Despite growing employee salaries, rising pension costs and general uncertainty over the broader economy, Palo Alto leaders are feeling increasingly chipper when it comes to the city's financial health, thanks in part to a new forecast that shows strong growth in taxes.
Even with expenses expected to swell by $19.2 million in the next year and the city's infrastructure costs spiraling out of control, the city's budget team is predicting years of steady and comfortable growth, with small budget gaps in the next few years gradually giving way to healthy revenue surpluses thereafter.
That, at least, is the projection in the city's Long-Range Financial Forecast, a document that aims to achieve an admittedly impossible goal: predicting the city's budget picture for the next decade. And if the document is to be believed, the picture is mostly rosy, thanks in large part to healthy gains in property- and sales-tax revenues.
In approving the document by a 6-0 vote on Monday night, with Councilman Greg Tanaka absent, the City Council cautiously endorsed the report's conclusions even as it questioned some of its assumptions. The council will revisit some of these assumptions in the coming months, as it begins to put together the budget for fiscal year 2020, which begins on July 1.
The new forecast is intended to be the first step in the budget-setting process, Interim Chief Financial Officer Kiely Nose told the council during the Monday discussion. The document, she told the council, provides the city "with a very high-level overview of where we're at and where we're going" to help inform the council's future policy decisions.
Yet the document also reflects the decisions that the council has already made. For the first time, the forecast assumes a lower rate of return (or "discount rate") for pension investments than the rate used by CalPERS, the giant statewide fund that administers Palo Alto's pensions. The forecast assumes a 6.2 percent discount rate for CalPERS, a rate that was recommended by a CalPERS consultant in 2016 but that is lower than the 7 percent used by CalPERS.
The lower discount rate in the forecast is part of a broader effort by the council to brace for growing pension obligations. The council has also been contributing money to an irrevocable pension trust and directing staff to cut $4 million from the budget, changes that will likely spark difficult decisions before the council's budget adoption in June.
Mayor Eric Filseth, who has long championed the more conservative assumptions on pensions, argued on Monday that while the council's new position creates some tricky short-term budget challenges, it is necessary to ensure long-term stability for employees.
"People shouldn't lose sight of the fact of what we're buying by doing this," Filseth said. "What this means is that going forward, our future employee pensions in the city will be fully funded. ... If you're not at 6.2 percent, you're not fully funding future pensions and you're still piling on big debt. But our pensions will be fully funded, and that's why we're doing this."
The council's task of budgeting for a smaller discount rate is made somewhat easier by strong revenue figures. The new forecast shows property taxes rising every year between now and 2029, generally by 5 to 6 percent. This revenue source has nearly doubled in the past decade, increasing from $18.7 million in 2010 to a projected $36.1 million in 2019.
Sales-tax revenues are also coming in at levels greater than anticipated. Staff from the Administrative Services Department projects that sales-tax revenues will reach $32.4 million this year, about $1.2 million more than the city had budgeted, and that they will grow to $34.3 million in fiscal year 2020.
Thanks in large part to these factors, staff is projecting tax growth of 7.2 percent in 2020, $9.1 million above the current year. City officials are also buoyed by the fact that Bay Area unemployment remains low (2.5 percent) and its job growth remains high (2.1 percent in the last quarter).
And even though the city's expenditures are expected to increase by about 9.1 percent, from $210.7 million in the current fiscal year to $229.9 million in fiscal year 2020, some of this increase is attributable as much to the council's conservative assumptions as to the city's economy or the council's spending priorities. Several council members noted that the budget picture is somewhat counter-intuitive: By trying to be more responsible and realistic in its pension assumptions, the council is creating a budget gap that is making the city's financial picture look worse than it is.
"We are taking on some new assumptions, which in a funny way increase costs going forward," Vice Mayor Adrian Fine said. "That's because we're being more realistic about it."
For Councilman Tom DuBois, the new document in some ways isn't realistic enough, particularly when it comes to labor costs. He pointed to the forecast's assumption that the city's expenditures will go up only slightly (between 1 percent and 2.5 percent) every year between 2022 and 2029. That, he noted, clashes with the city's recent history and near future, which is based on recently adopted employee contracts (the projected 9.1 percent growth in expenses in 2020 is largely thanks to growing labor costs).
DuBois recommended basing growth in the future years on recent trends (which show significant increases to employee compensations), rather than an expectation of slow and steady growth. Others, however, argued that the forecast is inherently imprecise, particularly when it comes to the distant years, and that its predictions don't need to be as specific as DuBois had hoped they would be.
Councilwoman Liz Kniss recalled the global recession that began in September 2008 and that surprised just about every elected leader (she was a Santa Clara County supervisor at the time). An event like that, she said, can quickly upend all city, county and state assumptions about the economy.
