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C I T Y O F S A N L U I S O B I S P O
FROM :
Monica Irons, Director of Human Resources*'
Bill Statler, Director of Finance & Information Technology
SUBJECT : CALPERS RETIREMENT COSTS :
WHERE WE'VE BEEN AND WHERE WE'RE HEADE D
RECOMMENDATIO N
Review and discuss City retirement costs and trends under its participation in the Californi a
Public Employees Retirement System (Ca1PERS).
REPORT-IN-BRIE F
The purpose of this report is to provide a comprehensive review of the City's retirement benefit s
under its contract with CaIPERS . It discusses the City's history with Ca1PERS, which goes bac k
to 1952 ; past and current benefit levels; factors that determine the City's employer contributions
to the system ; the challenges ahead of the City in funding its pension obligations ; what other
agencies are considering in light of increasing pension costs ; and next steps .
Key Observation s
1.The City's retirement plans are in the mainstream of other public employers . That said,
virtually all local agencies are facing significant fiscal challenges in the future in fundin g
Ca1PERS pension obligations – and this includes the City .
2.While increasing benefit levels is certainly a factor, major investment losses by Ca1PERS ar e
the driving factor in recent rate increases as well as those that are likely to occur in the future .
3.For 2009-10, the City's estimated Ca1PERS cost for employer contributions is $7 .6 million .
While this is certainly a significant cost, it does not reflect an undue portion of total Cit y
expenditures : it accounts for 10 .7% of the City's total 2009-10 operating budget of $7 1
million .
4.That said, while employer contribution rates have been stable for the past six years, this i s
likely to change at the end of the 2009-11 Financial Plan when the City will begin to se e
increases in its employer contribution rates .
Next Steps
As noted above, the purpose of this report is to provide a comprehensive review of the City's
participation in Ca1PERS plans . Accordingly, while this report can serve as a solid base i n
developing strategies for the future, it would be premature to attempt to do so at this point. Fo r
Meeting Date 2-23-1 0
?ItItem Number
CaIPERS Retirement Costs and Trends Page 2
this reason, no action is proposed at this time. However, staff does recommend the followin g
next steps :
1.Continue to actively engage in a dialogue with local city and county managers regardin g
potential regional pension reform efforts .
2.Continue to participate and support broader reform efforts in keeping with the League o f
California Cities' guiding principles .
3.Consider Ca1PERS cost trends in the context of upcoming labor negotiations and discussion s
with unrepresented employee groups .
DISCUSSIO N
Backgroun d
At its December 15, 2009 meeting, the Council discussed the results and key findings of th e
Comprehensive Annual Financial Report for 2008-09, which included audited financia l
statements . In that context, Council members asked about the impact of increasing retiremen t
costs on the City's financial outlook . In response to the Council's direction at that time to retur n
to the Council this report provides a comprehensive review of the City's retirement plans an d
establishes a "baseline" of information for all Council members on where the City's been and
where we seem to be headed on this issue in preparation for any strategies the City might pursu e
in the future .
Ca1PERS Pension Benefits : A General Overvie w
Ca1PERS is a separate and distinct legal entity from the City, and serves as an independen t
fiduciary in managing the City's retirement plan assets. It is an agency in the State o f
California's executive branch that manages pension and health benefits for more than 1 .6 million
California public employees, retirees and their families . Along with 2,500 other cities and local
agencies, the City contracts with Ca1PERS for the City's "defined benefit" retirement plan, whic h
covers all of the City's regular employees (except in rare circumstances, temporary employee s
are not covered by the Ca1PERS plan).
As described in further detail below, the City has two plans : one for sworn safety employees (like
police officers and firefighters) and another for non-sworn employees (everyone else).
The City first contracted with Ca1PERS in 1952 to provide a defined benefit retirement plan to it s
employees . These defined benefit plans guarantee a benefit amount based upon a "formula" tha t
considers retirement age, years of service credit and final compensation for two groups o f
employees : sworn fire and police employees ("Safety") and all other employee s
("Miscellaneous"). These plans reward a commitment to public service, promote stability an d
low turnover, and help attract employees to public sector employment . Ca1PERS plans ar e
funded through employee and employer contributions and earnings on those investments .
CaIPERS Retirement Costs and Trends Page 3
Safety employees include police officers, police lieutenants, police captains, firefighters, fir e
captains, fire battalion chiefs, and the police and fire chiefs . The City's "sworn" employees ar e
covered under the Safety contract while all other employees, including non-sworn safet y
employees (such as fire inspectors, communication technicians and police records clerks),
general employees, management and appointed officials, are covered under the Miscellaneou s
contract with Ca1PERS .
Only employees that work more that 1,040 hours per year (half of the hours of a full-tim e
employee) are eligible to participate in Ca1PERS . Under the City's temporary employee policy ,
this means this benefit is typically onl y
available to regular employees ;
however, temporary employees ar e
eligible for participation in those limite d
circumstances where they work more
than half-time . Any such circumstance s
require approval by the City Manager o n
a case-by-case basis .
Ca1PERS retirement benefits are base d
on three key factors at retirement :
1.Age
2.Service credi t
3.Final compensation
at age 55 would receive a retiremen t
The following describes how each of these factors is determined by Ca1PERS .
1.Age .To be eligible for retirement, a Ca1PERS member must be at least 50 years of age an d
have a minimum of at least five years of Ca1PERS credited service . The "normal" retiremen t
age is the age indicated in the agency's benefit formula . For example, "2 .7% at 55" indicate s
that 55 is the normal retirement age . Benefits are reduced if an employee retires between ag e
50 and the normal retirement age .
2.Service Credit .This is determined by the number of years an employee has worked for a
Ca1PERS agency. Some public agencies – counties as well as cities – have other retiremen t
These three factors then determine th e
pension amount based on the plan i n
place . For example, under the "2 .7% at
55" plan, retired employees will receiv e
2 .7% for each year of service credit ,
times their final compensation if the y
retire at age 55 . Under this plan, an
employee with 25 years of service credi t
with final compensation of $4,000 per month that retire s
pension of $2,700 per month (0 .027 x 25 x $4,000).
