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Heading for the cliff

The city's citizens owe $559 each to help make up for losses in its employees' pension fund

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UP AND UP:  Employee costs have closely shadowed the city of San Luis Obispo’s revenues. The lower line—employee expenses—is set to rise dramatically while the upper line—revenues—likely won’t go up nearly as fast. - IMAGE COURTESY OF THE CITY OF SAN LUIS OBISPO
  • IMAGE COURTESY OF THE CITY OF SAN LUIS OBISPO
  • UP AND UP: Employee costs have closely shadowed the city of San Luis Obispo’s revenues. The lower line—employee expenses—is set to rise dramatically while the upper line—revenues—likely won’t go up nearly as fast.
San Luis Obispo is quietly headed for financial doom. The city is in really bad, hold-your-head-in-your-hands financial trouble. The odd thing is, though, you wouldn’t know it if you were to attend City Council meetings, hang out around City Hall, or take a stroll through the city’s shiny downtown. The city’s core is in the midst of an expensive makeover, featuring utility boxes transformed into art projects for $2,000 a pop and a brand new $850,000 London-style double-decker bus. While the city is failing to reduce spending on downtown cosmetic procedures, it’s headed for the biggest financial troubles of its history.

Of course, it’s not unusual for a city in California to be in financial trouble. The Great Recession has driven tax revenues down, and simultaneously rising pension and employee costs are stretching city budgets everywhere in the state. SLO is not the only city that has been forced to cut services and personnel to meet its shrinking budgets.

“A lot of people are in the hole,” said a city official who wished to remain anonymous. “We’re not alone.”

San Luis Obispo, though, appears headed for a much deeper hole than the other cities in the county—and maybe many in the rest of the state. Because of binding arbitration, SLO can’t really control its employee costs—only about 24 of California’s 479 cities have binding arbitration and, except San Luis Obispo, none are in SLO County. More on that later. Other cities in the county admittedly have money problems, but they can theoretically deal with their budgets.

San Luis Obispo is facing an unholy trinity of declining tax and fee revenues, escalating pension payments, and rising employee pay increases, all of which threaten to drive the city to financial insolvency.

The issue of pensions alone produces this unpleasant fact: The city has an unfunded liability of $25 million, which means the city is legally obligated to find $25 million to pay for its employees’ retirement. That’s more than $559 from every one of SLO’s 44,750 residents.

Even as the Measure Y half cent sales tax increase brought more revenue into the city, employee costs rose to match the additional income. In a literal sense, Measure Y money paid for the rising salaries of city workers. Instead of paying for more police patrols, for example, Measure Y income helped the city bring in enough money to pay for a 30 percent pay raise for police officers. The budget for the police and fire departments has doubled in 10 years, though the departments now have fewer personnel.

To fulfill its pension obligations, continue to pay workers, and provide services could mean bankruptcy, but even that desperate step might not resolve the city’s problems. Employee costs amount to 80 percent of the budget, and that percentage is set to climb significantly in a few years. If current projections are correct, the city could face a shortfall of $11 million, and the percentage of the budget spent on employee costs will drastically rise. Payments for employee pensions already account for 14.5 percent of general fund expenditures, and those are set to soar.

Until recently, the city has relied on surplus funds, temporary employee concessions, and easy one-time solutions to bandage up the budget through the rough times. But no budgetary smoke and mirrors can hide the red ink that may be soon drowning the city.

The real problem is that the city may not be able to change course: Tax income will likely remain low for a long time, and, in many ways, the city has lost control over its personnel costs. Barring a tremendous political about-face by the people of San Luis Obispo, the city will eventually have to choose between fulfilling its obligations to its employees or drastically cutting back services.

This has happened in other cities, and it’s not a pretty sight: Streets remain un-swept, parks close, and police and firefighters are laid off. Plunging home values would only exacerbate the situation. No one wants to buy a house in a town that’s broke.

Nice job, if you can get it

Longtime city observers were a bit surprised when Mary Bradley, a respected municipal expert, was hired as finance director to temporarily fill in while a permanent replacement could be found. She was hired at what some people thought was an exorbitant rate of $100 an hour. In terms of the usual city pay rates, those who thought this were wrong.

