Apr 24 2012

Stockton Leaders Cite Hidden Costs for Fiscal Woes

Knowing the Future Impact of Decisions is Key –

The article “How Stockton, California Went Broke in Plain Sight”  by Steven Malanga in the Wall Street Journal (WSJ 3/30/12) discusses some of the reasons why Stockton, California now faces bankruptcy.  City leaders explained they weren’t looking at future costs when making decisions.

“In last year’s budget, Stockton admitted that its biggest problem has been a lack of transparency resulting in a host of “hidden costs’ in labor agreements for ‘obligations that are often difficult for citizens to identify or understand.’ “ (WSJ 3/30/12)

In the article, Stockton city leaders pointed to specific issues that led to their financial crisis. How do Piedmont’s “hidden costs” compare?

Stockton:  Extras Amounting to 48% on Top of Base Pay:  “Now Stockton is stuck with interest costs on top of pension obligations that pile an additional 48% onto basic employee pay. Thus a public safety worker earning $70,000 annually costs the city another $33,000 in interest and pension-borrowing costs. . . . These benefits crowd out other services.”  (WSJ 3/30/12)

  • Piedmont’s total benefit and pension costs are 53% of Piedmont’s total compensation costs.  Over the past decade, they have increased from a 25-33% level.
  • Piedmont has no unfunded interest costs for debt.  An annual $500,000 in sewer debt service is specifically funded by $2 million in annual sewer parcel tax revenues.  The City Charter does not allow debt for a period greater than 12 months. (Section 4.13.)

Stockton: No Projections of Future Costs:  Stockton Mayor Ann Johnston, who voted for these expensive measures when she served on the city council, is quoted in the WSJ article,  “We [the city council] didn’t have projections into the future what the costs might be.”  Votes were unanimous, according to Stockton Record columnist Michael Fitzgerald.  Mr. Deis, the current city manager, is quoted as stating ‘Nobody gave thought to how it was eventually going to be paid for.'” (WSJ 3/30/12)

  • The costs of Piedmont’s most recent union contract were projected for the following year, not future years.  The projection did not include possible “additional pay” costs if workers obtained certification entitling them to a 5% increase.  Continued increases in benefit costs were not halted, as recommended by the 2011 MTRC.
  •  The recent contract did reduce all new employee pension benefits from 3% to 2% (times the highest year’s salary times number of years worked).  Savings, although not immediate, will occur if and when new employees are hired, as the annual required contribution toward their pension will be lower.
  • Piedmont recently created a Budget and Finance Committee to provide its City Council with 5 year budget projections and recommendations on the impact of expenditures over $250,000.

Stockton:  Additional Pay:  Various categories of “additional pay” in Stockton boosted employee salaries but, according to the WSJ,  “still make basic compensation packages appear reasonable to the outsider. A fire captain earning an annual base salary of $101,000, for example, can easily increase that by $35,000, thanks to additional pay for everything from automatic annual stipends for uniforms (regardless of need) to more schooling.”

  • Piedmont’s most recent contract with maintenance workers included 5% “additional pay” for pipe certification.  (See PCA article.)

Stockton:  Unfunded Medical Retiree Benefits:  “Perched precariously atop this mountain of obligations are retiree health benefits. Stockton officials awarded these to city employees in a series of votes in the 1990s but made no effort to fund them, intending simply to pay costs out of their budget as workers retired. As hundreds did just that over the years, the costs grew. Next year, the city’s fiscal documents project, retiree health costs will surpass those of the city’s regular work force.” (WSJ 3/30/12)

  • In 2010 Piedmont determined it had an unfunded liability of $16 million due to promised medical retiree benefits.  (The City had been reflecting this benefit obligation only as an expense each year.)
  • The City Council set up an “Other Post Employee Benefits” (OPEB) Trust to fund these benefits.  The City Manager and the Finance Director act as the Trustees.  The City has started making contributions to the fund of over $1 million per year to the OPEB trust.
  • The most recently negotiated union contract provides that maintenance employees will also contribute $100 per month to the fund.  The City anticipates additional employee contributions as other union contracts are negotiated in the future.  (See PCA article for details on funding.)

Stockton:  Paying the Worker’s Pension Contribution:  “. . . while the state [CalPERS] requires workers to contribute between 7% and 9% of their salary toward pensions, Stockton agreed in a series of agreements with various municipal unions going back to the 1990s to pay the worker portion of the contribution along with its 20% employer share.” (WSJ, 3/30/12) 

The percent paid for the employee is treated as “wages” when calculating California Public Employees’ Retirement System (CalPERS) pension benefits.  For example, if a city pays the 9% employee contribution, then CalPERS calculates the pension based on wages + 9%.  If employees make a pension contribution, but it is used “to pay the employers share” rather than the employee’s share (a technique now being utilized in Piedmont) the 9% is still added to wages by CalPERS. 

  • Piedmont is a CalPERS member and generally pays the pension contribution of its workers, as well as the employer contribution.
  • Some Piedmont union contracts provide that all or part of CalPERS contributions above a certain percentage (e.g. 38%) will be paid by the employee.  This can result in the last 1-2% (or more) of the contribution being paid by the employee.

Stockton,  prior to bankruptcy, is currently going through a mediation required by a new, union-backed State law.  These negotiations with employees and creditors may take months and are non-public except for the results.

To address its underfunding, CalPERS recently announced it will gradually increase required contributions over the next 2 years.  A gradual, rather than sharp, increase will occur due to “smoothing” which averages losses/gains over many years.  (The employer/employee pays in contributions and CalPERS pays out a lifetime pension, if the system is properly funded.)

CalPERS has recently taken the position that, once pension benefits have been agreed to by a CalPERS employer, they can not be renegotiated downwards, even through a bankruptcy proceeding.

As reported by the New York Times, CalPERS issued a warning to Vallejo that, even if the bankruptcy judge ruled otherwise based on federal bankruptcy law, CalPERS would appeal any reduction and make Vallejo pay its legal bill.  Robert V. Stout (Vallejo’s Finance Director at the time),  said “We interpreted that as, ‘If we try, they’ll fight us through the courts forever,’ ”, which Vallejo could not afford.  In response to the threat, Vallejo never missed a pension contribution to CalPERS throughout its three-year bankruptcy, even though every other part of its budget was cut, including public safety services. 

In addition to Stockton, Monrovia and Pomona could find themselves in trouble, according to an analyst who sees their low liquidity, excessive debt, and large pension liabilities as warning signs.

One Response to “Stockton Leaders Cite Hidden Costs for Fiscal Woes”

  1. Another terrific PCA investigative article, thank you! Stockton is going bankrupt at a 48% compensation package and Piedmont is 5% above that with no plan in place, no substantive discussion from Council to limit employee benefits and no voluntary reduction from staff in this regard. Reducing these compensation package costs was the primary recommendation of last year’s Municipal Tax Review Committee. Yet Council and Staff have only implemented the supply side of the financial equation, placing more tax measures on the ballot. The financial demand side has not been addressed by substantively reducing costs. This may explain why the City was asking for twice as much as even the suspect City numbers stated were needed in the recently failed Measure A sewer tax.

    City Hall will have to move quickly in making substantial changes or the Municipal Service Tax most likely planned for the November ballot will be in serious trouble. The overly generous compensation packages were implemented, and questionably so, during a short term window of financial optimism. As a long term model they can only spell financial disaster for Piedmont. My sense, shared by many others, is that Council and staff have still not gotten the message provided by Measure A’s dramatic failure.

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