Palo Alto's effort to curb the exploding costs of employee benefits will hit a milestone this week, when the City Council officially reduces pension benefits for newly hired police officers and mulls other, more dramatic reforms aimed at shrinking the city's liabilities.
The council is scheduled to launch on Monday night what promises to be a long and complex discussion on ways to reduce employee costs -- a discussion prompted by a July memo from Vice Mayor Greg Scharff and council members Pat Burt, Karen Holman and Greg Schmid. The four council members argued in the memo that with costs of employee benefits rising dramatically, the council needs to provide "policy direction" regarding future changes to benefits.
One reform that the city has already implemented is setting up a second pension tier for newly hired workers in each of its major labor unions. On Monday night, the council is scheduled to officially implement this reform for its largest police union, the Palo Alto Police Officers Association. At the same time, the city is negotiating a similar agreement with the small group of police managers.
Under the new agreement, newly hired officers will be subject to a pension formula of "3 percent at 55" -- that is, 3 percent of the highest salary for each year of service, after retirement at age 55. In another change, the "highest salary" will actually be an average of the three highest years rather than the single highest year. Current members of the police union will remain subject to the "3 percent at 50 formula."
Though the changes to the police agreement will have little immediate impact on the city's fiscal situation, they are expected to pay off big in the long run. According to a new report from the city's Human Resources Department, the city expects to save about $11,000 in fiscal year 2015. The savings are expected to rise to $120,000 in 2022.
The change comes at a time when state and city officials throughout California are looking for ways to bring down rapidly rising pension and health care costs. Pension reform has been a major component of Gov. Jerry Brown's legislative agenda, and he scored a major victory last month when the state Legislature approved reforms raising the retirement age for newly hired state workers and requiring more contributions by employees toward their pensions.
Palo Alto officials have been pursuing pension and health care reforms since 2008 and reached their first milestone in 2009, when they added a second pension tier to their agreement with the Service Employees International Union, Local 521, which represents more than half of the city's workforce. The city subsequently reached similar agreements with its non-unionized group of managers and professionals, its firefighters union and, most recently, its police union.
The city has also been trying to get employees to pay for a greater share of their medical expenses. While the city has traditionally picked up the entire tab, its new agreements require employees to pay up to 10 percent of the medical costs. The topic of cost-sharing between the city and its employees is expected to loom large in the council's discussion.
Other questions that the four council members had posed in the memo and that the council is expected to start tackling next week include: "Should the city move toward fixed health benefit contributions?"; "What retirement age would make for a proper transition to Medicare coverage for retiree health care?"; and "How can the city provide greater employee choice in health benefits?"
The council members argue in their memo that the rising costs of benefits has reduced the funds the city has available for services and infrastructure. The proportion of employee benefits to salaries has risen from 23 percent in 2002 to 54 percent in 2010 to 63 percent in 2012. Benefit costs are expected to exceed salaries by 2022, according to the city's Long Range Financial Forecast.
According to the Human Resources Department report, an employee with a $50,000 salary received benefits valued at about $11,500 in 2002. Today, those benefits are valued at $31,500.
The Human Resources Department recommends holding three public discussions on issues related to "innovations in employee pension, medical, compensation" and "other benefits related to employee engagement, recruitment and retention strategies." The report stresses that the city's efforts to reduce costs should be coupled with a push to retain its workforce despite the less-lucrative benefits. Over the last three years, the city has seen a huge spike in retirements from workers in response to the benefit reductions.
"In the end, we are concerned with not only managing costs but support for a high quality of life in Palo Alto through delivery of quality services," the report states.
Schmid, who proposed the memo, said during a discussion in July that the idea for the public conversation was prompted by the reforms Brown had been pursuing at the state level. Scharff said he was glad the city's consideration of future reforms for employee compensation will take place in a public forum rather than in closed sessions, as is typically the case.
"That's a rare opportunity to think of this from a more holistic approach of what we're doing as a city, what challenges we're facing in terms of long-term deficits (and) how we're going to retain services in the face of pension and medical-care costs that are increasing dramatically compared to the revenues we're getting," Scharff said at the July 2 meeting.
Related story:
Comments
another community
on Oct 12, 2012 at 8:28 am
on Oct 12, 2012 at 8:28 am
It would be nice if the City Council directed staff to show the benefit costs to the City for present and past City Council Members?
