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Santa Rosa’s pension costs to rise $12 million in 6 years

By KEVIN McCALLUM
THE PRESS DEMOCRAT

Santa Rosa’s pension costs are set to soar by about $12 million over the next six years as it is forced to pay higher rates by a state pension system trying to come to grips with a massive gap between its assets and what it owes current and future retirees.

The increases of about $2 million per year would result in the city by 2020 paying about 45 percent more that it does now toward employee pension costs, already one of the largest costs in the city budget, the City Council learned Tuesday.

PensionCosts would rise from about $27.4 million a year now to nearly $40 million in 2020, a figure that city actuary John Bartel said he knew was difficult for the city leaders to swallow.

“From a budget standpoint, it’s horrible,” Bartel told the council.

But he also argued that the pain would be worth it because it would begin to bridge what is a nearly $200 million gap between what the city owes its current and future retirees and the money it has set aside to pay for their rapidly increasing retirement benefits.

“From an intergenerational taxpayer point of view, I think it’s the right thing to do,” Bartel said. “From actuarial perspective I think it’s the right thing to do.”

The increases keep coming in spite of city and state pension overhaul efforts which focused on establishing lower pension benefits for new workers.

That’s because the lower tiers, while helpful in controlling costs long-term, won’t affect a large percentage of the city’s workforce for more than a decade, Bartel said.

Bartel explained that his estimates are based on several factors, most of which revolve around policy changes the state Public Employee Retirement System has either already made or is likely to make in the near future.

One was the CalPERS board’s April decision to base rates that it requires cities and other public agencies to pay annually on the actual, or market, value of the assets in the funds. The previous method allowed another method to be used, called the actuarial asset value, which smoothed out changes in value over several years but which critics argued allowed cities to pay less than they truly owed.

For Santa Rosa, the difference is significant. The old valuation put the gap, or unfunded liability, at $128 million in 2011, the latest data available. When the market value of assets is used however, the gap grows to $197.4 million.

The new rates will be aimed at eliminating this larger gap. That portion of the rate dedicated to reducing that gap is expected to last 30 years, though it will be phased in over five years beginning in 2015/16, Bartel said.

Another change likely to happen in the near future is a change to the assumptions about how long retirees live. With life expectancy climbing steadily for decades, Bartel said, he expects CalPERS to dispense with the formality of requiring a study to justify the assumption and just assume future retirees will live an average of about two years longer.

Lastly, he said it’s likely, though far from certain, that the board will also reduce its assumed rate of return on investments by a quarter of a percent, from 7.5 percent to 7.25 percent. Though that seems minimal, Bartel explained that even a slight drop in how much CalPERS earns from its massive investment portfolio can lead to higher rates for cities that have to make up that difference.

One of the key reasons Santa Rosa’s costs are increasing is because of an increase in the number of retirements compared to active workers. In 1994, the city had 1,030 active workers and 382 retirees.

In 2011, it had 1,193 active workers and 1,096 retirees. In three or four years, the number of retirees will probably surpass the number of active workers, Bartel said.

That’s not a problem by itself if enough money is set aside, he said. But average annual retirement payments are also on the rise. In 2003, the average retirement payment for nonpublic safety workers rose 58 percent, from $20,300 to $32,200. For police that figure was 49 percent, increasing from $36,900 to $55,200. For firefighters that figure was 69 percent, rising from $41,000 to $69,200.

Councilman Gary Wysocky noted that of the $12.3 million in additional costs expected by 2020, about $9 million would come from the city’s general fund, while the balance would be borne by ratepayers. But he said that assumes a flat salary budget, which he said is not reasonable, meaning the increases are likely to be even higher.

The problem is the city will face a $9 million increase in pension costs the same year that Measure P, the general quarter-cent sales tax that brings in about $7 million per year, will expire.

“That’s quite a hurdle,” he said.

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin. mccallum@pressdemocrat.com. On Twitter @citybeater.





36 Responses to “Santa Rosa’s pension costs to rise $12 million in 6 years”

  1. GAJ says:

    Regardless of the rationale or spin the situation is that Public Safety will continue to eat up ever large pieces of the pie and services and other departments will have to continue to be cut to support the unsustainable house of cards the City budget has become.

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  2. Reality Check says:

    Gentlemen:

    Thanks for the civil exchange of views. More later, I’m sure. It’s a complicated subject.

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  3. County Worker says:

    Applicants are not the problem. QUALIFIED applicants are few and far between. Some departments have tested hundreds, and found 5 or 6 that can get past their lie detectors and drug policy. I am sure many had a great time partying up for a long time. Now the consequences kick in. Oops. Hope the parties were worth it, you no longer qualify to get the jobs everyone will hate you for having. The evil public employee.

