Whom do you trust?

All right, dear readers, the Merry-Go-Round has a question for you:

Suppose you wanted an authoritative evaluation of the impact on the City’s financial condition of a proposed deal between the City and its public safety unions that establishes a new trust to pay retiree health benefits.  Whom would you look to:

A Certified Financial Planner and a Certified Public Accountant who have been studying the City’s liability for pensions and “Other Post Employment Benefits” since 2008?

Or politicians who, by their public comments, reveal that they either don’t understand or don’t care about the financial repercussions of the proposed contracts?

We know whom we’d pick.

But, of course, we’d be wrong.  The only thing Kevin Kennedy, the City Treasurer (he’s the CFP) and Kevin Kearney, the City Auditor (he’s the CPA) are allowed to do is to perform the narrow functions of their offices – which do not include analyzing the financial effects of public safety union contracts.

You didn’t know this?  Why, it’s right there in the City Charter!

Or so City Attorney Janet Kern, egged on by outgoing City Manager John Russo, would have you believe.

At Wednesday’s Council meeting, Mayor Trish Spencer called upon Messrs. Kennedy and Kearney even before summoning the assembled gaggle of current and former legislators to the podium.  What the Treasurer and the Auditor had to say wasn’t what staff – or an audience full of union members from inside and outside Alameda – wanted to hear.  Having now had all of two weeks to review the contracts after Mr. Russo first disclosed their terms, the Treasurer and Auditor identified potential flaws in the MOUs that ought to be examined before Council approved deals that would bind the City and the unions for the next six years (and, in some instances, even beyond).

During their remarks, both Mr. Kennedy and Mr. Kearney commented on what they saw as their mission.

“This situation has been very difficult for the auditor and me,” Mr. Kennedy said, “because we’ve been basically working on a very, very short time frame to try to give you what you expect and what the public expects from us, which is financial guidance on probably the biggest issue the City faces.”

Added Mr. Kearney:

We’re the people with financial expertise.  We got elected to comment on things.  We don’t comment on Del Monte, or about the development of the base, or the golf course, or how many parks we need to have.  About the [only] things we can actually say we’re experts on are finances:  the budget, OPEB, anything to do with liabilities, those kind of things that are financial things.

Sound reasonable to you?  It did to us:  Not only do Messrs. Kennedy and Kearney have the training and expertise to analyze financial issues generally, but both of them had served as co-chairs of the Fiscal Sustainability Task Force appointed by Council in 2008 and the Pension/OPEB Task Force appointed by Mr. Russo in 2011.  If there were any two people whom Alamedans could turn to for an appraisal of the financial consequences of the proposed contracts, it’s the two guys they’ve been electing, and re-electing, Treasurer and Auditor every four years since the year 2000.

But that wasn’t the way staff saw it.

We knew something was up when Mr. Russo, in his opening remarks, described how he had negotiated the contracts “in my role under the Charter” as City Manager.  What was the point of the reference to the Charter?  It became clear when, several hours later, Ms. Kern interrupted the public comment period to make “one further clarification” about the “roles” of the City Manager, City Treasurer, and City Auditor (an issue about which no public speaker previously had expressed any bewilderment).

She began with a lecture about the Charter, whose provisions, she declared, were “very specific”:  “the City Treasurer is to produce an annual audit and the City Auditor gives advice on investment policy.”  (This was actually a paraphrase of the language in the Charter, and Ms. Kern got the roles of the Treasurer and Auditor reversed.  But no matter.  As she said when Councilwoman Marilyn Ezzy Ashcraft caught her mistake, the hour was late).

She then came to the heart of her argument:  “Just to be clear,” she said, the Treasurer and the Auditor “are not designated in the Charter to be members of the negotiating team, so any of their advice beyond investment advice and auditing is really above and beyond what they are authorized to do.” (emphasis supplied).

It was a typically legalistic interpretation by Ms. Kern, but the message was unmistakable:  Rather than giving Council and the public the benefit of their experience and expertise, the uppity Mr. Kennedy and Mr. Kearney should confine themselves to checking out investments and reviewing the books.  If they stuck their noses into other areas affecting the City’s finances, they’d be exceeding their authority and, by implication, abusing their power.

To which we say:  Balderdash.  Going “above and beyond the call of duty” used to be a compliment; now, apparently, it’s a crime.

