BY ELAINE GOODMAN
Daily Post correspondent
As the city of Palo Alto looks for ways to reduce its massive employee pension shortfall, residents might soon start feeling the impact, officials said.
City services could be reduced. Pay and benefits for city employees might be affected. And the pension gap could influence how often the city hires outside contractors to perform services.
The city doesn’t pay pension benefits for the contractors, and so outsourcing might make sense in more situations, city council members said during a meeting of the City Council Finance Committee this month.
During the meeting, City Manager Jim Keene warned council members about challenges that may arise from tackling the pension issue.
“We haven’t at all talked about the real-life realities … about implementing changes that force reallocations,” Keene said. “Even outsourcing in and of itself can be quite challenging to the community — particularly when you’re not in a crisis mode. We all just know human nature. The thing is, ‘why are you guys doing all of this? Why do I have to have a contract street sweeper? It was so much better when Public Works did it.’ There will be a hundred issues
like that, potentially.”
The city of Palo Alto’s shortfall for covering employee pension costs shot up by nearly 20% in one year, reaching $405 million as of June 2016, according to new data that was presented to the Finance Committee.
The $405 million figure is an increase from a pension shortfall of $338 million as of June 2015 and $250 million in mid-2014, according to the projections by the California Public Employees Retirement System, or CalPERS. The new figure is close to double the amount of the city’s $210 million general-fund budget for this fiscal year.
The unfunded liability
The pension shortfall — also known as the unfunded liability — is the difference between what will be needed to pay employee pensions into the future and the amount that’s been set aside.
CalPERS determines the unfunded liability amount by estimating how much will be needed to pay for pensions of current and future retirees. Another variable is how much CalPERS will earn from investments of the money it collects. A lower rate of return means that cities will need to contribute more to cover pension costs.
CalPERS announced in December that it would start using a lower rate of return in its calculations, decreasing the rate from the current 7.5% to 7% over three years starting next fiscal year. That’s expected to cause a sizable increase in the city’s annual CalPERS payment, and will also increase the amount of the pension shortfall.
Palo Alto officials are concerned that the actual rate of return will turn out to be 6.5% or even lower. Councilman Eric Filseth, who chairs the Finance Committee, said in May that the city’s pension gap could actually be between $500 million and $800 million.
At this month’s committee meeting, Filseth said he wants to “get the numbers right” before developing strategies to reduce the pension gap. “Because once the other stuff starts, once we start on a funding strategy, even the numbers, there’s going to be a tendency to try to politicize those,” Filseth said.
Explaining the problem to the public
Finance Committee members said this month that they want to find a way to explain the pension dilemma to the public in easy-to-understand terms. For example, the city’s payments to CalPERS thus far could be viewed as similar to making a minimum payment due on a personal credit card. The minimum payment does little toward paying off a large outstanding balance.
Councilman Greg Tanaka said when the city discusses the cost of employees, the expense of pensions should be considered as well as salaries. The pension costs should be a factor in situations such as labor negotiations and in deciding whether to contract out a job rather than have a city employee perform it, he said.
“That’s really important to have every figure for labor framed as our true cost,” Tanaka said.
The Finance Committee will continue discussing the pension issue in a series of meetings this fall, and is expected to make recommendations on how the city can approach the issue.
City attempts to reduce the debt
Chief Financial Officer Lalo Perez told council members that they could decide to “bite the bullet” and pay off a large portion of the pension gap in a short time. The question would be how such a move would impact city services, he said.
The city has been reducing pension benefits to new employees over the last several years by increasing the pension eligibility age and decreasing the amount paid.
Another issue is how much the worker pays toward their pension, Keene noted.
“The distribution of the cost between the employee and employer is not set in stone,” Keene said. “That can be renegotiated and actually, in some ways we’re behind some other jurisdictions as far as shifting more of the growth and the increasing cost to the employee.”