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  4. David Stubblebine says:

    RC said: “When liberals like Wysocky and Adachi see that public employee benefits, if not reigned in, will crowd out other programs they value highly, the landscape has shifted.”

    Maybe so but the flat-rate Employer Paid Member Contributions (EPMC) is not the culprit; the situation today is being driven by the variable rates of the employer contributions (tied to the stock market) and management packages.

    The EPMC issue usually comes up with a tone of indignation over employees not making direct retirement contributions. The point I have been trying to make for months on these posts is that the indignation over the EPMC is strictly an emotional response that does not consider the history, does not consider how EPMC actually works out to be a savings for everybody (especially the taxpayer), and does not consider how little EPMC truly impacts the larger situation.

    RC, just to be clear: I did not sense this kind of indignation in your question here – you just asked a question. My preceding paragraph was more in response to the way EPMC keeps coming up as if it were a substantive issue and not necessarily in response to how you asked your question.

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  5. Reality Check says:

    “. . . . pay for middle management and IT and other skilled positions still trails what is payed in the private sector.”

    Then the city will need to, and should, raise salaries to what is necessary to attract quality employees.

    BLS data, however, indicates that turnover for most public employee positions is low, suggesting that compensation (in all its various forms) is at least satisfactory. And when one sees hundreds or thousands of applicants for openings in the fire department, we know what that says about compensation.

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  6. Lets be Reasonable says:

    @RC – And yet before the Crash, the City converted miscellaneous management perks into salary, since they were having a hard time recruiting qualified applicants. It was figured that most folks pay more attention to the salary then they do to other benefits. I’ll grant that with the current unemployment rate, the City is getting more applicants, but pay for middle management and IT and other skilled positions still trails what is payed in the private sector.

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  7. Reality Check says:

    DS,

    Thanks for the further explanation. I don’t doubt what you and LBR say. Nor do I doubt the role of cities in digging their own hole; nor do I blame public employee unions for willingly accepting generous contracts when offered. But, time’s up. When liberals like Wysocky and Adachi see that public employee benefits, if not reigned in, will crowd out other programs they value highly, the landscape has shifted. About time, by my reckoning.

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  8. David Stubblebine says:

    @RC: To add to LBR’s comment, I was at the table during several negotiations where Employer Paid Member Contributions were negotiated and this idea was always put forward by the cities. During the years when this benefit was trendy, The League of California Cities urged cities to adopt this practice since it was a cheaper way for the cities to offer raises (as LBR said). A 2% raise done this way costs the City less than 2% and benefits the employee better than a 2% salary increase would. The first time I ever heard the expression “It’s a Win-Win” was at the table over this issue. It was a “Win-Win” then and it still is today.

    The point of all this for today is this: Every increase in what the City pays for employee contributions came in lieu of salary increases that all parties agreed at the time were warranted. Critics who would want to do away with this benefit should, in all fairness, offer the corresponding salary increases that were not granted so the benefit could be adopted. If this benefit is taken away without the corresponding salary increases, then that should be viewed as a cut in pay – because that is what it is.

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  9. Lets be Reasonable says:

    @RC – Sometimes it is cheaper for the City to pay the employee portion rather than give more salary. In general, it is only done for public safety. Miscellaneous employees pay their full portion.

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  10. Reality Check says:

    LBR,

    Thanks again for the useful information. I will spend some time with it. Question: What portion of the employee’s portion of the contribution is actually paid by the employee? I’m under the impression that it is common for the employer to pay this? Only for some employees?

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  11. Lets be Reasonable says:

    If you look at the presentation to City Council on CalPERS on page 12, you can view Actual City contributions (dark green) compared to suggested (light green) for Miscellaneous employees. For four years it was zero or 1%. Employees paid their portion during this period.

    http://santa-rosa.granicus.com/MetaViewer.php?view_id=5&clip_id=342&meta_id=16847

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  12. Lets be Reasonable says:

    My numbers were a bit off – 2008/09 to 2012/13 saw a drop from 1377 to 1198 or 179. If you look at General Fund Miscellaneous, that was a drop from 622 to 489; a loss or 133 or a bit over 21%. We did see 23 new jobs this last year, but again, 20 of those were in Police, Fire and Utilities. So the Business Journal says there were 1200 public sector jobs in Sonoma county. My figures were national. and it would be nice to know where in Sonoma County those jobs were coming from, but certainly not the City of Santa Rosa General Fund Miscellaneous employees.

    CalPERS sets minimum rates, yes, and during the superfunded period, those rates were ZERO for miscellaneous employees. The laws have changed recently, and it can never go so low again.

