UNSUSTAINABLE: City PERS Contributions Skyrocketed Over Last Decade

citycatFor those who have closely followed the debate on the blog, the chart you are about to see should come as little surprise.  Over the course of 2000 until 2009-10, the City’s PERS contribution has increased dramatically from just under one million dollars per year, up close to seven million by the end of the decade.

Obviously that rate of increase is unsustainable.  Thanks to the city of Davis and Finance Director Paul Navazio, we have the latest projections as well.  The key question is whether PERS contributions will continue to increase at the rate that they have and the second question is what the city can do about it.

First, a word of caution.  1999-2001 represented a low in city contributions.  From 1990 to 1999, the city’s average PERS contribution was $1.8 million.  Then for a two year period that fell to less than one million dollars.  What happened during that time is that the system became superfunded.  The economy and investments paid off so much money that PERS almost did not need any money from employers to sustain it.  However, as the stock market and economy began to slow, investments fell again and city’s began the long increase in salaries and benefits after 2001. 


The point to make here is that looking merely at the period 2000 to 2010 would not accurately reflect typical payments prior to this decade.  There has been a vast increase in PERS contributions over and above the typical year in the 1990s though.

The question though is really not about the past but the future.  That is where the projections of Mr. Navazio come into play.  Will PERS contributions continue to increase after 2011-12?  In other words, what we want to know is whether or not this trend line that we see will continue past this graph.

This is crucial because if pension payments increase to 20 or 30 percent of employee costs, the city really is going to implode upon itself.  If however, the contribution rates flatten after this graph, they are less concerning.  Mr. Navazio was typically nuanced in his answer, but he generally thought is that it is going to be closer to the former than the latter.  More alarming still, is that the 2010-11 number is probably overly optimistic and within a few weeks it would be revised upwards quite a bit.

What has happened is that PERS take contributions and invests them into funds that pay them back at a rate much higher than you or I could invest.  A typical rate of return has been over 7%.  But on a yearly basis the investments yield and uneven return.  In order to prevent huge spikes and valleys, PERS has smoothed rates over the course of a 30 year time horizon.  Thus they can adjust the rates up and down at the margins depending on what happens.

2008-09 was probably been the worst year on record.  There are expectations that they have probably lost money in excess of 20%, which will be reflected starting in 2011-12.  The question is one about rate smoothing.  Before PERS took account of this past year, they had projected a slight decrease in rates for 2010-11.  For 2011-12, they predicted somewhere between a 2 to 5% increase in rates.  Mr. Navazio picked 3% to reflect that figure as his estimate.

PERS is currently debating a second rate smoothing plan.  The result of that will probably be the biggest ever one year increase in PERS contribution rates for 2011-12.  However, they will likely smooth the impact of this year’s losses.  What that means is that the decrease in contribution rates for 2010-11 is likely not going to materialize and that the actual payments by the city for 2011-12 will increase.

In mid June they came up with a plan to do this.

The June 18, 2009 LA Times reports:

“Despite opposition from the governor, the board of the state’s biggest pension fund Wednesday approved part of a controversial plan to temporarily ease pension payments for schools and local governments by spreading this year’s deep investment losses over the next 30 years.”

It continued:

“CalPERS holdings, currently valued at about $184 billion, have plunged more than 20% since last summer. Without Wednesday’s action, cities, counties and other public entities around the state would have been hit with large increases in their CalPERS contributions next year.

So-called smoothing of the losses means that the increases in 2010 and 2011 would be smaller, saving cash-strapped governments millions of dollars in the short term.”

But this is as the Governor has complained more than a bit of a gamble.  The gamble is that future investments earning would grow fast enough to meet retirement obligations of state and local government workers. 

Actually it is less of a gamble than one might think.  Over a 30 year period, you can probably adjust the rates up over the course of time if the investment goals are not being met. 

For our purposes right now, the key point to make is that the rates are going to continue to go up for the foreseeable future as PERS will have to cycle the hit it took for the past year in over the course of the next 30 years.

Mr. Navazio described the system now as one of an unfunded liability where the current pensions costs are being deferred into the future.  The city’s liability figures to increase over time.

Policy Decisions Impact Future

If we look at the historical employer contribution rates we can see exactly what went wrong with this system.  From 1986 to 1999 the city paid an average 6% contribution rate of the overall pension to miscellaneous employees and around 12% to public safety employees which up until 2005-06 were separate (and are now on the same public safety plan). 

