HomeMy WebLinkAbout03/01/2005, COMMUNICATION HRAZ#1 - MARCH 1ST COMMUNICATION ITEM: PENSION LEGISLATION & RESOLUTION (COUNCIL MEMBER SETTLE) RED FILE
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DATE: February 25, 2005
RECEIVED
TO: City Council FEB 2. 5 2151
FROM: Ken Hampian, CAO SLO CITY CLERK
SUBJECT: March V Communication Item: Pension Legislation & Resolution
(Council Member Settle)
Council Member Settle has asked that I forward the attached material to the City Council
regarding public employee pension legislation and reform at the State level. The material
includes a "white paper" prepared by Ca1PERS entitled: "Pension Debate: The Myths and
Realities of Defined Benefit and Defined Contribution Plans." (Attachment 1) Also attached is
material provided by the California Professional Firefighters, which includes a draft resolution
for adoption by local agencies opposing state-mandated two-tiered retirement systems for state
and local employees (Attachment 2)..
On February 15, 2005, the City Council adopted its 2005 Legislative Action Program. This
program included the following language concerning the pension issue:
Supporting pension reform efforts in concert with the League of California Cities positions
Attached is an article off the League website which discusses this issue further, and notes the
task force that has been formed to work on the issue (Attachment 3). SLO City staff shares
concerns regarding ACA 5, tiered systems, and other "quick fixes" that may undermine the
fundamentally sound PERS system. However, if Council is interested in adopting a resolution,
we ask for latitude to modify the proposed draft, as appropriate, and to reference the League
process and our interest in participating in a carefully considered reform effort. Without a
willingness on the part of cities to consider reforms, the authors of ACA 5 are determined to
bring their bad legislation to voters — and given the emotion that typically surrounds such
matters, such a measure could pass.
In terms of possible reform, the City Council and staff have been interested in ways of
moderating future benefit increases and costs, and in developing greater predictability in rates
from year-to-year. Language similar to this is in the proposed resolution, but could perhaps be
strengthened.
Attachments: GC UNCIL ? CDD DIR
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1. Ca1PERS "White-Paper" ACRO Z.�FIRECHIEF;
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2. CPF Info and Draft Resolution CLERKORIG 2 POLICE CHF
3. League Website Material raF:
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Pension Red File(Settle)
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California Public Employees' Retirement System
Ca1PERS Research Brief
Pension Debate: The Myths and Realities of
Defined Benefit and Defined Contribution
Plans
January 2005
Moving from a Defined Benefit Plan to a Defined Contribution Plan
Won't Help Current Budget Crisis
The change to a defined contribution (DC) plan would not save the State and
local government money for at least 10 years, and in fact, it will add a second
pension system that will add start up costs to government budgets. In addition,
the State would also have to pay more money to cover disability and death
benefits for these employees, as well as Social Security, which State safety
personnel and others don't currently receive.
The CaIPERS Defined Benefit Plan Works Very Well
CaIPERS has been a proven great investor for the taxpayers of California.
Over the last 10 years ended June 30, 2004, CaIPERS returns averaged 9.7
percent even with two years of negative returns. It has generated positive
investment returns 18 of the last 20 years, and costs less than a DC plan. Some
75 percent of income to fund pensions came from good investment earnings
during the last 10 years.
CaIPERS investment earnings have made up the lions share of the fund
over the last 22 years. According to its pension consultant Wilshire Associates,
wealth created through investments has totaled $171.9 billion from 1982-2004.
During the same period, employer and employee contributions totaled $29.7
billion and the System paid out $48.6 billion in retirement benefits.
A report compiled by Cost Effectiveness Measurement Inc. found that CaIPERS
investment staff added $7 billion in excess returns over the five-year period
ended December 31, 2003, while taking less risk than other public pension funds
in the United States, Europe, Canada and Asia.
{,�j/n Updated 2/23/05
1
Excessive Benefits in the Defined Benefit Plan Is a Myth
Average pension is small. No one is getting rich on pensions. Some 25,000
CalPERS members retire each year. The average age at retirement for the
largest segment of workers is 60, with 19.5 years of service,and a benefit
allowance of$1,673.82 a month. The average CHP employee retires at age 55,
with 27.9 years of service, and receives an allowance of$3,811.27 a month.
