Blogging Bayport Alameda

April 16, 2015

Trust fund kids

Filed under: Alameda, City Council — Lauren Do @ 6:06 am

Right now you have a full two weeks to review the proposed MOUs for all the City labor groups that take small steps toward “smoothing” out the OPEB liability for the City.  If that’s not enough time for you, well, technically you can go to the meeting on the 29th and complain about that and I’m sure that someone on the City Council will agree with you and rather than talk about the actual MOUs being offered will complain about timing instead.

Anyway, just to generally nutshell what in the heck is going on, as a reminder.  The City is in a bad position regarding benefits that were promised to our bargaining units way back when the economy was good.  When I say “way back when” I mean like a long time ago and not just like two administrations ago.  Anyway, after kicking the can down the road for years, the last administration — despite the alleged coziness between a majority of the City Council members — was the first administration that actually managed to put in initial controls to help stem the inevitable tide that threatened to bury the City of Alameda.   While some people felt as though it did not go far enough, it was certainly more than had been accomplished prior to the Marie Gilmore administration. At no point did anyone at that time say that they had solved the problem, but rather had taken the first of many steps.

The large issue is that there is no silver bullet that can automatically “fix” the larger issues of pension and OPEB liabilities.  We can sit here and shake our fists at our former City leaders that thought they were doing the right thing, but in the end just sitting around a complaining won’t fix the problem and looking for everything to be repaired in one fell swoop is also not feasible.

So these MOUs are another incremental step that the City is looking to take to control costs. Additional background from the staff report:

In July 2013, staff again provided the City Council with an update to the OPEB situation and recommended that at a minimum, a financial Trust be set up to begin pre-funding the benefit. A copy of this staff report is attached as Exhibit 2. The Trust was created in early 2014 with an initial deposit of $300,000. The City Council also provided direction to the City Manager to begin informal discussions with the Public Safety Associations to develop shared solutions to the problem. Those discussions began in earnest shortly thereafter.

On September 2, 2014, staff met with the City Council in closed session to discuss the formation of a deal that had been developed in concert with the Safety members that would require both the City and the employees to contribute toward an OPEB Trust. The City Council provided direction to the City Manager to continue discussions with the Public Safety Associations and return as progress was made.

On March 17, 2015 staff returned to the City Council in closed session to brief the Council on the discussions and to outline potential deal points that would partially address the OPEB issue. Unanimous direction was given to staff to continue discussions. Finally, on April 7, 2015, Council provided final direction to staff to return with a set of recommendations including a new or amended MOU, for their consideration in open session.

Here are the changes to the MOU, from the staff report:

  • The establishment of an OPEB Trust to assist in the payment of OPEB obligations for those contributing to the Trust;

  • Funding of the Trust by the City;

  • Funding of the Trust by member contributions based on date of hire;

  • Wage increases similar to those in the current contract, based on the City’s performance of the largest five revenue categories for each year except for one;

  • The calculation of retiree pay based on “single highest year” for Classic Employees (generally those hired prior to January 2013) rather than a three year average as required by the Public Employee Pension Reform Act (PEPRA) of 2013;

  • An additional non-monetary change that requires all APOA members hired after June 2011 to contribute 2% of pay to a supplemental retirement plan that is currently required of IAFF members through their MOU; and

  • Administrative changes intended to ease the functionality of the MOU, resulting in little or no financial impacts.

The two biggest changes are, of course, the wage increases and the OPEB Trust.  The “wage increases” are not necessarily new because those were in the old MOU as the “give” in the “give and take” with the unions.  The unions paid more into their retirement plans and they received a negotiated wage increase depending on how well the City was doing from an economic stand point.

The biggest change is the OPEB trust fund and an actual model for putting money in that trust fund.  A few bullets:

  • City of Alameda will seed the OPEB trust fund with $5 million in 2016
  • Every year for nine years starting in 2016, the City will contribute $250,000 to the OPEB trust fund
  • In 2016, employees hired after 2011 will contribute 1% of their base pay to the OPEB trust fund
  • In 2017 and years thereafter as long as the MOU is in effect, employees hired after 2011 will contribute 2% of their base pay to the OPEB trust fund
  • In 2016, employees hire before 2011 will contribute 2% of their base pay to the OPEB trust fund
  • In 2017, employees hired before 2011 will contribute 3% of their base pay to the OPEB trust fund
  • In 2018 and years thereafter as long as the MOU is in effect, employees hired before 2011 will contribute 4% of their base pay to the OPEB trust fund

Here’s how the staff report sums up the effectiveness of this trust fund model:

As described in the four agreements, all safety members will begin contributions into the Trust effective 1/1/2016. These contributions will not be used to offset the City’s OPEB Pay-As-You-Go costs until 1/1/2019. Staff estimates employee contributions to the Trust from four bargaining groups made between 1/1/16 and 1/1/19 will be $3.0 million. Of this amount, approximately $272,000 will be used toward the reduction of City’s OPEB cost in FY 2018-19 and FY 2019-20.

The City contracted with Bartel & Associates (Bartel), an actuarial firm, to project the impact of the OPEB agreement over the next 30 years assuming the employee contributions continue at 4% of the top step of Police Officer classification into the future. Bartel projects the City’s cumulative savings from setting up and contributing to the OPEB Trust for all safety groups to be $47.3 million. Nonetheless, even with the proposed City one-time lump sum contribution of $5 million and annual contributions of $250,000 for the first ten years coupled with the employee contributions of 4%, the Trust is expected to run out of funds by year 2035, as the City draws upon it to pay for retirement benefits.

Here’s the staff report portion on how much the wage increases will cost the City:

With the approval of the four safety MOUs, the estimated increase in labor cost as a result of revised salary adjustments will be approximately $115,000 in FY 2015-16 and $268,000 in FY 2016-17. Cumulative salary and related benefits increases over a five-year period is estimated at approximately $1.2 million for all safety groups.

I am always torn when issues about pension and post-retirement benefits are discussed.  On one hand, it’s rather shocking that these promises seem so extravagant and may break the City Government.  On the other hand we hear about retirees struggling to survive and it only seems appropriate to care for our public service employees as they enter their golden years.  Regardless of how everything shakes out in the end — because this really is only the second step in a lot of steps to help work out the liability of these pension and OPEB costs — unilaterally attempting to force a group of employees to do something has not worked in the past and careful negotiation seems to actually move the post incrementally as opposed to holding out for a huge drastic change.   For example, and this is just spitballing, if we want to see something like a flat maximum for pensions for all public safety employees — even ones hired before 2011 — that’s going to be the result of heavy negotiation and not through unilaterally trying to change contracts.

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2 Comments

  1. Sticky wicket (noun): the process of trying to deal with public safety unions’ retirement benefits and pension obligations.

    Comment by BMac — April 16, 2015 @ 9:14 am

  2. While I am not equipped to follow all of the financial details, I can see that the City of Alameda and our public safety unions are trying to navigate a very complicated nest of laws, contracts, and regulations to try and turn around the city’s OPEB liability problems. Despite being hemmed in on almost every side, they seem to be making progress while we await the (necessary) legislative solution(s) that will be required to solve this knotty statewide problem.

    Comment by Jon Spangler — April 17, 2015 @ 11:38 pm


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