It was during the period of superfunding when the investment market was producing more money than needed that pensions went up to 3% at 50 for police and fire.  In fact, in 1999-2000, the city paid zero percent of contributions for police, fire, and misc. employees. but within just a few years by 2004-05, the city was paying over 20% contributions for public safety.

In the historical context it almost makes sense that the city would bump up the pensions to 3% at 50.  The economy was rolling, the city wasn’t having to pay into it, and it seemed like a small price to give the public safety employees especially in the wake of 9/11 when we say what happened to firefighters and public safety employees were seen on the front line of the war on terror.  Riding that wave, we see public safety employees going from making in the $30 and $40K range in salary at the beginning of the decade to their current salaries nearing $100K and well over that in total compensation.

What is less explainable is the change in 2007-08 where the city bumped up misc. employees to 2.5% at 55.  Although that was approved under the condition that employees contribute an additional 1% to off-set the costs of the higher pension.

For 2009-10, the city will be paying 12.5% of misc employees contributions and 22.75% of public safety employee contributions.  On the other hand, employee rates have remained virtually unchanged.  In 1986 misc. employees paid 7% of their contributions and police and fire 8%.  This year it’s 8% and 9% respectively.  Thus employer rates have practically doubled (and the principle has gone up as well) from the 1990s while employee rates are unchanged. 

The question at this point is how do we fix this system.  One possible solution has been to create a two-tiered system.  This would be difficult to implement and patently unfair to pay newer employees at lower rates than older employees.

A second approach might be a more radical approach of leaving PERS and then simply renegotiate the terms of agreement.  Other cities have attempted that but have seemed to abandon that approach.

A third approach would be to change the employee part of the equation and require them to pay for a larger portion of their pension.  That has the problem of being a veritable salary cut and if we attempt to implement that at the same time we cut wages, people will face a double hit.

A fourth approach would be for city or state to lobby PERS to change their rules to allow us to negotiation a reduction in our pension system with the employees.

None of these are perfect solutions.  They all would require at the very least agreement with the city employee groups.  Most public employees got into the system for the reliability of the wages along with the assurance of retirement.  The problem is that we set a situation that worked alright in good times until we increased the level of contributions to the point where during bad times we could no longer sustain it.  Moreover, there is real question at this point as to whether even in good times, we can continue to be able to sustain a larger and larger portion of our money going away from productive workers and towards retirees.

This is one reason we remain so concerned about the current employee bargaining talks.  Unless we address these problems in negotiations we are going to continue to have to deal with them into the future.  Our current problem is three fold.  First dealing with increasing employee salaries.  Second, the runaway pension costs.  And third, the unfunded liability of retiree health benefits that is currently running around $41 million.

Let me put this into real numbers here.  For this just completed fiscal year we paid out roughly $6.6 million in pensions and around $2 million in retirement health pension.  That latter number increases to around $6 million by 2020.  And if the council doesn’t change our approach it exploded to over $16 million by 2030.  Even if we do fix our approach, we are looking at $10 million by 2030.  Right now we have a budget of about $60 million for employees total compensation.  About one-sixth of that goes to pensions and retirement health.  That number could increase to 20 or 30% by 2020.  That is what we are facing as a city.

We have a chance to fix some of that right now, but we appear to be squandering it for the simple reason that we lack the will to make the tough bargain and that right now things do not look that bad that we need a drastic fix.  City’s that are in far worse shape right now are having to make those tough decisions and may ironically end up in better fiscal positions in the longer term as a result.  Right now, we live in denial facing a situation that is bad enough that the canaries are getting stressed but not bad enough that we are forced to act.

—David M. Greenwald reporting

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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  1. For the record

    David… you should clarify that for misc. employees (non public safety) the increase in both the employer’s and employees’ share to date, was not only offset by decreases in market adjustments and COLA’s, but in addition certain CC members demanded an additional decrease of 1% as a “premium” to implement the change from 2% @ 55 to the 2.5% @ 55 formula. The future may remain an issue, but the same issue applies to Social Security and Medicare.

  2. stan forbes

    i think we are going to have to change our mind set about “unfair” fiscal reality may mean new employees willget paid less or that employees will have to take an effective pay cut becasue they have to pay more–the fact is all through the society we have promised more that we can pay and so we will have to get less in the future.. its loke health care-we want the care to cost less-the only way that can happen is for someone to get less either doctors or hospitals or insurance companies or reduced care–there is no magic that lets things cost less while everyone continues to get the same. that is president obama’s challenge and it is ours at the local level as well

  3. anon

    Let me put this into real numbers here.