Except that it’s not.  An itemization of responsibilities – which is what the Charter provides for City officers – is not the same as a limitation on authority.  If Ms. Kern were right, Mr. Russo has been violating the Charter every time he gives his “State of the City” speech to the Alameda Democratic Club or the League of Women Voters.  After all, informing the public about municipal affairs is not one of the duties specified by the Charter for the City Manager.  Yet does anyone really doubt that Mr. Russo’s “authority” extends to making such public reports?

(Ms. Kern’s argument reminds us of the so-called “strict constructionist” view of the U.S. Constitution.  Under this interpretation, President Lincoln committed an unconstitutional act when he issued the Emancipation Proclamation, since freeing the slaves went “really above and beyond what he was authorized to do” by Article II.  Other than Justices Scalia and Thomas, you won’t find many adherents to this view these days.  The former Constitutional law professor currently occupying the White House surely doesn’t subscribe to it.)

In any event, if providing expert advice about matters vital to the financial health of the City is not part of the job description for the City Treasurer or the City Auditor, then whose job is it?  Under Ms. Kern’s view, apparently no one’s.  But if we can’t hear from, and rely on, Mr. Kennedy and Mr. Kearney, we’ll just have to trust that the politicians sitting on the dais will be able to figure out these complex financial deals on their own.  And that, as Council’s discussion of the proposed public safety contracts showed, is a truly disconcerting prospect.

Take, for example, Councilman Jim Oddie.

Six days before Council was scheduled to vote on the new MOUs, the Alameda Sun published an op-ed written by Mr. Oddie endorsing them.  Since the Councilman is the fair-haired boy of the firefighters’ union, this was hardly surprising.  But Mr. Oddie argued that the contracts were a good deal for the City as well.  “If the City Council agrees to the contract extensions,” he wrote, “the city’s $91 million OPEB liability will be reduced by $47 million over the next 30 years due to this partnership — all at a small cost to the city.”

Unfortunately, this statement contained not one, but two, misrepresentations.

As the staff report made clear (at least to most readers), the $47 million figure referred to a reduction in annual OPEB payments, not in unfunded OPEB liability. And, in fact, the deal does not reduce the City’s unfunded OPEB liability by anywhere near $47 million.

After one of the speakers at Wednesday’s meeting – an aide to Alameda County Supervisor Wilma Chan – repeated Mr. Oddie’s claim, Vice Mayor Frank Matarrese finally put the matter to rest.  He asked staff for “clarification”:  Was it true that the proposed contracts reduced the $91 million unfunded liability by $47 million?  No, it wasn’t true, Mr. Russo replied.  The impact of the contracts on the unfunded liability was “minimal.”  He then turned to Interim City Manager Liz Warmerdam for a more precise answer.  We estimate the impact on unfunded liability to be about $5 million, she said – a tenth of the benefit claimed by Mr. Oddie.

The other part of Mr. Oddie’s statement – that the proposed contracts imposed only a “small cost” on the City – also was wrong.  In his op-ed, Mr. Oddie pegged the minimum salary and benefit increases over the term of the new MOUs at $1.2 million.  At Wednesday’s meeting, Mr. Russo displayed a slide that showed the salary and benefit increases in each of the years from FY 2015-16 to FY 2019-20 if public safety employees received either the minimum (“Min BRI”) or maximum (“Max BRI”) raises.  The “Sal[ary]/Ben[efit] increase over 5-Year (incl[uding] PERS)” for the minimum raise scenario is $6.25 million – five times the amount claimed by Mr. Oddie.

Salary-Benefit Increases

Now look at the bottom of the “Min BRI”column.  During the same period in which public safety employees will be getting an additional $6.25 million in salary and benefits, the estimated revenue increase in the four categories used in the salary formula is only $4,934,660 – i.e., $1,315,340 less than the total amount of the expense increase.  So from the slide it would appear that if the City hits its budgeted revenue targets, every penny of the additional revenue in the next five fiscal years will go to pay salary and benefits to the cops and firefighters – and the City will still have to find another $1.3 million to cover the rest of the tab.

We suppose that, even if Mr. Oddie had gotten his facts right, he still might have pooh-poohed a $6.25 million impact on the bottom line.  But remember:  The City also is being required to pay $7.5 million ($5 million upfront and $250,000 per year for 10 years) to fund the trust.  $13.75 million is a “small cost to the City”?  If you say so, Jim.

