters degrees. That leaves 8 with high school diplomas and some college. With the school disticts in Sonoma County having a 40% drop out rate, “That ain’t too bad”. Why do they work as Public Employees? I personally did the math 20 years ago with pay and benefits, calculated the retirement and decided it wasn’t a bad deal.

    However there will always be those who believe we don’t deserve our pay and benefits for any reason. Prejudging is very common in Sonoma County. It is a very prejudice place.

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  4. Working Fish says:

    @ Union Guy. Your post was a poor attempt to tell the voters that unions have the politicians in their pockets so forget about change. Someone with a college education could of been more effective and convincing. Then again I guess that’s why you are in the union.

    When businesses start losing money and closing the doors and the public sees a rapidly deteriorating education and public service/safety sector they will start to recognize the primary root causes for the demise:unions and illegal immigration. When the state,county and local taxes go up people may finally realize they are paying to advance their miserable lives so union members can live fat. Enjoy it now as the pendulum is about to swing the other way. You also may want to brush up on bankruptcy laws.

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  5. Union Guy says:

    When I see the lousy decisions made by local gov’t, I shake my head. SMART is a black hole of public funds. Unions have tried for over 4 years to effect real pension reform and lower medical costs and the local gov’t just keeps on down the road. Will it lead to BK? It may. Orange County did it and so did Vallejo. We have examples of what happens. Contracts remain in place. There are layoffs and service reduction. The safety guys and gals still have their 3%@50 retirement and no major pay cuts. The state is holding a gun to education. Brown says, “Raise taxes or I will gut education”. What will people vote for? This is California, they will always vote for more taxes and less guns. How many decades have they proved it. Yes, I will still try to convince local gov’t to grow a brain. If they choose to throw more money at the problem instead of solving it, how can anyone stop them? You can’t even say, “We will vote them out!” No you won’t. Don’t try to whine that out…. You will vote the same idiots in who have continued this and have no intention of changing it. You will. A few will squawk and claim it will change. There is always a dim bulb in the box. Nothing will change and taxes will go up despite my best efforts. You really can’t help yourselves. I will still be making money.

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  6. GAJ says:

    Very well stated Tom.

    The negative effects of these unsustainable benefits can be felt today…it is not something “down the road.”

    It will get a lot worse over the next 20 years before it gets better.

    Here’s what the Major of San Jose, a Democrat, had to say in a recent article in Vanity Fair:

    “The problem was going to grow worse until, as he put it, “you get to one.” A single employee to service the entire city, presumably with a focus on paying pensions. “I don’t know how far out you have to go until you get to one,” said Reed, “but it isn’t all that far.” At that point, if not before, the city would be nothing more than a vehicle to pay the retirement costs of its former workers.”

    http://www.vanityfair.com/business/features/2011/11/michael-lewis-201111.print

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  7. Tom Lynch says:

    The problem is one generation has negotiated benefits for themselves that will be paid for by the next generation. Too generous benefits have been given without setting aside enough to fund it.

    As reality check notes the ten year return at Calpers is 5.7% (with a 12 year return under 5%!)while the taxpayers and next generation of public servants are on the hook for the difference.

    The true measure of the failure of the present retirement system is the amount of pension obligation bonds and unfunded liability. For Sonoma County, with one of the most generous and least funded systemsin the state; the failure to get an 8% return for the last 12 years has created $1.1 Billion of principle and interest on $600 Million of bonds plus another $400 Million in unfunded liability (this if they get an 8% return for the next 30 years). This does not include the $1 Billion plus unfunded liability for retiree medical.

    In order that we try to honor promises made for past service, we need to change the terms of future service for active employees. From one who has now spent years studying this problem I see no alternative but to freeze the current pension system and create a generous 401K similar to what 90% of us in the private sector earn.

    You cannot compensate someone with a benefit for this years service, by indenturing the next generation to be debt slaves for 30 years to pay for it.
    If you can’t pay for the full benefit today; how can we possibly pay for it tomorrow.

    Incidentally, Healdsburg is an incredibly responsible community with their retirement; and they have huge unfunded liabilities. Unlike Sonoma County they do not pay into Social Security, have no retiree medical, and a retirement less generous than Sonoma County…100 employees in Healdsburg to Sonoma County’s 3500…

    There is a reason we are seeing a massive decline in essential services local government used to be able to provide for generations. Now we are cannibalizing our younger work force to pay for the retirement of the newly retired.