The majority of State cost.increases are due to market downturn, not to
increased benefits. Nearly 80 percent of increases in employer rates between
2002-04 are due to the two-year downturn in the economy. And as a percent of
payroll, the State pays less per employee than it did 25 years ago for school
employees, state miscellaneous employees, state industrial workers, state safety
workers and state peace officer and firefighters.'
Defined Contribution Plans Don't Cost Less,
They Cost More
Dollar for dollar, DC plans cost more. Administrative costs of DC plans are
higher—often much higher—than a DB plan.2 The average cost of administering
CalPERS defined benefit plan from 1997 to 2003 was 0.18 percent. The annual
cost of a.DC plan can rise to as much as 2 percent of assets. The expense ratio
for a stock mutual fund is 1.1 percent of assets.
CalPERS investment portfolio is low cost and less risky than other public
pension funds. A Cost Effectiveness Measurement Inc., found that CalPERS
saved $144 million compared to its peers, paying less for consulting, custodial
and active management services. Costs to run the pension fund's investment
portfolio were $413.2 million in 2003, compared to a peer benchmark of$557.1
million.
In a typical.DB plan, 80 cents of each $1 is spent on members who retire; in
a DC plan 50 cents of each$1 is spent on benefits with the other 50 cents
spent prior to retirement. For retiring members to receive the same amount of
benefits, contributions to the fund would need to increase substantially.3
There is no guarantee that tax dollars put into an employee account will be
used for retirement. Research indicates that most employees who leave one
job for another, cash out their accounts-including the monies contributed by the
employer for the purpose of retirement rather than roll them over to the next
employer's retirement plan.4 If DC proceeds fall short of basic retirement income
needed, the State will end up paying more in public assistance when employees
are old, ill and infirm.
A comparison of operation expenses favors DB plans. Employees pay big
fees to mutual funds and other investment mangers on their investment dollars in
2
DC plans.. On average, mutual funds charge $1.35 for"load" and/or
administrative expenses for every$100 invested. For each of the last 6 years,
CaIPERS spent less than two tenths of one percent of the fund's value— 18
cents on every $100 invested.5
The State will bear start-up costs of a DC plan, bringing to two the number
of plans it will need to budget for.The State's contributions to the CaIPERS
plan do not require direct payment of administrative costs to run the system. If
the State were to set up a DC plan, it would have to pay for start-up costs. The
DC plan does not cover costs of disability retirements and death benefits, which
are embedded in the cost of the DB plan. The State would also have the added
expense of starting to pay 6.7 percent of payroll for police, firefighters, and others
in safety classes who don't get social security under the existing DB plan.
The State throws away an opportunity to use future investment returns to
cover retirement costs, relieving taxpayers from some of the burden of
funding pensions. A DC plan does not give the State the ability to use
investment returns to pay for a portion of pension costs. For example, investment
returns and employee contributions generated enough income in the mid-1990s
that the State did not pay any contributions during four years _ Fiscal year 1998-
99 through Fiscal Year 2001-02 -- for 350,000 classified school workers. That
represented a savings of over$4 billion alone.
Over the last 10 years, 75 percent of the income to CaIPERS has been from
investments, not employer or employee contributions. Over the last decade,
members' contributions have actually exceeded the amount of employer
contributions by $1.1 million.
Replacing a Defined Benetit.Plan with a Defined Contribution Model
Tums Off The Future Spigot of Pension Dollars For Investments in the
State Of California
Under the existing CaIPERS defined benefit plan, more than $19.5 billion in
pension dollars is set aside for California investments. Replacing CaIPERS with a
DC plan would mean that future contributions needed for a DC plan could not be
re-deployed for California investments. It would turn a blind eye to the opportunity
to redeploy capital to strengthen California business, promote job growth, and
build communities and infrastructure. These investments—a part of CaIPERS
diversified portfolio of investments -- help strengthen the State's economy and
tax base.
