The Sacramento Bee’s editorial board this morning argues that Federal Bankruptcy Judge Christopher Klein’s “potentially groundbreaking ruling in the Stockton bankruptcy case should send messages loud and clear.” The question is whether cities like Davis will hear that message.
The Bee writes, “To the Legislature – that it can’t rewrite federal bankruptcy law. To the city of Stockton, Franklin Templeton Investments and CalPERS – that they need to make a deal. And to local officials across California – that they need to get more serious about pension reform.”
It is, of course, the bottom line that we are most concerned about the need to get more serious about pension reform.
By ruling that “insolvent California cities could choose to reduce already-promised pension payments and even walk away from the California Public Employees’ Retirement System,” even though Stockton does not plan to do that, the door is now open to change.
Writes the Bee, “This entire ugly spectacle ought to refocus local officials on their financial reality: If they don’t control long-term retirement costs, those obligations will consume tax dollars at the expense of services to residents and jobs for current employees.”
As the Bee notes, many have started to dial back pensions. Cities like Davis have begun to reduce benefits for new hires and require all employees to pay their full share of the CalPERS contributions.
However, Davis, like other cities, has had to negotiate these changes. Davis exchanged the employees’ pension and retiree health concessions for as much as a two percent pay hike.
The Bee writes, “Because these changes are being made through negotiations with unions, local governments are often having to hand out pay raises and other sweeteners in return. And because they were far too generous for much too long, it is going to take years for significant savings from pension reform.”
That is exactly the dilemma the city of Davis is in. The city has implemented the pension reforms it can, it has slowed down the rate of salary and compensation growth to below inflation levels and yet, it is still in the red.
The Bee notes, “The city of Stockton overpromised and overspent, and buried itself in more than $200 million in debt. Franklin Templeton and other creditors made bad bets. And the biggest losers are the working people of Stockton, who will be paying for these mistakes for years to come. About 2,400 retirees have lost their city-paid health insurance, while residents are getting slammed by $90 million in budget cuts and by higher sales taxes to shore up public safety.
“If other cities don’t learn the right lessons, they could put their citizens in similar straits, even if they don’t flounder all the way into bankruptcy court.”
And that concerns us greatly at a time when the city of Davis is at a crossroads. The city has attempted to reduce pension obligations by convincing employee groups who signed agreements (that does not include fire or DCEA) to pay more of their employee share and agree to a second tier of benefits for new employees.
But Davis remains in the hole due to local issues such as lack of sales tax revenue, increased costs due to CalPERS changing their formulas, and the failure of the city to invest in infrastructure.
These changes are not nearly as robust as we would like to believe they are. While the city carved out labor agreements with 5-0 votes, other reforms required 3-2 votes to implement.
There are indications that some of the employee groups are resurgent. Fire and DCEA held out until contracts were imposed on them last December, and only have one-year contracts. Many of the labor agreements are up as soon as next summer.
The city voters passed a sales tax measure as a stop gap to close a $5 million shortfall, but a follow-up parcel tax measure that would have dealt with infrastructure needs will not be on November’s ballot, and polling suggests that, even if it makes it to the ballot, it may not pass.
There are indications – despite some protests from some on the council – that there is an impasse or at least a difference of opinion about the new city manager. The Vanguard continues to get confirmation that there is one candidate backed by employee groups, hopeful that new revenues will filter now to increase employee compensation.
Many continue to worry that new revenue – far off as it may be – from innovation parks will eventually go to employee compensation rather than shoring up existing city services and infrastructure costs.
There is some precedent for it. In 2004, the voters passed their first half-cent sales tax measure with the city purporting to need the revenue to continue existing services. But that’s not how it worked out, and instead the roughly $3 million in revenue went to a roughly 36 percent pay increase for fire, with additional revenues from double-digit property tax revenue increases going to fill 15-18 percent pay increases for the other bargaining units.
That engine shut off in 2008 when the economy and real estate market collapsed, but in 2009, the city made only small and minor adjustments to pensions and retiree health care. It was left to the last council to do the heavy living.
The question now is whether the council will continue down the path to sustainability or whether it will turn back and go with an approach that seems more employee-friendly, but masks the city’s fiscal problems.
—David M. Greenwald reporting