For the last several years, Berkeley Budget SOS has attempted to focus our City government on the realities of Berkeley’s financial crisis; unfortunately, our pleas for fiscal reality and transparency have fallen on deaf ears. During 2011, most Berkeley City leaders appear to have remained deluded by the comments of Councilman Laurie Capitelli, who proclaimed “We are in better fiscal shape than virtually any other jurisdiction in the Bay Area and I would suggest even California”. The fallacy of that comment was repeatedly evident last year. The chickens have indeed come home to roost.
Auditor Hogan’s Employee Benefits Report
In late 2010 City Auditor Ann-Marie Hogan issued her “Employee Benefits: Tough Decisions Ahead” Report. Among other things, the report revealed that on an actuarial basis, the City owes more than $250 million in pension and benefits liabilities, mostly to CalPERS which administers our City employee pensions. Calling for increased transparency and communication of costs and liabilities to the public, the Report had a “report back” date of September of 2011 and full compliance by September of this 2012. Our City Manager specifically agreed with the Report and its prescribed timeline. Unfortunately, as far as the public knows, there has been no compliance with the Report.
The City Stalls Its Response
Last September, when a response to the Report was due, our citizens were told no response was forthcoming, presumably because of ongoing labor negotiations with the Police and Fire Unions, whose members benefit from some of the egregious practices criticized in Hogan’s Report, which she recommended should be eliminated or changed. Obviously, the Unions are in no rush to make any changes to the generous benefits given them by our City leaders.
City Manager Kamlarz Retires With an Enormous Sick Leave Payout
One of the significant items discussed in Auditor Hogan’s “Employee Benefits” Report was the City’s practice of allowing employees to accumulate sick leave, and upon retirement to obtain a large portion of that leave as a termination payment, usually at 50% for long term employees, and payable at the final salary rate rather than the salary rate at which it was accrued. In the private sector, generally, no such practice exists; sick leave is essentially meant to protect an employee when she or he is actually sick. The State of California also provides no such payout. Auditor Hogan recommended that the practice be eliminated or vastly reduced. Her overall concern was that “Benefit costs are expected to increase sharply over the next five years. This means that [even} if the City reduced salaries, costs could still rise. Benefit costs are less predictable, less controllable.”. So what do we learn one year after Auditor Hogan’s Report? City Manager Kamlarz retires with a $93,298 cash payment for sick leave, $42,382 for accrued vacation pay, $4,070 for longevity pay, and $ 7,687 in regular pay at retirement, a total last day check of $147,439. Added to this will be his monthly retirement payment of $20,785, or nearly $250,000 per year to start, and this amount will increase annually because of built-in “cost of living” increases. Mayor Bates frequently talks about the reduced employee count for Berkeley; but elimination of the sick leave benefit for the City Manager would have theoretically saved or created two entry level job, jobs badly needed by Berkeley residents and services badly needed by our community. Most important however is the bad example that this enormous sick payout sets for other employees while negotiations are ongoing with our Unions. Action should have been taken a year ago to eliminate sick leave payouts for all managerial employees in line with the Auditor’s recommendations and the City Manager especially should have set a good example. Recently, former Obama aide Rahm Emanuel took over as Mayor of Chicago. Facing a $600 million budget deficit, he is taking extraordinary steps to reduce that deficit. As he told Fortune Magazine, one of his key tenets is: “I’m not asking anybody down the line to do something we haven’t done upstairs.” In other words, “Lead by Example” is desperately wanted in Berkeley.
Auditor Hogan’s Infrastructure Report
In mid-November 2011, Auditor Hogan issued her “Failing Streets” Report, another nail in the coffin of financial stability for Berkeley. Noting the “economic struggles” our City faces, Auditor Hogan demonstrated how our failure to repair streets leads to a looming financial catastrophe: “Reconstruction of a failed street can be 32 times the cost of timely maintenance”, concluding that Berkeley streets have reached the point where “less costly maintenance is no longer effective”.
The Lights Come on at the December 6 Workshop Featuring Our City’s Actuary
The usual upbeat and rosy atmosphere at our City Council meetings was absent at the December 6 Workshop, “Pension Costs and Liabilities”, the last of a series of Workshops the Council held at year end. First, and most importantly, our outside Actuary cautioned that CalPERS was considering the reduction of its rate of return on its investments from the current assumed rate of return of 7.75%. Given that the S&P index was just above flat this last year, that many mutual funds barely had a 2-4% rate of return, and that even ace investor Warren Buffet had only a 6% return, it is very possible that the CalPERS assumed rate of return will be lowered, and, if so “it will have a considerable effect on the City’s rates because those rates will have to be increased”. Auditor Hogan told us in her November 2010 “Employee Benefits” Report that the City would be paying $41 million to CalPERS in 2016 and another $4 million to other retirement accounts, amounting to 12-15% of City revenue. If CalPERS reduces its assumed rate of return from 7.75%, the portion of our City’s revenues going towards pensions and benefits could be in the 15-20% range. Second, using the actual actuarial asset value of the CalPERS assets to estimate the future liabilities of the City, the City’s unfunded pension liabilities are well over $400 million. This is staggering number, threatening the financial future of Berkeley, as the Council mood reflected on December 6.
The Forthcoming Budget Update, and the Need for Leadership.
Next month a mid-year budget update will be provided to our City Council and Berkeley citizens by the new City Manager and it will certainly not be a pretty picture. For the future of our City, we need bold action and leadership, just like Rahm Emanuel is taking in Chicago. For me, the hour is late, very late.