City Council members get the same exact medical and dental benefits that full time employee's do.
And does like Palo Alto really need a City Council of it's size? just more people collecting benefits. If the Council wants to honestly look at reducing benefit cost's I might suggest a look in the mirror.
Another Palo Alto neighborhood
on Oct 12, 2012 at 9:03 am
on Oct 12, 2012 at 9:03 am
"...the rising costs of benefits has reduced the funds the city has available for services and infrastructure. The proportion of employee benefits to salaries has risen from 23 percent in 2002 to 54 percent in 2010 to 63 percent in 2012. Benefit costs are expected to exceed salaries by 2022, according to the city's Long Range Financial Forecast...."
in crime growth Palo Alto, we start by cutting police costs?
Have the public meetings on this already taken place?
Barron Park
on Oct 12, 2012 at 9:06 am
on Oct 12, 2012 at 9:06 am
How about looking at the salaries of the city manager and all of his minions called "assistants" to the city manager. How about looking at his $2 million dollar house that he needed over a quarter of a million dollars of tax payer money to renovate. Don't see anyone else in the city getting these benefits. Or how about his monthly car allowance. I mean come on, the guy lives 10 blocks from his place of employment. How about buy the guy a bike instead!
#realreformsstartfromthetop
Another Palo Alto neighborhood
on Oct 12, 2012 at 9:34 am
on Oct 12, 2012 at 9:34 am
what are the different unions that the City has to hire from?
what percentage of jobs are not union?
Fairmeadow
on Oct 12, 2012 at 9:53 am
on Oct 12, 2012 at 9:53 am
This issue of pensions is going to be difficult for people to understand because every government agency has done a good job hiding the details of their pension obligations from the public for such a long time. Most government officials don’t have a clue as to what their individual agencies’ current/future obligations are, since they “outsourced” the management of their pensions to CalPERS/CalSTRS—making it “someone else’s problem”.
Pensions are effectively deferred income, a fact which has been masked by the claim that pensions are a “benefit”--which is both “earned” and guaranteed by contract. Moreover, Government agencies do not, for the most part, deal with employee costs in terms of “Lifetime Compensation”:
Lifetime-Compensation=Years-of-Service-Costs+Post-Retirement-Costs
The following paper tries to explain the issues:
Web Link
The reality of the current pension system is that government employees are likely to see pension payouts that amount up to twice what they made when they were working:
For instance—
Using a minimum COLA of only 2%, public safety retirees receive the following payouts:
Total Pension Payouts
Pension
$100K--10-Years: $1.1M | 20-Years: $2.5M | 30-Years: $4.1M
$150K--10-Years: $1.7M | 20-Years: $3.4M | 30-Years: $6.2M
$200K--10-Years: $2.2M | 20-Years: $5.0M | 30-Years: $8.3M
Palo Alto City employees who are not involved in public safety can retire at 30 years with 82% of their high-years salaries, whereas public safety employees retire at 90% of their exit salaries. In all cases, employees are not capped at 30 years, so those who work longer than thirty years can see their pension payouts start at more than 100% of their exit salaries. And then there is the issue of “Pension Spiking”—which has not seen much discussion here in Palo Alto, as opposed to other areas where Grand Juries have looked into these very expensive, dishonest, practices.
With about 500 employees (out of roughly 1100) FTEs on the Palo Alto payroll now making more than $100K, and public safety employees now pushing $200K—the taxpayers are increasingly on the hook for paying City retirees millions of dollars in pension payouts. The table above provides the basic information—showing that some of the highest paid employees will be seeing pension payouts upwards of $10M in the future.
With public sector salaries doubling every 15-20 years, we need to project our current City labor costs out at least forty years, and then review those expenditures against the pension obligations, to fully understand the impacts of this problem.
Many current pensioners fear that “pension reform” means that they will see small pensions. This is not the case. What is at issue here how much the taxpayers owe very highly-paid public sector employees, and future employees. There is no interest in reducing the size of pension payouts that are less than $35K a year.
So far, the City of Palo Alto has done very little to make these issues clear to the residents/businesses/taxpayers. It will be very interesting to see what the City does to try to clarify what it has obfuscated for so very long.
