Questions the candidates won’t want to answer (Part I)

Traditionally, the election season begins on Labor Day, and already lawn signs – at least for the well-financed candidates on the firefighters’ union slate – are sprouting up around town.

Candidate forums won’t be far behind.  The Alameda Citizens Task Force will hold a “Meet the Candidates Night” on September 17.  The Alamedan and The Alameda Sun just announced “candidate debates” for the Mayoral and Council candidates on September 18.  And the League of Women Voters has scheduled three candidate forums – details to follow – on October 2, 9, and 16.

Now, the Merry-Go-Round wishes we could take literally the billing of The Alamedan/Sun event as a “debate.”  What we saw in the 2012 election, and expect to see this time, more closely resembles a press conference (or a Larry King interview) in which the questions are bombastic and the responses banal.  (Actual question asked by the LWV in 2012:  “What is your vision for Alameda ten years from now as it relates to residential growth and business development?” Paraphrase of answer given by all but one candidate: “I favor a vibrant, robust, and sustainable community with a mix of residential and commercial uses.”)

So we decided to put together our own list of questions we’d like to ask the candidates.  Our goal is to explore what – if anything – they know about the problems facing the City and what – if anything – they propose to do about them.  We’d be delighted if any of them chose to send us responses – which we’d publish unedited – but we’re not holding our breath.  One thing we learned from 2012:  Substance may earn you admiration, but it won’t get you votes.

There are a host of possible topics we could address.  We’ll leave it to the various interest groups to inquire about issues of parochial concern.  (By the way, did you see that the Sierra Club endorsed Frank Matarrese for Council, but not Stewart Chen, D.C., to whom it gave the nod in 2012?)  Instead, we’ll focus on two areas:  finances and development.  To some – and, if you listened to Mayor Gilmore’s “State of the City” speech, she’s one of them – the City has nothing to be concerned about in either area.  We beg to differ.

We’ll devote today’s column to finances.

As shown in the chart below prepared by City Finance Director Fred Marsh, the City’s General Fund will incur an operating deficit – i.e., expenses will exceed revenues – in each of the next four years.  By fiscal year 2017-18, the balance in the General Fund will fall to zero.

5 Year Projections - 2

So our first question to the candidates is:

What would you propose to do to balance the budget?

There are two answers to this question we will not accept:  “find more sources of revenue” and “let Fred figure it out.”

According to the “mid-cycle update” presented to Council this June, total revenue has remained relatively flat for the last 10 years (except for the recession year of 2010).  “A full return to the revenue levels of several years ago is unlikely in the near future,” the report stated.  If staff couldn’t find any other sources of revenue to include in the revised five-year forecast – and we have no doubt they tried – can we expect the politicians to do any better?

Moreover, for the last several years, staff has managed to cover the operating deficit by moving revenue into, and expenses out of, the General Fund from other City-controlled “funds” or entities.  (For example, Alameda Municipal Power “advanced” the General Fund $1 million in FY 2012-13 and $1.2 million in FY 2013-14).  Mr. Marsh was a master of such maneuvers (all of which, as far as we know, were perfectly legal), but we’ve learned that he recently took a job with the City of Fairfield.  We just hope he left his bag of tricks behind for Assistant City Manager Liz Warmerdam.

Having ruled out fantasy revenue and fiscal wizardry, our first question thus can be re-written:

What expenses would you cut to balance the budget?

If this question were posed to a business owner, she undoubtedly would focus on the area where expenses are the highest (and therefore potential savings the greatest).  No point in nickel-and-diming the pittance spent on coffee and not touching the six-figure salaries paid to staff.

For the City of Alameda, a business-like approach would shine the spotlight on the fire and police departments, whose spending (as the chart below shows) will eat up about 79 per cent of General Fund revenues by FY 2017-18.  Even a token – say, 1 per cent — reduction in fire and police expenses would save more than half a million dollars a year.

PS %

And it’s not just MBAs who’d look to the fire and police departments for cost savings.  In fact, although Mayor Gilmore professes not to know it, the public thinks this is exactly where the budget-balancers should focus their attention.

In February 2012, staff launched what it called the “budget challenge” in which respondents were asked, for each City department, whether spending should go up, down, or stay the same.  A similar challenge was issued the following year.  According to the press release announcing the 2013 challenge, “The results will help inform the City Council during their budget deliberations.”

