The Flywheel

April 3, 2015

NEXT MEETING: April 3, 2015

Putting Richmond Students First

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Enjoy a special presentation by violin students from Benito Juarez Elementary School led by Don Benham, followed by a conversation with Jorge Lopez, Chief Executive for Amethod Public Schools (AMPS).

AMPS believes that all students can succeed in rigorous college-prep environments when provided with high expectations, capable educators and leaders, a disciplined commitment to academics, extended time for learning, and access to a range of enriching learning experiences. An excellent college education is necessary for expanded opportunities in an increasingly competitive and global 21st century job market, and together as a school community AMPS strives to meet that challenge, and to prepare students to be driven individuals who take smart and calculated path for the good of their personal progress. AMPS seeks to strengthen the character and academic foundations needed for underserved students to excel in school in order to assume positions of responsibility and distinction in society. Central to the network’s mission is the belief that it doesn’t matter where you start in life, but what you do with what you have in life is what counts.

ANNOUNCEMENTS

  • Alan Baer announced the club’s 95th Birthday Celebration at his house April 4th starting at 2 PM. Also District 5160 will be holding the annual District Assembly Saturday April 25th at Solano Community College in Vallejo, starting at 8:30 AM (free coffee & donuts, Free lunch if you register at http://www.rotary5160.org/calendar/events-calendar
  • Sid Chauvin, DDS (Dr. of Drains and Sewers) asked that the local plumbers union 100th year celebration be announced again, April 4th at the Rosie the Riveter Museum and the Craneway Pavilion. The event starts at 5:30 PM and includes dinner and dancing.$125/ticket, available from Sid. Rumors about a ‘hosted bar’ were premature. Sid’s still wondering if they were the product of wishful thinking or inexperienced caterers.
  • Prez Stoney reminded the club that Dave Calfee’s Celebration of Life will be Saturday the 28th from 1 – 4 PM at the Calfee home in Meadow Vista CA. Directions are available at the podium.
  • Stacey Street reminded the assembly that next week 33 student violin performers from Benito Juarez Elementary School will play at the meeting next Friday. The violin performance will be followed by a conversation with Jorge Lopez, Chief Executive for Amethod Public Schools (AMPS).  AMPS believes that all students can succeed in rigorous college-prep environments when provided with high expectations, capable educators and leaders, a disciplined commitment to academics, extended time for learning, and access to a range of enriching learning experiences.

MEETING OF March 28, 2015

Welcome

Whoa Nellie! As the check-in line whittled down to a mere three and the buffet line got down to only five, President Stoney Stonework welcomed the 60+/- guests and Rotarians to today’s meeting and called to order the Richmond Rotary Club. Erle Brown was asked to lead us in the Pledge of Allegiance. Stoney led us in the invocation, a silent prayer for Freedom, Peace & Justice on Earth. Sidney was on his way to David Calfee’s Celebration of Life (more later). Filling in for Sid and busier than a one armed Boatwright was Stacey Street.

Visiting Rotarians

Mack Lingo from Berkeley Rotary. Hello Mack!

Rotarians with Guests

Felix Hunziker introduced again local boy and Chevron engineer Oscar Garcia. Jan Brown introduced her husband Byron Brown. Prez Stoney introduced his wife Maryanna Stonework. Mark Howe introduced his guests, City Manager Bill Lindsey and new City Director of Finance Belinda Warner. Nick Despota introduced his wife Nel Benninghof. Don Lau introduced Randy Enos, School Board Trustee. In the Rotarians as Guest Dept, it was nice to see Paul Allen who said he would not be such a stranger in the future.

Other Guests included:

County Supervisor John Gioia, Capt. Anthony Williams RPD, Susan Segovia, Sean Pyles, Jim & Marilynn Mellander, Kevin Keane, Joan Barrett, Ben Therriant, Susan Wehrl, Kazue Nakahara, Leah Casey, Patty Caressa, Vann Ferber, Martin McNair, Mike Pacer.

Sunshine Report

Bill Koziol reported talking with both Ralph Hill and Charlie Wong and they are both doing well and would appreciate a phone call.

Recognitions and Happy and Sad Dollars

  • Mayor and PP Tom Butt had a check for the Community Fund in recognition of his 71st birthday last week.
  • Don ‘the Menehune’ Lau wished Heather Kulp a Happy Birthday which is today, even though she’s left Richmond for the relatively calm and civil political seas of Washington DC.
  • Josh Genser had Sad $$ because he had to leave the meeting early today. But he was Happy he was leaving to interview candidates for the RCF’s new bond funded Housing Blight Elimination Program.
  • Mack Lingo had Sad $$ because today’s SF Chronicle (& CC Times) headline announced the closing of Doctors Hospital and he is concerned about the soon to be unmet medical needs of the residents of West County.

PROGRAM

Understanding Public Employee Pensions

borensteincolmug_01Jim Young introduced today’s speaker, Investigative Reporter Daniel Borenstein from the Bay Area News Group – “Contra Costa Times”. Dan has worked for the Times and its affiliated newspapers since 1980, including previous assignments as political editor, Sacramento bureau editor, projects editor and assistant metro editor. Dan is a Bay Area native and Contra Costa County resident. He holds undergraduate degrees in journalism and political science and master’s degrees in public policy and journalism, all from the University of California, Berkeley (Go Bears!). Dan Borenstein’s weekly column often focuses on public finance issues, including columns during the past six years on government employee pensions. Today’s presentation has been ‘personalized’ to the public employee pension issues of the City of Richmond.

