Mayor Calls City’s Unfunded Liabilities Situation – Urgent

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Mayor Robb Davis has reacted to an updated analysis by a city-contracted actuarial as “urgent.”  Despite cost-containment and other efforts by the city, an actuarial report shows a huge jump in the city’s unfunded liabilities for pensions, among other things.

For pensions, the unfunded liability has increased from $85.3 million up to $98.3 million in just a two-year period.

As Mayor Davis told the Vanguard on Thursday, “The most updated analysis by the City-contracted actuary indicates that even if employee salaries do not grow at all over the next five years, our required pension contributions across all employee groups (police, fire and miscellaneous) will grow by over $4.8 million per year compared to today.”

While the report on medical seems more optimistic, as the liability actually decreased by $5.5 million over the same period, Mayor Davis warns that “our retiree medical contributions will increase by over $700 thousand IF recent lower medical insurance growth rates hold. About 65% of this growth will hit our General Fund (unrestricted fund) but all of it finds its way into increased costs for the delivery of services such as water and sewer.”

The city had largely contained salaries until last year when they bumped up salaries slightly.  Mayor Davis warns, “If salaries grow by 3% (a level that CalPERS assumes cities’ salaries will grow at), the pension contributions will require an additional $5.3 million per year.”

Said Mayor Davis, “If the average annual General Fund revenue growth of the past 15 years continues for the next five (the 15-year trend is 4.8% per year), fully a quarter of the increases will be consumed uniquely by pension and retiree medical cost increases.”

Worst yet, that “is if salaries do not grow at all (no promotions, no longevity bonuses—which are already built into contracts). And, because the last 15 years included two sales tax increases, it is arguable whether these rates of growth will be maintained.”

These extra millions would only cover pension and retiree medical.  “They do not include non-employee cost increases related to City services, nor do they include the tens of millions of dollars we are underspending each year to maintain our parks, streets, and bike paths.  It is no exaggeration to say that over the coming 5 years (and beyond) we need an additional $15-29 million each year to cover all these costs combined,” the mayor explained.

In a recent article in the Enterprise, city staff downplayed the situation, acknowledging the urgency, but pointing to things like “lump sum” payments which have helped the city keep up with annual payments required into the pension and health benefit funds.

However, while the city may be currently managing the situation, the cost increases will increase burden on the city.

“There is no doubt that paying down OPEB (Other Post-Employment Benefits – retiree medical) with lump-sum payments helps mitigate the changes,” said Mayor Davis.  However bigger questions remain concerning “whether the more recent slowdown in medical care costs will continue, or whether there will be a return to more rapid inflation in these costs” as well as “whether the assumptions CalPERS is providing as the basis of the actuarial analysis will hold.”

The big concern here is that CalPERS (California Public Employees’ Retirement System) lost about $100 billion in the market crash in 2008 and the fund is at 68 percent funding levels.  As Ed Mendel reports, “Most experts are predicting a decade of weak investment returns, well below the annual average earnings of 7.5 percent that CalPERS and CalSTRS [California State Teachers’ Retirement System] expect to pay two-thirds of their future pension costs.”

In late October, Comstock’s reported that the fund will expect an average return of 6.21 percent, far below previous estimates.

“CalPERS dimmed its outlook after reporting a gain of 0.6 percent in the fiscal year (that) ended June 30, with losses in both stocks and forestland. That followed a 2.4 percent return in fiscal 2015.”

“The next two years, the next five years, and perhaps the next 10 years are shaping up to be the most challenging market environment for us, for institutional investors and for pension funds going forward,” said Chief Investment Officer Ted Eliopoulos.

Remember, as the Vanguard has previously discussed, CalPERS investments must return 7.5 percent over the next 30 years in order to meet obligations without assistance from taxpayers.  The Vanguard has consistently questioned the reasonableness of the 7.5 percent expectation and now we are seeing it is not even close.

Comstock’s reports, “CalPERS’ annualized returns were 6.9 percent for the last three years, 5.1 percent for the last 10 years and 7 percent over 20 years.”

Where does that leave the city?  Previous estimates were that for every quarter-percent reduction in the expected annual rate of return, the city will have to pay an additional million.

For Mayor Davis, “while it is true that we are ‘keeping up’ as things stand currently, the cost of ‘keeping up’ continues to grow and that crowds out funding for other projects our community needs to maintain the level of service citizens expect.”

“Something must give,” he says.  “Thus, I am less sanguine than our City staff.  In fact, it is not clear to me at this point how we are going to cover everything over the next five years, given that we are not even covering critical infrastructure backlogs now.”

He concludes, “I believe we must discuss cost containment—broadly writ—and put a revenue measure before the population in the next two years.”

The Vanguard will have more on this developing situation in the coming days.

—David M. Greenwald reporting

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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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72 thoughts on “Mayor Calls City’s Unfunded Liabilities Situation – Urgent”

  1. Barack Palin

    —and put a revenue measure before the population in the next two years.”

