Mr. Kennedy Goes to Council

Every time City Treasurer Kevin Kennedy makes his annual appearance before City Council to discuss the City’s financial condition, one can’t help but think of “Mr. Smith Goes to Washington.”  Senator Jefferson Smith spends hours trying to get the legislators to face the truth about the Willett Crick dam, but they ignore or belittle him and take their cue instead from the grandiloquent Senator Joseph Paine, who insists everything is just fine, thank you.

Finally, just before he collapses, Smith looks heavenward – or at least up toward the gallery – and gasps, “Someday, somebody will listen to me.”

Unlike Senator Smith, Treasurer Kennedy has yet to faint on the chambers floor.  But maybe the time to listen to him has finally arrived.

As chairman of the Fiscal Sustainability Committee, Kennedy began a crusade in 2009 to educate the public about the time bomb buried in the City’s financial statements – unfunded liabilities for employee retirement benefits and deferred maintenance – and to get Council to take action to defuse it.  In his role as Treasurer and as a member of the Pension and OPEB Task Force, he’s been at it ever since.

To summarize – and elaborate upon – this year’s Kennedy report on employee retirement benefits (we’ll leave deferred maintenance for another day):

Pensions. The terms of pensions for public employees are negotiated between the City and the unions, and, not surprisingly, Alameda has agreed to provide almost all of the “optional benefits” available under state law for public safety employees.  CalPERS administers the pension plans, and each year the City and the employees contribute a percentage of wages to a fund managed by CalPERS.  State law sets the employee contribution rate; CalPERS determines the employer contribution rate.

As Kennedy pointed out, the City’s required employer contribution rate has been rising and will continue to climb even more dramatically in the future.  Kennedy displayed a chart showing that Alameda’s employer contribution rate for safety pensions had gone from 20% of payroll in FY 2002-3 to 39% in FY 2015-16:

Pension contribution slide

He then cited an updated chart that looked into the future and projected a 54% employer contribution rate for public safety pensions by FY 2019-20:

Page 41 from 2013-05-28 PPT presentation re contribution rate

We’re talking about real money here.  The employer contribution rate is applied against the total payroll to determine the amount of the contribution.  Last year, the City paid $13.45 million to CalPERS for safety and miscellaneous employee pensions. (This represents 19.86% of total general fund revenues of $67.73 million).  If the projections in City staff’s charts are right (and assuming a static payroll and no further changes by CalPERS), this amount will jump to $19.18 million – $12.58 million for safety employees and $6.6 million for miscellaneous employees – by FY 2019-20.

And that isn’t all.  For years the amounts contributed by employers and employees, together with returns on the investments made by CalPERS, have not built up a bag of money big enough to cover the total future liability for providing pensions.  The result is a so-called “unfunded liability,” consisting of the difference between the total future liability and the estimated value of the fund’s assets.

As Kennedy has frequently pointed out, Alameda’s unfunded liability for pensions has been growing, and it now exceeds $100 million.  The latest actuarial report from CalPERS pegged the numbers, as of June 30, 2011, at $80.99 million for the safety plans and $25.5 million for the miscellaneous plan.  To borrow a phrase from the real estate world, these are the amounts by which Alameda is “under water” on its pension plans.

OPEB.  In addition to pensions, the City provides health benefits for retired public employees.  (These benefits go by the acronym, “OPEB”). The extent of the benefits is negotiated between the City and the public employee unions, and, again, Alameda public safety employees fare quite well.  For example, under the current MOU, the City pays the Kaiser or Blue Shield health and dental premiums for a retired firefighter and his or her spouse for life for firefighters hired before June 7, 2011.  Firefighters hired after that date get lifetime premiums paid only for themselves.

The City provides retiree health benefits on a “pay-as-you-go” basis – i.e., it pays the premiums due in the current year; it sets aside nothing to cover future premiums.  Under this approach, the City’s annual payments go up as health insurance gets more expensive.  It will – and they have.  According to a pre-Obamacare report prepared by Bartel Associates, the amount paid by the City for retiree health benefits – which doesn’t cover their entire actuarial cost – will jump from $2.498 million in FY 2011-12 to $5.009 million in FY 2020-21:

Estimated No Pre-Funding Illustration

The result of setting aside nothing to cover future premiums is to create another “unfunded liability.”  But, unlike pensions, OPEB is totally unfunded: there are no assets whatsoever put away to pay future premiums.  At Tuesday’s meeting, Kennedy presented a chart showing that as of January 1, 2011 this accrued liability for future retiree health benefits was $86 million:

OPEB existing unfunded liabilities slide

An updated estimate as of January 1, 2013 is due soon.  Expect the number to beat the $100 million mark.  Indeed, according to the Pension and OPEB Task Force, the accrued OPEB liability will hit $150 million in the next 15 years:

OPEB future unfunded liability slideTo date, the campaign waged by Kennedy and others to get the City to rein in employee retirement benefit costs has not met with a warm reception at City Hall.  The FSC report presented in 2009 was allowed to languish on the shelf.  When Kennedy appeared before Council in March 2011 to warn of the dire consequences of continued inaction, Mayor Gilmore responded with a rare op-ed piece excoriating him as being irresponsible for “crying fire in a theatre.”  (Irony presumably unintended).

