City Council Lacks Financial Literacy

City Council Lacks Expertise On Pension And Budget Matters

Insanity: doing the same thing over and over again and expecting different results.
—Albert Einstein,

THE FIREFIGHERS PENSION INCREASE – A CONTRACT?

[ NOT!]

In previous editions we informed you that in 2008 the City Council, on a vote of 4 to 3, increased the Firefighters salary and retirement benefits.  They voted to increase those benefits from 2% to 3% even though they knew (were told) they did not have the money to fund it.  The vote resulted in an approval of a Memorandum of Understanding (MOU) with the union.

bad city council contract

City Council approves an 11% increase in firefighters’ pension.

The issue had to be revisited because of the failure of the City Council to obtain an actuarial report from CALPERS on what it would cost to increase these benefits.   To “try” to fix the problem the Council, at their regular meeting on April 26, 2010, was presented with a report from the CALPERS actuary, Bill Karch.  He informed the council that the “present value” of the cost of the increased benefits (in addition to what we are already obligated to pay) would be $5,047,760,  that the city would have to pay $548,271 this year, and a sum yearly thereafter to fund the $5.4 million increase.  He didn’t say how much we would have to pay beyond 2010.

An actuary is a specialized, mathematical expert trained to compute values for present and future events. Actuarial “present value” calculations convert future occurrences, such as retirement payments, to a present dollar value.   The “present value” of benefits represents the total dollars needed today at an estimated investment rate of return to fund future benefits for members of the pension plan.  The lower the rate of return (say 4.5%) the more you have to pay up front now to meet the future payment demands.  The higher the rate of return (say 7.75%) the less you have to pay now.

The CALPERS actuary used a rate of return of 7.75%.  Interesting choice given that CALPERS lost $55.2 billion (25% of its value) in 2008-09, and just billed the State of California f $600,000,000 this year to pay for unfunded pension liabilities, but we digress.  None of the Council members asked about the investment rate of return that was used to make his calculations and/or whether the 7.75% rate of return of interest was a reliable dollar estimate in today’s market, and/or whether we should use a lower rate of return, to predict how much our present pension obligations would have to be increased in order to fund and pay future pension obligations.

Subsequent to the Council meeting Mr. Karch was asked in an email from VREG if he could calculate what the present value of the increased obligation if 4.50% was used, and how much more Ventura would have to pay this year. That number was selected because actuaries today conservatively use 3% to 5% as the investment rate of return in making such calculations. Mr. Karch declined.  His response was that we could get that the data if VREG made a Freedom of Information Act request through formal channels; and, by-the-by send a large check to pay for the voluminous computerized report.  Well Bubba I guess we know who that fella works for!

So in a state of blissful ignorance Council members Fulton, Brennan, Monahan and Tracy voted yes.  Council members Andrews, Morehouse and Weir voted no.  The deciding vote was that of Deputy Mayor Tracy, who in casting his yes vote stated:

“…what is clear tonight is that we are not deciding on whether or not we give our firefighters an enhanced retirement program.  That decision was made two years ago.  We have received (a) very competent legal opinion that frankly we have no choice but to honor that contract…”

Bad city council contract

City Council negotiates questionable contract with Ventura firefighters.

What the Deputy Mayor was referring to was a letter from a law firm named Liebert Cassidy Whitmore of San Francisco, attached to the Administrative report for Agenda item #8, which concluded – “Once approved by the City Council, the memoranda of understanding (MOU) between the City and the Association (firefighters) became a binding and legally enforceable agreement…”.

Just prior to the vote the City Manger, Rick Cole, advised the Council that the reason for the public hearing on the actuarial valuation was to let the public know about the cost of the increase, referring everyone to Government Code section 7507.  Connect this reference with the Deputy Mayor Tracy’s statement and we arrive at the crux of the problem — was there a valid contract?

Read Government Code § 7507 and you decide.  That code provides:

“The legislature and local legislative bodies shall secure the services of an enrolled actuary to provide a statement of the actuarial impact upon future annual costs before authorizing increases in public retirement plan benefits…”

The future annual costs as determined by the actuary shall be made public at a public meeting at least two weeks prior to the adoption of any increases in public retirement plan benefits”.

The letter written by the San Francisco attorneys, LIEBERT, CASSIDY WHITMORE does not address this error. For reasons that are not apparent, these high priced legal types did not even discuss this issue.

A mutual mistake of law and/or fact is always a good defense to breach of contract action.  If both parties to a contract operate under a mutual mistake of fact that there has been compliance with the law, and in fact there has been no compliance with the law, there is no contract

Questions for our readers:

  • Why a letter, bearing the legend “CONFIDENTIAL—ATTORNEY CLIENT PRIVILEGED”, which does not discuss a critical legal defense, would be attached to a public document?
  • Why not a single firefighter asked to speak in support of the measure when the room was packed with the fire folk, who were straining at the bit to get more benefits?