    Let’s hope they come up with something that includes everyone, not just homeowners.

      1. South of Davis

        BP wrote:

        > And I say the term homeowners loosely, in most cases it’s people

        > who are buying a home and have large mortgages and tax bills.

        Don’t forget that almost all of the people that pay “rent” to a bank every month” for the money they used to “buy” their home (and cars) have seen their Davis city services bills MORE than double over the past decade.

        I was just going through some files and my current “monthly” Davis city services bills are about 50% higher than the old “every other month” city services bills from ten years ago, a 200% (TWO HUNDRED PERCENT) increase.

        We always hear that the cost of healthcare and education is outpacing inflation but the cost of my healthcare and UC tuition have not even doubled in 10 years while the bill I pay to Davis has more than tripled (despite using even LESS water)…

        P.S. Smart move by the city of Davis to go from 6 bills a year to 12 since many people I talk to say “the current bills are only about 50% higher” forgetting that they are paying twice as many bills a year…

         

      2. Topcat

        P.S. Smart move by the city of Davis to go from 6 bills a year to 12 since many people I talk to say “the current bills are only about 50% higher” forgetting that they are paying twice as many bills a year…

        This was an extremely stupid move.  Going to monthly bills increased paperwork, postage costs, and employee time required to handle all the extra paperwork.

        This move shows that the Council is not concerned or even aware of how to control costs.

        1. South of Davis

          David wrote:

          > How much did it increase costs?

          With ~16,000 water accounts in town going to monthly billing added the cost of printing mailing and processing the payments for ~96,000 MORE bills every year.

          Even if it cost $25oK/year as the Master Card commercial says “tricking people in to thinking their bills have not tripled” is PRICELESS…

      3. South of Davis

        David wrote:

        > Instead of saying what you don’t want, why don’t you tell us what you support?

        Here are a couple ideas and I’m sure BP could come up with more:

        $1 tax on anything labeled “organic” (anyone buying $5 heirloom tomatoes won’t even notice this).

        $5 per person “protest” tax (the city could raise ~$500 every time the anti-pipeline/F Trump gang gets together with chalk downtown).

        $1 tax on “vaping” stuff (I don’t know why but I find “vaping” even more annoying than smoking).

        We could also lead the way with a first in the nation “fat kid tax” (in addition to making the default beverage water we would install a scale at every restaurant in town and every kid with a BMI over 25 would be charged $1 and BMI over 30 would be $5)…

      1. quielo

        Generally not. They already charge what the market will bear in most situations. Raising the cost of doing business will raise rents but it’s not a direct connection.

      2. hpierce

        You obviously have never been a landlord… given the property tax increase #’s/%-ages, it is generally not worth the effort… quielo is correct… “market” is the driver, and even then, if market rates go up, it has to be significant (~5% or more) to risk losing a tenant, having the space vacant (zero income), and then spending the time/effort/$ to re-lease at a higher rate.

      3. Barack Palin

        Matthew,

        If future city parcel taxes have to follow the same law that the school parcel tax had to then apartment renters absolutely won’t be subject to any parcel taxes as the apartment complex is no longer taxed per each unit.

         

      4. South of Davis

        Matthew wrote:

        > Barack Pain, You are not seriously naïve enough to believe landlords

        > absorb property tax hikes and don’t pass them on to tenants???

        I have been trying to get my “tenants” (aka my wife and kids) to give me more money every month to cover the tax increases but they remind me that none of them have jobs…

  2. Misanthrop

    “He concludes, ‘I believe we must discuss cost containment—broadly writ—and put a revenue measure before the population in the next two years.'”

    Shame, shame Robb. What happened to your “Davis is open for business” declaration?

    I’ll likely be voting no until I see the end of Measure R. What we need in addition to austerity is growth and Measure R is the chokehold against growth both as a driver of economic activity and increased tax receipts spreading the burden out among more people. Yet not a word from the mayor about growing our economy. Why not Robb?

    1. Robb Davis

      You may recall earlier in the year I wrote a comprehensive description of what I believed economic development entails at this time.  It was published here and I believe it still holds.  Perhaps David could provide the link to it.  I did not have time last night when I was responding to David’s request to search for it but could have/should have linked to it.  My fault.

      I was responding here in the context of the next 5 years.  With Nishi going down, and MRIC going away, the major opportunities for growing revenue from economic development are from TOT growth–we have one hotel on the agenda on Tuesday and another on the 20th.  I have come out in support of both.

        1. Robb Davis

          My apologies.  My comment should have said “tentative support” because we have laid out some conditions for approval that need to be met.  We all agreed on these and they require me to withhold final support at this time.

      1. Misanthrop

        What about the Cannabis economy? With the passage of Prop. 64 Davis should be looking to turn its agricultural expertise towards exploiting this new market. The voters have already put the tax structure in place, now all we need is the city government to move from opposition to support.