Defined Benefit Vs Defined Contribution Plan s
There are two basic types of retirement plans :
defined benefit and defined contribution :
Under a defined benefit plan,an employer
promises a specified monthly benefit upo n
retirement that is predetermined by a formul a
based on the employee's earnings history, tenur e
of service and age . Annual contributions ar e
made to the plan in an amount actuariall y
required to fund the plan . The benefit level i s
defined ;and contributions will vary as needed to
fund them .
On the other hand,defined contribution plans do
not commit to a specific benefit, but rather, to a
specific contribution amount by the employee and
employer . In this case, pension benefits will vary
depending on the contributions made and
investment earnings on them . The contributio n
level is defined ;and pension benefits will var y
Ca1PERS is a defined benefit plan .
a V -3
CaIPERS Retirement Costs and Trends Page 4
programs that may have a reciprocity agreement with Ca1PERS, allowing service credit to b e
transferred or retirement benefits coordinated . In addition, Ca1PERS allows members t o
convert a portion of unused sick leave at retirement ; and purchase prior military servic e
credit, prior unvested Ca1PERS service or additional years of service not worked for a publi c
agency (referred to as "air time").
3 .Final Compensation.The "PERSable "compensation is defined by Ca1PERS as base pay
and special compensation . Special compensation includes pay for performing an d
maintaining skills for normally required duties . For the City, special compensation include s
uniform allowance, paramedic pay, hazardous materials pay, bilingual pay and holiday pay ,
which are included in final compensation . However, compensation for services outsid e
regular duties such as overtime, standby, call back, court time, automobile allowance, pay in -
lieu of vacation or holiday, and leave cash-outs are not included in calculating fina l
compensation .
Depending on the plan selected, final compensation may be determined based on the average
of the three highest years of "PERSable" earnings or the single highest year. The maximum
pension benefit for safety employees is 90% of final compensation . There is currently no
maximum benefit for miscellaneous employees . However, under the 2 .7% at 55 retiremen t
formula an employee would need to work over 33 years (with all of his or her Ca1PER S
service under the 2 .7% at 55 formula) to attain 90% of final compensation. If a portion of th e
33 years was under a lower formula, such as 2% at 55, the employee would not attain 90% o f
final compensation .
Ca1PERS Pension Benefits : A Brief Histor y
Since the inception of Ca1PERS, the State legislature has continued to pass laws amending an d
updating the retirement system and pension benefit formulas . With the adoption of new pensio n
formulas by the State legislature, the "normal" retirement age has decreased over time from 60 t o
55 for Miscellaneous employees and from 55 to 50 for Safety employees .
The definition of final compensation has also evolved over the years . In the 1950s and 1960s ,
using an average of five years compensation was standard . The current options of averaging
three years of compensation or using one year final compensation were introduced in the 1970s .
The City moved from using a three year average to one year final compensation for all employe e
groups in the 1980s .
The State legislature added the "3% at 50" formula for Safety employees in 2000 ; and the 2 .5 %
at 55, 2 .7% at 55 and 3% at 60 formulas for Miscellaneous employees in 2002 . Currently the
following retirement formulas are available to agencies contracting with Ca1PERS :
CaIPERS Retirement Costs and Trends Page 5
As the chart indicates, som e
retirement formulas are only availabl e
for Safety employees, while others ar e
available for only Miscellaneou s
employees . Very few agencies hav e
the same retirement formula for bot h
Safety and Miscellaneous employees .
Negotiating
Pension
Benefit
Changes at the Cit y
Formula Employee Grou p
2%at 50 Safety Onl y
3% at 50 Safety Onl y
3% at 55 Safety Onl y
2 .7%at 55 Miscellaneous Onl y
2%at 60 Miscellaneous Onl y
3% at 60 Miscellaneous Onl y
2%at 55 Safety and Miscellaneou s
2 .5%at 55 Safety and Miscellaneous
Pension changes have taken place in the context of overall contract negotiations within tota l
compensation economic parameters set by the Council . At the time of negotiations, foreseeabl e
cost increases are considered as part of the total cost of the negotiated agreements . In many
cases, employee concessions offset the full actuarial costs of improved pension benefits .
The City has five formal bargaining groups and two groups of unrepresented employees . Th e
five represented employee groups are :
1.The San Luis Obispo City Employees Association (SLOCEA) represents approximately 15 2
general employees, including administrative, maintenance workers, utilities workers ,
planners, engineers, and building inspectors .
2.The San Luis Obispo Firefighters, Local 3523 (Fire) represents approximately 44 firefighters ,
fire engineers, captains, and inspectors .
3.The San Luis Obispo City Battalion Chiefs Association (BC) represents four battalion chiefs .
4.The San Luis Obispo Police Officers Association (POA) represents 65 police officers ,
sergeants, communications technicians (dispatchers), records clerks, and evidenc e
technicians .
5.The San Luis Obispo Police Staff Officers Association (SLOPSOA) represents 17 polic e
lieutenants, captains, communication and records manager, communications supervisors, an d
records supervisor .
The City's management group has been unrepresented since the mid 1990s and includes 7 1
employees in a variety of senior professional, supervisory and mid-management classifications as
well as department heads . Four confidential employees who provide administrative support t o
the City Manager, City Attorney and Human Resources are also unrepresented .
CaIPERS Retirement Costs and Trends Page 6
The following summarizes participation in the two plans by employee group for all funds :
Ca1PERS Employee Participation Summar y
Employee Group Miscellaneous Safety Tota l
Represente d
SLOCEA 152 15 2
Fire 5 39 44
BC 4 4
POA 20 45 6 5
SLOPSOA 4 13 1 7
L nrepro ente d
Management 69 2 7 1
Confidential 4 4
Total 254 103 357
As reflected in this summary, negotiating changes to the pension program can be comple x
because multiple bargaining groups must agree on potential contract changes . For example, th e
Miscellaneous contract with Ca1PERS covers 254 regular employees in four bargaining group s
and two unrepresented employee groups . The City must meet and confer with the represente d
groups prior to making any changes to wages, hours, benefits, or working conditions . Whil e
meeting and conferring is not required with unrepresented groups, it is customary to discuss th e
groups' concerns and goals .
