Sunday Commentary: Containing Costs Figures to Be a Huge Challenge

City Hall

A week ago Mayor Robb Davis presented his cost containment plan.  This is one I fully support.

The mayor writes, “It should be clear from the foregoing that we are taking a comprehensive approach to increasing revenue. What we have not yet done is critically analyze the role of cost containment in meeting our fiscal challenges. I believe that in addition to seeking revenue growth, we must engage in a more strategic and comprehensive analysis of cost containment approaches if we are to move the city towards fiscal resilience.  This analysis must include restraining employee cost growth, but must look widely for all manner of cost control measures.”

From my perspective this is easier said than done, and part of the real problem is that our general fund is only about $60 million while our unfunded liabilities and deferred infrastructure needs are into the hundreds of millions.

I think the best point that Robb Davis makes is “there is no silver bullet.”

This is a critical point, the critical point.

This week we had a piece submitted anonymously that I think illustrates the problem that we face.  Right now, payroll costs for 2015 represented about $41.7 million of the general fund (give or take).  We have seen in the past that the combination of pensions and OPEB (Other Post-Employment Benefits, as retiree medical) eats up nearly one-quarter of the city’s general fund.

In other words, one dollar out of every four goes to people who are not currently working.

There are a number of different possible solutions that people as recently as yesterday suggested.

Ideas that were thrown out:

  • Limitation of general fund growth
  • Bankruptcy
  • Aggressive Outsourcing
  • Moving from Defined Benefit Pensions to Defined Contribution

As recently as November, Rich Rifkin in the Davis Enterprise argued with respect to the challenges faced due to unfunded liabilities: “The only sensible approach to this situation is to restrict the annual growth of total employee compensation — that is, salaries plus benefits plus other employer costs — to 2 percent per year. That growth rate in employee costs tracks with sustainable revenue growth.”

While it sounds good, the problem is, as Mr. Rifkin acknowledges, “It has to be in the labor contracts. The City cannot just impose that without going through the complete negotiation process with its unions and associations.”

This is the problem.  The city might be able to limit general fund growth, but that takes the approval of the employee groups who have little incentive to agree to such a contract (and, even if they did, it would be limited to the employee group and the length of the contract).  The city could transition new employees away from PERS (Public Employees’ Retirement System), but the city has to get agreements on that issue, they cannot impose it.

Indeed, the city in the 2012-13 contracts did start to transition new employees to a lower PERS rate, but that only applied to the five groups that signed bargaining contracts – the city could not impose it on either DCEA (Davis City Employees Association) or fire – neither of whom signed a contract.

DCEA has had their terms and conditions imposed on them in both 2010 and 2013.  The firefighters had their terms and conditions imposed on them in 2013.  That means that, for DCEA, they have not approved a new contract since 2005, while for fire it has been since 2009.

There is not much the city council can do to limit general fund growth and move toward a defined contribution retirement system without buy-in from the employee groups and, right now, at least two of the seven have shown no interest in agreeing even to the rather modest terms that the city set forth in 2009 and 2013.

Last year, the five other bargaining groups agreed to new contracts with a small COLA (Cost-of-living allowance) – which further illustrates the trouble the city will have taking a harder line approach.

That leaves us with the second idea, bankruptcy.  Some see bankruptcy as an answer, but the problem is that, while bankruptcy may protect an organization from its debts, it doesn’t really absolve a city of its obligation.

As Phil Batchelor, former interim city manager for Vallejo, California, told NPR back in 2012, “When you declare bankruptcy, you don’t suddenly get a free pass that allows you to abdicate responsibilities for providing municipal services.”

He added, “Once you’ve declared bankruptcy, you still have the obligation to get your fiscal house in order. You still have to balance the budget. You still have to settle with the claimants. You still have to pay your legal bills, and you still have to deal with your unfunded liabilities.”

You may get to renegotiate terms with labor and maybe, according to a 2014 decision, change your pension system –  but as I pointed out in a 2014 column, the city of Stockton was able to get a ruling from U.S. Bankruptcy Judge Christopher Klein that was “groundbreaking.”  As the Sac Bee wrote, “It pierced CalPERS’ aura of invincibility and made clear, for the first time, that public employee pensions in California aren’t sacred.”

And yet, Stockton decided not to go that route.  The problem facing the city of Davis – yes, it’s partly related to pensions, benefits and unfunded liabilities – but the bigger problem is deferred maintenance on roads, parks, city buildings and other infrastructure.  And it has a further problem of sluggish growth in sales tax revenue, resulting from one of the lower per capita tax bases in the region.

None of this would be solved by bankruptcy.

As Matt Williams put it in a comment, “As serious as those fiscal realities are, the realities imposed by Mother Nature are a much more serious challenge.  A bankruptcy judge can not wave a judicial hand and eliminate the effects of Mother Nature on our streets and buildings and parks.  Unless we abandon those capital infrastructure assets, the cost of maintaining/repairing/replacing them is unaffected by bankruptcy.”

