Sierra Madre Edition - April 2018

Solutions to Sierra Madre’s Fiscal Crisis.

Here are some common-sense steps to address and ultimately fix the fiscal crisis in the City of Sierra Madre.

Admit You Have a Problem

The first step in solving any problem is to admit that you have one.  From all appearances, the City of Sierra Madre and the majority of its residents are either unaware they have a problem or are unwilling to admit it.

Like most California cities, Sierra Madre spends too much on too many things, especially employee salaries, pensions and benefits. They have spent so much and incurred so much debt that the very existence of the City is now in doubt.

The City Council and, more important, the citizens themselves must ultimately accept the blame for what has been done in their names. They must face up to the facts and admit they have a problem.

Retain Experts to Establish the Real Pension Debt

Appointing another committee is usually a bad idea for government because it is often a way to avoid responsibility for making a decision.  The issues related to the calculation of future employment benefits are complex financial issues that are obviously beyond the ability of the City Council to understand. Otherwise, they would have already acknowledged that they have a pension, pay and benefits problem.

The best way to deal with this problem is to hire a team of independent experts to review the City’s pension and OPEB (Other Post-Employment Benefits) obligations, calculate the real obligation and give the city its options. Hint: This number is not the fake $10 million number from CalPERS. The real number is more like the $40 million calculated by the Stanford Institute for Economic Policy Research.

Hold a Town Hall Meeting

The results of these reports should be released to the public at a real town hall where this issue can be discussed and debated. The time for accounting obfuscation has long passed. If the concerns of citizen groups like the California Tax Limitation Committee are misplaced, now is the time for the City to make its case and prove to all of us that Everything is Going to be O. K. It’s not.

Recognize the Real Pension Debt on the City’s Financials

The City Council has an independent fiduciary obligation to assess and report the true financial condition of the City. Each year the City compiles what is known as a Comprehensive Annual Financial Report (CAFR). This report is designed to record and communicate to all interested parties the true financial condition of the City. To the extent that it understates the real pension debt or fails to properly calculate and recognize the long-term risks of OPEB, it materially misleads the citizens and its creditors.

Once the City has determined the real pension debt number, it needs to put that number on its balance sheet for all to see and heed. It needs to do the same thing with its OPEB, which is another ticking debt bomb.

Get the City Out of the Pension Business:  Move to a 401(k) Type “Defined Contribution” Plan for All New Employees

When you are in the hole, the first thing you do is stop digging.

Most Americans have 401(k) plans if they have any pension benefits at all. These are what are known as “defined contribution” plans. This means that the employer’s responsibility for the employee’s pension benefits is both defined and limited. In practice, this means that an employer and employee are “even” every payday. The employee has received everything that he will receive, and the employer has paid everything that it is required to pay.

State law currently prevents the City from moving current employees onto such a program. It does not, however, prevent the City from putting all new employees on such a program. If the City of Sierra Madre is to survive at all, it must do this immediately. In addition, the City should cap pension and OPEB at 10% of compensation rather than the large, open-ended gold-plated pension promises now in place. Privileged public employees will resist this with everything they have. The reality, however, is that the City is on the verge of going out of business as it is. The City has admitted as much by its stated intent to dis-incorporate if it is short just $2.5 million.

Eliminate the Fire and Police Departments

Sierra Madre has been studying this alternative for some time. The reality is that the City is far too small to afford its own police and fire departments. They are luxuries that the City cannot afford and never really could.

It is time to enter into a contract with the County of Los Angeles for the provision of fire and safety services. Although it will not be cheap, it will certainly be cheaper. The chief advantages are that the cost will be fixed and known, and the City will be paid up at the end of each month.

This is by no means a final solution because County fire and safety personnel are likewise extravagantly compensated. Their salary and benefits structure is ultimately just as unsustainable. From the City’s perspective, however, it is the smart move because it will make at least part of its budget far more predictable.

Bankruptcy

“Dis-incorporation,” as suggested by the City Attorney is merely a temporary band-aid.  This does not address Sierra Madre taxpayers’ top problem: pension debt.

At some point, Sierra Madre and most other cities in California will need to consider bankruptcy. Final decisions on this issue must, however, await the outcome of several cases in front of the California Supreme Court which is now considering whether cities actually have the power to restructure pensions and other benefits after initial employment. This is a hotly contested issue and will determine whether cities can address their pension debt on their own or have to go into bankruptcy.

Statewide Pension Reform

The City of Sierra Madre should join with other cities and citizens groups such as the California Tax Limitation Committee in supporting a statewide initiative that will prohibit the payment of any fixed pension. It would move the State and all of the counties and cities and subdivisions of California into a defined contribution system such as discussed above. This needs to be done immediately so that the current pension system can be ended.

With regard to accrued pension benefits, these same groups need to work with the state legislature and public employee groups to settle past pension claims. If they cannot be settled, these claims should be put in bankruptcy and litigated.

Conclusion

It is time for the City and its citizens to wake up. One way or the other, the City Council must stop being the handmaiden and the willing accomplice of the public employees and start representing the citizens who elected them.

By | 2018-05-02T23:11:18+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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