Containing Employee Compensation Costs

Submitted Anonymously through YoloLeaks 

Recently several articles have been published in the Vanguard discussing the increasing costs of labor for the City of Davis and the lack of “appetite” City Council members, City employees and labor unions have to fix this problem. Here is some information that should help clarify the current situation and the City’s options.

What does the City of Davis pay for retirement benefits?

With general fund revenue of about $60 million every year the City of Davis spends about 70% of that revenue on employee compensation or about $41.7 million. Of the $41.7 million in employee compensation about $15.4 million is spent on pensions and retiree healthcare. The City also has an unfunded liability (it owes) another $90 million for pension and health benefits that they have already promised to people in previous years and have not yet paid.

How are annual retirement benefit payments and unfunded liabilities calculated?

Each member of CalPERS has its own account with money that the member (the City) has contributed to their pension plan. Every year CalPERS makes certain assumptions like what they think their return on their investments will be and how long retirees will live in order to calculate the percentage of payroll each member will need to pay into the retirement plan.

What happens if CalPERS changes any of its assumptions?

Recently CalPERS made a few adjustments to their assumptions that will have an effect on what the City of Davis is going to have to pay annually for retirement benefits and increase the City’s unfunded liability. Currently CalPERS estimates that they will earn an average of 7.5% return on their investment. However, over the last 15 years the rate of return on investments was less than 6% and CalPERS has estimated that investment returns will remain at 6% for the foreseeable future. So in 2016 CalPERS made the decision to slowly lower their expected investment return to 7%. This will increase the City’s unfunded liability to around $122 million and increase the annual retirement payments to around $21 million.

What would happen if CalPERS dropped the rate of return down to the amount they expect to earn on their investments?

If CalPERS used an investment return of 6% then the City’s annual retirement payments would increase to about $31 million per year and the unfunded liability would increase to $222 million.

What happens if the employee unions don’t agree to lower compensation and the City is unable to make the higher retirement payments because they need the funds to fix decaying infrastructure?

In 2013 Loyalton, California, made the decision to default on its contribution to the state pension system. After several collection attempts by CalPERS to get the City to make their required annual payments CalPERS found Loyalton in default. CalPERS then recalculated all pensions assuming a 3.25% rate of return and cut all Loyalton retirees pension payments by 60%.

Wouldn’t current and former employees sue if the City stopped funding retirement benefits that they are obligated to pay?

They could sue the City, however the City could then file for bankruptcy and have their obligation to pay discharged. This would save the City about $21 million per year. That money could then be spent on roads, parks and other City buildings.

 “The state of the city is very strong right now” Dan Wolk 2014 State of the City Address

If I were a current City employee or a retired employee currently receiving a pension and medical benefits I would want to sit down and negotiate some sort of compensation package that the City can afford to fund rather than wait until the City is unable to make CalPERS payment and cut all pensions by 60% and stops paying for retiree’s medical insurance. The longer they wait the larger the unfunded liability grows as the City continues to contribute less than the true annual pension cost to CalPERS.

About The Author

Disclaimer: the views expressed by guest writers are strictly those of the author and may not reflect the views of the Vanguard, its editor, or its editorial board.

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8 thoughts on “Containing Employee Compensation Costs”

  1. Richard C

    This is a very good presentation of the long term financial challenges facing the City.  One aspect of the issue of employee compensation that I have not seen discussed recently is City employee overtime pay.  Looking at the 2015 employee compensation numbers (the latest that are publicly available) it appears that there is a substantial amount of money being spent on employee overtime.  Perhaps this is an area that the FBC and the Council members should look at?

    1. David Greenwald

      Overtime has been looked at and discouraged after we had a series of articles maybe seven or eight years ago showing how much overtime was occurring.  The problem you end up having is if you want to end overtime, but its essential work, you end up having to hire additional people which means not only pay, but benefits and there is some sort of sweet spot where more overtime is more cost effective and hiring more employees is.

    2. Richard C

      The problem you end up having is if you want to end overtime, but its essential work, you end up having to hire additional people…

       

      Yes, that’s right.  The difficult part of this is to determine what exactly is “essential work” that requires overtime to accomplish. I’ve had enough experience to know that overtime is often used as an easy solution.  Perhaps the Council should be a little more forceful at stressing that overtime should only be used in emergency situations that threaten life or property?

      1. Mark West

        Another approach could be to reduce the number of paid days off that we provide employees, to better match that which is found in private businesses. If each employee actually worked more hours, instead of being paid to not work, we would not need as much overtime to finish the ‘essential work.’

        1. Howard P

          Mark… you are correct, and reducing holidays also has the advantage of more availability to the public… by the same token, vacation leave should be looked at… yet, increases in both were historically done as a way to compensate folk for no increases in salary, in the past…

          But, strictly related to OT, reduction in holidays would be a first step, as,  in an essential operation, for some, it results in 2.0 time… paid for the holiday, and the work performed on the holiday…

      2. Howard P

        There have been some definite abuses with FF’s, in the past, where someone will take a sick day, to force OT to cover the shift for a co-worker… and then there is a subsequent ‘payback’… SL is straight time… covering for someone on SL get’s compensated @ 1.5 time… hard to ferret out when that game is played…

  2. Ron

    Good article.  (I brought up some of the same conclusions in yesterday’s article, but noted that this is a huge problem throughout California – not just Davis. The entire system may be at risk of collapse.)

  3. Stephen Douglas

    “Of the $41.7 million in employee compensation about $15.4 million is spent on pensions and retiree healthcare.”

     

    How much of that $41.7 million actually  comes out of the general fund?  Are some of the city employees (and their benefits)  paid from other proprietary funds? (Water, Sewer, Transit.)

     

    The GF budget is only $60 million, but the total budget is over $300 million.

    …………………..

    “They could sue the City, however the City could then file for bankruptcy and have their obligation to pay discharged. This would save the City about $21 million per year. That money could then be spent on roads, parks and other City buildings.”

     

    I don’t think so. No other city has completely  eliminated pension costs through bankruptcy, typically  there is a small haircut for pensions and huge losses for bondholders. If the city managed to eliminate pensions altogether, they would be required  by federal law to be covered by Social Security, so add back in 6.2% of wages for SS.

     

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