The Safety contract with Ca1PERS covers sworn employees in four represented groups and th e
two chiefs, who are unrepresented employees . Over 80% of employees in the Safety group ar e
also covered by binding arbitration ; this represents about 65% of General Fund employe r
contribution costs .
Ca1PERS Pension Benefits : Miscellaneous Employee s
The "2 .7% at 55" retirement formula was implemented for Miscellaneous employees in Februar y
2003, one year after the State legislature approved this benefit formula . At the time, Ca1PER S
earnings were healthy and cost estimates low . Many cities moved to the newly-offered benefi t
formulas . In order to remain competitive with other public sector agencies and negotiate in goo d
faith, the City agreed to implement "2 .7% at 55" in exchange for employee salary and benefi t
concessions . The City's largest group of employees represented by SLOCEA extended thei r
labor agreement, deferred a scheduled 2% salary increase and forfeited a committed one percen t
contribution to deferred compensation . In turn, unrepresented management employees agreed t o
a six month, three percent salary reduction and an ongoing one percent salary reduction . Thes e
salary and benefit reductions were based on paying the full actuarial cost of the improved benefi t
as quoted by Ca1PERS at the time .
Before implementing this improved benefit, the miscellaneous employees' retirement formul a
was "2% at 55" from 2000 to 2003 ; and 2% at 60, prior to 2000 .
By -
CaIPERS Retirement Costs and Trends Page 7
Ca1PERS Pension Benefits : Safety Employee s
The State legislature's approval of the "3% at 50" formula for Safety employees in 200 0
coincided with the expiration of the POA contract in June 2000 and the Fire contract in Jun e
2001 . The improved formula was ultimately negotiated in long-term contracts with both th e
POA and Fire . The "3% at 50" Safety benefit formula was implemented in February 2003, th e
third year of a four-year labor contract with the POA . Fire agreed to an interim step – "3% at 55 "
upon ratification of the contract – with "3% at 50" becoming effective in December 2005, th e
final month of the four and a half year labor contract .
At the time of negotiations, for these benefits, three factors were in place :
1.There were significant excess assets in the retirement program (referred to as "supe r
funded"), due to high investment returns . Because of this, Ca1PERS predicted the enhance d
formula would not require employer contributions for many years (if at all).
2.With the change in State law (2000) creating optional enhancements to the Ca1PERS system ,
the new retirement levels quickly became the statewide public safety standard for cities .
Consequently, offering a competitive pension benefit quickly became a recruitment an d
retention concern .
3.Binding arbitration for sworn police and fire employees – which was approved by the voter s
of San Luis Obispo in November 2000 – created a bargaining environment that made i t
difficult not to meet the statewide standard .
Funding Ca1PERS : Employee and Employer Contribution s
Employees Contribution Rates .These are set by State statute and vary between five and nin e
percent of employee earnings depending upon the contracted pension formula and whether th e
agency participates in Social Security. The City does not participate in Social Security and
employee rates are 8% for Miscellaneous employees and 9% for Safety employees .
The employee portion of Ca1PERS may be paid either by the employee or employer . In the City,
who pays the employee portion varies among employee groups . At one time, if the employe e
paid the employee portion, the contributions were allowed only on an after-tax basis . Therefore,
many employee groups were motivated to negotiate the employer "pick-up" of the employe e
contribution in-lieu of salary increases .
On the other hand, certain groups negotiated salary increases instead of having the City pick-u p
the employee contribution because the employee contribution paid by the City was not include d
in final compensation . In the mid-1990s, tax laws were changed allowing employe e
contributions to be deducted on a pre-tax basis . State law also changed allowing the Employe r
Paid Member Contributions (employer pick-up) of employee contributions to be included in fina l
compensation . Today, the POA, SLOPSOA and BC groups pay the employee portion while th e
City pays the employee portion for all other groups . While this may appear inconsistent, salar y
increases were negotiated to offset the impact . Further, when comparing salaries with other
B y-
CaIPERS Retirement Costs and Trends Page 8
agencies, the City always factors in who pays Ca1PERS contributions to ensure an "apples t o
apples" comparison of compensation .
Employer Contribution Rates.These are driven by a number of actuarial factors, including :
1.System participation levels (how many employees will actually retire under the system an d
receive retirement benefits?)
2. Age of current participants (how close to retirement age are current employees?)
3.Mortality (how long will they live after retirement?)
4.Salary costs and inflation (how will these rise over time from today's levels?)
5.Contractual benefit levels .
6.Status of current funding (are current assets greater or less than accrued liabilities?)
7.Investment returns .
While all of these factors affect contribution rates, large swings in investment yields, both up an d
down, have played the largest role in rate fluctuations that Ca1PERS members have seen over th e
past 25 years . In evaluating the other actuarial factors and their impact on the City's plans, th e
City's Safety plan is "pooled" (as required by Ca1PERS) with all other Ca1PERS agencies that
have less than 100 employees in the plan. On the other hand, these actuarial factors are evaluate d
for the City's Miscellaneous plan based solely on the City's specific experience .
Current Employer Contribution Rates .Ca1PERS employer contribution rates are comprised o f
two components :
1.The normal rate is what's required to actuarially ensure that current contributions will mee t
future benefit requirements, assuming there are currently no excess assets or unfunde d
liabilities .
2.The unfunded liability rate is what's required to amortize past unfunded liability costs ove r
time . Unfunded liabilities are accrued to an employer when unforeseen circumstances, suc h
as investment losses or changes in benefits, mean that current contributions will not meet the
obligations to fund retiree benefits in the future .
For 2009-10, the City's employer contribution rates are as follows :
Plan Normal
Unfunde d
Liability Tota l
Miscellaneou s
Safety
10 .1 %
15 .6%
7 .6 %
20 .3%
17 .7 %
35 .9%
Past Ca1PERS Cost and Employer Contribution Rate Trend s
As noted above, there are a number of factors that determine employer contribution rates .
However, as reflected in the chart below, the volatility of investment yield has played the leadin g
role in the roller coaster ride that the City's rates have been on for the past 25 years : compare d
with a current actuarial assumption of 7 .75%, (Ca1PERS reviews and potentially adjusts thi s
assumption every three years) yields have ranged from a high of 35% to a loss of 24%. .
