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step and merit increases were premature

Ventura’s Imperfect Evaluation On Step And Merit Increases

Confucius on Ventura's step and merit increases

The man who asks a question is a fool for a minute, the man who does not ask is a fool for life.”

Confucius

Time will tell if Ventura made a good choice with step and merit increases

No one makes a lifetime commitment based on a single moment in time. Yet, the Ventura City Council made just such a commitment. In November 2020, they awarded step and merit increases to city employees based on revised sales tax figures. This decision is disturbing on several levels:

  1. The city staff led the Council to believe financial conditions were improving based on very short-term statistics.
  2. The people benefiting from the salary increases were the ones making the recommendation.
  3. Our elected officials failed to question the rosy picture the staff presented during the pandemic economic shutdown.

How Did We Get Here?

In the city’s fiscal year 2020-2021, the Ventura City Council faced a $12.0 million budget deficit due to California’s coronavirus shutdown. The city staff recommended a dozen possible solutions to the problem. Among them was the option to ‘defer’ $1 million in employee salary increases for step and merit increases until financial conditions improved.

As a provision of the FY2020-21 budget, former-Mayor Matt LaVere, the City Council and all the bargaining units agreed to freeze employee step and merit increases as a down payment on the massive reductions necessary in the year ahead.

Mid-Course Correction

The City Council receives regular updates on sales tax revenue collected. These reports include recent figures and may also include projections based on current trends. The updates are very short-term, especially in the early part of the fiscal year. Predictions made from these limited data may seem overly optimistic. Any upward trend tempts city staff and the Council to overreact. Past City Councils have been guilty of spending money from these projections because they seemed ‘good.’ The tendency is to see these projections through rose-colored glasses.

Step and merit increases were part of a mid-course correction

What Was The New Projection That Justified The Step And Merit Increases?

To everyone’s surprise, the September sales tax report update was higher than anticipated. The city staff projected that General Fund would be $1.657 million higher than forecasted. The City Council seized this as the ‘green light’ to reinstate the employee step and merit increases.

At the November 9, 2020 meeting, the Council rescinded the suspended step and merit salary increases for city employees. The suspension lasted only eight months, from March to November 2020.

Was The Decision To Grant Step And Merit Increases Logical?

Awarding step and merit increases puts Ventura on thin iceThe Council made its November decision based on data presented on September 23, 2020, a month and a half earlier. The Council received no updated data on which to decide. If they had, the decision might have been different.

In a report prepared by Michael Coon, the Director of Finance & Technology, after the Council’s November 9th decision, the $1.657 million surplus became a $483K deficit.

By the January 2021 Budget Workshop presentation to the new Council, the General Fund was positive again by $264,000. Mr. Coon admitted that $264,000 is a slim margin on a $116 million budget (0.2%).

What’s Happening With The General Fund?

The $1.657 million General Fund surplus presented in September 2020 was misleading. Yes, sales tax revenue was higher, but that didn’t account for the excess. Two unique, one-time events inflated the figures.

The General Fund received $2.0 million from the CARES Act funding. The city also received a donation from the Marion Schwab Trust.

Without these two rare revenue infusions, the city would have had $2.4 million less revenue than the city staff led the Council to believe when deciding to award the step and merit increases.

What’s more, on September 24, 2020, the city staff failed to mention the City Council’s risks to the General Fund. Player’s Casino Card Room sales taxes, parking violations, and Parks & Recreation programming were below budget. Mr. Coon’s November 2020 report shows revenue fell more than $5.2 million below budget in those three areas.

The Result Of Their Actions On Raises

In June, Councilmember Jim Friedman warned of an “absolute financial disaster” in the coming years if the city doesn’t continue to cut spending. Yet, the City Council reversed their earlier spending restraint and awarded over $719,000 in pay increases to city employees.

In June 2020, City Manager Alex McIntyre spoke of “shared sacrifice” when announcing the step and merit increases. Today, thousands of Ventura residents are not working. And those private-sector workers that remain employed may experience outright cuts in their pay and hours. Scores of businesses are closed by the pandemic and face bankruptcy. At City Hall, where jobs and salaries are guaranteed, things look very different, however.

What Can We Do?

Every budget cycle, the city goes through the same experience. The budget process begins in January and ends in June for the following year’s budget. Each year, the city staff presents their best estimate of what next year will bring. Often, those Staff recommended step and merit increases and the Council followed like chickens with their heads cut offestimates are optimistic. “We believe we’re conservative not to paint too bleak a picture,” Mr. Coon told the City Council on January 11, 2021. And, our City Council makes long-term decisions based on the short-term data they receive.

Staff isn’t always right. No one has examined the budgeting process for a long time. Periodically, it would be a good idea to have independent, outside consultants provide an unbiased analysis of Ventura’s budgeting. This evaluation should be different from the accountant’s review of the Comprehensive Annual Financial Report (CAFR), which is always 18 months in arrears.