Currently, CaIPERS invests more than $10.7 billion in companies based in
California —from blue chip corporations on the New York Stock Exchange to
start-up firms in south central Los Angeles and the Silicon Valley.
3
0
CalPERS holds $2.4 billion in fixed income assets, including corporate bonds in
California, that enable corporate expansion. And CaIPERS invests $6.4 billion in
California real estate. These include investments in industrial office properties,
office buildings, senior housing and retail establishments. CaIPERS is also one of
the largest real estate developers, financing more than $2 billion worth of single
family homes.
CaIPERS pension dollars have financed the building of more than 43,000 homes
and developed 33,000 lots for single family homes..This public pension capital
has provided $13.8 billion in mortgages for nearly 100,000 California families.
The private equity portion of the CalPERS portfolio has invested in many start-up
companies, including biotechnology which capitalizes on the advent and
convergence of new technologies including genomes, bioinformatics and
therapeutic agents.
During the recession of the late 1980s, CalPERS was among the only sources of
construction capital in the State. After the terrorist attacks on September 11,
2001, CalPERS helped stabilize the New York Stock Exchange by continuing to
invest into the stock market in spite of the market uncertainty.
Defined Contribution Plans Threaten
Employee Retirement Security
DC Plans Make Future Uncertain. Tax dollars set aside for employees' use to
finance their pension under DC plan may never be used as is intended. That is
because under a DC plan, participants will face daunting risks investing on their
own. Some may not be able to resist cashing out retirement assets prematurely.
These are uncertain factors on which to base a worker's retirement income
security. And research suggests that DC plan participants generally earn rates of
return on investment far below what DB plan funds typically earn.s
Even if employees in a DC plan do manage to earn the same rate of return
as a DB plan fund and resist the urge to cash out prematurely, at the end of
a full career they will likely receive a smaller benefit than similar employees
in the DB plan. For example, an employee in a DB plan (with a benefit formula
of 2% at age 60 and employer and employee contributions of 10% of pay) hired
at age 30 with a starting salary of$25,000 and 5% pay increases each year will
have a retirement benefit with a present value of$732,100 upon retirement at
age 60.
In contrast, the retirement benefit for an employee in a DC plan hired at the same
age with the same salary (assuming that the DB plan and DC plan both earn a
rate of return of 8%) will have a present value of$497,529 upon retirement at
age 60.'
4
Employees could outlive their retirement assets in a DC plan. DC plans do
not take into account the risk that the employee will outlive their retirement
assets. If public servants didn't earn enough through their DC plan, the question
will become who will help them when their retirement nest egg runs out? Will the
State's safety net—currently stretched to its limits— be responsible?
DC plans do not include inflation protection, disability benefits or death
benefits. For retirees in a DC plan, an annual inflation rate of 2.5 percent from
age 65 to 93 would cut purchasing power in half. Employees would be without
either disability or death benefits in a DC plan. This is an inequitable
arrangement when workers with the DB plan work along side of them. (Disability
& death benefits are already factored into a DB plan.)
When offered a DC plan, some employees don't even contribute and most
contribute less than the maximum amount allowed. 26 percent of employees
who are eligible for 401(k) plans do not participate. Non participation is
concentrated in lower-income employees.. Among all employees, less than 10
percent contribute the maximum allowable amount, which further restricts their
ability to match DB payout amounts.8
Chances that the DC plan would not provide an adequate benefit are high.
Research suggests employees do not invest well on their own to ensure an
adequate benefit through their later years. An annual study conducted by Dalbar,
a Boston fund consulting firm, found that the average stock fund investor had a 5
percent annual gain from 1984 to 2000; compared to a 16 percent annual
average gain for the Standard & Poors (S&P) 500 stock index for that period.9
Over the last 10 years ending June 30, 2004 CaIPERS returns averaged 9.7
percent.
A John Hancock Financial Services Retirement Survey of defined contribution
participants published in May 2002 showed that"many have a cockeyed view of
how investments work across the board. " John Hancock researchers said that
most defined contribution participants will fall well shy of the estimated 75
percent of pre-retirement income:needed to maintain the same lifestyle in
retirement.10
One half of DC plan investors do not diversify, almost none rebalance portfolios
periodically."