CaIPERS Retirement Costs and Trends Page 9
CaIPERS Investment Yields - Last 25 Year s
24.6%
T
13.8%16 .7%14.5%12.6%
16.3%15 .3 16 .7%
12796123%-
19 .1% -4
.9 %
9.7%
3.9%
-24 .0 °
CO I-CO O )0
N N N N
•4'U) CO r•CO O) O N M LC)(O N-CO 0) O N M U )
CO CO CO CO CO CO 0) Co O)O)0) 0)O O Co 0) C) C) O C) 0 O
Or Or rO CorrO O O O O)(A O O N N0 N N N N
r r rO rO r Co Co r
Fiscal Year Ending June 3 0
Employer Contribution Rates.As reflected in the changes in the chart below, these volatil e
yields, along with changes in the other actuarial factors identified above, have resulted in simila r
swings in employer contribution rates .
Employer Contribution Rates : Fiscal Year Ending 1986 to 201 1
CO CO COCO 0)00 0 O)NO MO)VCo U[)O)OQ)nCo 0 0O)O)Co C)O O N MO ,Cr '4)CO F-C)coo O)C)C)
OM)O)Co 0)O)O O)O d7 O 07 Co O O CD 0 O O C)O ONNONNNN N N N N N N
0 Safety ■ Miscellaneous
'E H
CaIPERS Retirement Costs and Trends Page 1 0
As reflected in the chart, while rates are higher than in the past, the very low rates in the lat e
1990's and early 2000's were an exception — not the rule — to employer contribution rates . An d
beginning in 2006, the City's employer contribution rates have stabilized .
Employer Retirement Contribution s
Fiscal Year Safety Miscellaneous Total
1998-99 $235,800 $0 235,80 0
1999-00 ---
2000-01 ---
2001-02 ---
2002-03 498,000 264,100 762,10 0
2003-04 1,660,100 1,397,300 3,057,400
2004-05 2,422,500 1,987,700 4,410,20 0
2005-06 2,796,100 2,550,200 5,346,30 0
2006-07 3,159,100 2,747,100 5,906,20 0
2007-08 3,385,800 3,145,200 6,531,00 0
2008-09 4,484,300 3,629,800 8,114,10 0
2009-10*4,403,400 3,243,100 7,646,50 0
2010-11 *4,510,400 3,347,300 7,857,700
That said, while retirement costs have stabilized in 2009-11, this is likely to change .
Prospects for the Futur e
As discussed above, employer contribution rates have been stable for the past six years . Based on
confirmed rates from Ca1PERS for 2010-11, the City will not incur any unexpected costs for th e
balance of the 2009-11 Financial Plan period as the actual Ca1PERS rates are very close t o
Financial Plan assumptions. However, based on rate projections provided by Ca1PERS, the Cit y
can expect significant rates increases over the next five years from 2009-10, summarized a s
follows :
Employer Retirement Cost Contributions .These changes in employer contribution rates alon g
with changes in "PERSable" compensation determine the City's annua l
contributions to Ca1PERS . As reflected i n
the chart (which reflects employe r
contributions for all funds), no contributions
for Miscellaneous employees were require d
for four years (1998-99 through 2001-02);
and no contributions were required for Safet y
employees for three years .
retirementemployer
This chart also shows the impact o f
compensation changes on employer
contribution costs . For example, in 2008-0 9
while rates were stable, costs significantl y
increased due to increases in compensatio n
resulting from the binding arbitratio n
decision .
Placing these costs in context, the City's
estimated Ca1PERS cost for employer
contributions in 2009-10 is $7 .6 million .
This represents 10 .7% of the total Cit y
operating budget for 2009-10 of $71 million . So, while it's certainly a significant cost, it is no t
an undue portion of total City costs .
* Budget for2009-10 and 2010-11 .
2008-09 reflectsretroactin costs for binding arbitratiion decision .
CaIPERS Retirement Costs and Trends Page 1 1
As reflected above, rates are stable through the end of the 2009-11 Financial Plan ; and increase
modestly the following year in 2011-12 : by 1 .3% for Miscellaneous employees and 2 .4% for
Safety employees . However, the increases are more significant in 2012-13 and 2013-14 ;
approximately 4% for Safety and 2% for Miscellaneous. Ca1PERS then expects rate increases t o
level-off in 2014-15 . Based on 2009 compensation, this would result in added cost to th e
General Fund of about $2 .5 million by 2014-15 .
City Defined Contribution Program s
The City also offers its employees access to programs where employees are allowed to "defe r
compensation" per Internal Revenue Codes 457(b) or 401(a). Defined contribution plan benefit s
are dependent upon contributions made by the employee and employer (if applicable) and an y
investment gains or losses on those contributions . Unlike defined benefit plans, these define d
contribution plans offer no predictability of benefits paid upon retirement and are therefor e
considered "supplemental retirement plans ."
Deferred compensation plans are the typical vehicle for these programs . Participants authorize the
City to withhold a portion of salary to be invested for payment to the participant at a later date .
Neither the deferred amount nor earnings on the investments are subject to current Federal or Stat e
Income Taxes . Taxes become payable when the deferred income plus earnings are distributed t o
the participant . The City offers "457" deferred compensation plans to its employees through thre e
providers : Hartford, ICMA, and Nationwide . A 401(a) plan through Public Agency Retiremen t
System (PARS) is also available for management employees and department heads .
Regular employees that are eligible for Ca1PERS pension benefits may voluntarily contribute t o
a deferred compensation plan . The City does not make contributions on behalf of employees t o
these plans . A participant may defer up to $16,500 (or $22,000 if the employee is 50 years of ag e
or older) in 2010 . This maximum deferral amount is set by the Internal Revenue System (IRS )
and is typically the same limit that applies to 401(k) plans .
Employer Contribution Rates: Actual 2009-11 Financial Plan
and Projected though 2014-1 5
0%
2009-10 2010-11 2011-12 2012-13 2013-14 2014-1 5
Fiscal Yea r
® Safety ■Miscellaneous
Ca1PERS Retirement Costs and Trends Page 1 2
Temporary, part-time, or seasonal employees of the City who are not participating in Ca1PER S
retirement program must defer an amount equal to 7.5% of salary up to the base wage for Socia l
Security during the year of contribution . This mandate satisfies the requirements of Section 218 o f
the Federal Social Security Act for participation in some form of retirement plan .