According to city documents, the annual base salary for a finance director is $154,544. If you throw in benefits, the salary comes to $222,791. That comes out to $130.86 an hour.

As you may have guessed, the city of San Luis Obispo is a great place to work. The pay is good, and the benefits are great. No, that’s not right. The pay is amazing, and the benefits are out of this world. Many of the city’s workers say they’re among the highest paid in their job category in the state.

Few jobs of the city’s 400-person workforce pay less than $50,000 a year.

A typical administrative assistant makes $52,676 a year; if you throw in benefits, it comes to $75,938 a year. This includes 15 vacation days, plus 12 paid holidays and 12 sick days. That works out to more than $45 dollars an hour. The employees’ cost of living increases have greatly outperformed the consumer price index.

Those employees in the San Luis Obispo City Employee Association (SLOCEA)—most of the rank-and-file city employees—received a 3 percent salary increase in July 2009 and received a 2 percent increase in December of last year. These employees also don’t have to pay any money for their pensions; the city pays for them.

But most city employees make far more than this. At the top of the city food chain are the police and firefighters. A police officer, after a few years, can make $97,474 a year—or $157,869 a year, including benefits. That comes to nearly $87 an hour.

What? There’s more?

While the salaries of city workers are good, the real outstanding benefit is even better. After five years of employment, workers are eligible for a defined benefit pension. Most pension or retirement funds in the private sector are defined contribution plans: You put in a defined amount every payday and reap the benefits when you retire.

Defined benefit plans are different; city employees are guaranteed a specified benefit. The city or whatever government agency sponsors the pension is legally obligated to supply enough money to ensure the retired employee gets it. It’s a legally binding guarantee, and it’s expensive.

Most city employees can retire at age 55, and they will receive 2.7 percent of the salary from their final work year times each year they were employed. Under this plan, an administrative assistant with 30 years experience would get around $42,667.56 a year in pension, or 81 percent of the employee’s last year’s salary. If the employee worked a lot of overtime during that last year or didn’t take any sick days or vacation, the pension is boosted significantly.

Most city employees make more than an administrative assistant and therefore their pensions will be bigger. Much bigger.

According to a database collected by the California Foundation for Fiscal Responsibility, SLO, as of last year, had more city pensioners making more than $100,000 a year than all the other cities in the county combined: 16, with the pension champ being recently retired city manager Ken Hampian, who brings in $152,824.68 a year. Over a 30-year period, the city will be responsible for more than $4.5 million in retirement paid to Hampian. That’s just for one employee.

Police officers and firefighters get an even better deal. They can retire at age 50 and receive three percent of the salary of the last year they worked multiplied for every year of their career. They are restricted to receiving no more than 90 percent of their last year’s salary.

City employees say defined pension benefits are necessary because they don’t pay into Social Security. Critics point out that most city pensions far outweigh the Social Security benefits.

These pensions wouldn’t be a problem if there was enough money to pay for them. Unfortunately, there isn’t.

Too good to last

San Luis Obispo, like most Californian cities, invests its employees’ pension money with the California Public Employees’ Retirement System, known as CalPERS. CalPERS is one of the largest pension investment funds in the county, managing retirement benefits for more than 1.6 million government workers and retirees, according to the fund’s website. The system puts city and employee pension contributions in the stock market, real estate, and other investments. In some years, CalPERS does fairly well with its investments. It states that it expects to make a 7.75 percent return every year.

Doom struck CalPERS investments in the last several years; it lost more than 40 percent of its investments in a one-year period. Among other investments, CalPERS invested in real estate—big time. As the real estate market boomed, CalPERS actually borrowed money to buy more real estate. When the economy tanked, the value of most of the state’s employees’ retirement investments plummeted $634 million in a single year.

Those losses need to be made up by those who put money into the system—namely governments and their employees. Because of the economic downturn and bad investment strategies, CalPERS needs hundreds of millions from city and county  governments to cover pension benefits.