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  13. David Stubblebine says:

    GAJ: Fuzzy math.

    You construct an odd percentage of employees laid off per year and then compare it to the local unemployment rate, which is calculated by an entirely different process. The numbers really cannot be compared with one another.

    The unemployment rate is the unemployed divided by the workforce. That is: [the number of people out of work but looking for work divided by (the number of workers with jobs plus the number of people out of work but looking for work)]. The unemployment rate takes into account all unemployed workers, not just those who lost their jobs during a given year like in your numbers.

    Assuming LBR’s figures are correct and assuming all 200 laid off workers were still out of work (unlikely), then 200/1300 would be an isolated unemployment rate of 15.4%; well above the regional rate.

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  14. Accountable says:

    It would be nice if government workers actually read Business Journals. Interestingly, NBBJ showed that last year in Sonoma County “the government sector added 1,200 jobs”: http://www.northbaybusinessjournal.com/67702/employment-figures-for-december-2012/

    Stubblebine and LBR apparently parrot back the sound bites they’ve heard about what went wrong with the Pension Funds. The following website gives a detailed and comprehensive history about the fraud and deception perpetrated by CalPERS, which are the actual reasons why local governments find themselves in this financial predicament. http://calpensions.com/2011/01/10/state-pension-funds-what-went-wrong-2/ When CalPERS sponsored SB400 to the State Legislature, it claimed that the increased “benefits would be paid for by using ‘excess’ assets”. They never showed the Legislature the “worst case scenario”, actuarial calculations.

    Furthermore, the CalPERS board sets employer contribution rates. Local governments simply cannot arbitrarily refuse to pay their contributions. Even more disturbing…CalPERS has the authority to demand taxpayers pony up additional money without any Legislative approval.

    FYI – the former CEO and former Board Member of CalPERS are as corrupt as any Wall Street banker http://www.usatoday.com/story/news/2013/03/18/former-pension-fund-exec-charged/1997747/

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  15. GAJ says:

    200 layoffs in the City since 2008??

    What is that 40 a year.

    Not counting Public Safety in 2008 the City had about 1,300 employees so 40 layoffs a year represents an “unemployment rate” of about 3% per year.

    That’s some tough sacrifice right there by our City employees.

    The overall unemployment rate since 2008 in Santa Rosa has ranged from a high of 11.2% in 2010 to a current rate of 6.5%.

    The City is planning to add at least 22 City jobs in the next 12 months effectively; no more budget related cuts.

    City employees’ “pain” is behind them evidently.

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  16. Lets be Reasonable says:

    @RC – the real world… In the real world, private sector jobs have been growing for the last 3 1/2 years, while the public sector continues to shed jobs. Santa Rosa lost around 200 jobs, mostly in the General Fund Miscellaneous ranks. For every layoff, there was probably one or two bumps – where an employee was bumped to a lower position. I know employees who have lost 20% of their salary. That’s the real world.

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  17. Reality Check says:

    LBR,

    At the risk of sounding unsympathetic, welcome to the real world. My sense is that public employees did not willingly accept the new reality. And, especially for public safety employees, the basic (unsustainable) agreement was left intact, actually renewed for additional years, with some deferrals of raises.

    I appreciate your point of view, civil tone, and reliable information, but I think the reforms needed go beyond a trim or two and a lot of can kicking.

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  18. Dan Drummond Sr says:

    There’s another type of pension plan called a cash balance pension plan. Some say it might be as popular as 401k plans in a few years. It seems to have an easier conversion process, but may not be as beneficial for the workers, especially the older ones.
    http://en.wikipedia.org/wiki/Cash_balance_plan
    http://www.dol.gov/ebsa/FAQs/faq_consumer_cashbalanceplans.html

    Long live the goose that lays the golden eggs!

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  19. Lets be Reasonable says:

    @RC – I’m sorry, but Santa Rosa employees have had to live with layoffs, unpaid furloughs and no COLAs for a number of years. The unions have understood the economic realities and have worked with the City through these difficult times. Employees and unions both understand the current realities. Inflation has been low, but not zero over the last few years, yet employees have not seen any increases. The number of employees at the City has been dropping, yet the workload hasn’t. Folks who have been blaming employees need to start looking elsewhere.

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  20. Reality Check says:

    LBR,

    Inflation is so devastating to families because typically rising wages don’t keep up with rising prices. Public employees enjoy what most private sector employers don’t have, the belief that wages just go up every year.

    The fat hits the fan when tax revenue fails to keep up with the CPI. In a sane world public employees unions would face reality and adjust their expectations, as do private employees, accordingly. Alas, that’s not what typically happens.