    Thank you David S. for your years of public service. Retiring public servants deserve a generous retirement, but we have to set aside enough the year given to sustain it; not lay off younger cops and firemen and planners today to fund it.

    It is not anti-union, anti-public servant nor anti-retiree to state the obvious. Unfortunately our elected leaders and government administrators have become willfully blind to solutions.

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  8. David Stubblebine says:

    @RC: Anyone who wants to make an issue out of cherry picking numbers should have pounced all over Joe nation’s shenanigans long before noticing me. I did cherry pick some numbers to make a point. The period I chose also included the “melt down” year of 2009 where the CalPERS return was a negative 23.4% – a pretty big setback and certainly not a year to crow about. Looking at the past 10 years, as RC did, may indeed be a better predictor of the short term future than the 20 year period I looked at. But even with the two significant dips of 2001 & 2009, (as RC points out) the fund still managed a 10-year performance of 5.7% – pretty impressive, huh? And as long as we’re looking at the short term history, let’s look at the rate since the depths of the melt down – let’s look at the past 3 years: 16.2%. And 20.9% in just the past year [June 2010 – June 2011]. All of a sudden, 7.75% looks more reasonable; I guess those CalPERS people are smarter than some Press Democrat posters give them credit for.
    The new smoothing rules enacted in 2005 were supposed to slow down how CalPERS lagged behind the market, but CalPERS is rebounding faster than anyone would have expected. With a negative 23.4% year in the middle, CalPERS is back to where it was just about 5 years ago and on the rise (at least in the short term – but certainly only time will tell).
    I do not want anyone to think my position is “There’s nothing to worry about.” The pension situation deserves the close look it is getting with hard looks from all angles. I am just saying the discussion should not engage in foregone conclusions based on politics. The hysteria whipped up by the artificially inflated Unfunded Liability numbers is a perfect example. The Unfunded Liability is the difference between what a fund will earn minus what the fund will have to pay [“Unfunded Liability” if this calculation is negative and “Overfunded” if it is positive]. In Joe nation’s calculator, the numbers are twisted on both sides of the minus sign: 1) the fund earnings are grossly underestimated by insisting on unrealistically low rates of return and then 2) the amount the fund will have to pay is grossly overestimated by figuring that each and every current employee will retire at their maximum pension when experience tells us there will be nowhere near that number of retirees. Twisting the first number down and the second number up can only yield a result that is drastically in the negative – but it’s all trumped up.
    I have yet to see a projection that appears to be based on realistic numbers all the way through, but I am trying desperately to find that. When that study surfaces, my prediction is that it may still show Unfunded Liabilities in most cases, but nowhere near the stratospheric numbers presently being thrown about with a self-proclaimed authority.

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  9. Reality Check says:

    DStubblebine,

    Do you think cherry picking investment returns is a good way to measure fund performance? Apparently so.

    CalPers 10 year return through 10/31/11, the last period reported: 5.7%

    We know that if they achieve 7.75%, and they’re a tad short, many local PERS agencies will be underwater. 5.7% is a disaster.

    And, unfortunately, long-term demographics suggest above average future returns will be difficult. We have an aging population. That is, a smaller portion of us will be engaged in productive labor. Worldwide competition is a stiff headwind we need to overcome. And then our high debt level suggests some portion of capital investment will be diverted to debt service. None of this is good if one is counting on a return of the go-go years.

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  10. Union Guy says:

    It shouldn’t be $26 million. You should use the fantacy Standford low end numbers and push it up to $186 million for the full effect. Oh, that’s right, we aren’t interested in facts. This is another chicken little story. Run, run, run,….

    Brings out the usual suspects to chime in every time. How quaint.

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  11. David Stubblebine says:

    GAJ says: “Anyone who thinks the next 20 years of market returns will come close to matching the unprecedented runup associated with the last 20 years is fooling themselves.” This is probably true. Apparently CalPERS thinks so too since their present assumed rate is only 7.75%, instead of the 20.2% they achieved in 1997 or the 19.1% they achieved in 2007 or even the 20.9% they achieved in 2011.

    Anyone who only sees the short terms pension costs without verifying the long term facts simply isn’t willing to pay attention.

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  12. GAJ says:

    Anyone who thinks the next 20 years of market returns will come close to matching the unprecedented runup associated with the last 20 years is fooling themselves.

    Anyone who can’t see that pension funding is eating up an ever larger portion of municipal budgets simply hasn’t been paying attention.