Mr. Oddie thus got both parts of the cost-benefit analysis wrong:  He overstated the benefits and understated the costs.  But his colleagues didn’t distinguish themselves, either.

At Wednesday’s meeting, Mayor Spencer was the only one on the dais to display any concern about the costs imposed by the proposed contracts.  “I don’t believe that it is appropriate to enter into a long-term agreement that takes us through 2022 prior to going through the budget process,” she said.  She stopped short of saying whether she believed the City could afford to take money out of the General Fund to fund the trust upfront and then incur additional multi-million-dollar expenses for salary and benefit increases over the next five fiscal years.  But at least she wanted to know how the proposed contracts fit into the overall budgetary picture.  None of her colleagues seemed to care.

But they did appear a bit . . . confused about just where the projected $47 million in “savings” would come from.  Having listened to the discussion, Vice Mayor Matarrese concluded that “the general public and even some knowledgeable speakers here have not understood what the mechanism is, what the liability stands for, and what our trust fund
. . . does to that liability.”  (Mr. Matarrese named no names, but we suspect he was referring to Councilman Tony Daysog, who had remarked that “[m]y sense is that, in using the word ‘savings’ and attributing that to the $47 million, we have to caveat that, I suspect, by saying that is more of an Excel spreadsheet savings as opposed to an actual dollar that we’re going to have.”)

To us at least, a decision of this importance shouldn’t be made in a state of uncertainty.  Unless Council is willing to pay any price and bear any burden to promote what Councilwoman Ashcraft called an “amicable” relationship with the public safety unions, it should want to ensure that the benefit the City is receiving is really worth the cost it is incurring.  In making that determination, the Council members should have not just welcomed but invited input from the Treasurer and the Auditor – even if providing advice about labor contracts isn’t one of their itemized responsibilities.  The right thing to do was to turn to them for analysis, not turn on them for overreaching.

Messrs. Kennedy and Kearney have had a target painted on their backs since March 2011 when they spoke before Council about a five-year forecast projecting that the balance in the General Fund would be exhausted by FY 2013-14.  (This forecast, it should be noted, was prepared by staff, not by the Treasurer or the Auditor).  Not only did Messrs. Kennedy and Kearney urge immediate action, they urged immediate action to cut costs.  And not just costs, but public safety costs.  And not just public safety costs, but maybe even staffing and salaries.

Having just gotten the Gilmore-Bonta-Tam slate elected and then sent away the notoriously tight-fisted Interim City Manager, Ann Marie Gallant, the firefighters’ union leaders were riding high.  They took the message delivered by Messrs. Kennedy and Kearney as a personal insult, and they and their friends in organized labor have gone out of their way to dis the Treasurer and Auditor ever since.

By now, Messrs. Kennedy and Kearney probably are used to having invective hurled at them whenever they don’t jump on the union bandwagon.  Thus far, both have showed they can roll with the punches.  But this latest effort to intimidate them into silence is a low blow.  Here’s what we’d like to know from Ms. Kern:  Where in the Charter does the City Attorney get the authority to lecture two elected officials about how to do their jobs?

Sources:

April 29, 2015 staff report: 2015-04-29 staff report re IAFF contracts

April 29, 2015 staff presentation: 2015-04-29 Presentation – REVISED

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.

11 Responses to Whom do you trust?

  1. Bill says:

    I do believe that Kearney and Kennedy should have been more involved with the contractual process and they had plenty of time to do that, but chose to wait until the contract was presented for approval by Council. If they want to BE involved, they need to GET involved. I and others felt comfortable with the City Manager’s ability to negotiate a solid contract and applaud the unions for working with him to pen something of value.

    • Interesting Bill. Key in the discussion at the Council meeting was the fact that the Kevin’s could not get involved before they given the information. They were not being allowed.
      Much was made of the fact that the Charter did not require Russo to involve them and that was mis characterized as meaning that he was not permitted to consult them and bring them into the process. Also the Council was called to advise and consent on the City’s approach to the negotiation. It seems the Council and Mayor could have asked for advice from the Kevins, but that they did not do so. The Kevins were not allowed, it seems, to involved themselves without invitations and information.
      It seems to me that the Council could have asked for advice from the Kevins and that the Kevins could have gone to open Council to rimind the Council and the public of their past involvement, concern and expertise. .