This year, the newly designated apologist for the administration, assistant city manager Liz Warmerdam, sought to preempt anticipated challenges to the proposed budget.  She did a full Ginsburg by submitting an op-ed piece to all of the papers and blogs – or almost all of them; for some reason, she missed the Merry-Go-Round – disparaging the “regular naysayers” who fail to join the chorus of hallelujahs for staff’s achievements.  (Who writes these pieces anyway – Karl Rove?  Demonizing the critic in an effort to deflect the criticism is becoming a favorite technique of the current administration).

The political establishment has matched its words with actions. Barely a month after the Pension and OPEB Task Force presented its report, Council voted to approve four-year contracts with the public safety unions that, by increasing wages, added $1.45 million over four years to the City’s required employer contribution to CalPERS.  The City did negotiate concessions that lightened its load, although not by anywhere near as much as state law allowed for pensions and by only a token amount for retiree health benefits.  Then, just last month Council amended the City’s contracts with CalPERS to bestow another “optional benefit” – service credit for pre-Alameda employment – on the firefighters despite staff’s acknowledgment that this step would increase the City’s annual pension costs and unfunded liabilities in an “unknown” amount.

Perhaps it is not difficult to understand why Kennedy’s call to bring down employee retirement benefit costs has gone unheeded.  Simply put, there is no political pressure to change the status quo:

  • Retirees are happy as long as their pensions and health insurance premiums keep getting paid – even if the City has to dip deeper every year into the general fund to be able to do so.
  • CalPERS is happy as long as the City makes the annual required employer contribution – even if it’s not enough to fund future pension liabilities.  And no state or other agency is pushing the City to shoulder the true cost of providing retiree health benefits.
  • The politicians are happy as long as staff continues to present annual budgets that appear to balance – even if those budgets ignore the accrued unfunded liabilities for employee retirement benefits.
  •  The public safety unions are happy as long as the City demands only minimal concessions from them toward the cost of providing their retirement benefits – even if they’d prefer that the City pick up the entire tab.  (As IAFF local 689 political director Jeff delBono candidly told Council last December: “Personally, I think that’s wrong” to ask union members to share in pension or retiree health benefit costs).

And the public?  The average citizen probably doesn’t care.  Why should she?  As long as Alameda remains a “vibrant” – last year’s word – or “robust” – this year’s word – community, let the guys with green eyeshades worry about finances. To paraphrase John Maynard Keynes, in the long run we’ll all be dead (and Rob Bonta will be president).

There are, however, a few signs that Kennedy is finally getting through.  Staff did get the public safety unions to allow their members to contribute something toward the City’s pension and retiree health benefit costs.  Moreover, unlike prior years, this year’s budget presentation included actual data about pension and OPEB liabilities.  Staff even added “Future City OPEB and Pension Liabilities” to the list of items worthy of consideration.  Most significantly, city manager John Russo committed to presenting Council with a proposal regarding OPEB by July.

We’ll have to see what staff comes up with to address the problems Kennedy has been warning about for years – and then whether Council takes any action in response.  Somehow, one doesn’t expect the final scene to mirror the one in “Mr. Smith” in which, after the Boy Ranger has collapsed in exhaustion, Senator Payne bursts out of the cloakroom shouting, “Every word that boy said is the truth!  . . .  Every word of it is true!”  But wouldn’t that be a sight to behold?


Bartel reports: 2012-01-24 Bartels report on pension plans; 2011-10-04 Bartels report on OPEB

CalPERS reports: 2012-12-28 CalPERS report to City (safety); 2012-12-28 CalPERS report to City (misc)

Fiscal Sustainability Committee report: Fiscal Sustainability Committee 2009 report

Pension & OPEB task force report: 2012-10-30 task force report

FY 2011-12 CAFR: 2012 CAFR

FY 2013-14 budget presentations: 2013-04-18 Power Point for budget workshop; 052813 PPT presentation re FY 2013-15 budget; 2013-05-28 Keven Kennedy PPT presentation re budget

IAFF Local 689 MOU: 2013-17 MOU

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Budget, City Hall, Firefighters, Pensions and tagged , , , , , . Bookmark the permalink.

1 Response to Mr. Kennedy Goes to Council

  1. moviegoer says:

    Your analyses are spot on. It’s about time someone in this town tells it like it is.

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