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PART II: Council Candidates Tackle Pension Debt, City Hall Pay
By Lookout Staff
October 15, 2018 -- The City's pension debt is rapidly reaching half a billion dollars and its workforce is among the highest paid in the state. The Lookout asked the City Council candidates what they plan to do.
Unfunded pension liabilities for the City of Santa Monica have reached $461 million. What should the council do to address the debt?
We need to have ongoing resident advisory committees that participate in the review of the use of funds and debt management. The residents pay a significant portion of the bills, so the residents should have a voice in the decision-making process. We need to have frank discussions and look at all options.
A first step would be to have an independent third party look at the current staffing levels to determine if the city is operating efficiently. Is the city overly generous relative to comparable cities? Would offering early retirement have cost savings?
Until the city can meet its financial obligations, we must scale back or stop all pet projects that are overpriced, such as the $2.3 million bathroom at Clover Park. We need to stop hiring, with the exception of police. How can we justify paying premium prices and adding more staff when we have a $461 million liability?
We have discussed this issue in the Audit Subcommittee and are now assembling a committee of individuals, including representatives of our employee unions, to look at our alternatives in depth. I have asked to be a member of that committee. We also have hired an actuarial expert to advise the committee and our staff. We have already taken the unusual step of paying down our CALPERS liability by $45 million in the last year.
I am looking forward to learning in the course of the serving on this committee what avenues are available to us to best reduce this liability.
We’ve already begun to pay down future obligations, and new employees do not receive the same pension benefits historically given to those who committed to public service instead of more lucrative commercial jobs.
It’s important to remember that our pension obligations were fully funded until 2008. The Great Recession was weathered well by our City, because we had been fiscally prudent. Other communities did less well, and the California Public Employees' Retirement System (CalPERS), heavily invested in the stock market, was especially devastated.
We, like every other California governmental agency reliant on CalPERS, now must make up the losses of a decade ago. At the time we agreed to pension terms for long-term employees, the funding was there. We’re still obligated to keep our employment promises, and we will do so by continuing to pay down the debt and limit the obligations we incur with new employees.
As an audit commissioner and finance professional I understand this issue. It is critical that we defend our credit rating by constantly evaluating our assets vs. the amount of unfunded liabilities in order to maintain our AAA rated bond status.
It’s important that our community knows that we no longer offer pensions that we cannot afford, we have stopped the bleeding. At this point we are at the mercy of Calpers management. Going forward we should look for alternative investment vehicles that can earn a better return than the CALPers fund and we should explore potential risk-averse investments such as Santa Monica real estate.
We must keep our promises to those city employees who agreed to work for us in the past, but must not make the mistake of over-promising in the future.
Our pension liability is among the highest in the state and an unfortunate legacy of imprudent and misguided policy. Fortunately, Santa Monica is in a stronger financial position than other cities facing a similar crisis.
However, there is no good solution to this problem, only the lesser of various evils and compromises will need to be made by all. To choose from among the various options we have, we will need to assemble a committee comprised of representatives of the employee unions, experts and, most importantly, resident advocates.
Ultimately, like anyone who finds themselves over-extended financially, the City of Santa Monica will need to pay down its debt and stop wasteful spending going forward. As the old adage goes, when you find yourself in a hole, the first thing you must do is stop digging!
The City has been paying down its unfunded pension liability ($1.3 million/year) for several years to take advantage of prepayment discounts. But pension rates are rising due to external actions of the California Public Employees Retirement System (CalPERS).
The City is working with its employees to share the costs of pension contributions. The City Manager is convening a Pension Advisory Committee to consider approaches to the issue. The Committee will start soon and report its findings to the Council in early 2019.
Crucial going forward is for the City to retain its strong fiscal health (the City has AAA bond ratings from all three national credit rating agencies). To ensure a strong fiscal foundation going forward the City is moving to a performance-based budgeting process and at its last Council meeting (10/9) adopted a Performance Management Policy to transition to a reimagined, performance-based biennial budget to prioritize allocation of resources.
I do want to say that I think that unfunded pension liabilities, while concerning, should not scare us provided we feel confident of being able to pay for them in the future. Our main goal should be that future expected economic growth will generate revenue necessary to cover these pensions and that we get the most effective government service from those who have earned pensions with Santa Monica.
For limiting the growth of unfunded pension liabilities, we should consider raising retirement ages and requiring longer vesting periods for public workers before pensions can be earned for new city employees. We should also look at the possibility of having defined benefit plans for those who retire locally in the state and defined contribution plans for those who don’t.
Santa Monica has among the highest paid government workers in the State. Do you think residents are getting their money's worth?
Santa Monica’s pension debt is among the highest in the state. We have some of the highest salaries among public employees, along with very generous benefits packages. We have more personnel than similar cities. Our City Manager makes more than a US President.
What are the residents of Santa Monica getting in return?
As a businessman, I define “ROI” as return on investment. But as a resident, I define “ROI” as quality of life. The salary costs we pay are not providing the commensurate quality of life that one would rightly expect.
Is crime under control? No. Is traffic getting better or worse? Worse. Is the homeless population shrinking or growing? Growing.
I think the developers are getting their money’s worth. I think Silicon Beach businesses are getting their money’s worth. But I do not think Santa Monica residents are getting their money’s worth.
This question does not accurately represent our compensation for Santa Monica employees.
The truth is that while “Santa Monica had the highest median senior leadership level cash wages among peer cities at $214,842, which is 14.5 percent ($187,689) above the peer median,” “the median value of cash compensation (including base pay and overtime) amongst all of Santa Monica’s employees was $86,077, which falls below the peer median ($91,600) of cash compensation.” See page 17 of Final Compensation Study Report.
In other words, our higher level employees are above the peer median and our lower level employees are below the peer median. In response to this, the Council directed as part of the new compensation guidelines that the difference between salary levels be compressed to raise the lower end and decrease the upper end.
First, let’s correct the assumption in that question: SOME Santa Monica employees are outliers in terms of compensation, but a recent review showed that the majority rank and file City employees are far closer to the average for comparable cities, and some are actually paid below average.
What I want to do, though, is compact the pay grades, reducing the spread between our lowest paid city workers, who deserve compensation that allows them to be resident members of our community, and our highest paid, whom we sometimes must bid for in competition with other cities for the very best top management.
Yes. Santa Monica government workers are amongst the best anywhere. We benefit from an exceptionally-skilled workforce that we wouldn’t attract at lower salaries. Although our overall payroll is costly, it is important that we continue to offer government workers competitive salaries to recruit the best and brightest, and ensure that the employees themselves can afford to live in the city.
In order to attract top talent, the City of Santa Monica offers relatively high salaries. However, there is no reason for us to pay over and above the market rate for top talent.
Recent studies have shown just that, we are paying well over market, especially at the top of city management hierarchy. Even if you believe our city manager is doing a good job, he is still overpaid relative to other public servants.
Meanwhile, studies indicate that employees lower in the management hierarchy are underpaid. We need to eliminate that wide disparity and close the pay gap.
Santa Monica residents expect a high level of service, infrastructure and a wide range of facilities and programs. The City is taking actions to better manage and measure performance.
City workers are taking on ‘total workplace’ initiatives to modernize the way the business is conducted and services delivered. Efforts are being undertaken to streamline or eliminate bureaucratic practices that no longer serve useful purposes.
In addition, new technological tools are being adopted to deliver better and faster results more affordably. And most of the people who do this work are committed to delivering the highest quality of service to the City’s residents.
Yes, while we do need to make sure that they are sustainable over the long term, good salaries help ensure that we bring in the best people to work for us.
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