    The fix is for unions to demand that full pension contributions by everyone become part of the contract.

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  21. Steve Humphrey says:

    The unwinding of public employee pension systems is just beginning. Without any movement or redirection, either public employees or ratepayers are going to be left with nothing. Sadly the ratepayers currently hold a large lead to the cliff.

    Two steps would dramatically help resolve this issue.

    1. Immediately raise the retirement age… dramatically.
    2. Immediately convert all public employee retirement plans to 401K

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  22. James Bennett says:

    Government workers are the new elite.

    AND.

    The Agenda is to deliberately crash us.

    They have a whole new currency, a whole new program in mind.

    Thumb up 17 Thumb down 8

  23. R.B. Fish says:

    Any county position should not exceed the amount the taxpayers can reasonably expect to pay based on a consumer type index.Regardless it should never exceed $100 K with a top 20-30 year pension not to exceed 25,000 a year. End the unions and political corruption will stop. End illegal immigration and our county will prosper.

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  24. David Stubblebine says:

    @Larry Watkins: Can someone explain why the disastrous choices that bankrupted the private pension funds must be duplicated by the public sector? Why are we required to engage in a race to the bottom instead of encouraged to make a race to the top?

    @RC: In the late 1980s, CalPERS was super funded and some employers saw their rates sink to zero (subsequent changes in the law prevent this from happening again). At the time, CalPERS encouraged, but did not require, employers to set aside their contribution amounts to ease the pain for when the rates went back up; but very few actually did (none in Sonoma County). Everyone knew the 1980s bubble would deflate but nobody saw 2008 coming. When the trickle-down from 2008 finally hit the CalPERS employer rates, the rate jumps were a bit staggering for those agencies that did not follow CalPERS’ advice – but not altogether unexpected.

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  25. Lets be Reasonable says:

    @RC – Traditionally, in a normal economy, employee salaries tend to go up based on inflation. There was usually a clause in contracts where inflation as measured by the Consumer Price Index (CPI) was included. This is referred to as a Cost of Living Adjustment (COLA). This is not so much a raise as a way to keep salaries at the same buying power. The City did not want to pay for the extra retirement, and said that if employees wanted it, they would need to pay for it. It was agreed that the employees would get less than the CPI until they made up 10%. As it turned out, they forgave the last 2%, since the inflation rate fell almost to zero, and it would’ve meant an actual reduction in salaries. That 8% that was not given in COLA would’ve been added to employee salaries if they had not opted for the increased retirement. So employees gave up 8% to get the new benefit.

    Since the Crash, there have been no COLAs, and so employees have lost salary when adjusted for inflation. In addition, there have been unpaid furloughs, resulting in another 3-4% loss in take home pay.

    In terms of the City not paying their fair share – yes, it was at a time when returns were abnormally high, and the plan was Super-funded. But as we all know, the stock market and other investments do not climb like that forever, and the City should’ve continued to pay into the plan. The laws have been changed so that now they have to pay, regardless of the returns.

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  26. Larry Watkins says:

    Can someone explain why government employees need to have a pension that is not affordable, cannot be sustained and is way, way out of line with what private sector employees receive?

    The government long ago stopped caring about what the public taxpayers want. They only serve themselves and they are very greedy about it. And no, greed is not good.

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  27. MOCKINGBIRD says:

    How much is contributed by the government agency a employee works for and out of the employees paychecks is governed by the current contracts. Every paycheck for every government employee has deductions that go into their pension funds. If the government entity DID NOT PUT IN THEIR SHARE for whatever reason (the return was really great so why bother?) then they are liable. The contracts exist and have to be honored.

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  28. Reality Check says:

    LBR, well I didn’t live here when this transaction took place, so I’m conflicted by what you say and what I’m told took place.

    As I understand it, employees dropped a demand for a raise in exchange for deferred compensation, a hike in pensions. Since the city didn’t have the money for the raise, I’m not sure they actually gave up anything. The city did what politicians do best, keep an important voting block happy while deferring the costs to the next generation. Unfortunately, this set in stone the myth that employees paid their share of the pension increase.

    Also, in the years when the city didn’t contribute, weren’t those years in which portfolio returns made a contribution unnecessary? I not defending it, just trying to understand how negligent city officials were.

    Solution: How about the union making a full contribution by the city part of the contract? That would make it less likely politicians could play the promise-today, pay-manana game.