"It's really hard to predict," Kniss said. "We've been in a very long bull market and one has to wonder how long will this go on and have we become sort of comfortable with what we're currently dealing with? Are we going to be ready when something hits?"
Comments
Palo Alto High School
on Mar 5, 2019 at 6:47 am
on Mar 5, 2019 at 6:47 am
Because times are good, we need to fully fund the pensions and save for a rainy day. No (very little) additional spending until that is done. And please do not increase staff (and pension liability).
Old Palo Alto
on Mar 5, 2019 at 8:53 am
on Mar 5, 2019 at 8:53 am
Pensions are the biggest cost for any city. Pensions will bankrupt most cities because employees are living longer and paying 90 percent of employees salary after retirement. Palo Alto needs to start looking at an alternative employee retirement fund.
Registered user
Gunn High School
on Mar 5, 2019 at 10:53 am
Registered user
on Mar 5, 2019 at 10:53 am
Outsource, outsource, outsource everything that is practicable.
That way we run much more efficiently via competition.
And we don't incur generous, open-ended pension liabilities.
Registered user
College Terrace
on Mar 5, 2019 at 11:02 am
Registered user
on Mar 5, 2019 at 11:02 am
If you were not at last night's meeting or did not watch it, I suggest watching the video. Our mayor made some remarkable comments about Palo Alto's pension liability. In short he informed the gathered that PA pensions will be fully funded, are safe, and that job seekers should, therefore, choose Palo Alto over other cities. Alrighty!
Professorville
on Mar 5, 2019 at 11:22 am
on Mar 5, 2019 at 11:22 am
> Pensions are the biggest cost for any city.
Actually, salaries are a city's largest cost.
Even though the City is the employer of record and is ultimately responsible for a retiree's pension--CalPERS will likely provide the bulk of that pension.
Midtown
on Mar 5, 2019 at 1:30 pm
on Mar 5, 2019 at 1:30 pm
I don't understand from reading the article how pensions are to be fully funded. Will someone explain?
Professorville
on Mar 5, 2019 at 2:29 pm
on Mar 5, 2019 at 2:29 pm
> I don't understand from reading the article how pensions are to be fully funded.
Let me try.
Every year CalPERS requires that the City "contribute" a percentage of the payroll for the SAFETY employees and the MISC(Miscellaneous) employees. This percentage varies from year to year--generally going up yearly. Additionally, CalPERS provides the City with a fixed dollar amount to pay down its Unfunded Liability (often referred to as the UAL). As I understand it, the City may choose to underfund these CalPERS "charges", which will result in higher contributions in the future.
The UAL is currently somewhere around $400M--so unless the City find a sugar daddy to pay off the UAL, or pass a parcel tax to pay for employee retirements--it can't "fully fund" its pension obligations. It can pay CalPERS' charges fully for the year, but this will not change the long-term pension obligation of the City very much.
another community
on Mar 5, 2019 at 7:45 pm
on Mar 5, 2019 at 7:45 pm
A simple explanation of pensions. Both the city and employee contribute to the employee’s pension. The employee’s contribution is used first after the employee retires. All of the employee’s contribution is used up in roughly 10 years. After that, the city must pay the full pension until the employee dies. With employees now living longer, you can see why pensions are never fulling funded. Also, after the employee dies, his or hers spouse still gets the full pension until they die.
Many of my co-workers that retired from PA are living well into their 80’s after retirement in their 50’s.
Mayfield
on Mar 5, 2019 at 9:35 pm
on Mar 5, 2019 at 9:35 pm
so the cost is about $3400 a yer per resident (include kids and adults).
Not to bad. The problem is the expected growth rate, at 6% a year, unless
property tax growth continue, this is not going to happen.
Also, note that the infrastructure needs attention. Time to reduce payroll and
renegotiate those pensions.
University South
on Mar 5, 2019 at 9:51 pm
on Mar 5, 2019 at 9:51 pm
The point is that the city is increasing its contributions to the pension fund over time to reduce the unfunded liability, rather than allow to stabilize or increase.
The pension will not be fully funded for some time.
Professorville
on Mar 6, 2019 at 11:13 am
on Mar 6, 2019 at 11:13 am
> After that, the city must pay the full pension until the employee dies.
> With employees now living longer, you can see why pensions are never fulling
> funded. Also, after the employee dies, his or hers spouse still gets the full
> pension until they die.
This is not factually correct.
Unless CalPERS were to cease to exist, the City never pays the full pension of a former employee, now retired. CalPERS has that responsibility with the City being the backstop in the case of CalPERS failures.