Defined benefit plans outperform 401(k)'s in a down market.
According to a 2004 analysis by Watson Wyatt Worldwide, defined benefit plan
returns tend to do better than those of 401(k) plans during bad market years that
follow periods of hot stock market returns. Watson Wyatt Worldwide analyzed
5
2000 and 2001 Form 5500 data for companies that sponsor both defined benefit
and defined contribution plans.
Previous studies by Watson Wyatt showed that from 1995 to 1998, defined
benefit plan returns beat those of 401(k) plans. Once the market turned sharply
downward in March 2000, defined benefit plan returns began to dominate again,
with Watson Wyatt researchers theorizing that better downside protection came
from the higher portfolio diversification of the professionally managed defined
benefit plans.12
Defined Contribution Plans Will Hamper Recruitment and Retention and
Make State Attract Less Capable, Not More Capable Work Force
DB benefits help recruit for classifications when the State experiences a
labor shortage. The State competes with the public sector for many specialized
workers—especially safety employees. The State has and will continue to have
challenges recruiting scientists, researchers, technology workers, nurses,
doctors, accountants and other specialized workers. (This occurred when the
State had mandatory tier 2 programs in the early 1990s.) Human Resource
specialists indicate that it is not the pay that attracts people to work for the State,
but rather the retirement benefits. State workers have not kept pace in pay—
most of whom went without annual pay raises for many of the last 13 years.13
DB plans promote longevity which gives good return on the investment in
training specialized workers such as firefighters and safety personnel. In
contrast, under a DC plan, employee turnover may be higher, causing the State
and local government to waste taxpayer dollars training a revolving door of
workers.
DC plans would encourage older, more expensive workers to continue
working longer, rather than retire: The performance of the markets would have
a significant influence on when people retire. When the economy is doing poorly
and individuals' DC accounts are down, they may decide to work beyond a
reasonable retirement date, creating less opportunity to replenish the workforce
with younger workers.14
People who retire with a defined contribution plan end up retiring later than
earlier. The expected retirement age of a DB plan is 63.9 nationwide; the
expected retirement age of a DC plan participant is 65.1 years.15
Market timing would determine when people retire. Retirement trends, not
age periods of market growth would spawn large numbers of employees retiring.
Down markets would restrict the number of workers retiring.
6
Contrary to Popular Belief,
DC Plans Get Thumbs Down From Large Employers
The decrease in DB plans has been limited nearly exclusively to small, not
large employers. Companies that are electing to discontinue DB coverage have
been small employers, not large employers, and they are doing so because of
the expense of complying with complex federal regulations, most of which do not
apply to the public sector.16
Large employers have generally kept their DB plans rather than convert to
DC plans.
• Most of the decrease in DB plans has occurred among small and
medium size employers (employers with less than 1000 employees).17
• Eighty percent of professional service firms offer DB plans, with the
average contribution rate from companies with over 1,000 employees
sitting at$40 million in 2003.18
• Due to their size, public employers are more comparable to large
private-sector employers, most of which offer DB plans. In 2003, 68%
of large private-sector employers offered DB plans compared to 45% of all
private sector employers. 9
• Although DB plans are more prevalent in the public sector, it is likely
that more private sector employers would adopt or continue DB
plans were it not for the cost and administrative burden imposed by
ERISA laws and regulations. Because public pension plans are exempt
from most of ERISA, DB plans are even more advantageous for public
employers than for private employers.20
• Large and medium private companies value DB plans as primary
recruitment and retention tool (American Benefits Council).