    Please do. What is the average retirement income per/employee/classification/year? Cost of health benefits/employee/year? Link?

  4. Rich Rifkin

    [b]For The Record:[/b] Are you trying to suggest that the adjusted salary increases given to non-safety employees working for the City of Davis over the last decade (1999-2008) did not exceed the CPI for our region? My understanding is that after “offsetting” the salaries (and the benefits and the pensions) each grew at a rate twice CPI on a compounded basis.

    Also, everyone reading this should understand that the figures in the contracts called COLAs and Market Adjustments are arbitrary. Thus, when money was “given back” to adjust for the increased pension benefits, that was essentially a fiction.

    In 2005, for example, when the now expired but still operative PASEA MOU was signed, the agreement called for a COLAs (for all members) of 0% in 2005, 2% in 2006, 3% in 2007 and 3% in 2008. Were those based on actual increases in the cost of living? No. They were made up out of whole cloth.

    In addition to the COLAs, various job descriptions in PASEA got “Market Adjustment” increases in their salaries. For example, the “WWTP Supervisor” got annual “market” increases of 7%, 6% and 5% (on top of the so-called COLAs). Added together, these wage increases were 7%, 8%, 8% and 3%. However, in 2006 and 2007, the increases were “offset” to account for the much higher pensions. Those offsets were 2.2% and 2.2%. So, in effect, before the large pension increase, the wage increases over the last four years were 7%, 5.8%, 5.8% and 3%. On a compounded basis, the total wage increase was 23.4%.

    FOR THE RECORD refers to the increase in the “employees’ share.” Odd to consider that, because the City of Davis pays 100% of the “employees’ share” for non-safety employees. That will be more than $1.7 million this year.

    With regard to the so-called “market adjustments,” these increases are partially determined by a comparative wage study with “comp cities” (Citrus Heights, Fairfield, Folsom, Lodi, Napa, Rocklin, Roseville, Vacaville, Walnut Creek, West Sacramento and Woodland). While there is value in knowing what other cities are paying, a BIG PART of the reason Davis is now in such dire financial straits is because we forced ourselves into a “keeping-up-with-the-joneses” ratrace. That was (and still is) foolish. The other “comp cities” have different revenue streams than we have. We suffer a loss when we lose good employees to other cities. However, we suffer far more when we pay more that we can sustainably afford. Our salary structure must be a function of our revenue growth (i.e., our ability to pay). Obviously, as we face growing deficits, massive long-term unfunded liabilities, huge growth in pension obligations and tremendous reductions in city services (including less police protection and worse road repairs) that truth becomes more and more obvious.

  5. Call Me Stupid

    I don’t get how the system works. Did not the city foolishly decide to give overly generous pension benefits? Are not the contracts now locked in? If we have a CC majority (A.S.S.) stuck on stupid, what else can we do than:
    1) Vote them out of office at the next opportunity;
    2) Refuse to extend the parcel taxes – which will force the situation – either the unions become more reasonable or a lot of their membership will have to be laid off.

    What I am not clear about is the way in which the employer’s contribution is decided. Does PERS decide? Or is it the CC majority, or what?

  6. Make the Needed Cuts!

    Rich, would you join a committee to oppose the next tax renewals, unless the CC does the right thing and adjusts employee pay and benefits packages to a sustainable level?

  7. Rich Rifkin

    [quote]What I am not clear about is the way in which the employer’s contribution is decided. Does PERS decide?[/quote]Yes, CalPERS decides.

    The employee contribution amount is a percentage of an employee’s salary (not counting overtime). There are different percentages based on the pension plan. The most generous plans, such as 3% at 50, have higher employee shares than the less generous ones, such as 2% @55. This is from PERS: [quote]The percentage of your contribution is fixed by employer contract and varies from about 5 to about 9 percent of your earnings, depending on the plan type and whether you are covered by Social Security[/quote] Most of the money CalPERS gets each year from current employees and employers which is not used to pay benefits for current retirees goes into its investment portfolio. The amount CalPERS charges employers is based on 1. How well the portfolio performed (over a previous period); and 2. How much the employees paid in for the plans covered by that employer.

    If CalPERS market portfolio performs exceedingly well, the employer shares fall. If the investments go bad (as they have for the last 2 years), employer contributions go up. The employee shares, however, don’t change.

    In Davis, the safety employees are currently paying the maximum allowed for the employee share. That adds up to about $1.75 million this fiscal year. The City of Davis share for the safety pensions is about $2.73 million. Because of the drastic fall in the PERS’ portfolio, the $2.73 million figure (paid by Davis taxpayers) will go up quite a bit, while the employee share will hold constant.

