By Mark Gutglueck
There was strong indication this week that the Upland City Council will reject the fiscal 2015-16 budget being prepared for the City of Gracious Living by city manager Rod Butler and finance director Scott Williams which was previewed last week unless they work into the spending plan an effort to head off or otherwise mitigate the unfunded liability crisis looming over the city as a consequence of burgeoning retired employee pension costs.
The city of Upland’s finance committee meetings, which are low key and relatively obscure events that involve two members of the city council, the city treasurer, the finance director and the city manager discussing arcane fiscal issues, are normally not well-attended events. They are traditionally held in the Pinky Alder Room at Upland City Hall, a conference room with a capacity of no more than 25. But the June 1 finance committee meeting was held in the forum of the city council meeting chambers and it drew over 40 attendees.
Perhaps sparking interest in the meeting was the approaching passage of the upcoming 2015-16 budget, the inclusion of a report by Russ Branson, the senior managing consultant for PFM Group, a San Francisco-based management and budget consulting team the city has employed, as well as word that members of the committee were intent on discussing a comprehensive adjustment of the city’s employee retirement plan.
Indeed, before the meeting concluded, committee members Glenn Bozar, Debbie Stone and Treasurer Dan Morgan made pointed reference to the increasingly unwieldy burden keeping current on pension contributions represents.
While Branson said that in terms of population and population growth, income levels, poverty and unemployment and home values, Upland “remains stable,” according to other economic markers the city is facing challenges, he said. “Upland has fewer resources to provide services,” Branson said. “Property taxes are just now returning to fiscal year 2010 levels.”
The economy is looking up slightly, Branson said, giving the city grounds for confidence on a certain level. “Significant increases in sales tax – with added retail and a better economy – helped Upland return to positive budgets,” he said.
Nevertheless, Branson said, the city is simultaneously wrestling with “underfunded liability, workers compensation and unemployment insurance funds requiring additional payment from the general fund.”
So while the Upland’s municipal ship is currently staying afloat, it is on the verge of taking on a significant amount of water through an existing perforation of its hull, Branson intimated.
“We forecast Public Employee Retirement System rates will have a significant impact on the city of Upland’s finances through fiscal year 2021,” he stated.
In previous years, particularly during the tenure of former Upland Mayor John Pomierski, the city offered to its employees very generous retirement benefits through the California Public Employees Retirement System that will result in the city having to pay $11.9 million from the city’s $41 million general fund into the state retirement fund in 2016-17. The Pomierski regime also reduced or eliminated the city employee contributions toward building and maintaining employee retirement accounts, transferring that financial burden to the city. Upland’s payments to that fund have been increasing for the last several years and will continue to grow as more and more city employees retire.
Branson said that “Increases in California Public Employees Retirement liabilities will be a major challenge for the city’s budget in coming years, with California Public Employees Retirement contributions increasing almost 65% by fiscal year 2021. California Public Employees Retirement contributions will take up a greater share of the budget, increasing from 28.9% of total salaries in FY15 to 41.0% in FY2021.”
Thus, within six years, more than four tenths of the money the city spends will go toward covering the pensions of employees no longer working for the city.
Simultaneously, city manager Rod Butler and finance director Scott Wiliams have prepared a budget for the city next year that essentially keeps the city in a holding pattern, reflecting a continuation, with slight adjustments, from the current 2014-15 budget.
Branson suggested that in order to improve its fiscal position, the city might consider seeking resident approval of a sales tax add-on. Both Butler and Williams were supportive of that concept.
But in response to questions about the improving sales tax situation and boosting sales tax even further, Williams conceded that “the projected $11.9 million in projected pension costs are going to eat up whatever revenue you obtain.”
Treasurer Dan Morgan, while recognizing the city is in dire financial straits, emphasized the need for demonstrating to city residents who must approve the tax that city officials have done all that can be done to redress the problem with the city’s overcommitment to its pensioners before soaking the taxpayers for more money. He made repeated references to the pension crisis as “the 800 pound gorilla in the room. How much of an effect can we have on this?” he asked rhetorically. “Can we cut back [on the amount being paid to the California Public Employees Retirement System] enough to eliminate the pressure and pain on our budget? In terms of the pension benefits for our employees, that is not in the cards anytime soon unless the California Public Employees Retirement System changes the way they operate.”
