The Budget Charade of 2014-15 Continues
The City Council this week adopted a roughly $833-million budget for fiscal year 2014-15. The General Fund budget, which pays for parks, police and other general services, was set at $182 million, up by approximately $11 million compared to last year. (1) Yet, there was a $495,000 General Fund budget gap, even after including the illegal anticipated $20 million plus non-surplus transfers from GWP, in violation of the City Charter, and the $28 million plus generated from the Utility Users Tax on GWP assessed on water and electric charges, telephone line and cell phone usage, gas, and cable.
The GNP reported that City pensions continue to be a major cost driver as rates the city pays to the California Public Employees’ Retirement System are reaching historic highs. Pension rates are forecast to cost the city about $20.1 million, after employee cost-sharing, in the upcoming fiscal year, or 11.5% of the budget. That’s up from $18.9 million, or 11.1% of the budget, compared to last year. (1) This was a $1.2 million increase over FY 2013-14, even after the historic stock market rise last year. CalPERS posted a 16.2% return on investments in 2013. The public pension fund’s results, buoyed by the stock market’s best year since 1997, were its best in more than a decade. CalPERS’ overall rate of return for 2013 was more than twice the 7.5% minimum that the fund’s board has said it needs to meet current and future obligations to retirees. (2)
For 2012, the rate of investment growth was up to 13.3% compared with 1.1% in 2011. Yet, the City’s annual pension obligation costs to CalPERS skyrocket from $1.3 million in 2003 to $13.7 million in 2007, to $24.8 million in 2011 to $30.6 million in 2012. The City’s pension obligation costs to CalPERS for 2013 was $28.5 million, a $2.1 (6.9%) decrease, even with CalPERS historic 16.2% return on investments in 2013, representing 9.7% over and above the percentage to meet its future obligations,
Many are saying that stock market has reached a historic bubble. Peter Schiff, a well known investment advisor said that the stock market is “misplaced optimism” will lead to a “worse collapse than in 2008,” when CalPERS lost over 27.5% of its portfolio value. Schiff said that the Fed’s extraordinary support of bond and housing markets will lead to a market crash as interest rates rise in the future. U.S. stock market bubble will collapse amid Fed QE tapering. Zacks Investment research agreed, adding that the “Downside Risks Of The Stock Market Currently Outweigh Its Potential Benefits”. There are many market indicators that suggest that the market may be nearing its peak. The stock market is also exceedingly vulnerable due to the historically low trading volume and market volatility. Why do I bring this up? Because I believe that the City Council is unprepared for a major stock market correction, that could result in unprecedented capital contribution obligation requirements to CalPERS, to bring its investment return back up to 7.5%, regardless of its portfolio loss, in order to meet current and future obligations to retirees.
The City’s Medical costs obligations are also expected to increase 10% annually over the next five years. Presently, city employees contribute only towards their current health benefits, paying a small percentage premium, generally with a co-payment and deductible, depending upon whether they choose a HMO or a PPO as their healthcare provider. Presently, the City pays 100% of employees’ post retirement health benefits, since they made no contributions during active employment, and the MOU (union contract) does not require retiree health benefit contributions after retirement. In other words, residents and businesses pay 100% of a retired employee’s health premium from date of retirement through age 65, including their Medicare premium after becoming eligible for Medicare at age 65, as well as the retiree’s supplemental insurance premium costs, for the portion not covered by Medicare.
In 2012, the City faced a 15.4 million deficit, resulting in early retirement bonuses, in lieu of layoffs, for 120 miscellaneous employees who submitted their application to retire within the eligibility window period. Then in fiscal year end 2013 the city experienced a rare $300,000 budget Surplus since the 2007 recession. “The worst, I believe, is behind us,” Ochoa said. I hope that his misspoke comments are not the same as the City’s budget projections.
So why has the City now forecasted deficits of $1.7 from FYE 2014 million to $5.5 million through 2018 in the budget? As of June 2012, Glendale’s post-employment benefit projections were at $191 million, up from $103 million the prior fiscal year, according to the city’s annual financial report. (3) As for pension costs, CalPERS changed the rules for local governments pension contribution that will increase pension contributions among public agencies beginning in 2015-16, a rate hike of roughly 50% over the next six years to bring down their respective unfunded debt. In Glendale’s case, it’s approximately $238 million. Also, the Accounting board, in June 2012, changed pension rules for state and local governments, requiring governments to disclose unfunded pension promises alongside debt on their balance sheets.
The council again passed a resolution to set aside $897,888 in the budget for FYE 2014-15 to pay for another round of early retirement incentives just like in 2012. (1) This is not a onetime proposition. It is permanent for the rest of their lives, that will increase the city’s pension obligation costs and projected unfunded debt by 5% for each employee who accepts the early retirement offer. The reality is that whatever the City saves in salary costs against the general fund is offset by the increased unfunded pension costs that will escalate sooner than later. No other city is offering a golden handshake in lieu of layoffs, faced with budget deficits in 2012, as well as 2014 for that matter. This appears to be totally inappropriate, given the fact that city officials should be determining which positions are dispensable and can be permanently eliminated vs. allowing miscellaneous employees in critical roles to determine their own retirement timeline.
This scenario that happened in 2012, whereby the City paid $2 million in early retirement bonuses to 120 employees that could have been easily laid off, with no early retirement bonuses. It’s a no brainer for employees who are about to retire and/or near retirement. As a result, two years of active employment productivity and employee contributions was lost. Further, the City authorized early retirement bonuses to employees in critical position roles. Because of this misstep, the City needed to rehire 46 retirees as annuitants, of which 13 or 28% had accepted early retirement bonuses, by justifying the nature of their critical role of unfinished business that needed to be completed during this transition.
The GNP reported on May 12, 2013, “Retired, but still Working”. This pertains to the revolving door policy, where an employee retires, and is simultaneously rehired as a temporary retired annuitant, resulting in two paychecks, a pension and a salary. In other words, this was also known as double dipping, a two for one, by drawing a retirement pension as well as a paycheck. This is AKA double jeopardy when the City is facing a budget deficit.
In January 2013, the state passed more stringent limitations for miscellaneous (non-safety) employees, requiring an 180 days waiting period after retirement, prior to becoming eligible for an annuitant position, except under extending circumstances. Note, this legislation does not apply to safety employees, police and firefighters. Temporary employment shall not exceed 960 hours in a fiscal year (July 1st through June 30th), except again for extenuating circumstances.
Based upon my review of City Pensions, as of May 2013, several City employees were retiring with starting pensions, well over 50% higher than the maximum allowed (75%) for non-safety employees, or (90%) for safety employees, of their final last year’s base salary prior to retirement. This appears to be directly attributed to the City Council past givebacks, per their Memo of Understanding agreements with the employees unions, for overtime, salary perks, pension bonuses, and benefits, in return for the employee unions past support and endorsement during their reelection campaign for another 4 year term, that has allowed council members to easily win reelection every four years. If so, then those City Council members have violated their oath of office and fiduciary responsibility to safeguard the public’s assets and public trust and should either resign or be recalled.