The proposed public safety union contracts

We’re sure that, if anyone heeded the exhortation by Vice Mayor Frank Matarrese to begin studying the proposed new public safety union contracts as soon as they were posted Tuesday afternoon, it was readers of the Merry-Go-Round.  After all, who else would be willing to try to analyze all of the financial implications of those contracts in the mere 15 days Council gave the public to look them over before it votes on them?

What, you mean you didn’t?

Well, there’s still another 10 days left to get the job done and keep the vice mayor happy.  Today, we’ll try to give you a head start.  Then you’re on your own.

As we see it, the proposed new contracts will have the following financial consequences for the City over their six-year term:

  • The MOUs guarantee that police and firefighters will continue to receive annual raises for five out of the next six years regardless of how well or poorly the City performs financially.
  • The annual raises are calculated by a formula that allows one-time revenue – e.g., from the sale of property to or by a developer – to trigger the maximum possible annual raise (which then is built into every subsequent salary).
  • Over the six years beginning on January 1, 2016, the contracts will increase public safety wages and benefits by not less than 17.17% and as much as 42.25%.  In dollar terms, we’d estimate that the raises (and associated CalPERS contributions) will cost the City between $3.6 million and $9.0 million.
  • These costs will not be offset, to any significant extent, by any savings resulting from the establishment of the “OPEB trust.”
  • The contracts do not require public safety employees to share any portion of the increases in the City’s pension contributions expected from 2017 through 2021.
  • The contracts delete the language in the prior MOUs making it difficult for firefighters hired before January 1, 2013 to engage in pension “spiking.”

In the rest of this column, we’ll lay out the basis for each of our conclusions.  (Warning: you may be in for some rough going).  But first, let’s back up and put the issue into perspective:

Concerned ever since his appointment about the City’s “OPEB problem” – i.e., its unfunded liability for retiree health benefits – City Manager John Russo decided to recommend creating an “OPEB trust” as a “partial solution.”  Some of the money to fund the trust would come from the City:  $5 million in January 2016, and $250,000 per year for 10 years thereafter.  But Mr. Russo knew that even those sums wouldn’t be enough to reduce the $91.2 million unfunded liability to any significant extent.  Since the only other source of funding for the trust was City employees themselves, Mr. Russo needed to persuade the unions to agree that their members would pay into the trust as well.  And so he did before he walked out the door for his new job in Riverside.

The result of his efforts is the new public safety union contracts that will be submitted to Council for approval on April 29.  Essentially, Mr. Russo has presented Council with a classic trade-off:  If it approves the new MOUs, the City will get a “partial solution” to the OPEB problem.  (How much of a solution remains open to debate).  In exchange, the City will incur the financial consequences identified above.

And let’s be blunt about it:  Over the next six years, the new contracts will drag the General Fund even deeper into the red.  At the “budget study session” Tuesday, staff presented five-year projections showing that that the City will begin running an operating deficit – i.e., revenues will not cover expenses – beginning in Fiscal Year 2016-17 and that the deficit will hit $5.3 million by FY 2019-20.  But those projections do not take account of the proposed new contracts.  When the impact of the new MOUs on the City’s operating expenses is factored in, the picture inevitably will get worse.

So, in the end, the issue for Council to decide on April 29 is straightforward:  Is the “partial” solution to the OPEB problem proposed by Mr. Russo worth the price the City is being asked to pay for it?

Now into the weeds.  We’ll start with the provisions in the contracts regarding wages.

Under the current MOUs, police and firefighters got raises on January 1, 2014 and January 1, 2015, and another is scheduled for January 1, 2016.  The proposed new contracts, which cover the six-year period from November 2015 through December 2021, extend this pattern of annual raises through 2021 (except for 2019, when no raise is due).

Both the current and the proposed MOUs compute the amount of the raise using a formula based on 50% of the annual increase in five revenue categories.  When this formula was introduced in the MOUs approved in December 2012, the pitch was that public safety workers would get paid more only if the City took in more revenue.  Seems only fair – right?  Indeed, the pitch was so persuasive that even Interim City Manager Liz Warmerdam believed it – at least until last October.