        1. Topcat

          With the passage of Prop. 64 Davis should be looking to turn its agricultural expertise towards exploiting this new market.

          Yes, this could be a big source of future income for the City.  There are going to be legal and political issues to work out so I expect that we won’t start seeing revenue from this source until 2018 at the earliest.

        2. Misanthrop

          No its not David. The feds aren’t going to go to war with the states over marijuana. They will be too busy gorging on tax cuts for the rich and wallowing in heaping the public largesse upon themselves and their Wall Street friends and colleagues from their Goldman Sachs days. They will go after the big expenses, privatizing everything nailed down or not, while cutting services for 99% of the population. The model is Kansas home state of  Koch Industries. Besides they love the uneducated and the doped up. As Phil Ochs sang almost 50 years ago “Maybe we should raise our voices and ask somebody why? But demonstrations are a drag, besides, I’m much too high.”

        3. Topcat

          The feds aren’t going to go to war with the states over marijuana.

          I think that the most likely stance of the Trump administration is to leave it up to the states whether to allow recreational cannabis.  Trump has said he supports medical marijuana.

          1. Don Shor

            I seem to recall that Attorney General Holder simply directed that marijuana enforcement was not a priority for use of resources. It’s well known that some DEA officials chafed at that. All Sessions has to do is rescind or fail to renew that directive, and local DEA officers could enforce federal law at their will. Holder also declined to file suit against state marijuana laws. Presumably that would also be at Sessions’ discretion.
            None of this means that local governments should stop processing regulations and deal with zoning issues. The county is moving forward on fees and regulations for grow operations. But it does mean that tax revenues from pot sales could be unstable.

        4. South of Davis

          Misanthrop wrtoe:

          > What about the Cannabis economy?

          It would be amazing if UCD also started a department to study the cultivation of cannabis, just think if Davis pot stores had people coming from miles around to try the best UC Davis grown hot house pot (paying high local pot taxes).  I say this as a guy who has not smoked pot since Dead/Dylan show at the Oakland Coliseum about 30 years ago and hopes my kids never smoke pot (other than trying it a few times)…

    2. Tia Will

      Misanthrop

      I fail to see any “shame” attributable to Mayor Davis on this issue. He has repeatedly stated his preference for a comprehensive, balanced approach including prudent use of available funds ( cost savings), economic growth ( he favors densification and mixed use projects and actively favored the Nishi project) and increased revenues through tax measures. My only criticism would be that in promotion of developments, there was a concomitant delay in putting a revenue measure before the electorate. However, I do not believe that this is directly attributable to the Mayor.

  3. Topcat

    The Vanguard will have more on this developing situation in the coming days.

    I expect that discussions will include economic development and higher taxes, but I hope that a big part of the discussion will be on total employee costs including post employment benefits.  We know that the City has been extremely generous in the past and this has left us with huge unfunded liabilities.

    Going forward, I would like to see MOUs that reflect the economic realities.  We should also be look at moving to a defined contribution plan for new employees.

    1. South of Davis

      Topcat wrote:

      >  We know that the City has been extremely generous in the past

      The reality is that the people that make the decisions all work for the city and it is easier to tack $10 on to every properties monthly “Municipal Service Tax” or “Public Safety Charge” than to tell their friends they won’t be getting a raise (or that their nephew that is in line to get a city job won’t get a multi-million guaranteed government pension like they have)…

  4. Misanthrop

    “We should also be look at moving to a defined contribution plan for new employees.”

    Good luck with that. A more realistic possibility is that Davis continue to clamp down on benefits, a path that seemed to begin and end with Steve Pinkerton’s tenure as City Manager. There is still low hanging fruit with the medical benefits cash out. The California State Supreme Court just took a case on changing the rules about promised but yet to be earned pension benefits. This might present a path forward for getting out of the 3% at 50 public safety contracts that were never sustainable and are at the root of the problem. See the link:

    http://www.ocregister.com/articles/california-737048-pension-supreme.html

    1. Topcat

      A more realistic possibility is that Davis continue to clamp down on benefits, a path that seemed to begin and end with Steve Pinkerton’s tenure as City Manager.

      I hope that a big part of the discussion focuses of the need to “clamp down on benefits” and how to do this.

      I also agree that the 3% at 50 contracts are big part of the problem.  Many employees will be getting those generous retirements for 30 to 40 years.  I expect that many public safety employees will spend more years in retirement collecting their generous benefits than they did working.

      1. South of Davis

        Topcat wrote:

        >  I expect that many public safety employees will spend more

        > years in retirement collecting their generous benefits than

        > they did working.

        Just like most big cities in America are mailing pension checks to more retired cops and firemen than pay checks to working cops and fireman most cops and firemen that retire at 50 with 90% pay after 30 years will get a pension for about as long as they got a paycheck.

