Seeing red 

Would you like to pay more for less?

It’s a sales pitch even the slickest used car salesman couldn’t pull off, but as the bottom drops out from SLO County’s finances, it’s becoming a reality.

Consider:

County officials expect that next year’s budget will be about $21.5 million in the red. To put it another way, it’s going to cost about $404.5 million to run the local government and there will only be about $383 million available.

A year later the deficit will bore another $15 million hole in the budget. Within five years, the shortfall is expected to reach about $66 million, unless something is done now.

More than half of SLO County’s money goes toward salaries and benefits for county employees, so there are going to be job cuts—many cuts. To get the county’s budget back into balance, there could be as many as 100 layoffs needed next year. Over the next five years, roughly 400 positions could go.

Service will suffer. At some point, fewer employees will mean fewer services, or longer waits for help. Decisions haven’t been made, but look to library hours, for example, as one way the problem will hit home.

Pensions are a big problem. There is nearly $1 billion invested in the pension fund, but the fund is only 78.5 percent of where it needs to be, because of losses in stock-market investments. Shortages and surpluses in the fund are spread out over five-year periods, so the immediate deficit is about $200,000. Still, one official said, “that’s huge.”

SLO County, like nearly all of its counterparts, sets pay based on salaries offered by other counties. The result is an upward spiral. So, even as some are laid off, the employees who stay will likely get a pay increase. Despite poor revenues, salaries and benefits, which include health care, are expected to climb 6 percent next year.

Revenues are slipping, layoffs are almost inescapable, spending is climbing, and the stock-market collapse is draining the SLO County employee pension fund.

And yet, it could be worse.

Government officials are cautiously optimistic. They say it’s not all doom and gloom in fact, SLO County is in a much better position than a lot of other public agencies. Markets are cyclical so things will get better. In the long scheme of things, the pending layoffs will be a bump in the road.

The question is: How big will the bump be and how can it be avoided? There are two sure ways to fix the problem: raise revenue or cut expenses. The problem is that no one is expecting Santa to come along with a multi-million dollar sack of cash.

 

The forecast

County Administrator David Edge was slouched back in an armchair. He leaned back with one leg perched on the edge of his seat and one arm resting on his knee.

“In a sense, the public-sector unions have been very successful at what they do,” he said in his dry British accent.

Edge is not the only one who thinks so.

“Unfortunately, the balance of labor negotiations has shifted in favor of union representation in public labor,” said Paul McIntosh, executive director of the California State Association of Counties.

It’s not a matter of unions negotiating too much pay for their members. The issue SLO County administrators will have to grapple with is whether that pay is more than the system can bear and what will get cut.

On paper, the line representing expenditures is far steeper than the line representing revenues and the disparity will get larger over time.

“Unless you reduce your total labor cost, you’re never going to be able to—on a year-to-year basis—get those lines together,” Edge said.

There’s usually enough money to keep salaries competitive and draw qualified workers—just not now. The system will probably not reach its breaking point but it will go through a serious bending.

The driving force behind SLO County labor negotiations and pay increases is the county’s Prevailing Wage Ordinance. This mandates that local public salaries and benefits stay on par with other comparable counties. It was put on the books after voters approved it in 1984.

Every year the local pay scale gets put up against eight other counties—Kern, Monterey, Marin, Napa, Placer, Santa Barbara, Santa Cruz, and Sonoma—and the pay goes up from year to year. It’s a system that nearly every county in California uses to craft salaries.

“It’s kind of a spiraling effect,” SLO County Supervisor Harry Ovitt said. “We don’t have the choice to say, ‘No, we’re not going to give you a raise this year.’”

When prevailing wage works as expected, county governments simply try to match the pay of similar counties. Edge said it’s common across all governments.

“That’s the classic problem,” he said, twirling his finger in an upward motion. “Because of the nature of the market you’re in, you’re forever chasing your tail.”

