CALIFORNIA FOUNDATION FOR FISCAL RESPONSIBILITY

CFFR SPECIAL REPORT

Issued March 2, 2008

California Foundation for Fiscal Responsibility
Makes Recommendations to Solve Vallejo's Fiscal Crisis

Fiscal Crisis Solutions for Vallejo

Vallejo is not facing a municipal fiscal crisis alone in California, it is just the first city to run out of cash. The root cause is promised increases in wages and benefits for government employees that are not supported by tax revenues.

Looking for answers, Vallejo leaders have chosen to reduce services and increase fees to close an $8 million shortfall. The unions have reluctantly agreed to accept smaller raises than provided by their current contracts and they have agreed to personnel cuts. The city is asking bond holders for more time to pay which only increases future interest costs. Spending on infrastructure and much needed road maintenance will be curtailed indefinitely.

The California Foundation for Fiscal Responsibility (CFFR) is focusing on the root cause -- the need for a change in excessive retirement benefits. CFFR solutions do not require further reductions in personnel, increases in taxes or fees, or defaults on bond debt payments. While Vallejo encourages its workers to reduce hours, leave, or retire, CFFR believes the city would serve its citizens better by encouraging its workers to stay on the job longer. This "work longer" strategy reduces retirement costs, retains the City's most experienced and productive workers, preserves cash otherwise spent to reimburse employees for accrued sick and vacation pay, and it provides a permanent fiscal fix instead of a temporary patch. CFFR recommends immediate adoption of the following steps toward fiscal responsibility.

Stop Illegal Payments for Extra Pension Benefits
Related to Services Rendered Years Earlier

Orange County, which declared Chapter 9 Bankruptcy a few years ago, is still struggling fiscally. The current Orange County Board of Supervisors last month filed a lawsuit to invalidate the retroactive portion of pension benefit increases that were granted by the prior board. Like Orange County, Vallejo was struggling fiscally when the previous city council increased pension benefits for its safety employees from 60% of final wages at age 50 to 90% (assuming a 30 year career). Retiring at younger ages, cops and firemen are draining pension funds and cashing in accrued sick and vacation pay.

Despite the fact that the benefit recipients had already been paid in full for their services under the terms of their contracts, the Vallejo City Council awarded retroactive benefits to employees. They did not work any extra or pay for the windfalls. The citizens of Vallejo were never given the opportunity to vote or approve this pension giveaway. Payment of these additional pension benefits using future tax revenues violates the California constitutional limitations on incurring city debt to be funded by future-year taxes. This multi-million dollar giveaway also violates the state constitutional limitations on granting extra pay to incumbent public employees for work already completed.

The previous city council also increased pensions from 60% of final wages at age 55 after a 30-year career to 80% for miscellaneous workers. These employees also receive annual cost of living increases, health insurance for life and social security, so they receive over 100% of final wages when they collect social security.

The city council is responsible for upholding the law and protecting the interests of city taxpayers by providing a safe, healthy and fulfilling place to live, work, and play -- today and for generations to come -- by providing outstanding, cost-effective public services. In light of Vallejo's fiscal crisis and although the current city council members did not award the benefits, they should discontinue these illegal payments immediately to avoid being sued individually by taxpayers. Discontinuing the retroactive portion of the benefit increases that were granted in 2000 will save the city about $5 million annually in pension costs.

Workers who have already retired will have their benefits reduced after their retirement is recomputed. But they will not be required to repay the illegal windfalls received to date, and many who returned to work part-time after retiring may need to work more hours. Current workers will still earn the benefits granted, but higher benefits will only apply to years worked since 2000.

For example, a firefighter who has worked for the city since 1982 turns 50 in 2012. His or her pension will be 2% of final pay times 18 years (# years worked before 2000), and 3% of final pay times 12 years (# years worked after 2000). The old 2% formula was provided in union contracts for the first 18 years of the firefighter's career, so that promise is kept. And the new 3% formula will remain as long as the firefighter works for the city.

The current rush to retirement will slow because many workers will see more benefit to staying on the job. Later retirements will reduce the medical premiums the city must pay before early retirees become eligible for MediCare, while delaying vacation and sick leave cash-outs that in 2007-2008 cost Vallejo, on average, $125,000 per safety employee.

Adopt a Second Tier Pension Plan for New Hires

We are living healthier, longer lives today. It is fiscally irresponsible for city retirement plans to encourage employees to retire at the peak of their careers.

New employees should be offered a second tier pension plan. Retirement ages should be increased. Sworn officers and firefighters should not be eligible for full benefits until they reach age 55. Retirement benefits for miscellaneous workers should be actuarially reduced if they choose to retire before age 65.

Financial planners universally agree that to maintain their pre-retirement lifestyle, retirees need 75% of final pay, so pension benefits for new safety workers should be reduced to that level. Pension benefits for miscellaneous workers should be reduced to a level that combines with social security to provide them 75% of final pay at age 65 after a full career.

As current workers retire, the savings will accrue from new hires, whose pension costs will be half of what is currently paid.

The city paid almost $3 million for retiree medical premiums last year for those eligible to receive them after age 50 with at least five years of service. Higher retirement ages for new workers will cut retiree medical premiums in half for safety workers, and it will almost eliminate retiree healthcare costs for miscellaneous workers.

Reduce Compensated Absences

Last year Vallejo provided $12 million in compensated absence benefits to its employees for sick leave and vacations. This is about 24% of regular wages in addition to paid time off for holidays. When money was tight in prior years, governing boards typically added time off with pay in lieu of salary increases as a way to appease workers, even though the city provides wages to its safety workers that are far in excess of what hourly blue collar workers make in similarly hazardous private sector jobs. Excessive time off is expensive and unnecessary. A 20% reduction in vacation and sick leave benefits will save the city almost $2.4 million annually.

Discontinue Allowing Employees to Purchase Air Time

For purposes of computing their pension benefits, the city allows employees to purchase up to five years of service credits to add to the years worked. The price for this time is supposed to be neutral compared to the benefits employees receive, but a flaw in the State Government Code allows CalPERS to price these service credits at a bargain. Assemblyman Roger Niello, whose family owns car dealerships, likens this anomaly to "paying a Volkswagen price for a BMW" and is planning to introduce legislation next year to close this loophole. Until then, Vallejo can ill afford to subsidize air time purchases which give zero benefit to taxpayers, increase pension costs, and encourage employees to retire early. This unnecessary costly policy should be stopped immediately.

This summary is provided by and endorsed by the California Foundation for Fiscal Responsibility (CFFR).

CONTACT:
Marcia Fritz, CFFR Vice President
MarciaFritz(at)CaliforniaPensionReform.com
916-966-9366