Midtown
on Oct 12, 2012 at 10:14 am
on Oct 12, 2012 at 10:14 am
Wayne: Thank you for explaining in simple terms what the real costs are.
This issue of public employee pensions sucking the tax paying public dry is something that will need to be addressed not just in Palo Alto but across the state. If it is not addressed at some point all that the public will be paying for will be salaries and pensions and not much by way of services that they receive in exchange. The path towards that future is already clear as San Jose has increasingly shown.
My personal expectations on this topic for a rational outcome are very low given the vested interests at play. Unionized public employees in cohorts with politicians effectively block any sort of reform at all levels. At the local level any call for reform is usually met with the usual sort of protests from some noisy but ill-informed members of public who are happy to say things like "who will come to save you when your house is burning or when you have a heart attack".
The only real solutions to this problem are the following:
1. Privatize most functions with a capped cost and competitive bidding. Given the current job environment there are plenty of highly qualified candidates capable of performing a very competent service for competitive costs
2. Cap salaries and costs as a fixed percent of the annual budget and learn to live within this budget.
Again I dont expect any of these to happen in my lifetime. But then a person is allowed to dream that rational behavior is possible!
Another Palo Alto neighborhood
on Oct 12, 2012 at 10:32 am
on Oct 12, 2012 at 10:32 am
What is the incentive?
There is no incentive for the City of Palo Alto or elected officials to do anything.
Fairmeadow
on Oct 12, 2012 at 10:37 am
on Oct 12, 2012 at 10:37 am
Putting lipstick on the pig.
Barron Park
on Oct 12, 2012 at 12:02 pm
on Oct 12, 2012 at 12:02 pm
Public empoyees should pay at least 25% of working and retirement medical costs, and this should apply to ALL empoyees, not just new workers. Like the privatae sector, public employees with 30 years work credit should retire at a minimum age of 60 with 25-40% of their highest average 3 years salary (no overtime inclueded). As it stands now, the pension costs are destroying the city budgets and no real effort has been made to reduce them. The average Palo Alto employee makes 125,000$/year so the future pensions will bankrupt the city if nothing meaningful is done. Has the city looked into contracting the work out to private companies? One place to start.
Midtown
on Oct 12, 2012 at 12:26 pm
on Oct 12, 2012 at 12:26 pm
Wait until the CalPers financial requirements fully kick in. CalPers is way below the returns that they have predicted. Participant cities are required to make up the difference.
Another Palo Alto neighborhood
on Oct 12, 2012 at 2:32 pm
on Oct 12, 2012 at 2:32 pm
Why does the City continue building, and growing the city?
If City Services costs are prohibitive, the bleeding needs to be stopped somewhere.
at least until these costs are under control.
one more question. WHy is the article titled
Palo Alto PLOWS ahead with more pension reforms when the savings mentioned include "the city expects to save about $11,000 in fiscal year 2015"
10,000 savings by 2015? IS that plowing?
Barron Park
on Oct 12, 2012 at 4:20 pm
on Oct 12, 2012 at 4:20 pm
Wayne, your posting is outstanding. People need to be educated on how to understand the magnitude of the fiscal predicament we are in. Please consider writing an op-ed in the PA Weekly on this.
To see how confused people are, consider the writer of the article, as "public question" pointed out:
Palo Alto is "plowing ahead" with pension reform in reaction to "exploding costs". Instead of capping pension payouts, and reducing the 3% times years-of-service pension to something a lot less, our intrepid city council is going to take an action with new police that will reduce the pension cost by $11,000 in 2015. Hello? $11,000 is the *monthly* pension that a single 30 year retiree with a maximum salary of $125,000/year will receive for the rest of his life!
Let's at least understand the orders of magnitude here (these numbers are not exact, but should be within a factor of 2):
$11,000 -- savings per year in 2015
$10,000,000 -- annual deferred maintenance due to structural budget deficit
$100,000,000 -- Palo Alto yearly cost for salaries
$70,000,000 -- Estimated deferred yearly cost for pensions
$2,000,000,000 -- Unfunded liability we already have for the current retirees and the 1100 current employees in the 2.7% and 3% pension plans, plus their medical.
Yes, $11,000 is about 0.1% of the annual shortfall and about 0.01% of the annual cost it is supposedly trying to reduce. They're proposing to trim about 1/10,000 of the deferred annual liability. Write it as 0.0001. Think of it as 6 inches compared to a mile.