        The social security site calculator says that the average 50 year old guy today will live for another 32.2 years .  A 50 year old female is expected to live for another 35.5 years.

        Former Davis Fire Chief Rose Conroy that retired in 2010 after 31 years is making over $120K a year.  If she lives another 25 years she will get around $4 MILLION more in pension payments (if she makes it well in to her 90’s she will take home another couple million)…

        I would be nice to give everyone a multi million dollar pension but anyone with 6th grade math skills (that is not in denial or paid to lie) knows it is a ponzi scheme destined to fail without a miracle (like CalPers funding the firm that makes a machine that turns water in to wine or sewage in to gasoline).

        With that said I’m happy that my retired CHP high school friend is doing so well with his $100K+ CHP pension and $100K + Sheriff’s salray that he does not need to rent his place in south shore and let’s me use it if I leave behind some good wine and beer and my retired East Bay firefighter friend who at 55 is getting a $180K+ pension in addition to $200K+ as the fire chief of a different department (where he will get a second pension when he “retires” for the second time) lets me use his place (on the lake) near Kings Beach.

        https://www.ssa.gov/cgi-bin/longevity.cgi

  5. Frankly

    I applaud this mayor stating the facts and not sugar coating the situation to keep the reactionary electorate placated and happy to cast the next vote.

    However, I think that the city of Davis will have to hit financial insolvency before there is any significant acceptance of the things that a city like Davis needs to do have a balanced municipal budget.

    I have said it before… Davis is a sinking ship of graying fools.

    1. Michael Harrington

      Frankly might agree with the idea of the City establishing a pot growing area on city land out by Mace Ranch could raise large amounts of city revenue?

      1. Matt Williams

        I disagree Chamber Fan.  We absolutely can provide basic services and infrastructure needs, but our actions tell us that we (both the government and the people, individually and collectively) have chosen not to do so.

    2. Matthew

      I’m sorry Frankly.  But it is so bewildering that community members oppose the very things that could address this problem: taxes, developments they could put special levies on.  Perhaps accepting fewer/less services is the solution.  This is a challenge that the state and broader society are clearly struggling with. “We want X but we don’t want to pay for it!”

      Davis is hardly a sinking ship though.

      1. Frankly

        The operational budget is barely balanced and would tip significantly red with the next recession or any increase in city employee compensation, while the unfunded long-term liability for pensions, roads and infrastructure is massive and keeps growing.  Meanwhile the old fool voters keep voting down development that would increase the tax base.

        So, yes, Davis is a sinking ship of old fools… especially in consideration of the vast opportunities Davis is blessed with to build its tax base.  Most other communities don’t have those opportunities and note the foolishness of Davis voters to reject them.

  6. Edison

    Thanks to the Mayor for again calling attention to this problem. This situation won’t be resolved simply through raising taxes or cutting employee benefits. More economic development is needed. For this reason I urge the Council to proceed with caution in contemplating LEED requirements for the proposed Marriott Residence Inn. The upfront capital requirements to achieve LEED gold can indeed become fiscally infeasible.  I saw that occur with the new Terminal B at Sac Int’l Airport. The Director of Airports and the Sac County Board of Supervisors initially aimed for LEED Platinum but had to adjust their sights on LEED Silver because the bond proceeds for the project simply did not provide sufficient funds for the additional cost of achieving Platinum.  I fear that pushing the Residence Inn developers too far could kill the entire project, thereby costing the city badly needed TOT revenue.

    As I mentioned previously, there are some relatively simple and probably inexpensive things the developer could do. For example, a Marriott Courtyard I visited several years ago had lights and electrical outlets in each room that could only be used if the electronic key were inserted into a receptacle in the room. When leaving the room the visitor would of course remove their key, which would then deactivate the lights and outlets.  That means a hotel guest can’t accidently depart their room and leave the lights on, nor the TV, etc., thereby reducing energy use.

    The City’s fiscal situation also lends some urgency to putting pressure on UCD to cease its practice of executing master leases on apartment buildings in Davis, and to call a halt to bidding on commercial properties such as the University Research Park recently sold to Sacramento developer Mark Friedman. UCD bid $66 million for the business park, which would have removed any buildings subsequently occupied by UCD from County property tax rolls.  Same thing with master leased apartments; UCD pays no property taxes.

    I’ve long thought that the portion of employee health insurance provided by employers should be based health factors the employee can control. For example, why should the premiums for a healthy employee be the same as an employee who abuses their health by being overweight, not exercising, using drugs, drinking too much alcohol, etc.?  Car insurance premiums are based on driving records; why not health insurance premiums being based in a similar fashion on risk factors that are up to a person’s discretion?  This may seem like a radical idea to many, but it could probably help a city such as Davis.

    1. Topcat

      ….why not health insurance premiums being based in a similar fashion on risk factors that are up to a person’s discretion?  This may seem like a radical idea to many, but it could probably help a city such as Davis.

