Healdsburg city officials learned Tuesday that they face a $26 million gap for funding public employee retirements, a situation described as "bleak" and "grim" by City Council members.
In what Mayor Gary Plass said was a painful, but necessary exercise, the council heard the analysis by Joe Nation, a Stanford professor and former North Bay assemblyman, whom they invited to scrutinize city's pension plans.
Nation described the $26 million as a "big number" considering the city's general fund budget is only about $8 million annually."
"As grim as the news is, we're somewhere in the middle of the pack," City Councilman Jim Wood said of Healdsburg's comparative ranking.
"The economic meltdown of 2008-09," Wood said, "was the first tsunami that hit. What we're seeing here is a delayed tsunami."
"Everyone has to be educated on how complicated, difficult and miserable the problem is," said Councilman Tom Chambers.
Nation, who has raised the alarm about public pension financing through studies at the Stanford Institute for Public Policy Research, said state budget contributions to CalPERS, the state employee retirement system, have risen dramatically the past dozen years.
Even if the state's three biggest public pension plans achieve their objective of average investment returns of 7.75 percent over the next 16 years, the state's funding shortfall will be $142.6 billion, according to Nation's projections. That's equal to $12,000 for every California household.
If investment returns fall short of that, and achieve merely a 6.2 percent rate of return, the researchers project the shortfall will be $300 billion.
"It's clear it's a mess. We still have a lot of people who don't acknowledge the severity of the problem," Nation said. "Everyone's looking for an easy out. There is no easy out."
A number of factors have contributed to escalating pension costs, including decreased investment earnings for pension funds and market downturns.
"It's completely obvious we had a great run," Plass said. "We cannot sustain what we had. It's a hard pill to swallow."
More generous pensions have been granted to police and fire employees and retirees are living longer.
Healdsburg's contributions toward employee pensions jumped 16 percent this budget year - from $2.4 million to $2.8 million - even though the city's 100 or so employees last year began contributing more toward their retirements.
The city has been forced to dip into its reserves to fill the gap.
Nation said the $26 million unfunded liability represents the difference between the assets and liabilities for the retirement costs of retirees and current employees.
CalPERS, which administers the Healdsburg plan, assumes an investment rate of return of 7.75 percent annually, an amount that Nation believes is too high and should probably be closer to 6 or 6.5 percent.
Currently, the city's contributions to the retirement system are equal to about 37 percent of the annual salaries of police officers and firefighters each 24 of other employees' salaries.
To avoid going higher, Nation said the community needs to highlight the problem and recognize that minor fixes won't work.
Even before Nation produced the sobering number for Healdsburg, city officials acknowledged the seriousness of the pension liability issue.
"The City Council is taking the situation we're in very seriously. We have taken steps and will continue to take steps to lower our costs," Mayor Gary Plass said prior to the meeting.
He said the city will be negotiating a two-tiered system of retirement - less generous benefits for future workers - and will seek more concessions from employees beginning with police and fire department workers whose labor contracts are up for renewal this year.
But in his presentation Tuesday, Nation said new tiers for new employees won't matter much, especially if the city is not hiring.
Employees and employers will have to contribute much more.
Avoid issuing debt, he told city officials and don't expect the market to save you.
A hard fix, he said, is to decrease compensation costs through collective bargaining and require employees to pay a larger share of contributions.
Councilman Steve Babb said it is a serious issue and "we all need to come to the table and talk in good faith with each other. Hopefully we don't end up like Vallejo where we have huge layoffs."
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