PARS Plan .Under a 401(a) plan, the employer determines the amount of money to b e
contributed each year (i .e . by the employee, the employer or both), vesting schedules an d
eligibility requirements that may be tied to job performance as a way to retain key employees . I n
2000, Council approved establishing the PARS defined contribution supplemental retiremen t
plan for department heads and managers . Employees may contribute from zero to 14% to th e
401(a) plan . The City contributes one percent of salary for management employees, two percen t
of salary for department heads, and three and a half percent of salary for appointed officials . Th e
City also pays an annual administration fee of $4,800 while the annual asset fee is paid fro m
participant accounts .
Options and Strategies Under Consideration by Other s
We Are not Alone : What Are Other Agencies Considering ?
All Ca1PERS agencies are facing the same kinds of rate increases in the future as the City . Many
are considering whether current pension benefit levels are sustainable and are beginning t o
explore options to control or reduce costs now and in the future . This is also true of othe r
government agencies, such as the County of San Luis Obispo, that are non-PERS agencies . Most
agree that employee morale, turnover costs and difficulty in recruiting must also be considere d
when examining options . Further, before an agency can begin to consider negotiating reduction s
to its retirement benefits, it must also understand its employees' rights to existing retiremen t
benefits . Specifically, employees have a property right or are "vested" in their right today to a
retirement benefit in the future .
Stated simply, the City cannot impair the retirement benefits that are currently being received b y
retired employees . The City potentially could change the retirement benefits current employee s
will be eligible to receive in the future if :
1.The changes to those benefits are necessary for the preservation of the retirement system ;
2.The changes bear some material relation to the theory of a pension system and its successfu l
operation ; and
3.Equivalent benefits to those previously offered are provided in their place .
Of course, all potential changes would be subject to negotiations ; and with the POA and Fir e
groups, those negotiations would be subject to binding arbitration and as noted above, thi s
represents about 65% of General Fund employer contribution costs .
Regardless, an association or agency does not have the authority to negotiate away veste d
benefits . At best, an agreement to change benefits with the provision of alternative benefits may
CaIPERS Retirement Costs and Trends Page 1 3
be permissible . However, for future employees not yet vested, an agreement may be negotiate d
to do away with or change retirement benefits for those future employees only .
These legal issues may explain why most agencies are exploring two fundamental approaches t o
pension reform :
1.Two-tier systems that reduce retirement benefits for new employees .From a cost
containment perspective, this is a long-term strategy in that no significant savings materializ e
until the workforce experiences significant turnover ; it typically takes at least 10 to 15 year s
for that turnover to occur . Further, this strategy brings with it morale issues in that i t
establishes a perceived "class system" within the organization with employees performing the
same work receiving different benefit levels .
2.Greater cost sharing : employees go back to paying some or all of the employe e
contribution and/or the employer contribution .Some agencies have negotiate d
agreements to have the employee pay a portion of the employer contribution if it goes above a
certain rate . This approach could also be negotiated for just new hires .
Policy Position s
In 2005, the Council adopted Resolution number 9667 (Attachment 1) supporting the League o f
California Cities (League) task force in pursuing appropriate pension reforms and expressing
concern with Assembly Constitutional Amendment (ACA) 5 and other similar initiatives . ACA
5 and other initiatives at the time proposed offering only defined contribution plans to state an d
local employees newly hired by a public agency after July 1, 2007 . The proposals defined
"newly hired" as any employee hired by a public agency after July 1, 2007, regardless of whethe r
the public employee had prior public agency experience .
This significant disincentive to move from one agency to another would have posed majo r
recruitment problems for public agencies especially when combined with the "brain drain "
occurring as baby boomers retire . The proposals also required the defined contribution plans b e
administered by the private sector, where administrative costs are likely to be higher than thos e
charged by Ca1PERS . Even with the recent losses reported by Ca1PERS, it has a better long-term
track record than many private sector financial institutions .
In late 2004, the League asked the City Manager's Department standing task force on Ca1PER S
to undertake a study of potential defined benefit reforms . The task force also include d
representation from appointed and elected officials and public safety unions . Reform effort s
under consideration included changes to benefit levels, improved management of rate volatility ,
and limiting excessive retirement benefits . Since 2004, the League has adopted policies an d
guiding principles on retirement plans (Attachment 2) and the task force continues to meet . At
the heart of the City Managers Department's recommendations lies the belief that pension s
should be fiscally sustainable and politically defensible . They recommend that to get there, th e
League should support regional efforts to address the growing pension problem .
CaIPERS Retirement Costs and Trends Page 1 4
Initiative Reform Proposals
Currently, three public sector pension reform initiatives have been processed and are entering th e
signature-gathering stage to potentially qualify for the November 2010 ballot . All three measure s
exempt current public employees and pertain to individuals hired after July 1, 2011 .
The first two are very similar and limit retirement formulas for new peace officers an d
firefighters to 2 .3% multiplied by years of service at age 58 . Miscellaneous employees' pension s
would be limited to social security retirement age and a formula of 1 .65% multiplied by years o f
service . In addition, these proposals use the highest three consecutive years in determining final
compensation, establish a cap of 75% of base pay, require a minimum employee contribution o f
4% and provide other restrictions .
The third measure limits the pension of any new state or local public employee to $100,000 pe r
year with an annual cost of living escalator up to a maximum benefit of $165,000 annually.
Regional Strategie s
There has been significant local and regional activity in the area of pension reform . Groups in
San Diego, Marin, Santa Clara/San Mateo, San Joaquin Valley and Gateway/Orange Count y
have been raising awareness regarding the issue and authoring pension reform principles .
Common pension reform principles include :
1. Retain defined benefit plans .
2.Implement two-tier systems for new hires including a lower percent of final compensatio n
and an older normal retirement age . Consider formulas such as 1 .5% to 2% at 55 or 60 fo r
Miscellaneous employees ; and 2% to 2 .5% at 50 or 55 for Safety employees .