• Examples of large companies with DB plans:
- Chevron
- Unocal
Lockheed Martin
- Boeing
- Albertson's
Boise Cascade
- Louisiana Pacific
- Safeco
- Weyerhaeuser
7
Only 17 percent of Fortune 100 companies have a DC plan as their primary
benefit, according to Watson Wyatt. Most large employers continue to offer
defined benefit plans as their primary retirement program and its use among
large employers with 10,000 or more employees is increasing. The highly
regarded Employee Benefits Research Institute (EBRI) found that since 1985,
there was an actual increase in the number of large employers that offered a
defined benefit plan as their primary retirement plan. This occurred during a
period of many corporate mergers of large firms, who had a unique opportunity to
select one or the other.2'
The majority of U.S. companies with 1,000 or more employees that offer a
DB plan believe their plan directly impacts employee retention. According to
a September 2004 study by Diversified Investment Advisors.'
Public Sector Experience with DC Conversions Has Not Been Highly
Successful
Since 1997, large numbers of public employers have been given an opportunity
to participate in a DC plan as their primary retirement benefit..In Florida and
Michigan, an overwhelming majority— more than 90 percent of those eligible to
switch to a DC plan—elected to stay with the DB plan.zs
The state of Nebraska recently converted back to a DB plan from a DC plan. A
study showed that over 20 years, the typical worker posted an average annual
return of 6 to 7 percent. (Money managers running the state's old-fashioned
defined benefit plan ran 11 percent average returns.) Even though the state
made much effort to help individuals invest wisely, half of all employees stayed in
the default fund, even though they had 11 choices. Nebraska retirement system
officials were concerned that the state was wasting taxpayer money via matching
contributions to workers accounts.24
In Florida, where employees could leave the DB plan for the DC plan, most opted
to stay in the DB plan.
When the Illinois Municipal Retirement Fund looked into switching from a DB to
DC plan, it found that is total cost—administrative and investment expenses—
could rise from 0.44 percent of assets to as much as 2.25 percent of assets, a
difference that approached $315 million a year.25
The Value of"Defined Contribution Portability"
Is Not What It's Cracked Up To Be
The conventional wisdom is wrong that workers today are more mobile and
want more portability of their retirement benefits.
• Workers are not necessarily more mobile. From 1983 to 2000, median
job tenure increased or stayed the same for all workers in the U.S. with
8
the exception of workers in two sectors (manufacturing and
transportation/public utilities).26
• Public-sector workers are even less mobile. From 1983 to 2000, the
median tenure for government workers in the U.S. increased from 5.8
years to 7.2 years. In 2000, the median years of tenure for government
workers (7.2 yearsi was more than twice that for workers in the private
sector (3.2 years).
• DC plans are not necessarily the solution to deal with the issue of
pension portability. A significant proportion of workers with DC plans
"cash out" their accounts when they change employers rather than leave it
in the account or roll it over to their new employer's plan. For example, a
study conducted by the human resources consulting firm Hewitt
Associates found that 57% of employees who leave their companies
choose cash payments from their retirement savings plans instead of
rolling over the balances to their new employer's plans or into individual
accounts.28
• DB plans have been adopting changes to make benefits more
portable (e.g., shorter vesting periods and expanded reciprocity).
• In cases where public employees have the option of participating in
an alternative DC retirement plan, it appears that most opt for the DB
plan. During the first two years of Florida's optional retirement program,
only 3.4% of eligible employees opted for the DC alternative (8% of new
hires).29 In Michigan, state employees hired prior to March 31, 1997 had
the option to remain in a DB plan or switch to a DC plan that was
mandatory for all new employees. Only 6% of eligible employees switched
to the DC plan.so
DC plan would hurt "portability" via reciprocity with public agencies within
CaIPERS. One of the recruitment features of the CalPERS DB plan is that there
is reciprocity with other public agencies in the State; these employees would not
have the same reciprocity benefit as others who work for the State.
Employees taking money out of CaIPERS when they leave State service will
drain the fund. The Sacramento Bee in a 1996 editorial pointed that "Every
worker intending to leave public service short of vesting for a pension — political
appointees, highly paid managers, and professionals who have private sector
skills—would likely choose the new option, draining funds from the system. That
would leave taxpayers with the same pension obligations but less money to fulfill
them."
