Sunday, April 26, 2015

Our long and winding road to bankruptcy


From page A4 | January 02, 2013 |

Every long journey begins with a single step.

In 2001, for the benefit of union firefighters, Davis started down its perilous path toward penury. With no sustainable income to pay for its profligacy, the City Council doubled the value of fire employee pensions, even for those who were less than a month from retirement.

The new 3 percent-at-50 formulas meant that a firefighter who worked for 30 years could retire at age 50 and receive a pension worth 90 percent of his final salary that increases by 2 percent compounded for the rest of his life.

The immediate question was how to hide this expense.

The new formula required the firefighters to pay 9 percent of their salaries for the employees’ share. The union did not want its people to pay any of the added cost. But the city understood it would be a harder sell to the public if we discovered that the city was paying the employees’ share.

The solution was simple — our City Council gave every firefighter a 9 percent annual raise to cover their share of the costs. And the council gave them a larger raise on top of that, because, well, it was public money they were giving away.

When that contract expired in 2005, the next council increased base salaries for the firefighters by 36 percent more. It probably had nothing to do with the fact that the Firefighter Local 3494 spent tens of thousands of dollars to elect a pliant majority to the City Council.

One year after the firefighters were given 3 percent at 50, Davis gave that and a big pay raise to the sworn police officers. And a few years later, every non-safety employee working for the city was handed a new, richer pension plan.

Unfortunately, the housing bubble popped in 2008. Since then, the irresponsibility of our employee contracts has become painfully clear. Davis has been scrambling ever since to stay afloat.

The latest actuarial reports published by CalPERS say Davis needs an additional $141.3 million to cover unfunded debts to past and present employees.

We have a retiree medical liability of roughly $64 million. Pensions for our safety personnel are underfunded by $27.4 million; those for miscellaneous employees are short $49.9 million.

Since 2007, I have been calling for, among other things, more modest pensions for new hires. State law prohibits Davis from reducing the formulas of existing employees. But we could have and should have offered sustainable plans for added personnel.

Up to now, the city has dithered. Every new employee hired in 2012 gets what we cannot afford: 3 percent at 50 for safety; 2.5 percent at 55 for non-safety.

Other communities in similar financial distress in the last few years have taken bold action. For example, Cathedral City, a suburb of Palm Springs with 52,381 residents, adopted an affordable second tier for new hires in September.

Its existing employees are on the same formulas we have in Davis. Cathedral City’s new police and fire get 2 percent at 55 and the rest 2 percent at 60. These changes make little difference in the short run, but over time they produce tremendous savings.

In 2013-14, CalPERS estimates that the employer share for Davis will be $2,954,000 for public safety employees. The bill for non-safety will be an additional $4,551,000.

On a payroll of $32.16 million, that’s a yearly expense of $7.5 million, and it is rising. In 2015-16, the employer pension contribution for Davis will climb to $8.5 million on a payroll of $33.8 million.

If, in 2015-16, all our cops and fire were instead on 2 percent at 55 and our non-safety were on 2 percent at 60, the employer contribution would be $6.47 million. We would save just over $2 million per year.

The city of Davis recently signed new deals with the police and most non-safety employees. The two hold-outs are the firefighters and the Davis City Employees Association.

The staff reports that explain the new contracts say there will be a second tier for all employees hired in 2013 and beyond based on a change in state law. New safety must get 2.7 percent at 55 and new non-safety 2 percent at 62.

Because Davis dithered for the past five years, failing to act before the law changed, we will not be able to capture as much second-tier savings as cities that followed my advice.

Cathedral City’s newest safety employees, for example will now get 2 percent at 57; ours, 2.7 percent at 57. If we had all new sworn employees in 2015-16, the difference between those formulas would cost the taxpayers of Davis $565,000 annually.

Since our journey toward insolvency began with the 2001 fire contract, it’s fitting to close by noting that $565,000 is what one new, fully outfitted Type-1 Urban fire truck costs. They are supposed to last for 20 years. Unfortunately, we no longer have the money. We probably won’t have it for another 20 years.

— Rich Rifkin is a Davis resident; his column is published every other week. Reach him at [email protected]





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