Curious that , but we leave “that” to your speculation.

Editors Comments:  

An actuary report was NOT presented prior to the decision to increase benefits in August and October of 2009, thus was not enacted as required by the California Government Code. The attempt to finesse this critical error, by pretending it could be presented after the fact, on April 26, 2010,  ignores the underlying issue – THE RIGHT OF THE CITIZENS OF THIS CITY TO KNOW IN ADVANCE WHAT AN INCREASED PENSION BENEFIT WILL COST BEFORE THE CITY COUNCIL MAKES A DECISION.   The firefighters’ will of course dismiss this as a mere formality.   This contract should be rescinded and an accurate and reliable actuarial report provided to the citizens of this community.

 

FROM READERS OF THE MARCH EDITION OF RES PUBLICA

[THE PIPER WOULD PLAY A FAR DIFFERENT TUNE IF THREATENED WITH THE LOSS OF HIS PIPE]

This regarding the Pension Reform Committee appointed by the Ventura City Council:

“Very interesting news letter this time as always.  Only one public member appointed to the “ad hoc” committee. All the rest have a vested interested in the system. What would happen if the no guts council just plain and simple told the unions that from now on the fire and police will have to pay at least 1/2 of their contribution. Would the fire and police walk off?  If so I am sure they can replace the lot.  The problem as I see it is that all the cities have to ban together so that there will be a closed door to bouncing around of personnel.”

—K. Weber

THE COUNCIL ACCEPTS VENTURA’S NEW BUDGET

[A SORRY EXCUSE, AT BEST]

            Another letter concerning the current budget format mandated by the City Manger for use in 2009-2001 (called a Budget Book).  We mentioned in our last issue that the current “Budget Book” looked useless and appealed to you for help.

“Regarding the City’s budgeting process and the budget document itself, I spent some time looking at it after reading your latest publication and you hit the nail right on the head.  It is most assuredly not a decipherable budget document.  It lacks clarity and the detail required for the average lay person to begin to understand it, much less a person with a financial background.  I’m not even sure that it meets the minimum legal requirements, as promulgated by the State Controller’s Office.

I am a C.P.A., have a Masters degree in Public Administration, and have worked in government finance and budgeting for the past 29 years and, without a doubt, this is the most sorry excuse for a budget document that I have seen in my life.

In Santa Barbara County, we have developed a true program/performance-based budget that actually links dollar amounts with stated goals and performance measures.  Not only can you clearly and easily see the amount of money, staffing, and other resources allocated to each program area within each department of the County, but you can also see the performance and outcome measures associated with each individual program area.  In other words, as a taxpayer, you can actually see what you’re getting for your dollars.

The firefighter pension increase is just another example of the arrogance and disconnect with reality coming out of City Hall these days.  I certainly hope we can make some changes in the next election.  We definitely cannot continue down this path or bankruptcy becomes an inevitability”

—M. Gibson, CPA and 2009 candidate for Ventura City Council

 

EDITORS’ CORRECTION

Last month we reported that the Firefighters pension increase was 50% (2% to 3%). The City Manager corrected us and pointed out that it was ONLY 11%. .  After his response we received the CALPERS actuary report and confirmed that our report was in error. Under the current pension plan it is a 20% increase if the Firefighter retires at age 50, and an 11% increase if the Firefighter retires at 55.  That aside, this correction does not excuse the ridiculous statement by former Councilmember Ed Summers that it was only a 1% increase. It is still hard to believe he wants to be the County Treasurer.

 

EDITORIAL

The City Council is called upon to make many difficult and complex decisions concerning the financial welfare of this community, but one of the greatest decisions they will have to make concern the pension contracts with the public employee unions now and in the future.   Except for members of the public employee unions there is not a single informed individual in this society that would disagree with the conclusion that our pension system is bankrupt and unsustainable. The collective decisions of our City Council are costing the citizen’s of Ventura for decades in the future. Not to ask the hard questions, when asked to approve a new liability of $5.4 million dollars, such as the interest rate used for the assumptions of a pension increase, or to discuss if the right questions were asked and answered in a legal opinion statement, borders on malfeasance. It is not enough to say, “the report was too lengthy” or “we didn’t have enough time”. If decisions need to be delayed and other opinions sought, the City Council needs to control that process and remember the admonition of Jean-Jacques Rousseau to ”keep your experts on tap and not on top”.

 

Editors:

B. Alviani       S. Doll           J. Tingstrom

K. Corse         B. McCord    T. Cook

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