PENSIONS: Peril is in the eye of the beholder
Kevin Kennedy and Jeff DelBono agree that Alameda’s pension and retiree benefit costs are a problem that must be addressed. Where they differ is on the scope of the problem – and of the solutions needed to fix it.
Kennedy, a financial planner and self-described “numbers guy” who has served as the city’s elected treasurer for the last decade, and DelBono, a firefighter/paramedic and the political director of the local firefighters union, are key voices in the debate over how to address growing benefit and pension costs – a problem that has been decades in the making.
The arcane financial drama exploded into the public consciousness in late March when Kennedy claimed the city would go bankrupt without major, structural budget changes – a claim that left Mayor Marie Gilmore and union leaders scrambling to assure residents that Alameda is solvent and that unions are doing their part to try to fix the problem. It’s a drama that is playing out all over California, as policymakers and labor leaders try to come to terms over the rising cost of pensions and millions of dollars in retiree health care benefits that public agencies offered, but in many cases never saved money for.
City leaders have inked a tentative deal with firefighters, but the terms – which will go up for a vote before both the firefighters union and the City Council – have not yet been announced. Contracts recently approved for management employees and electrical workers don’t offer any concessions on pensions or benefits, however.
Kennedy, who first sounded the alarm about pension and benefit costs in 2009, said he believes they are “enveloping everything else” in the city with no end in sight. And he believes budget numbers offered by city staff in late March – the night of his bankruptcy claim – back him up.
“(The City Council) has to realize this probably can’t be kicked down the road any longer,” Kennedy said. “We clearly don’t have enough money to pay what we’re paying.”
Those financial projections show Alameda suffering a budget deficits of $6.2 million next year and larger ones in the four years to come – deficits which would exhaust the city’s reserves inside of three years unless expenses are reduced. Next year’s deficit projection includes an additional $3 million in pension and health benefit costs, and it shows pension costs – particularly for public safety workers – rising through 2015-2016.
Kennedy said health care costs are rising beyond projections – 14 percent versus the 9.5 percent predicted by the city’s actuarial – and he thinks return expectations offered by CalPERS, the state retirement system Alameda uses, are rosier than they should be.
CalPERS is charging its member cities and counties more money this year to cover previous investment losses, and barring some miracle in the market, Kennedy said the increased payments could continue over 15 years: The losses were so bad that the pension fund opted to spread them out over time, in order to spare public agencies who bought into it massive payments they couldn’t afford.
But the big issue, Kennedy said, is retiree health care, which the city has yet to fund. If the bill were due today, the city would owe more than $75 million, he said.
“I don’t know how that’s going to work,” Kennedy said. “We’ve never saved any money toward this.”
To fix the problem, Kennedy said policymakers should consider a range of solutions, including layoffs, wage reductions and increased benefit contributions – along with a 401(k) retirement plan for new hires in place of the pensions city employees now get, which pay a fixed amount regardless of how the city’s pension investment performs.
DelBono concedes there’s a problem, but he says it’s not as bad as Kennedy thinks. And he is adamant that pensions be preserved.
“I believe everybody in this country should have health care and retirement,” said DelBono, who said pensions allowed his grandparents, both machinists, to live comfortably in retirement.
He said he thinks employees should consider paying more for their benefits, and that health care plans should be restructured for new employees.
“We’re working hard to restructure the benefit and it will probably look different from what a retiree has now to an active (employee) to a new hire,” DelBono said during an interview last week.
DelBono said public safety employees are already contributing 9 percent of the cost of their pensions, and that they did so even as CalPERS, flush with cash a decade ago, lowered public agencies’ payments to zero. And he said actuarial projections of health care costs assume everyone will take the most expensive benefit plan available and that they don’t account for things like Medicare, which he said employees are required to apply for at age 65, lowering the city’s costs. He thinks the city can continue with its pay-as-you-go approach, since its employees won’t retire all at once.
He said CalPERS’ return projections are lower than their actual returns: The pension fund has set a standing expectation of a 7.75 percent return on its investments, but this past year, it earned 12.5 percent.
DelBono said city leaders offered public safety workers enhanced retiree medical benefits after they agreed in 1992 to move from a city-funded pension plan into CalPERS, a move that he said saved Alameda $3 million. He said that money was supposed to help pay for the new benefit. But it wasn’t.
While he thinks workers need to make concessions, DelBono said he also wants the city to pay into a rainy day fund to cover benefit costs when times are bad.
On this Kennedy and DelBono agree on: Alameda’s pension problem didn’t happen overnight. And while they disagree on the solutions to the problem, they know that whatever they are, they won’t come quickly.
“I do agree with Kevin that what we do need to be – need to work toward funding benefits we do have,” DelBono said. “It’s a slow process. And we didn’t get here overnight.”
WEDNESDAY: How we got here