      You could ask an even more radical question…. Why should health insurance be provided through a person’s employer?  It doesn’t make a lot of sense when you think about it does it?

      1. South of Davis

        Topcat wrote:

        > Why should health insurance be provided through a person’s employer?

        An even better question is when did “insurance” change in to “pre-paid medical care”.

        If car insurance covered gas something you use every day the way health insurance covers birth control pills and high blood pressure medication things you use every day it would cost a lot more.

        Homeowners insurance would also cost a lot more if in addition to “insuring” you were covered in the case of a flood or fire it also covered yearly “checkups” by a furnace guy, appliance guy, roofer and pest control guy…

        1. Matt Williams

          SoD, the answer to that question is also straightforward.  That change started shortly after WWII when Kaiser Permanente was established as the first Managed Care Plan.  The Kaiser model differed from the mainstream care giving model in that it was based on proactive/preventative medical care rather than reactive/remedial medical care.

          Bottom-line, the cost of proactivity was much lower than the cost of reactivity.  As a result they were able to under price the competitors, who eventually embraced the Managed Care model in order to be competitive.

    2. quielo

      “a Marriott Courtyard I visited several years ago had lights and electrical outlets in each room that could only be used if the electronic key were inserted into a receptacle in the room. When leaving the room the visitor would of course remove their key, which would then deactivate the lights and outlets.  That means a hotel guest can’t accidently depart their room and leave the lights on, nor the TV, etc., thereby reducing energy use.”

       

      This is the norm in China and other places. It also cuts of the A/C

  7. Sam

    Mayor Davis- Have you considered having the actuary run a projected cost using reasonable assumptions like a 6% rate of return and a realistic life expectancy table? Then you would have an accurate cost of the pension benefit that you are providing to employees on an annual basis and enable you to determine what each employee actually costs every year. Then you can calculate what annual revenue would be required to support your actual labor cost and what amount of labor you can afford at your current revenue. Then you can decide what combination of increasing revenue and decreasing labor costs are required.

    Using the current PERS projection is grossly inaccurate and does nothing to help you plan for the future.

    1. Matt Williams

      Sam, the presentation that the actuary gave to the Finance and Budget Commission the past two meetings did exactly that.  The FBC gave the actuary feedback based on those two presentations and incorporated that feedback into what he has provided to Council.

      The interactive 20-year budget modeling system that FBC is putting together with staff will dynamically show the impact of any change in the actuarial assumptions associated with pensions, the actuarial assumptions associated with retiree healthcare (OPEB), and the assumptions associated with the other major expense categories. Similar “scenario analyses” exist for the various categories of revenues.

      FBC has requested a December date from Council to present the interactive model as one of the items in a Council meeting.  The extended decision timeline for the two hotel proposals will probably result in a January scheduling of that presentation.

      Bottom-line, with this interactive model you can see the impact of decisions on (1) the annual budget, (2) the year-ending fund balances each year over time, and (3) the level of unfunded liabilities over time.

      1. Sam

        No, that does not really answer my question. You are only analyzing the the projected payment amount that PERS is expected to charge the City, not the cost of the benefit that the City is offering.

        Remember the variable interest payment option loans that were offered in 2003-2009? You could pick between making a fully amortized monthly mortgage payment or one that it negatively amortized. Essentially the payment that PERS charges each year is negatively amortized because the assumed rate of return is to high. The report only shows the estimated changes to those negatively amortized loan payments as the rate of return is slowly lowered. Each year the City is increasing their liability because they are only making a partial payment for an employment benefit that they are offering. I would like to know the actual full payment of the pension benefit that the City is offering using reasonable assumptions.

        It should not be hard for the actuary to calculate the cost of the pensions being offered next fiscal year if the rate of return is 6%. Basically assume that PERS votes today to drop the assumed rate to 6% starting 7/1/17. What would the pension cost have to be in the City’s budget next year?

        1. Matt Williams

          For some pretty straightforward reasons the actuary focused on the real and immediate situations/scenarios for the presentation to the FBC.  Even with that tight focus, each of the two FBC agenda item discussions lated a full two hours.  Wrestling (at that time) with “what if” scenarios like you have laid out would probably have doubled that 2 plus 2 time investment into a 4 plus 4 time investment. That was not a manageable commitment given the other items on the agenda.

          With that said, the FBC agrees with you 100% that we need to be closely/seriously looking at various scenarios like yours, and have included a number of pension and retiree healthcare scenarios in the interactive fiscal model we are building.  Not only will the model show the budget and fund balance impacts of those individual scenarios, it will also show them in the form of comparisons to one another.