3.Do not allow enhanced benefits retroactively. Currently, when an agency adopts an enhance d
benefit formula Ca1PERS regulations require the formula be adopted for all existin g
employees for their entire service with the agency . In other words, if an agency adopts 2 .7 %
at 55 six months before an employee is ready to retire after working 29 years with the agenc y
at the "2% at 55" formula, all 29 years are considered under the 2 .7% formula. In order to
adequately fund this retroactive benefit enhancement, the employer contribution rate must b e
adjusted to make up the actuarial cost difference .
4.Use the average of the three highest years as the method for determining final compensatio n
instead of single highest year .
5.Establish benefit caps such as 80% or 90% of final compensation.
6.Exclude all special pay and employer paid pick-up from final compensation .
7.Establish a minimum employee contribution .
8.Retain local options and flexibility .
CaIPERS Retirement Costs and Trends Page 1 5
Long and short-term implications of any proposed changes must be carefully considered an d
weighed . Most groups begin by establishing clear objectives related to pension reform that ma y
include cost containment, sustainability, competitive recruitment, employee retention, etc .
Further, most groups agree a "one size fits all" approach will not adequately address these goals .
Next Steps: Where to From Here ?
As discussed earlier, this report is intended to provide a thorough review of the City's Ca1PER S
benefits and costs, and likely costs in the future . While it can serve as a solid base in developing
strategies for the future, it would be premature to attempt to do so at this point . Accordingly, n o
action is proposed at this time . However, staff does suggest the following next steps :
1.Continue to actively engage in a dialogue with local city and county managers regardin g
potential regional pension reform efforts .
2.Continue to participate and support broader reform efforts in keeping with the League o f
California Cities' guiding principles .
3.Consider Ca1PERS cost trends in the context of upcoming labor negotiations and discussion s
with unrepresented employee groups .
ATTACHMENT S
1.City resolution on pension reform
2. League of California Cities pension reform framework : March 200 5
T:\Budget Folders\2009-10 Mid-Year Review\Ca1PERS Trends\CAR, Ca1PERS Costs and Trends, 2-23-10 .doc
Attachment 1
RESOLUTION NO . 9667 (2005 Series )
A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN LUIS OBISP O
SUPPORTING THE LEAGUE OF CALIFORNIA CITIES TASK FORCE IN PURSUIN G
APPROPRIATE PENSION REFORMS AND EXPRESSING CONCERNS WITH ACA 5
AND OTHER SINIILAR INITIATIVE S
WHEREAS, the League of California Cities welcomes a comprehensive discussio n
about pension reform, focused on curbing the increased costs of providing public pensions in th e
context of the critical role that public pension benefits play in the recruitment and retention of a
skilled public workforce ; and
WHEREAS,the defined benefit model used for public employee pensions has been i n
place for about sixty years in California, and has ensured that California residents receive hig h
quality services from motivated, highly professional public employees ; and
WHEREAS,the League recognizes that problems exist and must be addressed in th e
defined retirement benefit plans in California ; such concerns are : a) Increased cost to the publi c
employer and ultimately the taxpayer; 2) volatility of employer pension contributions ; 3) some
excessive benefit formulas ; and, 4) permitted abuses due to the lack of proper restraints i n
retirement law ; an d
WHEREAS,solutions to problems in the defined benefit retirement plans require a wid e
variety of options and strategic approaches and should avoid one-size-fits-all solutions, whic h
fail to take into account the complexity of the issues, such as ACA 5 and ACA 1-lx ; and
WHEREAS,defined contribution plans as the only alternative raise the immediate cost s
of public pension plans and seriously erode the ability of public employers, such as the City o f
San Luis Obispo, to retain and recruit skilled public employees .
NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Lui s
Obispo as follows :
SECTION 1 . League Task Force Recommendations .The Council hereby supports th e
League of California Cities' task force in developing recommendations that address th e
necessary and required reform of the public pension system .
SECTION 2 .Opposition to ACA 5 and ACA 1-1x . The Council hereby specificall y
opposes Assembly Constitutional Amendment 5, Special Session Assembly Constitutiona l
Amendment 1, as well as any and all measures proposed for the upcoming special electio n
statewide ballot that would mandate the replacement of the current defined benefit retiremen t
system with a private defined contribution system, whether for new or existing employees .
R 9667
Attachment 1
Resolution No. 9667 (2005 Series)
Page 2
Upon motion of Council Member Settle, seconded by Council Member Mulholland, and on th e
following roll call vote :
AYES :
Council Members Brown, Mulholland and Settle, Vice Mayor Ewan an d
Mayor Romero
NOES :
None
ABSENT: None
The foregoing resolution was adopted this 5th day of April 2005 .
Mayor David F. Romero
ATTEST :
APPROVED AS TO FORM :
P . Lowel l
City Attorney
Attachment 2
PENSION REFORM IN CALIFORNI A
League of California Citie s
March 1, 2005
For close to 60 years California state and local governments have offered "define d
benefit" retirement plans to their employees which provide a guaranteed annual pensio n
based upon retirement age, years of service, and some period of highest salary (typicall y
the last one or three years of work). These plans generally provide an annual cost-of-
living adjustment and additional inflation protection that maintains the purchasing powe r
over time at a specified minimum level . The Public Employee's Retirement Syste m
(PERS), the State Teachers' Retirement System (STRS), and a variety of individual citie s
and counties administer these retirement plans .
Over the years local and state government retirement costs have risen and fallen based o n
two principal factors : (1) the investment returns of the various systems ; and (2) the leve l
of benefit payments provided to employees . In the late 1990s the California legislatur e
enacted dramatic benefit enhancements for public employees in the PERS system tha t
were optional for participating local governments . Some local governments adopted thes e
benefit enhancement plans—for a variety of reasons, typically to retain employees and a t
times at a shared cost with the employees . When the retirement systems suffered seriou s
investment losses in the early part of this decade, these losses combined with the benefi t
enhancements to cause dramatic increases in employer contribution rates .
Defined Contribution Mandate Propose d
In the fall of 2004 a proposed constitutional and statutory initiative (File No .
