The Ramifications of keeping the Status Quo (Part I)

Tax revenues have dropped in numerous states for the first time since the end of the great recession. Corporate tax revenues declined in 20 states in the first quarter of 2014, while personal income tax revenues fell in 10. What we are seeing today is the effect of tax increases that resulted in lower income tax payments and a depressed environment. (1) California is losing ground in the number of business establishments. There were 1.3 million businesses in California at the end of 2012, 5.2 percent fewer than in the previous year (that’s about 73,000 fewer). It’s more likely the disappearance of a number of businesses than it is businesses leaving California. (2)

California has become infamous with business executives and owners there not only for high tax rates and complex taxing schemes but also for overzealous regulations and regulators that have managed to stifle the entrepreneurial energy of thousands of companies. Toyota’s 5,000 managers and employees headquartered in Torrance, Calif., will soon be leaving for Texas. (3). Doing business in California has become more expensive for companies and their workers.” Best places.net, said that the cost of living for employees is 39% higher in Torrance CA., than in Plano, Texas and housing costs are 63% lower in Plano where Toyota’s headquarters will relocate. (4)

California is losing businesses at a 3:1 ratio which brings the count up to 158 companies that have left California so far this year and we’re only in May. The exodus of capital from California is running at an alarming rate. Companies like Intel and McAfee, have relocated employees outside of the state’s borders, at a cost of 30% to 40% less than in California. “[Intel] who has made huge investments in Arizona and Oregon, totaling $8 billion, projected to create over 5,000 jobs. Intel has publically stated that Calif.’s costs are too high and will not build a new plant in Calif.” (5) Even Glendale Is no different, by overcharging business and commercial property owners on their fire lines, in an effort to raise water rates that was botched by Willdan Financial Services, outside consultants contracted by the City. As a result, businesses were overcharged, and some single, multi-family and commercial customers were under charged. The City lost $8.8 million since 2012.

There has been an upsurge of California local governments contracting out the delivery of services that formerly were provided by employees. Contracting is not a “new” management concept as much as it is an interim measure taken until employee salaries are restored to their economic worth. Contracting out services is a convenient interim measure to reduce the cost of retirement benefits. (6)

Back in the 1970’s, state and city employee salaries were below the salaries equivalent of employees in the private sector. It was a tradeoff, for job security and a guaranteed pension. However, after Governor Brown signed collective bargaining into law, public employees unions have been able to bargain not only for “equivalent salaries” but also increasing their retirement pensions and benefits, while lowering the retirement age to age 50 for sworn Safety officers (police & fire), and increasing the retirement formula from 2 ½% to 3% for each year of service, that was made retroactive for all prior years of service. This automatically boosted pensions by 10% (20 x .05%) for police and fire with 20 years of prior service once cities adopted the legislation.

After 30 years of service, instead of retiring with 75% of their base, they now retire with 90% (20% boost) or more due to pension spiking. Many Glendale safety officers are retiring earning more in retirement, than they earned in their final active year of service, making more than 100% of their base pay. In addition, retirees are guaranteed an annual cost of living increase, up to 2%, for the rest of their lives, while people in the private sector cannot even earn 1% on their bank Certificate of Deposit’s on their modest investment savings they were able to accumulate.

The Glendale Fire Department just this week proposed a budget increase for capital-improvement projects for next fiscal year, driving up the city’s overall spending plan. It wants to revamp a fire station to accommodate a female employee, plus add personnel, overtime increases and a jump in workers’ compensation payments are the primary reasons for the increased spending, Chief Scoggins said that part of the $1 million budgeted for capital improvements will go toward creating female shower and locker rooms at Fire Station 29, along with other revamps. (7) The 2013/14 Fire Dept. adopted Budget for capital improvements was originally $592,000. So, the increase in cost was $418,000. Scoggins also said, since the other eight stations do not have full-female accommodations, we can expect capital improvements in the near term as well.

Meanwhile, Glendale’s total budget for the next fiscal year, which begins July 1, is planned to be $833 million, up about $95 million from last year, according to a city report. (7)  This is attributed to the cozy relationship between unions and politicians. As Unions were able to increase its money flow in the form of guarantee union dues automatically deducted from members paychecks, and later “fair share fees” from non-members, they built a war chest to influence elected officials for more give backs and concessions to its members. Over the years, our elected Council Members have accepted indirect support from the police and firefighters union, via their Political Action Committees (PAC), in the form of mailers, walking precincts, telephone banks, etc… to ensure their reelection.

I have no problem with a candidate receiving and accepting an endorsement from a city’s employee union. However, I do have a problem when a union spends vast amounts of unreported money providing indirect support to a candidates’ election/reelection, and the very same Council members who are the beneficiaries are expected to later vote on future salary and benefit negotiation increases. The union’s is making an investment and a bet on that candidate, including future endorsements and support for their reelection, expecting a return on their investment that they will make future concessions to the union.