Editors Comments

We believe the City Council made the November decision to award the step and merit increases on flawed forecasts from staff. The City Council accepted the General Fund revenue would be $1.657 million higher in the middle of a pandemic. The Council decided based on a September bump in the sales tax revenue for the first four months of the fiscal year 2020-21. And, the data didn’t include the all-important Christmas season sales tax revenue. The Council made long-term decisions based primarily on short-term data.

Step and merit increases were justified by improved sales tax revenueIt seems clear that city staff provided fluid, optimistic data to the Council for their decision. Mr. Coon explained the projections, saying, “We are feeling alright with the additional projection of $1.5 million in Sales Tax for the current fiscal year. It is something that we definitely want to keep an eye on, especially if we start to see more businesses close.

“Currently, we are basically projecting that we will receive the same amount of Sales Tax this fiscal year that we received last fiscal year…the city would have received about $30 million in sales tax for FY 20-21 without the pandemic. So, the projections do factor in about a 10% decline from the activity that was seen in Jul-Dec 2019. This decline isn’t on the higher end because online sales tax collection is doing so well and offsetting the losses of some of the brick and mortar stores that are experiencing losses at the higher end of the spectrum.”

At a higher level, citizens should be concerned about this process. The same people who prepare the reports used to decide salary increases are the same people who get the raises.

Our concern isn’t with the exact budget numbers. We question using numbers provided by the very people who enjoy the increases. We also have reservations about the Council relying on unseasoned numbers over time.

And, we’re disappointed by the elected officials that failed to question staff’s rosy projections when we’re in the middle of a pandemic. There were variations in the General Fund projections from September 2020 to November 2020 to January 2021. Two different City Councils spanned that period. One would have hoped that at least one Councilmember would have remarked on the General Fund’s changes from positive to negative and back to slightly positive over that time. Yet, no one did.

Only four Councilmembers remain from the group that awarded the increases. They are Lorrie Brown, Jim Friedman, Erik Nasarenko and Sofia Rubalcava. At the January 2021 budget workshop, two Councilmembers (Ms. Brown and newcomer Mike Johnson) expressed concern about the COVID-19 impact on the city’s finances. One wonders why the other five didn’t share the same anxiety. We hope that the new Council will be more rigorous in asking questions when preparing next year’s budget.

Write Directly To Your City Councilmember To Insist They Ask More Insightful Questions During Budgeting

Below you’ll find the photos of our current City Council. Click on any Councilmember’s photo and you’ll open your email program ready to write directly to that Councilmember.

Sofia Rubalcava voted for step and merit increases Doug Halter wasn't on the Council when they voted for step and merit increases
Mike Johnson wasn't on the Council when they voted for step and merit increases Erik Nasarenko voted for step and merit increases
Jim Friedman voted for step and merit increases Lorrie Brown voted for step and merit increases
Joe Schroeder wasn't on the Council when they voted for step and merit increases

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unfunded pension liabilities should force pension reform in Ventura

Latest Facts About Unfunded Pension Liabilities You Need to Know

Norman Vincent Peale on confronting Ventura's unfunded pension liabilities

Stand up to your obstacles and do something about them. You’ll find they haven’t half the strength you think they have.”

Dr. Norman Vincent Peale

Which leader will arise to address unfunded pension liabilities?

Ventura’s unfunded pension liabilities continued to grow in 2019 to $218.6 million. The City of Ventura continues to sink deeper into debt to pay for city employees’ present and future retirement benefits.

Unfortunately, the economic reality of the city’s current public pension liabilities is not receiving the attention it demands. We raised the warning flag about the growing unfunded pension liabilities debt in 2009, 2011, 2013, 2015, 2017, 2018 and 2019, yet the problem continues to grow unabated.

Revised Unfunded Pension Liabilities Figures

The new unfunded pension liabilities figures come from the 2018-2019 Comprehensive Annual Financial Report (CAFR). Ventura added $3.5 million to its unfunded liabilities. Simultaneously, the market value of Ventura’s assets held by CalPERS dropped to 66.7%, a multi-year low.

A chart of how bad Ventura's Unfunded Pension Liabilities have become

 

A Political Hot Topic

Discussions about pensions get emotional because we’re talking about people’s future and security. Let’s be clear. We respect the work city employees do. There is no denying that fire and police perform a vital job that is both dangerous and requires a high level of training and responsibility.

Our concern is not about their work. We’re uneasy about how the city structures, accumulates and pays retirement benefits.

Neglecting Pension Liabilities Doesn’t Make Them Disappear

Unfunded Pension Liabilities don't calculate well for VenturaFor ten years, Ventura has done little to remedy its unfunded pension liabilities. During that time, there have been four different City Councils. Yet, they made only a modest effort to solve the problem. Then-Mayor Bill Fulton and City Manager Rick Cole claimed in 2011 that the City of Ventura had tilled new ground by requiring the city employees to pay something toward their retirement – 4 ½%.