  2. No one offered a reason as to why it would be detrimental to spend another month and hear more from the Treasurer and Auditor. The contracts still had two years to go. Saying that the contracts had already been approved by the unions did not relieve the city council from a fiduciary responsibility to review them.

    Many feared the analysis that might have come from a third party, not the overreaching. The analysis could have been rejected after a public airing if it was so bad.

    • Yes. Thanks. Russo excused the short time on the basis of the fact that he only had the news on Friday and informed the Kevins on the next Monday. But what does that have to do with rushing the vote so Kevins would not be allowed time?

  3. Sharon says:

    Between not understanding or not caring, I’d bet Matarrese, Oddie and Ashcraft don’t care about the financial repercussions of the proposed contracts.

  4. Irene says:

    I thank and respect the city auditor and city treasurer for speaking out on behalf of the financial welfare of the city, especially since the city solicited them to be part of the discussion.

    It’s disturbing that the city council didn’t want to hear the third-party analysis or comply with the advice of the OPEB task force.

  5. Paul S Foreman says:

    I question the legal opinion quoted by Ms. Kern on the question of whether accepting employee contributions would cause the OPEB to become a vested employee right that could not be bargained away or submitted to arbitration. If I understood her, she was saying that since the contribution was labeled as a contribution to the employer’s obligation to fund the OPEB rather than a contribution of the employee to his OPEB benefits it would not vest. I do not understand how labeling changes reality. It is comparable to an employer labeling a worker as an independent contractor to avoid paying social security, unemployment insurance or workers compensation. Case after case says that it is not the label, but the true nature of the relationship that governs.

    My comments on the need to determine why the cost of running our fire department is so much higher than other cities were ignored by the majority, excepting Frank Matarrese who did express concern for the cost issue, but argued that this could be addressed outside of the collective bargaining agreement. There is some truth to that, but the majority’s yes vote took away one big option, exploring contracting fire services to the County. I will be watching closely to see how Frank follows up on his concern. In my view, .

    My comparisons are listed below:

    Our 2014 budgeted fire expenses were 26M for 75,000 people living on 13 sq. miles (including water), San Leandro was 21M for 87000 people living in 13 sq. miles, Pleasanton 15M for 74000 people living on 24 sq. miles, Richmond 27M for 108000 people living on 52 sq. miles, Vallejo 25M for 220000 people living on over 50 sq. miles. These may not be fair comparisons, but the fact that we are on an unsustainable path and that other cities are getting fire service at a much lower cost leads me to one sure conclusion. The only efficient way to attack the problem is to hire an independent expert to audit the operation of the fire department from top to bottom.

    • Your point is well-taken. Ms. Kern was careful to say that she had asked outside counsel for an opinion about whether “creating the OPEB trust” would “create an additional obligation over and above the obligation the City has in the MOUs.” But the relevant issue is not the creation of the trust; it’s the imposition of an employee contribution requirement. So the question to ask is one you posed: whether requiring employees to contribute a portion of their salaries to fund a trust intended to pay their OPEB benefits creates vested rights to those benefits. Maybe Ms. Kern did ask the right question, but she didn’t say so, and, since Council is asserting the privilege, we’ll never know.

  6. David says:

    Clearly, the rush was for Russo to give one last gift to the firefighters (and stick us with the bill) before he runs off to Riverside.

    As for the 3 yes votes… Odie is close friends with the firefighters union by way of his having worked with/for Rob Bonta, and Bonta’s reliance on the firefighters to get elected.

    Regarding the other two – look to see when they come up for re-election vis-a-vis the duration of the firefighters’ union contract.

  7. Kurt Peterson says:

    One item not mentioned so far is how Mr. Russo had to take the lead sales position if these contracts were to be approved. It was all orchestrated perfectly, if you wanted the contracts. Mr.Russo (with beautiful charts that made the plan seem good), Ms. Kern (down playing the Treasurer’s and Auditor’s roles as well as bring up some opinion of a law firm that the City wouldn’t be liable) and the unions (bringing out every current and past politician that they have supported in some way) brought out all the cards to get these contracts passed. Keep in mind, this all took place on the second to last day of Mr. Russo’s roll as City Manager.

    Good article Robert. Only wish it was required reading material for every Alameda resident.

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