          I am going to copy and paste your comments in this thread into an e-mail to Jeff Miller and Bob Fung.  The three of us are the ones working most actively on the model . . . Jeff and I as the Long-Term Budget subcommittee of the FBC and Bob as an official intern dedicated to the FBC (working pro-bono).  We do have to be careful about violating the Brown Act, which is why the primary activities are being done within a subcommittee rather than by the FBC as a whole.  All four FBC subcommittees (1) Revenue, (2) Long Term Budget, (3) Efficiency and Fund Balance, and (4) Infrastructure and Information System (Mini-RFI IT Transformation) formally report their progress at each monthly FBC meeting.

          If you want to provide your input directly, rather than indirectly through posts here, just let me know and Jeff and Bob and I would love to meet with you to explore ways to involve you in what we are doing.

        2. Sam

          It makes sense to present the report in that manor because it does estimate how much cash the City will have to send to PERS over the next several years so I understand why it was done.

          The problem is the PERS Board is purposely suppressing the payments and the unfunded liability. Their own consultants have said to expect a 6.2% return over the next ten years but they refuse to drop the rate of return because then cities won’t be able to afford the funding payments. If that is the case then Davis can’t afford to spend what they are currently spending on labor this year using this year’s revenue and we don’t even know the amount we are actually spending.

          I would strip out the amount required to catch up on the current unfunded liability (the balance of what you owe for under funding prior years) and just calculate the total cost of labor for the City, wages, benefits, payroll taxes, OPEB and the pension (assuming 6% or 6.2% or 6.5%) for next fiscal year. Then you will be able to see what revenue is required to break even. To make it even more straightforward just do the departments in the general fund so that departments that have dedicated revenue sources do not come into play. I would love to see that calculation!

           

    2. Sam

      From what I could tell the report that was presented still uses the expected PERS contribution rate to determine costs going forward and that would be inaccurate. For example, if at a 6% expected rate of return the retirement benefit costs the City 55% of wages then the City should use $55,000 as the cost of retirement benefit for FY 18. They can’t use the PERS payment amount of 30% because they are just adding $25,000 per $100,000 in wages paid to their unfunded liability each year.

      Was this done in another document that I did not see? If so, at 6% rate of return what is the actual annual labor cost for the City and what amount are we currently adding to the unfunded liability this year? (aka. What is the gap the City needs to close with additional revenue or by cutting costs?)

      1. Matt Williams

        If you open the Actuarial Report for the October FBC meeting and go to slide 16 on page 10 you will see the Contribution projections rising from $5.4 million in FY 16/17 to $9.5 million in FY 24/25.  Based on an FBC question the actuary came back to the November meeting with a breakdown of what were the major components of the $4.1 million rise.  His answer was that:

        ~ $1.7 million is from anticipated payroll growth

        ~ $800,000 is from an anticipated PERS Contribution Policy change

        ~ $700,000 is from a more pessimistic (more realistic?) assumptions change

        ~ $500,000 is the impact of the 2015 Investment “Loss” (the amount below the expectation)

        ~ $700,000 is the impact of the 2016 Investment “Loss” (the amount below the expectation)

        ~($307,000) is the impact of putting the new hires into the PEPRA program

        That info was in a handout that does not have a link on the City website.

        Let me know if that does not answer your question.

  8. Edison

    Topcat makes a good point. A person’s employer does not provide car or homeowners insurance, so why should they provide health insuance? It is my understanding that employer-provided health insurance was not the norm until WWII.  FDR enacted wage and price controls because the limited number of available factory workers were threatening to go on strike.  Since employers could not be competitive with salaries, many began offering health insurance as a lure to attract and retain workers.

    1. Matt Williams

      Topcat and Edison, the answer to your question has three components.

      The first has to do with the employer’s self interest.  Sick employees mean lost production and suboptimal efficiency.  An employee having a car (insured or not) or owning a home (insured or not) do not affect a company’s productivity and/or cost of labor in any meaningful way.

      The second has to do with human nature.  An employer relying on each individual employee to actually have health insurance and keep it paid up was a massive make-work project when compared to simply paying for the health insurance themselves and reducing the amount the employees were paid by proportionally sharing the cost across the employees.

      The third was that at the time that employer-paid healthcare was put into place, the “prior employer” of the vast majority of the work force had provided no-cost, full-coverage healthcare. As a reuslt there was a huge “can’t let the boys down” sentiment throughout the country.

      1. Edison

        Matt:  those are all good points I had not thought of. I once worked for an organization that gave employees a monthly payment equivalent to the cost of a Kaiser HMO premium.  Some of the employees did not use the money for that purpose. For example, my secretary’s husband drank her money.  When she broke her jaw in a bike accident, she therefore had to pay the medical bills out-of-pocket.

        I still think the employee’s share of medical insurance premiums should be subject to an annual evaluation of the employee’s health. I once worked with a guy who was obese, as was his insured wife and daughter. He had diabetes that he admitted was related to his weight, but he always stood by the fact that he and his family “really enjoyed eating.”  They also got absolutely no form of exercise. I referred to it as “recreational eating.”  Despite his self-imposed poor health, he paid no more into for his portion of the employer sponsored health insurance program than other employees who were fit and careful about their health.