SA2005RF0007) was filed that would close all state and local public sector defined
benefit plans (including locally administered plans) to new entrants effective July 1 ,
2007 . Employees hired after that date could only enroll in defined contribution retiremen t
plans. Defined contribution plans provide fixed annual employer contributions to
employee accounts that are invested, along with employee contributions . Unlike define d
benefit plans, the employee has no guaranteed pension benefit and employers never incu r
any unfunded liabilities .
The initiative (which has a legislative counterpart by Assembly Member Richman) woul d
establish maximum employer contributions of 9 percent for police officers an d
firefighters and 6 percent for other employees, assuming participation in federal Socia l
Security (3 percent higher if no Social Security). Local agencies could exceed these limit s
with a two-thirds vote of their electorate. The state could do so with a three-fourths vot e
of both houses of the Legislature in two consecutive sessions . Mr . Richman has informe d
the League in a letter dated February 17 that he is willing to enter into negotiations t o
avoid the need for the initiative .
In his 2005 State of the State message, Governor Schwarzenegger recommended a
defined contribution pension mandate for new state and local employees . In a
presentation to the League board of directors on February 25, 2005 Tom Campbell,
Attachment 2
Director of Finance, explained the Governor's proposal contains no caps on employe r
contribution and would not require lower state or local contributions . It would simply
remove the risk of increased costs to the taxpayer due to future stock market declines b y
requiring that all new state and local employees be provided a defined contribution pla n
in place of the traditional defined benefit plan . Mr . Campbell indicated that in all othe r
respects (e .g ., PERS administration, employer contributions, employer contributions ,
etc .) the plans would be identical .
League Pension Reform Task Forc e
In late 2004 the Executive Director asked the City Manager's Department's standing tas k
force on PERS to undertake a study of the defined contribution proposal and potentia l
other defined benefit reforms . A group of other appointed and elected officials wer e
subsequently added to the task force to provide broader input, and since early Decembe r
it has met regularly to study the problems with the existing defined benefit retirement
systems and to evaluate the defined contribution proposal . The task force is chaired b y
Bob LaSala, Lancaster City Manager .
The League also retained the services of a retirement actuary, John Bartel of Barte l
Associates, LLC, who worked with the Task Force to ensure its recommendations fo r
reform of the defined benefit system were actuarially sound . He assisted the Board in it s
discussions . His report to the Pension Reform Task Force, dated February 26, 2005 and
entitled Replacement Ratio Study: Preliminary Results,is available from the League .
Review and Comment on Discussion Draft Sough t
The task force report was reviewed by subcommittee of the Public Employee Relation s
Policy Committee on Wednesday, February 23, 2005 and forwarded to the League board
of directors with a favorable recommendation. On Saturday, February 26, 2005 the boar d
accepted the report, with modifications, and authorized staff to circulate the report as a
discussion draft for review and comment . It is important to note the ideas contained i n
this report represent an initial assessment by the League on pension reform . It is offered
for discussion and consideration in the pension reform debate . Comments are requested
from League member cities, other local government associations, local government labo r
organizations, state legislators and the Administration . Comments should be sent to th e
League of California Cities, c/o Anthony Thomas, Legislative Representative, 1400 K
St., Sacramento, CA 95814 athomas(ibcacities .org .
2
Attachment 2
A Framework for Public Pension Reform '
March 1, 2005
General Pension Reform Principle s
Any serious discussion of public pension reform must begin with a set of principles/goal s
to guide any following recommendations . Until questions about the appropriate role an d
purpose of public pension benefits in local government compensation packages ar e
answered, it would be at least premature and perhaps self-defeating to make any specifi c
benefit recommendations . In keeping with this philosophy, it is recommended that th e
following principles precede any benefit recommendations :
•The primary goal of a public pension program should be to provide a full-caree r
employee with pension benefits that maintain the employees' standard of living i n
retirement .
•The proper level of public pension benefits should be set with the goal of providing a
fair and adequate benefit for employees and fiscally sustainable contributions fo r
employers and the taxpayers .
•Public pension benefits should be supported with proper actuarial work to justify
pension levels .. The Legislature should reject any and all attempts to establis h
pension benefits that bear no relation to proper actuarial assumptions and work .
•Pension benefits should be viewed in the context of an overall compensation structur e
whose goal is the recruitment and retention of employees in public sector jobs . In
recognition of competitive market forces, any change in the structure of retiremen t
benefits must be evaluated in concert with other adjustments in compensatio n
necessary to continue to attract and retain an experienced and qualified workforce .
•The reciprocity of pension benefits within the public sector should be maintained t o
ensure recruitment and retention of skilled public employees - particularly in light o f
the retirement of the post World War II "Baby Boom" generation which will result in
unprecedented demand for public sector employees .
•Perceived abuses of the current defined benefit retirement programs need to b e
addressed . Benefit plans which result in retirement benefits which exceed the level s
established as appropriate to maintain employees' standard of living should b e
reformed . It is in the interest of all public employees, employers and taxpayers tha t
retirement programs are fair, economically sustainable and provide for adequat e
benefits for all career public employees,without providing excessive benefits for a
select few .
'This report constitutes the recommendations of the League Pension Reform Task Force that was accepte d
by the League of California Cities Board of Directors for distribution as a discussion draft .
3
Attachment 2
•The obligation to properly manage public pension systems is a fiduciar y
responsibility that is shared by PERS, employers and employees . This joint
responsibility is necessary to provide quality services while ensuring long-term fisca l
stability . These parties need to be held responsible to ensure a high level o f
protection against mismanagement of public resources that could jeopardize a
community's ability to maintain services and provide fair compensation for it s
workforce .
•Charter cites with independent pension systems should retain the constitutiona l
discretion to manage and fund such pension plans .
Reform Recommendation s
Public employee defined benefit programs have been appropriately criticized in a numbe r
of areas . The following reform recommendations address short-comings within som e
defined benefit retirement programs, while preserving the aspects of the program tha t
have served the employees, employers and taxpayers of California well for over 60 years .
Pension Benefit Level s
Principles :Public pension benefit plans should :
â Allow career-employees to maintain standard of living post-retirement .