Ventura
on Oct 12, 2012 at 9:49 pm
on Oct 12, 2012 at 9:49 pm
I'm convinced Palo Alto will require a citizen's initiative such as the ones just passed (by a 2:1 margin) in San Jose and San Diego. If left to our representatives to handle the problem, they will just kick the can down the road with absurdly superficial "reforms" such as the ones our current council is proposing.
A San Diego style citizens initiative: 5 year city pay freeze and all new workers on 401k retirement plans, period, coupled with outsourcing the current overpaid bureaucratic functions to stop the bleeding from the current mess (does the city need to pay over 100K per year + pension backstopping for blue collar maintenance work, for example)is going to be the only way Palo Altans can save itself (or more likely our children) from today's spineless leadership.
Another Palo Alto neighborhood
on Oct 13, 2012 at 8:09 am
on Oct 13, 2012 at 8:09 am
What a joke! This looks like a scheme being promoted by the unions to give the appearance of real reform when in fact this nonsense being promoted is lipstick on the pig. The costs will still be rising 5 times faster than the pennies this worthless plan saves.
Either do it right or don't do it all.
another community
on Oct 13, 2012 at 1:26 pm
on Oct 13, 2012 at 1:26 pm
"Wayne Martin"
You wrote that employees are not capped at 30 years, and can have their pension pay be higher than their salary. It is my understanding that CALPERS pensions have a cap, period. Be it 50%, 75%, 80%, 90%. No matter if they work past 30 years the percentage cap can not increase no matter if they work 45 years for example.
If you have information or a link that shows how working past 30 years can enable retiree to get more than the CALPERS percentage limit I would really like to see that information.
As far as I know there is no CALPERS pension above 90%, period.
Midtown
on Oct 13, 2012 at 2:10 pm
on Oct 13, 2012 at 2:10 pm
The CalPers issues are fundamental, and much more serious than caps. CalPers is way below its published returns. Palo Alto, and many other cities will need to make up the difference.
Palo Alto staff and politicians are refusing to address this issue, even though it is the elephant in the room.
another community
on Oct 13, 2012 at 5:56 pm
on Oct 13, 2012 at 5:56 pm
From my understanding ( I have a relative in Capers), after you retire and start using your retirement, Capers uses first, the money that the employee had put in the system. This is use up in just under 10 years. The rest of the money ( for as long as the employee is alive or their spouse is cover by the city. So if a employee retires at age 55, the money he put in the retirment system is exhausted when he/she is around 65. The city is on hook for the rest of his retirment. This is why many cities are trying to change the current system. It will bankrupt most if not all.
Another Palo Alto neighborhood
on Oct 13, 2012 at 10:51 pm
on Oct 13, 2012 at 10:51 pm
Thanks Wayne for an enlightening post.
The City Council, mayor and (to some extent) the citizens have ducked this issue too long. Elected officials could not have gotten away with it if we were informed and heavily involved.
I think the city needs to:
a) Outsource much of its current work -- since it doesn't know how to get it done at a reasonable total cost
b) Eliminate defined benefit plans in favor of defined contribution plans
There is another scandal brewing with Utilities, which has turned into an indirect tax agency, doing an end-run on Prop. 13 via inflated water and sewer rates.]
Midtown
on Oct 14, 2012 at 9:49 am
on Oct 14, 2012 at 9:49 am
I dont know how to start a citizen initiative that would at a minimum educate all members of the public like Wayne has done. Too many people in Palo Alto are either in denial or are are so wealthy that they could not care. At least those of us who are not in denial or are not super wealthy need to do something to prevent the city management and its employees from bankrupting our city - something that they are definitely on a path to do. Of course the easier path then is to simply cry wolf and ask for more money. At some point those of us in the middle class can no longer afford to pay.
Ernesto and David: Do we think that there are sufficient people who care or is the middle class in Palo Alto that is afraid of higher taxes a small minority that is unlikely to be heard?!
Another Palo Alto neighborhood
on Oct 14, 2012 at 10:16 am
on Oct 14, 2012 at 10:16 am
Gouged,
"a citizen initiative that would at a minimum educate all members of the public"
YES!