      2. Topcat

        I wonder if it might make sense to provide health care in somewhat the same fashion that we provide other services that benefit society as a whole.  Think about how we provide national defense, law enforcement, fire protection, the interstate highway system, national parks, and thousands of other services.  Why shouldn’t health care be provided in a similar fashion?  Almost all of the developed countries provide basic health care this way.  Sure, there are problems with these national healthcare programs, but on the whole they seem to work fairly well and they avoid the problems we have in the USA.

        1. Matt Williams

          My personal opinion is that a National Health System is a bridge too far.  However, a consolidating actuarial risk into a single nationwide pool makes infinite sense.  Then within that single actuarial pool a base level of coverage would be available to everyone (which accomplishes what you are looking to do), and in addition, for those who wish to pay an extra premium (just as they do in the current system), higher levels of coverage (lower deductibles, different copay levels, coverage of special procedures, different referral requirements, different second opinion options, etc.) would be available.

          The biggest difference between the services you have described is the element of the personal connection between patient and medical services provider.  With national health that selective ability for patients to have a personal connection with their care giver and healthcare providers to  have a personal connection with their patients is largely lost.  In a single actuarial pool system the healthcare provider knows that they are going to get paid the exact same amount for providing a specific service to each and every patient.  They would have no reason to discriminate based on ability to pay.  Their paperwork would be infinitely simplified as well.  The same would be true for the patients.  Since Sutter and Dignity and UCDMC and Kaiser would all be getting paid the same amount by the single payer for treating them there would be no risk of being refused service because of the type of coverage.  The only reason a provider would say no to a patient would be if their patient load was completely full.

        2. Tia Will

          TopCat

          Yes, yes, yes, yes !  Countries that use some variant of a national health care program routinely do better  on many health care parameters than we do here in the US while spending less per capita.

          Here we are seeing increasing costs for diminishing returns and yet we seem to cling relentlessly to a “private” is better lack of system mostly for ideologic reasons, although also for a few misconceptions such as Matt put forth as a necessary evil with no evidence that I can see that loss of personal care would be a necessary outcome. Why we do not see improved overall health care as a matter of societal concern remains a great mystery to me when it is obvious that it consumes far too much in resources to obtain obviously suboptimal results in the face of a multitude of better options.

           

        3. Matt Williams

          Tia and Topcat, the reason we are so fiscally inefficient here in the US is that we slice and dice the actuarial risk pool down into such small slices that it is impossible to effectively deal with the fiscal risk that comes with medical risk.  First, we make each of the 50 states free standing.  Second, we create a myriad of individual health insurers (plans) within each state.  Third, many (most?) of those insurers/plans skim 20 cents of every dollar off for corporate profits and/or administrative overhead.  It is institutionalized graft at the highest level.

  9. South of Davis

    Stanford Study Reveals California Pensions Underfunded By $1 Trillion

    That may sound like bad news but is “only” $93k Per Household.

    A “progressive” solution would be to have the half of CA households that makes less than $65K pay nothing while the “rich” (making over $65K) each take on paying down $186K of the shortfall.

    http://www.zerohedge.com/news/2016-12-02/stanford-study-reveals-california-pensions-underfunded-1-trillion-or-93k-household

    1. Chamber Fan

      But that is somewhat misleading because the underfunding payout is not  in one lump sum but rather over a period of time.  And there is also a 30 year time horizon, so the fund is not quite as dire as you imply.

      1. Sam

        The underfunded amount is the amount needed today to be able to make those payments over the next 30 years, so yes it is as dire as the Stanford study implies.

        The misinformation and lack of financial understanding on pensions is almost criminal. The tobacco companies in the 50’s that sold the health benefits of cigarettes and the bank executives offering “alternative” mortgages ten years ago are shocked that taxpayers still believe that we are going to be able to pay these obligations.

      2. Matt Williams

        Chamber Fan, your statement lacks equivalency.  Yes there is a 30-year time horizon, but the $93K per Household number is absolutely real.  The 30-year time horizon applies to the payments.  If you assume a 4% discount rate (average inflation rate over the 30 year period) that means the stream of 30 annual payments needed to cover the $93K  is $5,300 per year.  If the discount rate drops to 3% then the stream of payments drop to $4,700 per year.  If we get into Jimmy Carter territory (a 12% discount rate) the stream of payments rises to $11,500 per year.

  10. Tia Will

    Matt

    My personal opinion is that a National Health System is a bridge too far.”

    The biggest difference between the services you have described is the element of the personal connection between patient and medical services provider.  With national health that selective ability for patients to have a personal connection with their care giver and healthcare providers to  have a personal connection with their patients is largely lost. “

    If this is the reason that your opinion is that a National Health System is “a bridge too far”, then I could not disagree more. There is nothing at all in the basic premise of a National Health System that says that an individual patient cannot choose their own provider and develop a strong bond with that individual. I really do not even know how you would have conceived this to be the case.

