Bankruptcy-Coming to Your City Soon!

Image result for carmel by the seaCity Retirement Payments Cost Each Resident almost $1,200 per year, and this is rising rapidly…

Below is a letter to the editor I recently sent to the Carmel Pine Cone in Carmel, California.  The letter was in response to an article discussing the City’s current fiscal year payout of $4.5 million in retirement benefits for its retired employees.  I am posting that letter here as it applies to practically all cities, counties and States in America.  Politicians are burying this problem but you the taxpayer are on the hook for bill!  Go to your next city governing council and ask to see how much of their current budget is being paid out to retirees and what the long-term deferred liabilities are projected to be…

Letter to the Editor:  Carmel Pine Cone

Public Sector Path to Insolvency, Defined Benefit Programs: 

In last week’s Carmel Pine Cone, it was reported that payments to retired City employees could total $4.032,696, and that the City’s future contribution costs into the CalPERS, (California Public Employees Retirement System), will increase to unsustainable levels.  According to the League of California Cities, “Rising pension costs will require cities over the next seven years to nearly double the percentage of the general fund dollars they pay to CalPERS,” and for many cities, retirement costs “will dramatically increase to unsustainable levels.” Salaries and benefits already account for nearly 60 percent of the city’s operating budget, which is fairly typical.”  

The same insolvency spiral is being fed by an equally unsustainable program for public employee’s health benefit programs.  Between the two programs, many California cities are unable to staff vital safety departments, police and fire, and ensure the safety of their citizens.  In short, California Cities, Counties and the State itself is on a sharp downward spiral towards insolvency! 

How did this happen?  In the 1970’s, the League of California Cities and California State Association of Counties began dealing with the rapid unionization of its public employees that was being promoted and supported by the first Jerry Brown set of 8 year terms.  As a Mayor of a California City in the 1970’s, I was directly involved in the LCC discussions on how to best structure benefit programs and how to negotiate these programs with the unions, primarily, AFSCME, (American Federation of State, County, and Municipal Employees).  There were those of us who vehemently opposed the union preference to DEFINED BENEFIT PROGRAMS, programs where the local entity guarantees its employees a fixed amount of retirement or health benefits.  We lost out to the union and those cities that supported defined benefit programs.  We supported the concept that is prevalent in the private sector described as DEFINED CONTRIBUTION PROGRAMS, where the benefits are not absolute but the amount a public entity was responsible to pay in was fixed or at least subject to negotiation.   So, rather than guaranteeing an employee a percentage of their salary prior to his or her retirement, we would have contributed a set dollar amount into the employee’s retirement account, like a 401K.  For health benefits, we would pay a fixed amount towards healthcare premiums rather than having to pay into a healthcare group where the City’s costs were dependent on the overall costs of the healthcare group.  Many of these groups are run by the unions.   

Blame Your Elected Officials:  The main reason today’s Cities, Counties and the State itself are being choked with rising retirement and healthcare mandated costs are the fault of the elected officials.  (Employees will take whatever these entities are willing to provide!)  Why?  Elected officials are usually in their positions for a relatively short time so they take a short view of their own responsibility for future results.  In the 1970’s, it apparently was too difficult for some elected officials to see that in 2018 their City budget would be swollen to the point of insolvency by mandated retirement and healthcare programs offered to its employees.  Adopting Defined Benefit Programs, rather than Defined Contribution Programs, made it easy to negotiate with the unions and to keep its employees happy.  The taxpayers never really knew the level of deferred liabilities that were being accumulated as the public entities did not publish data on this pending financial catastrophe.   

Today, Cities are bound contractually to live up to their commitments to past and current retirees and to pay for the unbound healthcare costs of its current employees.  Where is all of this leadingWho cares?  That will be the problem for future City Councils, Boards of Supervisors, and the future Governor and State Legislature!  Right?  Wrong!   The taxpayers better wake up today and demand that their local and State governments own up to their current problems with unfunded liabilities and  determine how they can “fix” this problem for our future.  Is this a problem for today’s residents?  You bet!  With upwards of 60% of a city’s budget going to pay past employees, that means that a city or county only has 40% of its budget to support today’s needs!  In real terms, this translates into fewer patrols of county neighborhoods, fewer city police and fire to be available to protect its city, and fewer dollars to maintain roads, sewers, and other needed infrastructure! 

Solution?  Cities, Counties and the States better renegotiate their current contracts and change these programs to Defined Contribution versus Defined Benefit Programs for all new employees, and even renegotiate with its current employees especially for future healthcare benefits.  They should also be open to its taxpayers and tell them how much they owe in unfunded liabilities and the fiscal impact on the city or county.  It is the taxpayer’s money, and not the money of the local officials!  The unions will scream but in the end local officials are accountable to their citizens and not the public employee union or even their own employees.  This problem will not go away without real action by local officials.  If local officials do not deal with this now, one day soon they will have to explain to their citizens why garbage pickup will only be once a month or why they have to file bankruptcy!  That won’t be a fun conversation, especially in affluent Carmel!

RD Pierini



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