It’s essentially inescapable. No one wants to be at the bottom of the pay scale, acting as merely a training ground for people who work just long enough to gain experience and then jump ship.

SLO County Deputy Administrator Gail Wilcox called it “keeping up with the Joneses.” Even though her paycheck gets a bump along with every other county employee, she believes there should be some control on wages when there’s not enough revenue to keep the budget afloat.

“Think about who’s paying the bill for this,” she said. “My concern as a public administrator is we’re trying to do our best to serve the public.”

 

Finding the balance

The San Luis Obispo County Employees’ Association’s General Manager Kimm Daniels said public employees have to pay bills, too. Still, they don’t want layoffs.

“We will consider just about anything that’s legal to ensure that real people, real employees, continue to have paychecks,” she said.

With layoffs more likely this year, Daniels said, “people are nervous.”

Last year, SLO County was able to use relatively painless tricks like cutting vacant positions. This year, the bag of tricks is running low.

The city of Vallejo filed for bankruptcy in May when it was unable to keep up with rising costs. It is still in court battles with public safety unions.

Vallejo Mayor Osby Davis said the situation had been predicted as far back as 1993, but was ignored while the city’s budget was in good shape. Previous city councils attempted to fill the gap by raising more revenue, but it only delayed the inevitable, Davis said.

“I’m a supporter of unions but I think what happened is that they got control over what was happening and how it was happening in our city,” he said.

“Pulling the trigger on this bankruptcy was a very difficult decision for every member of our [city] council. It wasn’t something that was easy it wasn’t something we’re proud of but there are really no other options at this point.”

 

Pension problems

SLO County’s pension fund gets harder to pay for when the stock market dives.

Public-sector retirement plans are one of the biggest draws to government work. Lately they’ve even had more to offer.

So what’s the problem? While private-sector plans, at best, generally only promise how much money will go into a plan, public plans promise how much will be paid out.

So when markets are shaky and the pension fund dips, the cost difference is made up by taxpayers and employees.

Tony Petruzzi is executive secretary of the SLO County Pension Trust, but he looks more like someone who just walked out of a Phish concert. Acoustic guitars hang on the walls of his office and he keeps a shelf of model trains in the corner.

It’s not all instruments and toys. His office is filled with boxes of financial reports. A TV in the corner stays tuned to 24-hour news channels, but Petruzzi keeps the volume muted so he can watch the stock ticker at the bottom of the screen.

The pension fund has to be viewed with a wide lens, he said in between glances at the ticker. Investments are made based on years-long projections and ultimately the market will bounce back. But, he admitted, “the short term, that’s where you feel the pain.”

Edge estimated that every $1 paid toward salary actually costs closer to $1.50 when pension and benefits are factored in.

Just like salaries, retirement plans are largely driven by competition.

The competition ramped up after California passed legislation that enhanced retirement benefits for public employees under the California Public Employees’ Retirement System [CalPERS] in 2000. At the time CalPERS had plenty of money from the dot-com explosion and claimed that enhanced benefits could be made without increased employer or employee contributions. So they reduced the retirement age for much of the public sector and created a system that provided more money after retirement.

Then the bubble burst. CalPERS stretched its losses out to avoid a huge hit and managed to sustain the increased retirement packages. Meanwhile everyone else had to play catch-up to stay competitive.

SLO County was one of the last counties in the state to adopt the new retirement plan and finally gave in out of fear of bleeding employees to surrounding counties.

“The problem with our benefits structure, especially in pensions, is that employees are given a promise for a pension and then the taxpayers are obligated to set aside the money by law in order to fund that pension while the person is working,” said California Foundation for Fiscal Responsibility Vice President Marcia Fritz. The foundation hopes to have a voter initiative ready for the 2010 primaries that would scale back public retirement packages.

“What happens is we’ve got these agencies ramping up to compete with each other and basically breaking the bank.”

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Staff writer Colin Rigley can be reached at [email protected].