Yet, closer scrutiny showed employees pay their 4 ½% retirement contribution toward the employers’ portion (i.e., The taxpayers’ portion) of what Ventura sends to the CALPERS retirement plan. This accounting maneuver explicitly increases the employee’s total compensation, meaning the “contribution” counts as the employee’s income to calculate the employee’s retirement benefit when they retire.

What Ventura Can Do About Its Unfunded Pension Liabilities

The City Council made this one attempt to improve the current system but did not address the problem in a meaningful way. Since there are no proposals from the Council, the League of California Cities and Government Finance Officers Association recommended these actions to confront unsustainable pensions.

  1. Reduce the unfunded liability by making annual catch-up payments even more than CalPERS instructs you to pay—if you can afford to pay more.
  2. Raise taxes
  3. Reduce services
  4. Require voter approval of any pension obligation bond or POB. (Click to learn more about POBs)

These are terrible choices for the public.

Suggestions For Addressing Unfunded Pension Liabilities

There are two other choices for our City Council to consider if they have the political will.

  1. City workers' pensions are creating large unfunded pension liabilitiesMake beneficiaries pay more. With the city covering 100 percent of the unfunded liability, the problem will continue to grow. There will be minimal reforms because the actuarial losses fall on the taxpayer. Capping the employer contribution at a fixed percentage of salary would cut pension costs for the city. As pension costs increase over the years, the employees will pay all the growing costs.
  2. Change when retired city employees may begin collecting pensions. This alternative solution applies to new employees only. What if police and fire could vest their generous pensions in full by age 50 or 55, as they do now, but the payments did not start until age 65? Why would that help? The reason is that even if the city makes no further contributions, the fund will have ten more years to grow. At current official pension growth rates, that would more than double the fund’s value over those ten years. Also, the retirement payment period would be ten years shorter, given the same life expectancy. Such a system would still offer retirement security, but it would start at what most of us consider average retirement age.

Public sector employees may resist the changes but this solution makes sense. Private sector employees don’t get their full social security until 65 or even 67, depending their birth year.

Examining How Much City Employees Make

In 2019, 92 of the top 100 salaries on the city payroll are police officers and firefighters. Every one of the Top 100 earns more than $216,762 in pay and benefits. For perspective, the average family in Ventura earns $66,000 per year with two wage earners.

Raw Political Power Behind Unfunded Pension Liabilities

Ventura’s city employee unions negotiate higher and higher salary increases disregarding any concern that the money may not be available to pay their pensions once they retire. Union negotiators believe a virtually ironclad guarantee exists for the workers to whom the city promised the pension benefits. So, many Councilmembers accepted the same thing, although it’s no longer valid. A Federal Bankruptcy Court ruled otherwise in January 2015.

CALPERS argued that the California Constitution guaranteed the union contracts and thereby pension benefits from cuts. And if the court didn’t agree, they pleaded that they enjoyed sovereign immunity and police powers as an arm of the state. And if the court still disagreed, they argued that they have a lien on municipal assets.

The Federal Bankruptcy Court effectively threw them out of court, saying, “It is doubtful that CALPERS even has standing.   In his opinion, Judge Christopher Klein writes “It does not bear the financial risk from reductions by the City in its funding payments because state law requires CALPERS to pass along the reductions to pensioners in the form of reduced pensions.”

Judge Klein further stated, “CALPERS has bullied its way about in this case with an iron fist” and “that their arguments are constitutionally infirm in the face of the exclusive power of Congress to enact uniform laws on the subject of bankruptcy…”.

The impact of this decision is that CALPERS cannot stop cities from modifying pensions. Yet, the Ventura City Council appears unaware of the findings.

Editors Comments

Past retirement pension negotiations were based on union bargaining and raw political power, creating a gap between what politicians promised and what cities can really pay. We offer some solutions, but it will take political will to bring the retirement benefits back to reality. Changing the system is the only way these promised benefits can be sustainable and dependable for retirees. It’s also the only way that taxpayers can afford to pay for them.

Write Directly To Your City Councilmember To Insist They Address Ventura’s Unfunded Pension Liabilities

Below you’ll find the photos of our current City Council. Click on any Councilmember’s photo and you’ll open your email program ready to write directly to that Councilmember.

Sofia Rubalcava hasn't addressed unfunded pension liabilities Doug Halter Needs To Address Unfunded Pension Liabilities in Ventura
2021 Ventura City Councilmembers Erik Nasarenko hasn't addressed unfunded pension liabilities
Jim Friedman hasn't addressed unfunded pension liabilities Lorrie Brown hasn't addressed unfunded pension liabilities
Joe Schroeder Needs To Address Unfunded Pension Liabilities in Ventura

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