California cities have to pony up more money to make up the difference.

SLO will pay an estimated $7.6 million in employer contributions this fiscal year. That’s 10.7 percent of the city’s current operating budget of $71 million and around 14.5 percent of the general fund of around $54.4 million. Based on 2009 compensation, the city will pay at least $2.5 million more each year by 2014 and, if actuarial experts are to be believed, it will likely be a far higher amount.

City documents predict an ever-increasing hole in the city budget—a structural deficit that may grow larger if pension costs continue to increase. They estimate the city will face a $3 million annual shortfall for the 2011-13 fiscal years. Add scheduled pension payment hikes to the mix, and the budget gap rises to $5 million by 2013. If Measure Y, a half a percent sales tax, is rejected when it comes back for voter renewal in 2015, the city could face an $11 million shortfall.

And that’s only what the projected shortfall is now. CalPERS is currently reviewing and adjusting its actuarial predictions. Translated to something humans can understand, that means CalPERS is recalculating how old its retirees get before they die. Though this may not sound like a big deal, when you’re calculating how long you need to pay an average retiree, it means a great deal. As pensioners grow older, CalPERS needs more money to pay them.

According to a CalPERS actuary who did not want her name used, CalPERS has been presuming their retirees will die far earlier than they actually will.

“That means your city will have to pony up more money than they do now,” she said. “A lot more money.”

TOP DOGS :  These are the city of San Luis Obispo’s top 10 earners. - IMAGE COURTESY OF THE CITY OF SAN LUIS OBISPO
  • IMAGE COURTESY OF THE CITY OF SAN LUIS OBISPO
  • TOP DOGS : These are the city of San Luis Obispo’s top 10 earners.
The turd in the punchbowl

Even with skyrocketing pension costs, the city might be able to weather the coming financial storm. But there is another factor that drills a big hole in the bottom of the city’s financial boat: binding arbitration.

Binding arbitration is a hallowed institution in the history of American labor negotiations. Simply put, when binding arbitration is agreed to, a mediator looks at the positions of the employer and employee and their disputes and decides on the outcome.

SLO residents voted for binding arbitration for police and firefighters in 2000. The police union is the only one that has used binding arbitration since 2000, and it worked out well for them: They got a 30 percent raise in 2008, which cost the city $5.4 million that fiscal year, with ongoing costs of $3 million a year.

To say that binding arbitration has been a boon for the police and firefighters is both an oversimplification and an obvious truth. Though the firefighters have never used arbitration, the threat of it has worked to their advantage, according to city negotiators.

Officials and politicians who were involved or well-briefed about the last few rounds of labor negotiations said binding arbitration changed everything. The City Council could no longer hold the line on labor costs.

“If we did not offer them the kitchen sink, the kitchen, and a bedroom or two, they could always go to binding arbitration,” said an ex-politician. “If we go to arbitration, we’re forced to offer a great deal or the arbitrator will just give the unions what they want. It’s crazy, but we had no leverage.”

Labor costs have exploded since arbitration came into the city, and not just for the safety categories of police and fire. Binding arbitration covers a small number of clerical and non-sworn workers (those who work for the police and fire department who are not police officers or firefighters). According to former city managers, the other city worker unions have insisted on their people being similarly compensated.

“A rising tide lifts all ships,” said the official.

How did we get here?

There is a logical explanation for how the city got itself in the shape it’s in now.

When times were good and tax money was rolling in, it only seemed logical that workers should prosper, especially since those guiding the city’s fiscal strategies were, in fact, city workers.

The pension rates—three percent at age 50 for safety officers—were established as the statewide standard in 2000 and 2.7 percent at 55 in 2003. That was a time when CalPERS claimed it was getting amazing returns. CalPERS leadership told cities that their investments were going so well they didn’t have to contribute to the fund.

Mayor Dave Romero said the council, like many others in California, increased salaries and benefits in the good times—CalPERS said their investments were going so well, city and county governments wouldn’t be on the hook for many long term benefits. Looking back on that, Romero conceded it wasn’t the council’s wisest decision, though he pointed out that nearly every city in California did the same thing.