I'm not sure I understand your concern about the middle class in Palo Alto being afraid of higher taxes, and therefore also afraid of being informed? And keep in mind that unfortunately, many activists are also heavy Koolaid drinkers, so their message gets lost behind their extremism at times.
If someone could be informative, without opinions, the facts would be of interest to everyone.
Maybe there is a volunteer out there trying to do public good.
Another Palo Alto neighborhood
on Oct 14, 2012 at 10:19 am
on Oct 14, 2012 at 10:19 am
Gouged,
Actually it's the City's JOB to do this.
In their black, still pathetic website, they could do a 1 page summary. Instead of those glossy pictures of the managers and his assistants,
Ventura
on Oct 14, 2012 at 11:06 pm
on Oct 14, 2012 at 11:06 pm
Gouged,
I think there would be ample support for a citizens proposition, given that the voting public here has shown a high degree of willingness to crack down on government waste when given the chance (the 3-1 defeats of the fire union's featherbedding measure, as well as the repeal of the oft-abused binding arbitration provision by a similar margin).
I don't know the signature requirements for a citizen's initiative, but it is in the city charter -- I think Michael, Taxpayer, or one of the other posters here researched it once and it was only a few thousand signatures, which I'd be happy to help gather. One key issue is to have a lawyer help write it because the unions always try to use the courts to overturn the voters (see San Diego and San Jose).
Menlo Park recently passed a similar initiative, led by Roy Thiele-Sardiña. I bet he'd be willing to help with the playbook.
Another Palo Alto neighborhood
on Oct 15, 2012 at 12:45 pm
on Oct 15, 2012 at 12:45 pm
Gouged, and Ernesto
Why would these 2 initiatives not work in Palo Alto?
1) Approved Menlo Park Pension Reform Initiative, Measure L (November 2010)
Pension Reform Initiative was on the November 2, 2010 ballot for voters in the City of Menlo Park in San Mateo County.
Measure L sets the retirement age for city employees at age 60. The current retirement age is 55. The change in retirement age does not apply to current city employees but only to those who are hired after Measure L takes effect.
Measure L does not apply to the city's police officers, who will continue to be treated under the old rules.
Under the rules in Menlo Park prior to the adoption of Measure L, an employee could receive 2.7% of his or her salary for each year of service up to 30 at age 55 with a cap of 81%. Measure L, instead, allows a city employee to earn up to 60% percent of an employee’s salary at age 60 or 2% at 60 for 30 years of service. This is known as the "2%@60" retirement formula.
The Menlo Park Pension Reform Initiative was one of SEVERALpension-reform ballot measures appearing on the November 2, 2010 ballot in communities around the state.
or
2) as Ernesto pointed out
"A San Diego style citizens initiative: 5 year city pay freeze and all new workers on 401k retirement plans, period, coupled with outsourcing the current overpaid bureaucratic functions to stop the bleeding from the current mess (does the city need to pay over 100K per year + pension backstopping for blue collar maintenance work, for example)..."
Midtown
on Oct 15, 2012 at 1:18 pm
on Oct 15, 2012 at 1:18 pm
CalPers is going broke. This is just the tip of the iceberg:
Web Link
Palo Alto will need to pony up, big time.
St. Claire Gardens
on Oct 15, 2012 at 10:11 pm
on Oct 15, 2012 at 10:11 pm
Thanks Weekly staff for your unbiased reporting on this subject with headline catch words and phrases such as "exploding","skyrocketing", "unsustainable","ticking time bomb", "ballooning", and many more. How about just writing the story offering valid information and leave your editorial remarks to the editorial page. It would be more interesting to read the news release with factual information and without your staff's editorial remarks.
To Wayne: Did you know that less than 1% of city staff work 30 years making your cost analysis arguments invalid?
Another Palo Alto neighborhood
on Oct 15, 2012 at 10:35 pm
on Oct 15, 2012 at 10:35 pm
Paco,
Where would the facts be available?
Midtown
on Oct 16, 2012 at 1:28 pm
on Oct 16, 2012 at 1:28 pm
To see how bad the CalPers pension situation is, see:
Web Link
This explains how participating city budgets (like Palo Alto) are facing a catastophe. All the quibbling about other issues, if the CalPers situation is also considered, pale in comparison.
California cities, including Palo Palo, have not explained how they will face this issue.