It’s not sufficient for a candidate just to tell the union endorsing their candidacy, not to provide any monetary, direct or indirect support. They have no control over what the Union may or may not due. The only solution is for the public to demand, that any candidate who receives any direct, indirect or unreported support from any employees’ union, should be required to recluse themselves from any future negotiations with that employees union involving its members. This is the only way to discourage union influence over the outcome of our elections.

Over the last decade, the City Council has obligated residents and business (taxpayers), via contractual negotiations, to pay for very favorable contractual agreement terms benefiting its members. This is why it was necessary for the City Council to illegally transfer up to $20 million annually from GWP to the General Fund, in violation of the City charter, causing a GWP deficit for FY2012 and 2013, with no surplus to transfer funds, resulting in neglect of GWP repairs and infrastructure, that very much was a factor in GWP water and electrical rates to go up over the next five years.

Since 2007, water rates have increased about 38.8%. In 2011, the City hired Willdan Financial Services to propose new water rate restructure. On March 27, 2012, The Glendale City Council approved the water rate increase over the next four years, totaling 12.6%, with a five tier water consumption usage charge, charging those who use large amounts of water, a much higher rate. (12)

In 2013, the council approved a 29.1% increase in electric rates over the next five years plus a Revenue Decoupling Charge, in order to ensure recovery of fixed costs over time and to avoid discouraging energy conservation efforts. If actual revenues fall below forecasted levels, the difference would be surcharged over time.

On December 18, 2013, Glendale water rates were determined to be severely flawed with the City coming up with a deficit in water revenue by $8.8 million since 2012. The City hired Bartle Wells to replace Willdan Financial Services. (13)  On May 7, 2014, GNP reported that, water rates will be going up again, possibly as early as July, over the next five years! Bartle Wells proposed a new series of rates increase that would boost revenues, by 26.3% compounded. Proposed rates also include an adjustable drought charge (similar to the Electric’s Decoupling Charge), designed to bring in revenue even as customers participate in mandatory conservation, telling customers, the more you conserve, you’re still going to pay. (8)  On May 14, 2014, the City Council rejected the full 26.3% increase, with council members saying it was too much for customers to bear following other rate increases.

Yet, the council is expected to approve a new rate plan next week, that most likely will be set at or just below the 20.4% ceiling, compounded. (14). All rate increases are subject to a 7% Utility Users Tax that goes directly to the General Fund to pay for non-utility related salaries, pensions and benefits. Then the GNP reported the following day, that the City is expected to increase 300 existing city fees, and creating 100 new city fees. What other fees and taxes does the city council have plan on the horizon?

The Glendale News Press on April 30, 2014, reported that even with post recession revenue increases, that rising pensions, COLA’s, medical, and other costs are expected to eat into those increases, leaving Glendale with deficits over the next five years. The deficits, which could range between $1.7 million the next fiscal year, and top off at $5.5 million by fiscal year 2018-19”. (9)  Don’t be surprised if the City’s deficit figures end up being much higher. Glendale officials said that it may need to undergo another round of retirement incentives in order to improve Glendale’s long-term fiscal health. The biggest burden on the city is the cost of salaries and benefits, officials have said. (11)

Yes, the 2013/14 budget for Police was $76.9 million (Police Dept. Summary of Appropriations (page 7/26) with $56.9 million allocated to salaries and benefits. 74% of the police budget goes to salaries and benefits, with 15.8% of salaries and benefits allocated to Pension, excluding post retirement benefits that was comingled with regular benefits.

The 2013/14 budget for the Fire Department was $53.3 million (Fire Dept. Summary of Appropriations (page 6/22) with $32.8 million allocated to salaries and benefits. 61.5% of the fire budget goes to salaries and benefits, with 16.4% of salaries and benefits allocated to pensions excluding post retirement benefits that was comingled with regular benefits. Note – The City should be required to segregate active benefits from Post retirement benefits so that we can determine the actual cost of pensions and post retirement benefits.

Up to 40% of the Glendale safety workforce are expected to begin their retirement over the next ten years, plus annual COLA’s with the City facing a 50% increase in its CalPERS contributions to deal with its unfunded pension costs for police and the fire department (Safety) totaling $132.9 million for 2012 per the FY2013 City’s CAFR’s. (9)
The following is represents the City’s unfunded debt obligations for FY 2001 and 2012, totaling $127,981 and $238,980 respectively, and Funded ratio of 118.6% and 83.9%.  This is all based on Actuarial assumptions. How do you equate that in FY 2001, the funded ratio was 118.61%? These percentages are based on dividing the Actuarial Assets by the Actuarial Accrued Liability.

The real issue is the unfunded debt. Over the last 11 years, the city’s unfunded debt has dramatically increased by $111 million or 94%. So, how is the City going to be able to sustain replacing these retiree positions, while paying it’s pension contribution to CalPERS, the difference in their pension investment shortfall for city retirees, when CalPERS investments earn less than 7.5% annually, with CalPERS is increasing the City’s pension costs by up to 50% over the next six to seven years to lessen the City’s unfunded debt?

It’s not doable. The City will not have the increased revenue to pay for new hires to replace the retiring police and firefighters. So, what is the city going to do, keep increasing their overtime? We already have some safety officers earning up to twice their pay in overtime at time and a half. How effective will these officers perform with too much overtime?