If that truly was the purpose of the “challenge,” the message was clear, as the charts below show:

2012-05-02 budget challenge

 

 

 

 

 

2013-05-28 budget challenge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Both years, an overwhelming majority of respondents favored cutting fire department spending by at least 2.5%.  Indeed, nearly half wanted the fire budget slashed by 5% or more.  (The police department fared slightly better).

If you take the staff reports at face value, staff tried to heed this message from the public.  But without backing from the politicians it wasn’t likely to get anywhere.

For FY 2012-13, staff asked all City departments for “scenarios in which they reduced their budgets by 5% and 10%.”  The fire department could come up with only 2%, and then only by applying for grant money to replace City funds to pay for equipment purchases.  For FY 2013-14 and FY 2014-15, “all City departments were tasked with developing scenarios in which they reduced their budgets and/or increased their revenues between 1% to 5%.”  The fire department couldn’t manage to hit even the lower number:  it proposed expense cuts and revenue hikes totaling only $180,000.

And then when the budget finally got to Council, the politicians actually increased the fire department’s authorized spending both times.  So much for listening to the “will of the people.”  The unions who finance campaigns speak with a louder voice at City Hall.

Maybe those running for office this year are different from their predecessors.  So we’ll ask this question:

Would you vote to direct the City Manager to take the steps necessary to reduce spending by the fire and police departments, and, if so, by how much?

We are not so naïve to expect that any candidate would risk the revenge of the robocallers by answering that question with an unqualified “Yes.”  In the last election, the one candidate willing to suggest that the fire and police budgets were not untouchable found herself slandered – by Jim Oddie, a Democratic party factotum now running for Council on the IAFF Local 689 slate – as an enemy of the “working family.”  But unless a current office seeker can tell us where to find millions in cost savings in the 22 per cent of the budget not devoted to fire and police, a refusal to answer simply will confirm that she’s willing to see the General Fund depleted during her term in office.

On the other hand, any candidate who is concerned about the City’s financial wellbeing won’t have far to look to identify areas for potential cost-savings in the fire (and police) budgets.

As the chart below shows, nearly a quarter of the fire and police budgets consist of pension and retiree health benefit costs (aka OPEB).  Indeed, by FY 2017-18, those expenses will gobble up 20.25% of total General Fund revenue.

PS PERS & OPEB

If you believe Mayor Gilmore, there’s nothing the City can do to reduce spending for retirement benefits.  Indeed, she’s claimed that it would be illegal even to try.

But she’s wrong.

Take pension contributions.

Before the Public Employees Pension Reform Act (“PEPRA”) was enacted in 2013, public employees could agree to share the cost of the “optional benefits” provided by their pension plans.  PEPRA abolished this limitation and allowed workers to pick up as much of the required employer contribution as their union would let them — theoretically, up to all of it.  As a lawyer from the distinguished San Francisco law firm of Hanson Bridgett commented, “These changes in the law go a long way toward helping cities reach the goal of classic employees paying one-half of normal cost.”  Moreover, “The change in PEPRA that expands cost sharing is not limited to normal cost. Any costs can be shared under the new rules.”

The City of Alameda has taken only minimal advantage of these opportunities for employee cost-sharing.  The “optional benefit” cost-sharing authorized by prior law would have permitted public safety employees to pick up 5.057% of the City’s employer contribution, but Council accepted the unions’ agreement to only 2%.  The new four-year contracts approved by Council in December 2012 retained the 2% for the rest of FY 2012-13 and upped the cost-sharing formula by 1% per year in each of the next four fiscal years.  By FY 2016-17, public safety employees will contribute 6% of their pay – in addition to the statutorily mandated 9% employee contribution — toward pension costs.

The Russo/Gilmore administration (and its union backers) have touted this as a major concession.  But with employer contribution rates expected to reach 52% by FY 2016-17, cost-sharing of only 6% doesn’t look so good.  By limiting employee cost-sharing in this way, the City will have left about $11.5 million in available cost savings on the table in FY 2016-17.  So what we’d like to know from the candidates is:

Would you vote to direct the City Manager to negotiate an increase in employee cost-sharing for pensions, and, if so, by how much?

OPEB presents an even bigger prospect for pruning City expenses.  Unlike pensions, the amount spent by the City on retiree health benefits for public safety (and other) employees is not subject to any CalPERS mandates; it’s totally within the City’s control.