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  29. Lets be Reasonable says:

    @RC – The City’s not paying in is really most of the problem. When City Miscellaneous workers went to the better pension plan, the City made them give up 8% of their salary to do it, and up their (employee) contribution from 7 to 8%. Employees were are in effect paying 16% toward their retirement, while for a number of years the City paid ZERO. Even with the Crash, CalPERS has been averaging close to their 7.5% expected return over the last 20 years. If the City had paid their share, there would not be an underfunded issue now. Because they didn’t, they now need to pay more to make up the difference. Probably employees will be forced to pay a larger share as well, even though they’ve been paying their share all along.

    @Bear, County pay is now better than City pay. They had COLAs built in when the Crash hit, while the City employees had gone without COLAs for a number of years prior to pay for the increased retirement.

    @DDS – Those that invest well may come out ahead, but most individuals are not good investors. The push for 401ks are coming from the financial adviser industry. A better solution would be to have employees pay half the cost of any defined benefit retirement, so the risk is split.

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  30. Dan Drummond Sr says:

    I imagine some public workers or taxpayers getting bamboozled in the long run. But taxpayers shouldn’t need to cover the investment risks for government employees. Unions should be asking for 401k conversions, so as not to kill the goose that lays the golden eggs.

    Good news on 401ks from a study by the Employee Benefit Research Institute.

    http://www.marketwatch.com/story/which-is-better-401ks-or-pensions-2013-07-12

    Excerpts:
    “Workers with 401k’s in some cases are likelier to end up with more money at retirement than they would with a traditional private-sector pension plan. “
    “The report is based on data for more than 2 million plan participants, and accounts for the fact that not all people who have a 401k choose to save money in it.”
    “If the study focused only on those who save … 401k plans would always do much better, especially for low-income workers.”
    (Scenarios are based on historical rates of return.)

    I respect the state workers and I respect their unions, but we simply can’t afford to pay benefits and pensions that are out of line with economic reality. ~Andrew Cuomo

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  31. Reality Check says:

    LBR,

    I’m not sure I follow you on the budget, but it’s a small point. Larger, is relegating this problem to the city’s failure to pay into the system each and every year. That is certainly a contributing factor, but hardly the only one. Generous benefits and Alice-in-Wonderland projected returns made this day of reckoning a certainty.

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  32. bear says:

    To be really fair about this, you need to understand what goes to management vs. public safety vs. line employees.

    Hint: line employees are not the problem.

    Then you need to consider record levels of the DJ, NASDAQ, and ask why are we not getting off this hook? Corporations make billions, but it doesn’t filter down to pension plans?

    That’s either poor money management or fraud.

    These problems started in 2001. Everything approved by the elected officials who profit by what they enacted since then – at least in County government, is a part of the problem. which is very different from Santa Rosa government.

    Hint: the city has always had higher pay and benefits than the county.

    Hint: look at the pay and benefits of county supervisors.

    Please focus your anger.

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  33. Lets be Reasonable says:

    @RC – you could argue that CIP shouldn’t be included, but Transit and Utilities DO have employees that pay into CalPERS. So, take away CIP, and you are left with $290 million. This $12 million shortfall is the result of new accounting rules and assumptions that retirees will live longer and investment return will be lowered to 7.25%, AND the fact that the City did not pay into the fund much at all for a 4-5 year period, something that is no longer legal. This 12 million is still only a little over 4% of the $290 million, or about 0.7% increase per year. This will be easily absorbed as the economy picks up. Sure, it would be nice to spend that money elsewhere, but it comes about as a result of Council shortsightedness awhile back – something the unions objected to at the time…

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  34. GAJ says:

    Under funded primarily because of the huge pension increases granted in the early 2000′s when CalPers convinced everyone it would be cost neutral to go to 3% vesting with some employees being allowed to retire at 50.

    Obviously I don’t want to pass it all on to our kids but keep in mind future generations will not be getting the pork laden pensions of the baby boomers.

    The greediness of my generation at the highest levels of government and business is nauseating.

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  35. Reality Check says:

    Yep, but . . . that $340mm budget you cite is for “all funds.” Increased pension contributions will be paid from general fund revenue, about $120mm I believe.

    An extra $12mm yearly from whatever it is 6 years
    from how will require someone or something take a hit, taxpayers or some city service.

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  36. Lets be Reasonable says:

    Let’s put this into a bit of context. This is meant to make the pension a more pay-as-you-go proposition. Currently, the City is under funded, and if rates don’t go up, then we pass the costs on to our children. The City is under funded primarily because 10-15 years ago, the City was paying little or nothing into the pension account. They somehow thought the dot-com bubble would go on forever, which didn’t happen. So now the City will be forced to pay more to make up for before. 12 million is about 3.5% of the current budget of 340 million, or about 0.6% increase per year over the next 6 years.

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