As to benefits for surviving spouses--there are too many options available to CalPERS members regarding survivor benefits to discuss here. The link below outlines those options:
Web Link
Professorville
on Mar 6, 2019 at 11:16 am
on Mar 6, 2019 at 11:16 am
> The point is that the city is increasing its contributions to the
> pension fund over time to reduce the unfunded liability, rather
> than allow to stabilize or increase.
Sadly, we don't know that this year's attempts to pay a little more into "pensions" will continue into the future. In the past, the City (City management and Council) have shown little interest in the pensions issue. The last Council election cycle saw virtually no discussion about the financials of the City. It's hard to believe that very many of those on the Council today could provide a coherent discussion of the pension obligations of the City.
Professorville
on Mar 6, 2019 at 11:52 am
on Mar 6, 2019 at 11:52 am
> In short he informed the gathered that PA pensions will be fully
> funded, are safe
Kind of hard to understand why anyone would rationally make such statements. Palo Alto's pensions are the responsibility of CalPERS, although the City is the employer of last resort. CalPERS, while under considerable scrutiny because of past management practices, has never been accused of being on a path to insolvency. Questions about future management and its belief that it can continue to manage its vast pool of assets with a return of 7.5% a year have been asked recently, and will necessarily be asked in the future. There have been a large number of articles in the media nationally about pensions are "unsustainable", but never "unsafe". A recent CA Supreme Court decision suggests that Cities can reduce some secondary pension benefits, but the core question as to whether Cities to reduce pension benefits after the fact has not been taken up by the High Court. The US Constitution suggests that contracts are inviolate and pensions have been considered as contracts by all lower courts. Hence, all pensions are "safe"--regardless of what the PA Mayor has to say about it.
The problem that Palo Alto, and all cities across the country are seeing is that with pensions linked to salaries--as the salaries of government employees now exceed those in the private sector, the member agencies' contributions to these pension funds has grown from 2-3% of the annual agency budget to upwards of 30% in some cases. These increased "contributions" are squeezing out other services that municipal (and agency) budgets have been funding (like road repairs).
Some agencies have chosen to issue "pension bonds" which shift the cost of the pensions from the Cities directly to the property tax payers--but not all residents equally.(Santa Clara County issued such bonds in the past). Unfortunately, the interest for the bonds increases the real cost of pensions on the people who ultimately have to pay them--an increase that never seems to be accounted for when trying to understand the cost of pensions. A couple years ago, Palo Alto decided not to issue pension bonds, thankfully.
Suggesting that Palo Alto's pensions are "fully funded" may be true this year (maybe?), but what proof does this Mayor have that CalPERS obligations will be fully funded in perpetuity? Unless the Charter is amended to force the Council to do the right thing where pension obligations are concerned--then a future Council can easily continue to underfund its obligations in order to spend general fund money on other things.
Suggesting that Palo Alto pensions were "safe" suggests that there might have been suggestions that Palo Alto pensions were "unsafe". No such suggestions have ever been made in any public venue. Anyone making such suggestions clearly doesn't have much of a grip on reality. CalPERS current market value of its assets is over $350B (subject to the vagaries of the markets where these assets are allocated).
Given the comments about pensions in this thread, it's conceivable that there are those in the community who have never taken the time to understand the complexities of the pension system. Very few working for the City have that knowledge. Former Councils certainly did not.
The last comment about "pick Palo Alto" seems to provide a clue as to why this selected Mayor might have said these things about Palo Alto's pensions. Recent articles in local media have pointed out that Palo Alto has a somewhat higher than "normal" vacancy rate in its SEIU employees. No doubt trying to pander to the SEIU, this Mayor has decided to promote Palo Alto as a "safe employer" for employee benefits, which now are in the range of 60% of salary.
It's a shame that no matter whom we elect, these folks quickly walk away from the voters and simply become protectors of "the status quo".
Mountain View
on Mar 6, 2019 at 6:23 pm
on Mar 6, 2019 at 6:23 pm
To Wayne Martin,
According to CalPERS most retirees, over 95% chose option 2 or 2w which states that if a retired employee dies, their spouse will receive the full yearly pension until they die. I chose this option for that reason. You received alitlle less per month, but the pension will be there for your spouse or significant other.
Old Palo Alto
on Mar 12, 2019 at 8:13 pm
on Mar 12, 2019 at 8:13 pm
You know where you can save even more money get rid of that building official George Hoyt this guy came from 4 leaf as a contractor and what company has the largest contract with the city of Palo Alto 4 LEAF of course. Has anyone looked into the number of people who are from 4 leaf ? Inspectors, plan checkers front counter staff in the development center of they are the only company working in the development center who has oversight of this why don’t the city outsource his job he’s making 200 k plus per year.