Our City Manager, Scott Ochoa told the GNP, that “The City Council could keep the status quo, by continuing a salary freeze, minus automatic salary bumps for some employees…. But allowing already agreed-upon future cost-of-living increases, or offer retirement incentives for miscellaneous employees and management staff’. (9) That right, the early retirement is only intended for miscellaneous employees and management staff, not police or fire, even though they consume the majority of the city’s costs.

Also, we can expect the City Council to offer early retirement bonuses, just like they did two years ago, that will automatically increase their pensions by 5% for life, even though they have no obligation to do so. This is the type of mindset that we’re dealing with when it involves other people’s money.
The City is also top heavy in management positions, with safety officers’, Police & Fire, performing administrative duties at safety Officer Pay, instead of filling the administrative functions with non-sworn civilian staff.

Here’s the kicker. The City Council agreed with the Firefighters Association’s proposal, per their MOU, to reward sworn officers who agreed to perform administrative duties, forced to keep a 40 hour work week,and unable to earn overtime as follows:  • Fire fighters, who work a regular 40 hour week, with no overtime, that includes Fire Captains, Fire Engineers, or Firefighters on administrative assignment working shall receive administrative pay which shall be a total of eleven percent (11%) above their base rate of pay at a 40-hour rate.
The Administrative Assignment Bonus is as follows:

Classification Maximum Annual Base Salary Administrative Assignment Pay Bonus Total Maximum Base Pay and Administrative Assignment Pay Bonus
Fire Captain    $ 126,936 * 11% +$ 13,963 =$ 140,899
Fire Engineer $ 107,832 * 11% +$ 11,862 =$ 119,694
Fire Fighter    $    94,584 * 11% +$ 10,404 =$ 104,988

To add insult to injury, the maximum base pay for a (non-sworn) senior accounting technician is $57,108, Secretary to the City Clerk is $59,844, Senior Office Specialist is $51,984. Why are we using sworn officers to perform full time administrative tasks, and then rewarding them with a 11% bonus?

In 2012, there were 172 (sworn) firefighters that earned over $100,000, with a base pay (calculated at maximum pay level) totaling $17.5 million and Estimated Additional Pay & Overtime totaling $7.2 million, representing 29.1% of their total compensation, bringing their total Gross Pay Compensation to $24.8 million.

Even the city’s so called “’pension reform” passed in 2011/2012 only impacted new hires beginning January 2013, with no material impact on “current employees”, meaning no pension relief over the next 30 years. By leaving the status quo in place, the city will continue to bleed with “future debt obligations growing annually” by leaps and bounds. Rather than address this dilemma now, our elected officials would rather than kick the can down the road.

The city really needs to hire an outside consultant, specializes in streamlining and restructuring City local government, consolidating and eliminating unnecessary city positions, i.e. miscellaneous employees, middle management and staff positions, as well as police and fire safety and administrative positions.

To be continued………………
Source Reference:
(1) http://www.washingtonpost.com/blogs/govbeat/wp/2014/05/08/states-blame-fiscal-cliff-for-tax-revenue-slide/
(2) http://www.businessweek.com/articles/2013-07-03/why-are-californias-businesses-disappearing
(3) http://www.forbes.com/sites/dalebuss/2014/04/27/it-makes-sense-for-toyota-to-leave-california-for-texas/
(4) http://www.forbes.com/sites/dalebuss/2014/04/27/it-makes-sense-for-toyota-to-leave-california-for-texas/2/
(5) http://www.foxbusiness.com/on-air/varney-co/transcript/companies-bid-farewell-california
(6) http://www.revenuecost.com/blog/general/planning-without-contracting-482
(7) http://www.glendalenewspress.com/news/tn-gnp-me-0510-city-departments-propose-increased-bud-20140510,0,7446701.story
(8) http://www.glendalenewspress.com/tn-gnp-me-0508-gwp-officials-to-propose-new-series-of-rates-20140507,0,4829805.story
(9) http://www.glendalenewspress.com/news/tn-gnp-council-to-review-options-to-address-glendale-budget-deficit-20140430,0,260094.story
(10) http://www.glendaleca.gov/government/departments/management-services/public-information-office/rumor-page/the-need-for-facts
(11) http://www.glendalenewspress.com/tn-gnp-me-glendale-demographics-report-white-workers-drop-armenians-increase-at-city-hall-20140509,0,2811330.story
(12) http://articles.glendalenewspress.com/2012-03-28/news/tn-818-0328-glendale-approves-water-rate-increases_1_customers-into-multiple-tiers-rate-increases-average-residential-customer
(13) http://articles.glendalenewspress.com/2013-12-18/news/tn-gnp-glendale-water-rates-found-to-be-severely-flawed-20131218_1_water-rate-glendale-water-power-city-council
(14) http://www.glendalenewspress.com/news/tn-gnp-council-moves-to-limit-gush-of-increasing-water-rates-20140513,0,2574926.story