And likewise, as the anonymous report notes, the city has actually done quite a bit in the way of temporary employees.  In 2015, the city of Davis had 827 total employees, and only 306 were full-time, year-round – can we cut that further?  Probably.  But, just like bankruptcy isn’t going to solve our fiscal problems, neither is outsourcing.

I am all for taking on Robb Davis’ approach – undertaking a full staffing analysis that matches service delivery needs to staffing.  In fact, this is long overdue because, while the city was able to greatly reduce its full-time workforce because it did so by attrition, it paid little attention to the intricacies of service delivery.

Like some of our readers, Robb Davis recommends “outsourcing of services where most appropriate, and analyzing alternative service delivery mechanisms such as using non-profits to provide programs.”  The key question is how much more can we gain and whether such a model will come with the cost of service delivery.

We can look again toward reducing city programs and sharing services.  Then again, the problem of sharing fire services between the city and university underlies that difficulty.

There is a cost-cutting component and then an elimination component.

The mayor argues that we should examine all means “to further reduce growth in compensation costs including analysis of retiree medical insurance options.”  He also talks about selling city infrastructure, which not only would generate one-time money but also ongoing maintenance savings, and examining green spaces and parks for ways to reduce maintenance costs as well.

At the end of the day, these are all good suggestions, but they are trimming costs on the margins and we are going to have to look at a more aggressive approach: (1) freezing compensation increases, (2) tax revenues, (3) economic and retail growth.

One point that gets missed here is that we don’t need to necessarily cut costs in absolute terms.  If we freeze costs to current levels, we are in effect cutting costs as inflation rates vary from 1 to 3 percent annually – which means that just freezing costs could lead to a 20 to 60 percent reduction in real terms over the course of a 20-year period.  But, even with our most aggressive measures, we have not managed to freeze costs.

The biggest hurdle we have right now is that the public is not aware of the challenges we face.  Without public understanding and support, the heavy lifts will not be possible.

—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. Ron

    Another article, same topic again.  Not much new, here.  (Apparently stating the same thing for years, now.) Again, I’d suggest looking at what other cities in California are doing, since they are facing the same issue (regarding pensions/retirement benefits). This isn’t a “Davis-only issue”. And again, there may be opportunities for collaboration, to resolve the concern with CALPERS, etc.

    But, was wondering what the following means, and the implications for it:

    “DCEA has had their terms and conditions imposed on them in both 2010 and 2013.  The firefighters had their terms and conditions imposed on them in 2013.”

        1. Howard P

          Sort of… for new hires, with no significant history in PERS, the State has stepped in to reduce the benefits, and hence, the costs…  since Jan 1, 2013.  4 years ago… the fact is that new, no PERS history prior, City employees are subject to that… independent of local ‘negotiations’.

          Interesting that the State did not, apparently, do the same for STRS or the UC system… as Napoleon Pig might say, all public employees are equal, but some are more equal than others… those two systems, while smaller, are more “in the hole”…

        2. Howard P

          Not as far as I know… you can’t check the internet?  Interesting you asked that, and not asking about CALSTRS…

          Try looking at transparent california…  think of putting in a professor’s name, and a staff member’s name…

        3. Howard P

          Jim… tried the link you gave… no joy… got diverted to… might be operator error on my part… just don’t know…

          And, to be clear, I have no doubt they mine real info… it’s their opinions that I question the motivation… as near as I can tell, the base info appears to be real and correct…


  2. Ron

    Here is the very first article that popped up in an online search, regarding unfunded pension liabilities in California:

    Below is another report which provides numbers regarding unfunded retirement liabilities in 20 California counties.  I very briefly skimmed this article, and noted the following statement regarding these 20 counties: “Their total retirement funding percentage, taking into account pensions, healthcare, and pension obligation bonds, is only 60%

    This stuff isn’t difficult to find.  I’m wondering why some seem to look at this from a Davis-only perspective.  (Perhaps some other motive?)

  3. Mark West

    “I’m wondering why some seem to look at this from a Davis-only perspective.”

    Just because other cities are experiencing similar problems does not mean that we should stop looking for a Davis-based solution. Most cities in California don’t share the severe (per capita) revenue shortfalls that are exacerbating our current situation, problems that have resulted from our past policy decisions. We should not be waiting around for someone else to bail us out of the problems that we created with our poor choices, but instead, should be working to find our own solutions.


    1. Matt Williams

      Mark, I find it hard to believe that anyone is myopic enough to think that anyone sees the pensions problem as “a Davis-only perspective.”  That is the height of folly, and wholly inconsistent with (A) the public record discussion of pension issues, and (B) the past discussions here in the Vanguard.