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  13. Juvenal says:

    It is typical of PD coverage of this issue that there is no mention of what PERS’ actuaries have to say about the Healdsburg situation. Joe Nation has no more claim to expertise in this area than I or any of the other posters do. Take any Joe Nation “projection” and cut it roughly in half.

    The City council has “invited” Joe Nation to evaluate the situation for one and only one reason: to stick it to City employees.

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  14. David Stubblebine says:

    I agree that as a matter of policy the public’s fiscal status and fiscal future should be diligently monitored, and this includes the pension obligations. But that should not include whipping up public hysteria about pensions by selling extreme-case scenarios as the inevitable future. CalPERS does assume an annual rate of return of 7.75%, but their actual annual rate of return over the past 20 years has been 8.4% – and that includes the 2004 mini-recession and the 2008 “melt-down.” At least Joe Nation’s recommended CalPERS rate of return is 6.5% instead of the completely absurd 3.3% (the rate for US 10-year bonds) that some of the pension bashers are calling for. The contracts between CalPERS and the public employers they represent all include variable rates for the employers; when the market is doing well, the employer rates go down and when the market turns downward, the employer rates go up. This was always been the arrangement. After the 2004 downturn, CalPERS changed its “smoothing” rules to better protect employers from an overly volatile market. During the market boom of the 1980’s when many employers had their CalPERS rates fall to zero, why weren’t the fiscal conservatives outraged then that the cities were not setting aside their pension contribution savings to better protect themselves when the pendulum swung the other way (as CalPERS recommended at the time)?

    All the dire unfunded liability predictions are based on the market declining or at best staying flat for 30 years. This is possible, of course, but if it does happen pensions will be the least of our problems. Nation says, “Don’t expect the market to save you,” which may be good advice, but betting on an extreme-case scenario that the market will only continue to do us harm shows an amazing lack of faith in America.

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  15. David Stubblebine says:

    Why would a city hire Joe Nation to examine their pension situation? Any money paid to him is a gift of public funds since his report could be predicted before he lifted a finger. There is no question that his assessment would be that the sky is falling; it always is. Joe Nation has completely sold out his Democratic roots by replacing Keith Richman as the point man for the ultra-right Republican attacks on public employees. His Stanford Institute for Public Policy Research is a Republican think tank and a front for the Wall Street giants behind it. These “investors” have mined the private pension funds dry, they have mined the banking industry dry, and now they are looking to mine the public pension funds until they are gone too.

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  16. Rosa Koire says:

    The city of Healdsburg declared approximately 85% of its developed area ‘blighted’ and diverted the property taxes to the Redevelopment Agency. Cities all over the US are paying the price for starving their police and fire, their parks and roads, and their pension funds by funneling all of that money (30-45 years worth) to the Redevelopment Agency.

    Manipulation by the redevelopment lobby in hand with the National League of Cities and National Association of Counties, plus ICLEI, has created a vast debt that we are burdened with now and for the future.

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  17. Jim says:

    What is actually funny about this story is that you could substitute any city, county and the state for “Healdsburg” and increase the dollars and the story would be the same.

    Nothing changes. Broke Sonoma County just approved 4 positions that they can’t pay for. Those positions have pensions attached. Police officers “retire” from local city police departments and work for the Sheriffs department, earning a SECOND pension while collecting their pension from the city they “retired” from.

    No one cares. Taxes will keep going up. Borrowing to fund the waste will keep happening.The IDIOT Sheeple voters will keep electing non-fiscal conservatives, and the system will implode.

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  18. Follower says:

    26 Million dollar gap in a 8 Million dollar budget?

    CLEARLY the “problem” is that we aren’t paying enough taxes.

    Time to end this madness.

    BAN PUBLIC EMPLOYEE UNIONS NOW!

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  19. Money Grubber says:

    GAJ :

    Right you are.

    The political parasites get their payoffs, perks, and favors while in office…

    Then take that loot and flee the area.

    The victims left holding the bag: taxpayers.

    Even though taxpayers can apply for social security 17 years after public employees are allowed their public pensions, even social security might not be around to pay off.

    Oh, wait. The Feds claim we do not need to worry about a failing social security. They have plenty of cash. Enough for multiple foreign wars !!!

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  20. GAJ says:

    We have a growing number of “canaries” dying in the coal mine.

    My guess is that they all have to “die” before any real evasive action is taken.

    Reminds me of the Italian Captain of that Cruise Ship…the current set of do nothing politicos will be long gone from the ship as the ship keels over with passengers on board.

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