Sierra Madre Edition - April 2018

Measure D: A Step in the Right Direction

In a few short days, taxpayers in the City of Sierra Madre will have the opportunity to do something both rare and necessary: reduce taxes and say “NO” to Big Government. Sponsored by local residents Earl Richey and David McMonigle, Measure D would end the obnoxious Utility Users Tax and reduce taxes by $2.6 million a year.

Even though City revenues have grown 82% since 2006, spending has kept pace. Obviously, Sierra Madre does not have a revenue problem. It has a spending problem. The City continues to hire and pay its employees more than it can afford while ignoring growing taxpayer anger.

The Utility Users Tax issue has come before the council repeatedly. In frustration, taxpayers qualified the current repeal initiative for the ballot. After using every excuse it could find to delay it, the Council finally put it on the upcoming April 10, 2018 ballot.

Sierra Madre is Broke

The City’s first order of business, of course, was to predict the collapse of Western Civilization if they had to reign in spending and face the harsh reality that the City of Sierra Madre, like almost all cities in the state of California is broke. There is no other way to put it. I will say it again: Sierra Madre is broke. Like its sister city to the south, San Marino, it is a fiscal illusion. It cannot hope to pay what it owes.

Sierra Madre Pension Debt Bomb:  $10 – $40 million

The main culprits in the City’s insolvency are high salary and benefit packages for public employees combined with unfunded pensions and Other Post Employment Benefits(OPEB) for these same people. The term “unfunded” simply means that the city has not set aside enough money to pay the lifetime pensions they have promised.

As you can see from the table below, the City, at the end of FY 2015 (!), owed its current and retired employees over $71 million. The problem is that it only has a little over $30 million set aside. While it is true that the City has $30 million in assets invested which will grow over time, those assets will not grow enough to meet the obligations. Even using its rosy investment assumption of averaging 7.5% a year over the next 20-30 years, Sierra Madre’s pension manager, the California Public Employees’ Pension and Retirement System (CalPERS), has calculated that it is at least $10 million short.

The reality is much worse. If you use a more realistic and conservative rate of return on these investments, the pension gap is much, much worse. The Stanford Institute for Economic Policy Research, directed by Joe Nation, Ph.D., ran the numbers of Sierra Madre using an annual compounded investment return assumption of just under 4%. Using that assumption, they calculated that Sierra Madre is at least $40 million short of setting aside enough money to meet its pension obligations.

Let me repeat and emphasize. The City of Sierra Madre needs to set aside somewhere between $10 million and $40 million dollars right now for pensions. Bear in mind that what the city really owes is $71 million and even that number is soft because that number assumes the city stopped hiring and paying employees December 31, 2015 and the employees did not live any longer than average. In other words, the $71 million continues to grow and fester as we speak. Given the fact that the numbers were only good through the end of FY2015, this data is almost ancient history. The situation is undoubtedly worse by now.

The Other Debt Bomb:  Unfunded Health Insurance Obligations

Speaking of living longer, let’s talk about health insurance for public employees. Most public employees also receive lifetime health insurance benefits. This means that public employees have permanent lifetime job security, followed by permanent lifetime pensions at up to 90% of what they were earning when they retired. And just to make things right, the taxpayers also pay for Cadillac healthcare insurance plans to keep them alive longer to collect even more money!

The City of Sierra Madre’s practice seems to be to pay for these benefits as they become due. In other words, the city has not established a reserve for this obligation. In fact, the City has not even reported the amount of its obligation. Rest assured: it’s a very big number, easily in the millions. That’s why they do not want you to know about it.

Benefits paid to public employees in addition to their pension are referred to as Other Post Employment Benefits  (OPEB). OPEB is one of the fastest growing fiscal problems in California. This uncalculated, unfunded, unrecognized problem will help bring about fiscal chaos throughout California.

Voting Yes on Measure D will send a message to the City Council and voracious public employees that taxpayers will no longer tolerate this kind of irresponsibility. If a reduction of $2.6 million in revenues causes the city to go out of business, so be it. It is going to happen in a few short years anyway. Sierra Madre taxpayers might as well stop the bleed now.  On paper, the city is already an irreversible fiscal failure.

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By | 2018-05-02T23:13:17+00:00 April 5th, 2018|Uncategorized|0 Comments

About the Author:

Michael Alexander is President of the California Tax Limitation Committee. A native Californian, Mr. Alexander grew up in Huntington Park and served in the United States Marine Corps before graduating from U.S.C. Law School. He has a broad background in law, business and finance. Together with his wife, Patricia, he is a founder and managing principal of Private Trust Management Group based in Pasadena. The firm provides private trust services and investment counsel to trusts, individuals, families and retirement plans. He is involved in a number of community organizations, and together with his wife Patricia, helped found St. Monica Academy in Montrose, California. He and Patricia live in Altadena where they raised their four sons.

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