In fact, police and firefighters are guaranteed a 2% annual raise for every year between 2015 and 2021 (except for 2019, where there will be no raise, and 2020, where the minimum raise goes up to 3%) regardless of how well or poorly the City performs financially.  If the total of the five revenue categories increases by more than 4%, the public safety workers get a raise equal to half of the increase (up to a maximum raise of 5%).  But if total revenue increases by less than 4% – or even stays flat – the employees still get a 2% raise.  And if total revenue actually goes down, well, the cops and firefighters get a 2% raise then, too.

This structure produces an anomalous result.  Suppose that in year one, the specified revenue categories increase 10% but in year two they decline by an equal amount.  At the end of year two, the City is in the same financial position as it was at the beginning of year one.  But the public safety workers will have gotten a 5% raise at the beginning of year two and they will get another 2% raise at the beginning of year three.  So they’re actually better off – even if the City isn’t.

And this isn’t the only perverse feature of the contracts’ wage-increase methodology.  Of the five revenue categories chosen for the formula, property taxes and sales taxes tend to reflect ongoing economic trends, and, arguably, it’s fair for the City to share any gains with its employees (as long as the workers also share in any declines).  But one of the other categories – taxes paid on the sale or other transfer of real property – doesn’t fit that mold.  As City Treasurer Kevin Kennedy told Council Tuesday night, “I don’t think it’s the City’s intention to give anyone raises based on one-time revenue.  And the property transfer tax is one-time revenue.”

Mr. Kennedy then explained that the issue he was raising was not just academic.  “We’ve got a lot of big projects in the hopper so there’s a good chance in the next five years that we could see big chunks of transfer tax come in,” he said. “If we have major development going on in this city and we end up paying higher salaries indefinitely for some money we garnered in one fiscal year, that’s a huge problem.”

In fact, the phenomenon Mr. Kennedy described already may have happened.

In response to our request, Ms. Warmerdam was kind enough to provide us with the figures used to calculate the last two years’ raises.  They show that the City handed out 4.1% raises on January 1, 2015 based on a $4.1 million revenue increase in FY 2013-14 over the prior year.  But if you go back and look at the staff report discussing the financial results, you’ll see that about half of the revenue increase was attributable to “one time sources of revenue”:  “unanticipated Redevelopment pass through payments” and – hang on, Mr. Kennedy – “transfer tax on the sale of two large apartment complexes.”

The current MOUs didn’t – and the new MOUs don’t – require staff to exclude revenue generated by one-time events like these from the computation.  Mr. Kennedy told Council he believes the formula should be revised to exclude transfer taxes, and perhaps other one-time events.  Unless Council takes his advice, the new residential and commercial developments of which he spoke are likely to generate transfer tax revenue that triggers the 50% formula – and corresponding raises of up to 5% – in one or more of the next six years.

So how bad might it get?  Let’s look at the numbers.  The following chart shows the annual and cumulative raises over the six-year term of the new MOUs using the minimum percentage:

Chart 1

But these figures don’t represent the full cost of the raises, since, as Mr. Kennedy pointed out Tuesday, every additional dollar paid in wages requires a corresponding contribution to be made by the City to CalPERS.  The following chart revises the schedule by taking account of the required CalPERS contribution:

Chart 2

The two preceding charts are based on the assumption that public safety workers get only the minimum annual raise guaranteed by the proposed new contracts.  But now let’s assume that the City does well financially and the maximum raise is due.   Here are those numbers:

Raises only

Chart 3

Raises plus PERS

Chart 4

How much, in dollars, will these raises cost the City during the term of the proposed new contracts?  This is where it gets tricky.

The staff report posted Tuesday states that, “Cumulative salary and related benefits increases over a five-year period is [sic] estimated at approximately $1.2 million for all safety groups.”  The report does not explain how staff arrived at that figure, and we have been unable to replicate it.  In fact, it strikes us as exceedingly low.

Here’s why we say that:  To translate the percentage raises into dollars, you need to make assumptions about the total public safety payroll in each year.  The staff report posted Tuesday doesn’t provide those figures, so, as a proxy, we decided to use the “projected 2013/14 Safety payroll” – $21,194,000 – in Bartel & Associates’ “alternative funding study” and assume that this figure would remain the same during the entire term of the new MOUs.  Under those assumptions, the dollar cost of the raises (and associated CalPERS contributions) over the six-year period is $3.6 million if the police and firefighters get only the minimum raise and $9.0 million if they get the maximum.

