Council’s Opportunity to Address Unfunded $40 million liability –

A Member of the Piedmont 2011 Municipal Tax Review Committee submits a letter responding to “Piedmontage” in the May 30, 2012 edition of the Piedmont Post:

Contrary to the misleading view expressed in the “Piedmontage” editorial, vital City services need not be reduced as there are sufficient opportunities to reduce cost in a reasonable, fair and orderly fashion particularly in the cost of employee fringe benefits (primarily health benefits for current and retired employees and contributions to employee retirement plans). 

The reports from two City Council appointed committees, the 2011 Municipal Tax Review Committee (MTRC) and the Budget Advisory and Financial Planning Committee (BAFPC) with reports dated August 1, 2011 and June 4, 2012, respectively, have been consistent in stating that the fringe benefit issue is the first and primary issue that must be addressed by the City Council.  City employees are diligent in fulfilling their responsibilities and provide excellent service. However, the MTRC and BAFPC concluded that the City’s pay and benefit structure is unsustainable.

For background, from fiscal year 2003–04 to 2011–12 fringe benefit costs have increased by 10% per annum. In 2003–04, the fringe benefit rate (fringe benefits divided by salaries) was 33% and will be an estimated 53% in 2011–12. A ratio of 30-35% is common in private and non-profit organizations. The increase in fringe benefit costs was accelerated in 2004 and 2008 as a result of City Council decisions to sweeten retirement benefits for City employees in the state’s CALPERS retirement system in a perceived need to attract qualified personnel. Further, these enhanced retirement benefits accrued retroactively to existing employees as well as to new employees. In essence, a solution with detrimental, long term consequences was implemented to address a short term problem. Market conditions have changed and it is timely to revisit these decisions.

If the 33% ratio had been maintained, the City would now be paying about $1.9 million less for fringe benefits versus the $1.6 million proceeds from the parcel tax. One might conclude that the parcel tax is in place to fund above-market, ever-increasing fringe benefits.

The BAFPC, after analyzing actuarial reports, concluded that the City has unfunded liabilities relating to pension plans and retirement health benefits of almost $40 million. Further, this is most likely understated; this estimate assumes CALPERS earns 7.50% per annum on its pool of investments in perpetuity while the actual return from 2000 to 2010 was 2.56% per annum.

Clearly, the City’s cost exposure must be reduced. There are several means to accomplish this, including but not limited to: (1) Negotiate to increase employee contributions for fringe benefits to reflect current market conditions; (2) implement staffing and organizational changes that would maintain service levels at a reduced cost; (3) make the recently negotiated lesser pension benefits for new employees retroactive to existing employees as was done in 2004 and 2008; and/or (4) move away from a defined benefit practice in favor of a defined contribution pay practice.

Assuming the City Council will ask voters to approve, in the 2012 November election, a continuation of the annual $1.6 million municipal services parcel tax for four fiscal years commencing in July 2013, the taxpayers of Piedmont are deserving of some answers and a comprehensive plan. The City Council has the opportunity and a fiduciary obligation to effect change. Recently negotiated employee contracts expire at the end of 2012. New contracts will take effect in January 2013. How does the City Council plan on addressing the issue of an unsustainable pay and benefit structure?

Respectfully submitted,
Eric Lindquist,  Piedmont Resident and
Member, 2011 Municipal Tax Review Committee

The opinions expressed are those of the author and not necessarily those of the Piedmont Civic Association.

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