Morgan suggested it might be worthwhile to begin “looking at the employee counts” and determining what municipal services are absolutely essential to maintain and then “seeing about having the work done without hiring in-house employees or during the collective bargaining process creating new benefit tiers so that future employees pay a greater portion of the employees’ share of their pension contributions.That is an area that can be negotiated. There has been statewide pension reform that will allow it so that new employees hired in Upland will fall under that new tier benefit formula that is less generous than what our past employees are receiving, so we will be paying half of what our California Public Employees Retirement System contribution now costs and all city employees from here on down are paying their full employee share.”
Morgan said it should be very easy to get new hires to accept making larger personal contributions to their own retirement accounts, but that for “existing employees that’s a tougher sell.”
Morgan then referenced the city of “South Lake Tahoe, where they established entirely new medical coverage based on the Affordable Care Act,” he said. “They saved 70 percent by opening up negotiations. We are looking to get our union representatives to understand what our dilemma is and work with us and get something positive to come out of this process. In the private sector if the costs get too high you lay off people. In the public sector we don’t do that too often because of the protection of the unions. The public sector had always been a place where the pay was not that good but the benefits were good. Now, both the pay and benefits have risen to a point where they have both gotten out of line with what the city of Upland can afford. We are now stuck with this 800 pound gorilla. From my perspective, this tax proposal that was thrown out there by Russ [Branson] indeed may be a possibility if it had a restriction that would not allow it to be made into bigger pensions.”
Councilman Glenn Bozar, the chairman of the finance committee, said that it is “The citizens of Upland who will have to deal with these increased pension expenses” by seeing their service levels drop to defray the cost of the increased California Public Retirement System contributions. He said he wanted to thank Butler for having “the managerial courage to bring in Russ Branson to lay out these projections. He identifies this structural deficit that not going to go away.”
Nevertheless, at that point Bozar expressed the view that merely recognizing a future financial problem is awaiting the city is not sufficient, given the drain on city resources. He called upon Butler and Williams to actively address the problem by incorporating into the budget due on July 1 steps toward offsetting the increased pension costs. The budget I see here is just maintaining the status quo,” Bozar said. “That is the problem. We are tightening the budget and I appreciate what is going on here but it is just not enough.”
Bozar noted that the police chief is currently reviewing his department’s staffing and is going to soon present his recommendations on expanding the department. “Whatever request he has is going to have to be baked into these numbers,” Bozar said, adding that the previous chief had pegged the cost of hiring a new officer at roughly $100,000 per year. Bozar said he wanted to know of every proposal to increase staffing or hire a new individual, which will involve an uptick in future retirement benefit costs to the city. “What are your costs and commitments in terms of pay and their benefits?” he asked Butler and Williams. “Costs are rising. I’d rather not do that [i.e., hire more city employees] if I cannot get my management team to commit to certain cost controls. Until we solve that [the city’s unfunded pension liability] you should not project this business as usual on us.”
Bozar acknowledged that in the past “Managerially and politically” the city was unwilling to make drastic cutbacks. He suggesting things have now changed.
This was given further emphasis by the other council member on the committee, Debra Stone, who questioned indicators in the tentative budget that positions that have been vacant for several years will be backfilled in the coming fiscal year. “I’m looking at your bringing in someone we haven’t had for three years and it doesn’t make sense,” Stone said. “I want to see the breakdown and why you are asking for that position. I want to see all the positions that are definitely in the budget. This is not ready to go to the council yet.”
In response to Bozar’s assertion that the budget had to be more thoroughly thought through in terms of its impact on future demands for pension fund service, Williams acknowledged, “This budget solves nothing. It gets us through to the next year. It is the same thing, assuming nothing goes wrong.”
Bozar and Stone represent only two-fifths of the council, and represent two of the three votes needed to approve, disapprove or delay passage of the budget, so their resistance, alone, to the budget draft does not assure that it will not be ratified. However, in attendance at the finance committee meeting was councilwoman Carol Timm, who immediately upon its conclusion, conferred briefly with Bozar, which was interpreted by at least some of those present that the budget will not be accepted by the full council as currently framed.
There were several key city staff members present at the meeting, including department heads, who included police chief Brian Johnson, fire chief Rick Mayhew and community development director Jeff Zwack. Also present in the audience was Stephen Dunn, who left as city manager in 2014, with his last substantial work assignment being formulating the current 2014-15 budget.