(We need to add one caveat:  The proposed new contracts overlap the current ones for the period from November 2015 through June 2017.  To calculate the cost for just the period by which the new MOUs “extend” the term of the current MOUs, we need to exclude the raises for the last half of FY 2015-16 and all of FY 2016-17 that are covered in both contracts.  Our back-of-the-envelope estimate is that this adjustment would reduce the total dollar cost by about $900,000 in the minimum-raise scenario and $2.3 million in the maximum-raise scenario).

But we can’t stop there.  To assess the net impact of the new MOUs on the bottom line, we need to offset the costs resulting from the wage raises with savings flowing from establishment of the OPEB trust – if there are any.  Unfortunately, again we are hampered by a lack of data.

As we understand it, public safety workers will begin making contributions to the OPEB trust in January 2016.  But those contributions themselves will have no impact on the City’s annual public safety expenses, since they go to the trust, not to the retirees.

The trust itself will not begin making payments to retirees until January 2019.  Instead, the City will pay the entire cost of retiree health benefits out of the General Fund for the first three years of the proposed new contracts – the last half of FY 2015-16, FY 2016-17, FY 2017-18, and the first half of FY 2018-19.  So the trust will provide no offset to the costs associated with the wage increases during that period.

Finally, beginning in January 2019, the trust will begin making payments to retirees.  According to the staff report posted Tuesday, “approximately $272,000 will be used toward the reduction of City’s OPEB cost in FY 2018-19 and FY 2019-20.”  Presumably, payments from the trust will continue for the remaining 18 months of the new MOUs.  But neither the staff report nor the Bartel “study” says how much those payments will be.  (The only clue we can find is that Bartel estimates that the payment from the trust in the year following expiration of the new MOUs will be $898,000 – out of $4.6 million in total OPEB costs).

We’d like to see a year-by-year estimate of payments made by the trust for retiree health insurance over the term of the proposed new contracts.  (And we think Council should insist on it).  Only then can the extent of the savings be known.  Based on the data available, we will be very skeptical of any claim that, over the next six years, the trust will offset all, or even a significant portion, of the costs resulting from the wage increases conferred by the new MOUs.

Now let’s turn to the provisions regarding pensions.

The annual contribution to CalPERS for pensions for City workers consists of both an employee contribution and an employer contribution.   The state pension law sets the employee contribution rate; for public safety employees, it’s 9% of “PERSable salary.”  CalPERS sets the employer contribution rate; for FY 2014-15, it’s 44.115% and it’s projected to go to 56.3% by FY 2020-21.

One of the major changes made by the pension reform law enacted in 2013 was to expand the scope of permissible cost-sharing by employees.  Under prior law, cities and unions could agree for employees to share a portion of the required employer contribution in addition to making their own employee contribution.  But the cost-sharing was limited to the cost of the “optional benefits” provided by the plan.  The pension reform law abolished this limitation and allowed employees to pick up as much of the required employer contribution as their union would agree to — theoretically, up to all of it.

The prior City administration did not take full advantage of this opportunity.  Instead, the current MOUs approved in December 2012 provided for 2% employee cost-sharing in FY 2012-13, followed by annual 1% increases in each of the next four years.  This meant that, by the time the contracts were set to expire in June 2017, public safety workers would be paying 6% of their “PERSable salaries” toward the required employer contribution; the City would pay the rest.

As we pointed out a year ago, the financial impact of this employee cost-sharing was negligible compared to the cost borne by the City.  But guess what?  It turns out we’ve already gotten all the unions are willing to give.

The proposed new contracts provide that the contribution rates in the current MOU “will remain in effect until the expiration of this MOU with the understanding that after July 1, 2016 the level shall remain at 15% [i.e., the 9% mandated by statute plus the 6% employee cost-sharing].”  This means that, as the employer contribution rate rises during the term of the new MOUs to 56.3%, all of the additional cost will fall on the City without any help from the police and firefighters.