â Be designed with consideration of age at retirement, length of service, compensatio n
level and applicability of Social Security .
â Be supported with proper actuarial work to justify pension levels . The Legislatur e
should reject any and all attempts to establish pension benefits that bear no relation t o
proper actuarial assumptions and work .
â Promote career public service without creating incentives to work past retirement age ,
nor disincentive to early retirement . Employees who voluntarily choose to either wor k
beyond retirement age or retire early should not be penalized or rewarded .
Recommendations
•Maintain the defined benefit plan as the central pension plan for public employees i n
California .
•Rollback/repeal public retirement plans that provide benefits in excess of level s
required to maintain a fair, standard of living2 that are not financially sustainable and
may have no actuarial justification . The new and exclusive benefit formulas t o
achieve these goals should be :
2 This should be determined in accordance with a Cal PERS 2001 target replacement benefit study and/o r
the Aon Georgia State Replacement Ration Study (6 th update since 1988).
4
Attachment 2
1.Safety Employees :3% @ 55 formula, offset by 50% of anticipated socia l
security benefit for safety employees with social security coverage . Safety
employees retain the current cap on retirement at 90% of final compensation .
2.Miscellaneous Emplovees(Non-safety):2% @ 55 formula, offset by 50% o f
anticipated social security benefit for miscellaneous employees with socia l
security coverage . A cap of 100% of final compensation is placed on newly -
hired, miscellaneous(non-safety) employees .
•The above formulas would incorporate "Three-Year-Average" for "fina l
compensation" calculation . All "Highest Final Year" compensation calculation s
would be repealed for newly-hired employees .
•Provide alternatives to a defined benefit plan for job classifications not intende d
for career public service employment .
•Give employers greater flexibility to determine when a part-time employee i s
entitled to public pension benefits . The current hourly threshold in PERS is to o
low .
Rate Volatilit y
Principle s
â Responsible fiscal planning suggests the need to "manage" volatility in define d
benefit plan contribution rates .
â Rates have historically been relatively constant and comparable to rates currently pai d
by most public agency employers .
â Recent rate volatility is primarily due to large fluctuations in annual investmen t
returns for the retirement plan investment portfolios, causing significant changes i n
plan funding status .
â Normal Costs for defined benefit plans have remained relatively constant over time .
Recommendations
•Public Agency retirement contribution rates, over time, should be constructed to sta y
within reasonable ranges around the historical "normal cost" of public pension plan s
in California . Sound actuarial methods should be adopted to limit contribution
volatility while maintaining a sound funding policy .
•Establish "reserve" funding for public pension systems that will help smooth th e
volatility of pension benefit costs . Plan surpluses are to be retained within pla n
5
Attachment 2
assets, but should be reserved for amortization of future unfunded liabilities, an d
should not be used to offset plans' normal cost contribution rates .
Shared Ris k
Principles
â Currently, in most local jurisdictions, employers shoulder the burden of rate volatilit y
risk — both positive and negative . This principle should be carefully examined wit h
the intent of better spreading the risk of rate volatility among both employers an d
employees .
â Negotiated labor agreements containing language whereby employers "pick-up "
employees' retirement contributions are assumed to be part and parcel of a "tota l
compensation "package ; this implies that agencies with Employer Paid Membe r
Contributions would also typically reflect correspondingly lower base salaries .
Recommendations
• When employer contribution rates exceed the "normal costs" threshold, employee s
should be expected to take some of the financial responsibility for those excessiv e
increases .
Disability Retiremen t
Principle s
â Retirement-eligible employees who are injured in the workplace should be entitled t o
full disability retirement benefits ; disability retirement benefits should, however, b e
tied to individual's employability and be structured so as to encourage return to work ,
where applicable .
â Larger disability reform measures should be considered outside of the scope o f
general pension reform .
Recommendations
•Full tax-exempt disability retirement should be retained for employees who ar e
injured and can not work in any capacity
•Reform the disability pension provisions of public retirement systems to restric t
benefits when a public employee can continue to work at the same or similar job afte r
sustaining a work-related injury .
6
Attachment 2
•Employees eligible for disability retirement should be first afforded applicable servic e
retirement benefits, and THEN provided disability retirement benefits up t o
applicable "cap" on total retirement benefits .
Portability of Plan Benefit s
Principle s
â Reciprocity of public agency retirement benefits is critical to recruitment of qualified ,
experienced public sector employees .
â Limiting portability of retirement plan benefits to non-public sector employmen t
helps in the retention of senior and management level employees .
Recommendatio n
Any pension reform package should retain transferability of retirement benefits acros s
public sector employers . No employee currently in a defined benefit plan should b e
required to involuntarily give up a defined benefit formula before retirement .
Tiered Plan s
Principle s
â Agencies should strive to avoid multi-tiered compensation structures where there ar e
large discrepancies in benefits accruing to employees . In addition to having advers e
impacts on recruitment and employee morale, multi-tiered approaches can raise issue s
of comparable worth and equity .
Recommendations
• Any pension reform measures should seek to minimize disparity between current an d
prospective public agency employees .
•Any reduction(s) or change(s) to current Defined Benefit plans should be considere d
in context of other compensation issues that will tend, over time, to "equate "
compensation plans within and across public agency employers .
Management Oversigh t
Principle s
â The obligation to properly manage public pension systems is a fiduciar y
responsibility that is shared by PERS, employers and employees . This joint
responsibility is necessary to provide quality services while ensuring long-term fisca l
stability . These parties need to be held responsible to ensure a high level of protection
7
Attachment 2
against mismanagement of public resources that could jeopardize a community's
ability to maintain services and provide fair compensation for its workforce .
Recommendations
•Public agencies that do not make the Annual Required Contribution under GASB 2 7
should be made subject to appropriate oversight .
•The membership of the Public Employees and Retirement System Board should b e
changed to achieve both a better balance of employer and employee representatives a s
well as a better balance of public agency representatives .
Conclusio n
Defined benefit retirement plans have been the traditional approach for close to 60 year s
in California and have produced fair and sustainable retirement benefits that have bee n
central to recruiting and retaining quality public employees . Defined benefit plans shoul d
be retained as the central component of public pension systems in California .
8
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