      Your answer to that foolish, myopic viewpoint is spot-on.  You are absolutely right when you say “Just because other cities are experiencing similar problems does not mean that we should stop looking for a Davis-based solution”

      On a similar note, during the Vanguard City Council Candidates Forum, Brett Lee pointed out that one of the most important reasons that the City was not maintaining its roads was because the Federal Government and the State of California had massively cut back on roads funding.  While that was indeed true (and continues to be true), because of the substantial levels of debt and deficit spending at the Federal and State levels, the chances of a return to past levels of Federal and State roads funding are somewhere between slim and none.  The roads are ours and the problems associated with their maintenance are ours.  No one is going to bail us out.

      The same is true vis-a-vis pensions and retiree health insurance.  I agree with you wholeheartedly that if we wait for others to fix our problems for us, we will be waiting for a very long time. Anyone who thinks otherwise is foolish and/or naive.

  4. Ron

    Davis’ challenges are a “pimple on an elephant’s butt”, compared to the system-wide problem facing cities and counties (and the state, itself).  Given the sheer magnitude and frequency of the problem, it’s likely that it ultimately needs to be addressed on a system-wide level.

    The first article I posted above provides an excellent summary regarding the root of the problem (see link, repeated below).  Since it’s from a San Diego newspaper, it also provides some perspective regarding the challenges facing that city:

    “The city of San Diego has an unfunded pension liability of $2.5 billion, while the county of San Diego’s debt is $3.3 billion. The state of California is staring down a debt in excess of $100 billion to its pension.”

    “The city of San Diego must pay $324.5 million on its pension debt during this fiscal year alone, a whopping 24 percent of the general fund budget.”

    1. Ron

      And again, it seems unlikely that CALPERS and the state will be able to ignore the problem indefinitely (and “extract” money from multiple cities and counties that isn’t there).

  5. Ron

    Just started reading the SacBee, and found this article today (regarding a previous “rush” to hire, to beat the deadline for pension reform in California):

    Relevant quote from the article:

    “The Legislature passed its pension reform bill in the wake of a recession that clipped CalPERS’ robust investment returns, leading it to draw more money from taxpayers to fund retirements for public employees.”

    Read more here:

    Yeah, I’m sure that’s “popular” with cities and counties throughout California, who are suddenly facing deficits as a result.

    1. Mark West

      “I’m sure that’s “popular” with cities and counties…”

      There are a number of decisions that the State has made that were detrimental to cities and counties, and therefore unpopular with the same. That unpopularity did not change the outcome of the decisions, nor will it have much impact on the future ones.


  6. Jim Frame

    I’m wondering why some seem to look at this from a Davis-only perspective.

    Because Davis can’t force CalPERS to change, and it can’t force the medical industry to reduce the cost of delivering health care.  Knowing that other cities and counties are in the same or worse position is cold comfort and does nothing to improve the situation.  Davis has to focus its attention on those things over which it has control.


    1. Ron


      That may be true, on an individual-city basis.  (Especially one as small as Davis.)  However, given the frequency and magnitude of the problem throughout California, I wouldn’t be surprised to see some movement toward a system-wide solution.  (Unless you believe that all of these cities and counties will somehow meet their new obligations, as a result of the change from CALPERS. I have trouble believing that this will occur.)  Ultimately, money can’t be extracted, if it’s not there.

      CALPERS has already demonstrated some flexibility, as noted in one of the articles discussed above (link repeated below):

      “In 2006, the annual cost grew by another $5 million hitting $16.6 million and by 2015 had grown to $21 million. However, this was a very modest growth considering CalPERS lost 29% of its assets during the Great Recession in 2008 and 2009. CalPERS lowered contributions in order to help cities and counties who saw their tax revenues during the recession drop.”

      Of course, the article goes on to state that this was a temporary solution, and essentially delayed the problem.  However, it does go to show that CALPERS (and the state itself) have the power to respond. And again, they have made significant reforms to the retirement system, already.

      1. Ron

        And, of course – the other thing that might occur is a system-wide CALPERS collapse (essentially forcing a change).  This might be more likely if a group of cities/counties band together, and successfully challenges and exits the CALPERS retirement system (e.g., via bankruptcy). (Or, if the stock market collapses, since CALPERS apparently depends upon it.)

        Sometimes, it takes a collapse of an unsustainable system, before it’s rebuilt into something more sustainable.  (Not advocating this – just noting it.)

        In any case, I suspect that this issue will be a concern for cities, counties and the state for years to come, before it really comes to a head.  Not sure if it will get worse, before it gets better.  (Regardless of what one thinks of Trump, I guess we better hope that the “Trump rally” continues!  Or, maybe not – if it’s better to face the problem sooner, than later.)

    1. Howard P

      I believe we might be “overdue” for mortgage interest hikes… mine is locked in @ 2.875%… no worries here… when I bought my first house, mortgage rates were over 13%… for those with good credit history…

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