Here’s a chart that breaks down the numbers:

Chart 5To translate these percentages into dollars, we’ll use the same assumptions we did before about public safety payroll.  Under those assumptions, the City will be paying $10.7 million in FY 2020-21, and the employees will be picking up the $1.3 million balance of the total required employer contribution.  Even when the statutorily mandated 9% employee contribution – $1.9 million using our assumptions – is factored in, the disparity between the amounts paid by the City and the amounts paid by the employees toward pensions for public safety workers remains dramatic.

It didn’t have to be this way.  City Manager Russo is fond of saying that a city can’t “impose” increased cost-sharing on its employees, but that’s only true (as he probably knows) as of January 1, 2018.  In any event, there’s no reason that the City’s negotiators could not have insisted that, in any new deal, police and firefighters continue picking up an additional 1% per year of the required employer contribution.  Using our assumptions, this would have reduced the City’s CalPERS bill in FY 2020-21 by $1.1 million.

The pension section of the proposed new contracts contains another section worth noting.

One of the other changes made by the pension reform law was to define the term “final compensation” – the salary upon which a pension is based – to mean the highest average annual pay earned during the last three years before retirement rather than the pay earned just in the last year.  The stated intention was to discourage the practice known as “spiking,” in which an employee seeks to boost her pay in the year before she retires in order to increase the amount of her pension.  Typical “spiking” techniques included working a lot of overtime hours or taking a higher-paying job on an “acting” basis.

The new definition applied only to employees hired after the pension reform law took effect on January 1, 2013.  For some reason, the IAFF Local 689 MOU approved in December 2012 adopted (effective January 1, 2017) the more restrictive language for all firefighters.  The proposed new contracts delete this language and re-establish the old one-year rule for firefighters hired before January 1, 2013.

What’s the reason for the revision?  If anyone other than John Russo had represented the City during the negotiations for both contracts, we would be tempted to say that it must be just fixing a drafting error.  A more cynical view is that the change is designed to restore the ability for firefighters hired before January 1, 2013, to engage in spiking.  (It may be just a coincidence, but the Alameda Sun recently published two articles reporting the amounts of overtime and acting pay had begun to increase significantly).  The staff report doesn’t say one way or the other.

Thus far our report on the financial impact of the proposed new public safety contracts.  We encourage our readers to use the scant time remaining before the vote to perform their own analysis.  We are confident that members of Council will do the same.  And if they do, we hope that at least some of them will see fit to consider whether the “partial solution” proposed by Mr. Russo to the OPEB problem truly is worth the financial consequences these contracts will create for the City during their six-year term.

Sources:

2013-17 IAFF MOU: 2013-17 MOU

Proposed 2015-21 IAFF MOU: 2015-04-29 Ex. 3 to staff report – MOU between the City of Alameda and the IAFF2015-04-29 Ex. 4 to staff report – Redlined version of MOU between the City of Alameda and the IAFF (redlined version)

Staff report re proposed 2015-21 IAFF MOU: 2015-04-29 staff report re IAFF contracts

Bartel & Associates “alternative funding study”: 2015-04-29 Ex. 5 to staff report – Bartel Associates OPEB Safety Alternative Actuarial Study Report

Staff report re FY 2013-14 financial results: 2014-12-02 staff report re amending 2014-15 budget

Staff report re proposed FY 2015-16 & FY 2017-18 budget: 2015-04-16 staff report

CalPERS 2013 annual valuation report: 2013 CalPERS annual valuation report (safety)

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.

5 Responses to The proposed public safety union contracts

  1. dave says:

    Can you remind us which council members have accepted money from the IAFF?

    • In the 2014 election, the IAFF Local 689 PAC contributed $11,799.57 to Councilman Oddie and nothing to either Mayor Spencer or Vice Mayor Matarrese.

      In the 2012 election, the PAC contributed $500 to Councilwoman Ashcraft and nothing to Councilman Daysog.

  2. Steve Gerstle says:

    In the meantime, Oakland, Berkeley and San Francisco have raised the minimum wage for workers while Alameda has not.