Movers and shakers

Another factor in the mix is the most strident force in local city elections: the police and firefighters union. Though the contribution limit for donations to city campaigns is $200, the safety unions will send their members door to door to help their anointed candidates. What the unions get in return for the investment of their time and energy isn’t known.

One City Councilmember who hasn’t been quiet is Andrew Carter. A self-confessed numbers geek, Carter doesn’t hesitate to warn residents of the coming financial crisis.

“This is a terrible issue for everyone,” Carter said recently in a candidates’ debate for the upcoming City Council election. “This is the true financial crisis facing the city.”

Carter has been telling the public the city can’t afford the financial commitments it’s made to its employees. His outspoken warnings have earned him the ire of the employee unions and, though he was their candidate in the last election, they’ve dropped their support for him in the upcoming election. The police union members’ feelings about Carter are pretty clear in the minutes from their March 13, 2009, general meeting: “What about Carter’s continued comments about arbitration? Hampian [the city manager at the time] has no control over his comments but is aware of our concern. … He has been told by City Attorney to stop conversations because of meet and confer process. Shows it is important to stay politically involved.” 

Additional minutes reveal how the union keeps close tabs on its candidates: “Status of Council on Binding Arbitration—Tonight Council will present their options on Binding Arbitration and putting it on the ballot. We have met with several Council members. Our understanding is that Marx and Ashbaugh will not support putting an initiative on the ballot.”

Jan Marx and John Ashbaugh were the police union’s candidates in the last city council election.

Unions see things a bit differently

Erik Baskin, president of the local chapter of the International Association of Fire Fighters, has a different outlook on the whole situation.

“We’ve always been part of the solution,” Baskin said. “We deferred a five percent raise this year to help the city’s finances.”

Baskin points out that the firefighters have never used binding arbitration and have nothing to do with the terrible state CalPERS is in.

“We realize the economic state of the city and the state and, like most departments of the city, we’re just trying to stand pat.

“It’s easy to vilify employees,” he added, “but they never point the finger at the superfluous spending of the city.”

Baskin mentioned some of the more memorable city spending forays of the last few years: $850,000 for a double bus, nearly $1,000,000 to replace a few small park bathrooms, selling a public parking lot for below cost to the Copelands for development, and giving city management raises in the last two years.

“We’ve always been willing to compromise,” Baskin said. “But you have to remember calls have increased 165 percent in the last 15 years, and we have two less firefighters to deal with that.”

Matt Blackstone, head of the SLO Police Officers Association, tends to see things in the same light as Baskin.

He concedes the SLO police are well compensated, but said that safety officers have often been painted in broad strokes that don’t accurately portray the reality of the situation.

The police officers have gone without a pay raise—two years—or a cost of living increase longer than any other city’s bargaining groups, Blackstone said.

“We have, at every stage, stepped up,” Blackstone said. “There is money being spent in the city that needs to be cut and deferred.”

He mentioned the $640,000 makeover of three blocks of downtown the SLO council approved in June as an example.

What is to be done?

There are a lot of ideas about how to deal with the crisis. A two-tier system of benefits is often touted as a solution: New recruits would get substantially less benefits, but existing employees would stay with present benefits. This is a long-term solution, and other cities and agencies would have to go along with it, too. Any reforms would have to be agreed upon by the labor unions.

Romero said the solution is the repeal of binding arbitration. Only then, Romero and others say, will city leaders have any true control over the city budget. He says it’s unlikely, though, because every police and firefighter union would pour in “hundreds of thousands of dollars” to retain binding arbitration.

“Whatever happens needs to happen sooner than later,” Carter said.

“There are rocks ahead, and we’re headed straight for them,” he said, comparing the city to a battleship hurtling toward the shore. “It will take a long time to turn this boat around. We’re not sure how close they are, but they are there, and if we don’t do something soon, we’ll be wrecked.” ∆

 

Staff Writer Robert A. McDonald can be reached at rmcdonald@newtimesslo.com.

 

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