For years, the City paid the entire cost of health insurance for retired firefighters and cops and their dependents and gave them a variety of plans from which to choose.  (Surviving spouses also were covered).  The 2010-13 MOU capped the City’s liability for retiree medical benefits for current and future public safety employees to the premiums charged by Kaiser and Blue Shield.  The 2013-17 MOU retained this limitation; it also required employee cost-sharing of a fraction (15% in 2014, 25% in 2015 and 2016, and 50% in 2017) of the annual increase in premiums.

Once again, the Russo/Gilmore administration has plugged these provisions as major concessions.  But the fact remains that the City still bears the bulk of the financial burden for providing retiree health insurance.  Paying a fraction of the annual increase is not the same as sharing the total cost of the benefit.

And the burden continues to get heavier.  A year ago, Mr. Marsh projected annual costs for public safety OPEB would reach $3.7 million by FY 2015-16.  A few months ago, he revised that number slightly upward and projected even higher costs for the following two years ($4.3 million in FY 2016-17 and $4.8 million in FY 2017-18).  And those figures already take into account the perfunctory “concessions” made by the unions in December 2012.

Like employee cost-sharing for pensions, every dollar of OPEB costs paid by retirees themselves (and, for that matter, every dollar of health insurance premiums paid by current employees) is a dollar that the City will not have to pay out of the General Fund.  So our question to the candidates is:

Would you vote to direct the City Manager to negotiate an increase in employee cost-sharing for retiree health benefits, and, if so, by how much?

Thus far, we’ve been talking only about operating expenses – i.e., the amount the City spends on its current bills.  But we can’t leave the discussion of City finances without also addressing the issue of unfunded liabilities.

By promising to provide pensions and retiree health benefits, the City has created liabilities that will become due in the future.  But it hasn’t set aside enough money to pay for them.  As a result, based on the latest figures, the City owes $200 million for future pension and retiree health benefit costs.  The total breaks down this way: $85,728,554 for public safety employee pensions; $25,206,659 for other City employee pensions, and $91,172,000 for OPEB.

The current Mayor and Council seem to prefer to treat these liabilities as somebody else’s problem.  But staff has not been so cavalier.  Last July, Mr. Marsh and Ms. Warmerdam presented Council with a list of options for reducing the unfunded liabilities for OPEB.  Here’s the menu:

OPEB options

So our question for the candidates is:

Which of the options presented by staff for reducing unfunded OPEB liabilities would you vote for?

You’ll note that the list doesn’t provide any estimate of the financial impact of any of these options on unfunded OPEB liabilities.  But the easiest to implement obviously is the first one:  establish an “OPEB trust.”  And that, of course, is the option the current Council picked.

Left for later consideration was funding of the “trust.”  As it turns out, the contribution has been relatively piddling:  According to the mid-cycle update, the balance in the trust was $1,386,689.  This is barely enough to cover the increase in annual payments projected over the next four years, so it won’t make much of a dent in accrued future OPEB liabilities.

Even if a candidate is unwilling to select one of the more effective options on staff’s list, we’d still like to know whether she would commit to putting real money into the “OPEB trust.”

So there, for the record, are the questions we think a candidate ought to be prepared to answer if she truly thinks of herself as a steward of the City’s finances.  Sure, they’re meant to be tough.  But if the candidates don’t answer them now, their successors will confront an even more difficult task in the years ahead.

Politically, it makes sense to dodge the bullet.  But it’s a bullet headed straight toward the heart of the body politic.  Perhaps it’s too much to ask, but we’d hope those running for Mayor or Council will do more than just urge the rest of us to duck.

Sources

“Mid-cycle update”: 2014-06-03 presentation re mid-cycle update2014-06-03 Ex. 1 to staff report- Mid-Cycle Update

Budget “challenges”: 2012-05-29 budget challenge survey2013-05-28 budget challenge survey

Annual budget transmittal letters: 2012-06-26 transmittal letter2013-06-11 transmittal letter

PEPRA: Bob Blum article on reducing pension costs

IAFF Local 689 MOUs: 2011-06-21 staff memo re 2010-13 MOU2012-12-11 staff memo re IAFF MOU

Staff presentation re OPEB unfunded liabilities: 2013-07-23 staff report re OPEB2013-07-23 PPT Presentation re OPEB

About Robert Sullwold

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

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