  3. Jeff DelBono Alameda Firefighters Association says:

    Mr. Sullwold’s recent blog contains several material and factual errors that I would like to correct for the readers of this site. The proposed MOU for the City’s public safety employees takes incredible steps to resolve several issues that have been discussed over the last 15 plus years. Most notably, the MOU proposes a solution to salary, pension, and the currently underfunded obligation for Other Post Employment Benefits (OPEB). It is unfortunate that Mr. Sullwold chooses to see this collaborative effort as a problem rather than a solution.
    Before the discussion of Mr. Sullwold’s errors, omissions and spin, it is important to explain why the City has been grappling with these issues for so many years and why we need a solution. Without the proposed MOU, we will continue with our present conditions which include a loss for the City of 3% towards CalPERS contributions in 2017 and NO employee contributions towards OPEB: This proposed MOU benefits the city because it provides for Public Safety employees to continue paying 15% towards CalPERS contributions and up to 4% in employee contributions towards OPEB.
    If a successor agreement isn’t in place by the end of 2017 Public Safety employees would go from paying 15% (9% employees share + 6% of the employers share for a total of 15%) back to 12%. That’s a loss for the city of 3%. It also would NOT INCLUDE any employee contribution toward OPEB.
    With the current landscape now in view, let’s move onto the factual inaccuracies.
    Mr. Sullwold did get one thing right in regard to salary, The MOU does guarantee police and firefighters will continue to receive annual raises over the next six years. But let’s also remember that during the recent economic downturn Alameda police, Alameda firefighters, and all other City employees went seven consecutive years without any raises. When they did eventually receive an increase, City employees’ salaries only rose an average of 0.56% each year for that 10 year period. Approximately 2 years ago, the City proposed using BRI to calculate raises for all City employees, not just public safety. Agreeing to use BRI (a formula that calculates raises) was a risk for all bargaining units to take. All other cities in the Bay Area get fixed cost of living raises, including cities that were surveyed in the chart below. Note that Alameda ranks fifth-

    Top Step FireFighter PERS RAISES OPEB

    FREMONT $ 9,073.57 12% 2013-2014: 2.22%,2%, Ends 6/15 0%

    OAKLAND $ 8,668.00 13% 2015-2017: 3%,3%,2% 0%

    BERKELEY $ 8,443.00 6.62%-10% Ends 6/15 0%

    Hayward $ 8,236.11 15% 2015-2019: 2%,3%,3%,0%,5% 1%

    ALCO $ 8,257.52 10.25% 2014-2020: Salary Survey 1.25%

    ALAMEDA $ 8,135.08 15% 2016-2021: 2-5%,2-5%,2-5%,0%,3-5%,2-5% 4%

    LIV/PLEATN $ 7,626.00 10% 2015-2017: 3%,3%,3%,3% 0%

    This year’s and next year’s salary has already been decided as part of the previous MOU. The current proposed extension would guarantee a minimum of 11% and a maximum of 20% over the next 6 years. (Mr. Sullwold must have miscalculated those figures when he wrote 17.17% as minimum and a maximum of 42.25%.)

