and the
Citizens Economic Research Foundation

Napa Valley (CA) Register
Sunday, June 29, 2008

Napa risks bankruptcy unless pensions, benefits reduced
Grand jury report critical of city, county post-employee benefits packages

By Jillian Jones

The city and county of Napa could risk bankruptcy if they do not reduce their generous pensions and post-employment benefits, according to a report by the Napa County Grand Jury.

In order to avoid a fiscal situation like that of Vallejo, which recently filed for bankruptcy, the grand jury said Napa County and the city of Napa must reduce the escalating costs of employee benefits.

The grand jury report also cites a conflict of interest on the part of the Napa County Board of Supervisors and Napa City Council, who are involved in compensation negotiations from which they directly benefit.

According to the report, the city of Napa and Napa County pay 80 percent and 54 percent of their annual budgets respectively for wages and benefits. The total cost to Napa County taxpayers for county employee benefits over the next two years will be more than $39 million, the report concluded. The estimated cost to fund city employees' pension benefits is $44 million over the next six years.

The city of Napa has a budget of $60 million for 2008, and the Napa County budget for 2008 is $247 million. "This commitment significantly impacts the services that can be provided by these local governmental agencies," the report said.

And these costs continue to rise, the grand jury found. The current annual cost to provide medical benefits to retired employees, for example, is $1.4 million, a more than six-fold increase since 2002.

The grand jury cites a $3.9 million funding gap for the city of Napa during the fiscal year 2007-2008, and $3.7 million for 2008-2009, as examples of the cost impact of employee benefits on other governmental services.

Cuts being considered by the city, for example, could range from the elimination of police positions to a reduction in economic development, D.A.R.E. and library hours, according to the report.

"The grand jury sees two basic problems that need to be addressed to avoid replicating the financial situation in Vallejo," the report said.

When the Vallejo crisis reached its peak, city of Napa officials said they believe the city is in a much better place.

City Manager Mike Parness acknowledged that retirement and public safety costs are high in both cities. But he added that city revenues exceeded expectations last year, and that the area's tourist-based economy has weathered the current economic turbulence fairly well.

Carole Wilson, Napa's finance director, said in March the city has a $7 million operating reserve and is increasing funds to pay for the long-term medical costs of retirees.

"This is a good cushion," Wilson said of the $7 million operating reserve. "Vallejo drained off every last dollar" of its reserves, she said.

Napa County has also managed its finances and obligations more predictably and safely than did Vallejo.

Steps to take

First, the grand jury recommended, the city and county must reduce costly pensions and post-employee benefits, which continue to balloon exponentially. Second, they must address the problem of mounting unfunded liability for both pensions and retiree health benefits.

The report cites Napa County's unfunded liability of $52.5 million for pension benefits and $34 million for health care.

The city of Napa has an unfunded pension liability of $49 million and $2.8 million for health care, according to the report.

"This liability will continue to grow and if left unchecked can adversely impact the financial integrity and borrowing ability of the county and the city," the report said.

As baby boomers retire, the cost to taxpayers will continue to increase, said the report. There are currently 322 retired Napa County employees, according to the report, and the county estimates that another 273 will retire in the next 10 years; there are currently 318 retired city of Napa employees, and the city estimates that another 54 will retire within the next five years.

To allay these costs, the grand jury recommends that both the county and the city switch from a defined-benefit plan for pension benefits to a defined-contribution plan for new employees, thereby reducing the benefits they provide.

"Surveys disclose that on average, the governmental agencies pay more in wages and salaries than the private sector but have not correspondingly reduced their pensions and other benefits," the grand jury wrote.

Further, the grand jury recommends that the county and city work with unions to reduce the terms of pension plans which allow employees to retire well before age 65 at a high percentage of their salaries.

The grand jury also criticized the city and county for their methods of negotiation.

While the report acknowledges that elected officials' involvement in benefit negotiations is legally permissible, the grand jury claims it is a conflict of interest for those who negotiate and ultimately approve agreements with unions to benefit from those same negotiations.

The Grand Jury recommends that the county retain an outside agency to advise on wages and benefits for the Napa County Board of Supervisors.

"Otherwise, conflict of interest concerns will cloud virtually every wage and benefit action taken by the Napa County Board of Supervisors," the report stated.

As with the county, the report recommends the city contract with an outside entity to advice on wages and benefits for the Napa City Council.

The city and the county, like all agencies studied by the grand jury, must offer a formal response to the findings in the coming months.

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