    Two cases in point. On the reservation where I served as a general medical officer, while it is true that patient’s who were dependent upon the hospital bus for transport from their rural homes to the health center frequently were not in control of the provider that they saw because their main limiting factor was the day of the week that they could be seen, patient’s who had more flexibility of transportation could and did choose their individual physicians and come during our office hours even though it was an entirely government run facility.

    Second case in point is Kaiser. While we are not government run, we are a very large integrated, pre paid health care system in which patients are encouraged to choose their own doctors and frequently establish relationships that last the entire span of the physicians career or the end of the patients life which ever comes first.

    I do not see how you could conclude that a National Health Care system would preclude individualized care.

    1. hpierce

      I’ll definitely agree on Tia’s second point… I’m not a spokesman for Kaiser, and if you had told me 40 years ago that they’d be my provider of choice I’d have laughed my proverbial “a” off… for over 15 years now, they have been, and my spouse and I have been very satisfied… four significant surgeries for me, one for my spouse, and overall great care for the minor stuff… they evolved.

      Their model of preventative care is exemplary… we need that type of model, and we do need a system for all to ‘nip problems in the bud’, and focus on preventative education… Tia has been pretty consistent on that theme, and I applaud her and her employer for that (IMHO, and I write that only because it “bugs” Tia!).

      Intervention early is medically important… and saves everyone the potential costs of ER treatment, which many uninsured use… with  no chance to pay the costs… so we all pay indirectly, in insurance premiums for the healthy, and taxes for Medical, etc.

      I may often disagree with you, Tia, but you pegged this one (except the Catholic thing… very big dissonance there)…

    2. Matt Williams

      Tia, I am a very happy Kaiser patient, but I very definitely do not have freedom of choice in selection of the provider for a particular service.  I must schedule an appointment with my primary care physician, and abide by his decision about whom I should be referred to.  I can’t go to a MD Anderson specialist to determine my possible cancer status.  If I were a woman I couldn’t go to Planned Parenthood for my healthcare needs.  I couldn’t choose to go to Johns Hopkins for a heart transplant.  I couldn’t choose to go to Ochsner for a liver transplant.

  11. Tia Will

    Matt

    I do not doubt that the issue that you address in your post of 8:52 represents a major part of our cost inefficiency, but it is certainly not the whole picture. By our poor distribution and poor accessibility of preventive services, we allow conditions to worsen until only the most expensive treatments will be necessary. The amputation, or blindness, or kidney failure that could have been completely prevented with diet, exercise, and perhaps early and aggressive use of medication cost not only in terms of the actual treatment, but also in terms of lost productivity, lost wages, perhaps loss of home and all means of self support. A medical system focused on treatment as opposed to prevention for all citizens will invariably be more costly than one that ensures that all citizens have access to preventive care and early interventions. We also fail in an economic provision of health services when we unnecessarily tip the employment scale in favor of the most expensive providers. When doctors create scarcity by limiting not only their own numbers by limiting medical school and residency training slots, but also by influencing laws to arbitrarily limit the care that can be provided by midlevel providers this also drives up the cost of care for the benefit of the few.

    And I am truly interested as I stated earlier in why you feel that a national health program would limit either choice of or development of a long term relationship between a patient and the doctor of their choice.

    1. Matt Williams

      Tia said . . .  “And I am truly interested as I stated earlier in why you feel that a national health program would limit either choice of or development of a long term relationship between a patient and the doctor of their choice.”

      Tia, I answered that earlier, but I’ll repost it again.  I am a very happy Kaiser patient, but I very definitely do not have freedom of choice in selection of the provider for a particular service.  I must schedule an appointment with my primary care physician, and abide by his decision about whom I should be referred to.  My expectation of a National Health System is that it would operate in the same closed panel fashion.

      If I were a woman I couldn’t choose to go to or develop a long term relationship with Planned Parenthood for my healthcare needs.

      If I were to develop cancer I couldn’t choose to go to or develop a long term relationship with a MD Anderson specialist.

      If I were unfortunate enough to need a heart transplant I couldn’t choose to go to or develop a long term relationship with Johns Hopkins for that heart transplant.

      If I were unfortunate enough to need a liver transplant I couldn’t choose to go to or develop a long term relationship with Ochsner for that liver transplant.

      If I were unfortunate enough to have a child with autism I couldn’t choose to go to or develop a long term relationship with the UC Davis MIND Institute for treating that autism.

      ———————

      With respect to the rest of your comment, I don’t disagree with anything you have said. All are good points, and the existing fractured state-by-state, insurer-by-insurer system facilitates and enables all the concerns you raise.

      I’m not sure where your “whole picture” comment is coming from. Care to elaborate?

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