    No matter what the increase is, whether minimum or maximum, the employee would still have to pay a large percentage back to the city for their pension. Pension is another subject where Mr. Sullwold seems a bit confused. Public safety will contribute more towards pension in the proposed MOU; more than is currently contributed, and more than almost anyone in the state of California contributes. If the MOU is approved, public safety’s pension contribution will be increased to 15% of each employee’s salary through the year 2021. Without this agreement, under the 2013 pension reform act, each city can only impose up to 12% (employee paid 9% plus the 3% employer’s share) if a successor MOU isn’t in place.
    “Pension Spiking” is irrelevant to this conversation since it has never been allowed in the Public Safety contracts in the City of Alameda. In fact, there is now State law that specifically addresses “pension spiking”. The Pension Reform Act was not enacted in time to be included in the last contract. The proposed MOU will be consistent with that law.
    The contract language reads: “Employees who constitute classic members of the City’s defined benefit plan will have their final compensation for pension purpose calculated based on a formula that defines final compensation on a 12-consecutive month period in accordance with Public Employees’ Retirement Law”. This language will make “pension spiking” impossible.
    Finally, there were important facts either omitted or stated incorrectly on the issue of health care. The proposed MOU secures and extends the current agreement that active employees split the cost of increases for their healthcare 50/50 with the city. It also guarantees three important changes to retiree health care. First, for the first time in the history of retiree health care, all active public safety employees will contribute 4% of their salary to a trust. The trust will be funded over the next several years by employees as well as by the city and in 2019, the trust will take over as the revenue source for health care for retirees. This is IN ADDITION to the structural changes that have already been addressed with the past MOU that includes increasing the vesting time (the time it takes for an employee to earn the retirement benefit) from 5 years to 10 years, limiting the cost of an individual’s plan, and changed the benefit for employees hired after 2011 to the employee only with spousal retire health care being dropped.
    The proposed MOU is a result of countless hours of collaboration between employee groups and the City to solve a problem that the City has been concerned with for over 15 years. The MOU includes contributions by all parties. The City will contribute funds, but we should not forget that each employee will contribute 19% (15% to CalPERS and 4% to the health trust) of salary to health care and retirement. This 19% contribution shall take place through the entire term of this MOU regardless of how the City performs. We believe this MOU and health trust will continue to allow the City to meet it’s obligations already made, continue to see budget surpluses, and a healthy reserve fund as the case has been for the last several years.

    • The Merry-Go-Round responds:

      Captain DelBono asserts that the column contains “factual errors” and “factual inaccuracies,” but we can find only one alleged error or inaccuracy, and, as to that, Captain DelBono is mistaken.

      He says that the 17.17% and 42.25% figures are a “miscalculation.” In fact, as the column states, these figures result from taking into account the additional CalPERS contribution by the City triggered by the raises, which by themselves range from a minimum of 11.49% to a maximum of 27.63%. (Captain DelBono did the math right on the minimum raise but not on the maximum raise). As City Treasurer Kevin Kennedy has made clear, every dollar of additional wages carries with it an additional amount (43 cents next year) the City is required to pay to CalPERS. Mr. Kennedy believes that the analysis of the cost to the City of wage increases should include this additional CalPERS contribution, and we agree with him.

      Initially, we were puzzled by Captain DelBono’s argument that, without the new MOUs, “we will continue with our present conditions which include a loss for the City of 3% towards CalPERS contributions in 2017. . .”, but we think we’ve figured out what he means. The 2013-17 MOU commits firefighters to pay 6% of their “PERSable salary” toward the City’s employer contribution effective July 1, 2016. We guess what Captain DelBono is saying is that, once that contract expires, the firefighters’ union could refuse to agree to share any part of the employer contribution and the City could not force the firefighters to do otherwise. Instead, all it could do – after January 1, 2018 – is impose maximum cost-sharing of 3%. Captain DelBono thus is correct that, if the union decided to play hard ball, it could cause the City financial pain.

      Unfortunately, we remain perplexed about the reason for restoring the one-year “final compensation” rule for firefighters hired before January 1, 2013. Captain DelBono says this provision “will make ‘pension spiking’ impossible.” But, as the column pointed out, the stated purpose of going to a three-year rule was to make spiking more difficult. (One public law firm described it this way: “To limit the possibility for pension spiking through final-year salary increases, final compensation for calculating the pension benefit is determined by averaging highest annual compensation over a consecutive 36-month period.”)

      Finally, Captain DelBono devotes a lot of time to arguing that Alameda firefighters are worse off, in terms of salary and pension contributions, than their counterparts elsewhere in the Bay Area. We have no independent basis for confirming this, but, with all due respect to Captain DelBono, we don’t think it’s particularly relevant to the decision Council is being asked to make on April 29. As the column states, from the perspective of the City, that decision boils down to whether the “partial” solution to the OPEB problem proposed by Mr. Russo is worth the price the City is being asked to pay for it. And that “price” consists of the financial consequences resulting from the proposed new contracts that the column describes.

      All that being said, we thank Captain DelBono for posting his comment. Too often, we see –- elsewhere — blog comments whose sole point is to insult or demean anyone with whom the writer disagrees. Although we don’t find ourselves persuaded, we appreciate that Captain DelBono has chosen to offer a reasoned defense for his point of view.

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