Here are the zingers:

  • Total unfunded public pension liabilities of the City of Richmond = $446,000,000.
  • Debt per Richmond resident, men, women & children = $4,500 per person +/-.
  • Unfunded Pension expense is a gigantic intergenerational debt transfer of the operating expenses of the past to the operating budgets of the future, our children and grand children.
  • Because ‘mistakes were made’ in past CALPERS funding, expectations and management, the City’s future CALPERS contributions are going up dramatically. The increase is expected to push annual city payroll expense from 42% to 59% of the annual operating budget.

Important Fundamentals of pension vocabulary & definitions:

  • CALPERS = California Public Employees Retirement System (also CalPERS), established by amendment of the California State Constitution in 1931; One of the largest pension funds on Earth with total assets under management >$300B & representing 1.6M + public employees..
  • OPEB = Other Post Employee Benefits a fund or class of obligations due public employees after retirement like health benefits and not part of penison benefits.
  • CALPERS and OPEB are the two largest funds, ‘defined benefits plans’, used by the City of Richmond. By contrast, in 2015, most private sector pension plans are ‘defined contribution plans’. The City has four pension funds all totaled.
  • In a ‘defined pension plan’, the annual retirement payment received by the retiree is ‘defined’ as a fixed amount of annual retirement income. Usually, never stated in this definition, are the contribution(s) needed to create the defined benefit. These contributions are ‘variable’ until the fixed benefit is paid. It is the responsibility of the pension plan and its sponsor, CALPERS & the City of Richmond, to adjust the variable contributions in order to guarantee payment of the defined pension benefits/payments.
  • In ‘defined contribution plans’, typically 401k savings accounts, the contribution from the employer and employee are defined, but the benefit is not. The benefit, if it exists at all when an employee retires, is the consequence of long term contributions, investment decisions, prudent planning and a lot of delayed gratification by the retiring employee-owner.

In a defined benefit plan like CALPERS and OPEB the City has the responsibility, liability actually, to manage the contribution variables and risks in order to guarantee the retirees ‘defined benefits’. In the defined contribution plan (401k plan) the employee/retiree manages the variables and risks including the ultimate retirement rate of payment.

Borenstein said that he thinks ‘defined benefits plans’ are a good thing because they allow retirees to actually plan their income and pool (share) the economic risk of investing, BUT they must be based on the fundamentals of affordable (sustainable) contributions AND realistic investment expectations and accounting, especially time-value*.

Herein lays the problem for the City of Richmond and most, if not all, of the other public employee pension funds in California. The funds are based on unrealistic and unsustainable assumptions. Some of the plans have been subject to inappropriate accounting. Taken together and rolled into public employee contracts under the authority of California Contract Law, they have produced the current unfunded public pension deficit.

How does this happen? Here is the formula used for calculating public employee pension benefit:

  • (Top Annual Salary in Dollars) x (# of Years of Service) x (“the Multiplier”) = Annual Pension Benefit in Dollars.
  • Example:   ($100,000 annual income, last year of service) x (30 year of employee service) x (.03 [3%, the Multiplier for Richmond Police & Fire Fighters]) = $90,000 Annual Pension Payment/retiree income.

The ‘Multiplier’ is something of a magic number that is hotly debated in public employee contract negotiations. The larger the Multiplier, the larger the benefit.

There is another number that is very important to the total amount of pension benefit liability but it is not a direct part of the individual formula. That number is the minimum age or years of service at which employees can retire and receive 100% of the Multiplier benefit. This number is very important because it sets the minimum number of years the pension fund has to earn income before payments must be paid to retirees. It also is an indirect, but not absolute, determinant of how long the pension fund must pay benefits to retirees. The duration of retiree benefits is determined by life expectancy Starting earlier usually means a longer time retirement benefits are paid.

So, when public employees work hard for a long time and get paid a decent living wage (to do the often tedious and sometimes dangerous work of public life in the community), and, are promised the benefit of a ‘high’ Multiplier, they can plan to retire with a pension that is a significant percentage of their working life salary.

Well, not quite, one other thing needs to happen. That defined pension fund needs to have enough money put into it every year the public employee works, so that the ‘wise and prudent’ pension fund managers (CALPERS, etc.) can invest the money in order to insure that every retiring public employee can receive their ‘defined benefit’ if they retire at the earliest age allowed by the pension plan. This is how the unfunded pension liability of $446,000,000 came into being:

  • The City has not been putting enough money into CALPERS, etc. each year to fund expected pension liability.
  • CALPERS has not been so ‘wise and prudent’ with yield expectations and risk management.
  • Fund accounting, at all levels, has been somewhere between overly optimistic to downright deceptive, depending on who, what and where.

Dan Borenstein’s presentation was a tour de force of specific facts and figures that I am sure will be accurately shared with the public again in the near future. If you hunger for those facts and figures, you should have been there. This scribe does not want to misrepresent Dan’s detailed efforts so they are not included here.

Thank you Dan Borenstein for an illuminating discussion of a complicated subject.

*Time-Value, arguably the most important and difficult concept in finance. Ask your CPA for clarification or maybe we can have a whole program about it. Colloquially it is exemplified by the old saw, “A bird in the hand is worth two in the bush.”


Rotating Editor, Jim Young