    The same math will apply with the non-safety employees in Davis. However, unlike the police and fire, the others don’t pay any of their salary, as the City of Davis picks up the full “employee share.”

  8. Rich Rifkin

    [quote]Rich, would you join a committee to oppose the next tax renewals, unless the CC does the right thing and adjusts employee pay and benefits packages to a sustainable level?[/quote]I’m not sure. I want to wait to see what plays out with regard to the new city contracts.

    As you may recall, I opposed the increase in the sales tax rate*, but I supported the parcel tax increase for parks. Even though I don’t think a parcel tax is fair (compared with a valuation tax, which is not allowed under the Prop 13 rules) to pay for improved and well maintained parks, my thinking is that our city as a whole, and property owners in particular, are better off having nice parks and greenbelts. I’m not yet sure that getting rid of the parks tax, to prove a point, is worth it. I might be convinced at some point by that argument. But so far, I’m willing to wait.

    * My take on the sales tax, back when it was on the ballot, was largely that it is regressive. An example I used was this: If a millionaire in El Macero buys his 16 year old a car, she pays X-number of dollars in sales tax on that purchase; if a poor person who buys that car as his primary vehicle, he also has to pay x-number of dollars in sales tax. The amount paid in sales tax, though, is a substantially higher percentage of the latter person’s family income than it is for the former. My view is that, as a general rule, I prefer income taxes to sales taxes, if taxes must be raised.

  9. Make the Needed Cuts!

    Sales taxes are regressive by nature. However, the sales tax is a general tax, and a simple majority vote will renew. I think that most of the funding for the gold-plating on the Fire pay and benefit packages is from the sales tax.

    Knocking down the parcel tax would be nearly a shoe-in (you blink they lose), but there are political issues about using a non-related tax measure to make the budget point that the Fire-owned CC majority will take the city bankrupt before they will do the right thing and reduce those giveaway packages.

    As much as I love the parks, the parks parcel tax failure will result in the city council having to strip down the huge giveaways to Fire to balance the budget. (Of course, there is still the $41 m in unfunded pensions, etc. that cannot be ignored.) So, knocking down a parcel tax will do the same thing as the sales tax reduction, and would be much easier to do.

    (Dear Donna Silva, nothing personal, but aren’t you tired of the Fire personnel sopping up all available money while your line staff suck air for funding??)

    Rich, agree with you. Let’t wait a bit.

    To Fire staff: this is not personal. You guys made out like bandits the past 5 years, but it cannot continue. Advice? Do a deal with your 3 CC members, reduce the packages to a sustaniable amount, and head off what is politically coming.

  10. Argggggghhhhhhhhhhhh!

    Rich, thanks for the explanation of how things work. Frankly, it doesn’t sound as if CALPERS “saves” for a rainy day. It lets the cities off the hook completely when the investment portfolio is doing well, and soaks the city when things aren’t going so well. Or to put it another way, the city is not “saving” for a rainy day. Instead of putting money aside when things are going well, the city spends to the hilt. Then when the hard times hit, the city is in real trouble, as it is today. It sounds like both cities and CALPERS need an overhaul in the way they do business. Judging from the way the economy is tanking (foreclosures are up bc of the increase in furlough time), things cannot ever go back to the way they were.

    I will be voting against the extension of the city’s sales tax and parcel taxes. I want a clear message sent to the CC majority (A.S.S.) it cannot be business as usual – the taxpayers’ collective pockets are tapped out. If it means city employees must be fired, so be it. How else do we friggin’ get control of the out-of-control spending? There doesn’t seem to be any willingness to collectively sacrifice on the part of police or fire or even the other city employees. If the state workers can take a hit, so can the city employees. Hello! Are you listening city employees, City Council majority?

  11. Crisis Managers

    Does anyone know what plain old payroll is for the City of Davis excluding benefits? If we are at 15% of total compensation for retirement and health benefits, it seems like we are not doing too bad compared to many other entities including private sector. I’m uneasy with the approach that policy has to quickly change during the worst economic downturn in 70 years. It’s akin to selling your house right now to raise cash to pay off your VISA bill. You’re selling a long term asset at the bottom of a price trough to cover debts that may be a short term problem with long term impacts.

  12. David M. Greenwald

    The best data I have is from 2007-08: $49 million total compensation, $15.9 million benefits, $5.8 million pensions, $27.4 million salary.

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