Moving to a DC Plan Helps and Hurts the Wrong People
Higher costs and fees are charged for DC plans. Wall Street money managers
will make money on these assets even if investors lose. Many people would
9
- - Page 1 of 2
Melissa Ellsworth - URGET PENSION MATERIAL-SAMPLE RESOLUTION
From: "California Professional Firefighters" -info@cpf.org>
To: -info@cpf.org>
Date: 1/14/2005 4`:13 PM
Subject: URGET PENSION MATERIAL--SAMPLE RESOLUTION
CPF LEADERSHIP ALERT
January 14, 2005
GETTING THEM ON THE RECORD AGAINST PENSION
PRIVATIZATION
Sample Resolution [ATTACHED] Helps Your Local Elected Officials Take A
Stand
In a move that closely tracks the national effort to privatize Social Security, Governor Arnold
Schwarzenegger has proposed requiring new employees to sign up for a private, 401(k)-style
plan that guarantees profits for Wall Street; but no guarantees for you and your family.
THIS PROPOSAL IS AN ASSAULT ON YOUR HARD-EARNED PENSION BENEFITS, AND
WILL ULTIMATELY HURT ALL EMPLOYEES, NOT JUST NEW HIRES
Many local officials are already lining up against the governor's plan. The League of California
Cities and the California State Association of Counties (CSAC) have not taken a formal
position yet on the governor's proposals, but they have publicly expressed sympathy with the
core argument that the current system should be mended, not ended. We expect that local
government will join us in opposing privatization, but we need to get them on the record
now!
This is where you come in.
Attached to this alert is a SAMPLE RESOLUTION, designed to be filled in and submitted to
your local city council, board of supervisors or special district board of directors. The resolution
is formatted in such a way that you can plug in locally specific information (areas highlighted in
yellow). It is designed to let your governing board send a message that it is against
privatization but also go on record in support of pension reform that doesn't set up a two-tiered
system or take away what you've earned.
WE NEED TO GET THESE RESOLUTIONS PASSED AS QUICKLY AS POSSIBLE BY AS
MANY LOCAL GOVERNMENTS AS POSSIBLE. AND WE NEED COPIES OF THESE
RESOLUTIONS AS SOON AS THEY'RE APPROVED.
■ Take this sample resolution to your local government allies.
® Urge them to put it on the agenda and to lobby hard for its passage.
z
file://C:\Documents%20and%20Settings\slouser\Local%20Settings\Temp\GW}00003.HTM 2/24/2005
Page 2 of 2
■ REACH OUT TO OTHER EMPLOYEE ORGANIZATIONS— WE'RE ALL IN THIS
TOGETHER
■ Rally your members and supporters in the community. Get them to attend the meeting
when the vote will be taken
® Be sure they have access to the background material available AT THIS LINK
■ PLEASE SEND US A COPY OF YOUR RESOLUTION WHEN 17"S APPROVED—
SEND TO ABENTONQCPF.ORG.
If you need more specific talking points and/or a specific issue addressed, please contact us at
info@cpf.org, or call us at (916) 921-9111.
LET'S SHOW OUR ADVERSARIES THAT LABOR AND MANAGEMENT ARE UNITED IN
OPPOSING THIS ATTACK ON THE PUBLIC PENSION SYSTEM.
ATTENTION CHARTER CITIES AND COUNTIES:
The California Constitution affords specific home-rule protections for charter cities and
counties. Encouraging your local government to defend these home rule provisions could add
to your resolution's attractiveness.
If you are in a charter city or county, we suggest you add the following "Whereas" clause
toward the end of your resolution:
"WHEREAS, This mandate attempts to pre-empt the explicit authority of the
people in Charter cities and counties, through their elected officials, to set the
compensation and benefit levels for their employees — a violation of the state
Constitution and a number of specific court decisions"
CPF Leadership Alert is a free,electronic update published for the leadership of the California Professional
Firefighters(CPF),featuring news about legislation,political action, health and safety, retirement,and other issues
affecting California firefighters.CPF is the state council of the International Association of Fire Fighters and
represents over 30,000 firefighters throughout California.
To subscribe or unsubscribe to a"CPF Leadership Alert"write to the CRF at info@cof.org
file://C:\Documents%20and%20Settings\slouser\Local%20Settings\Temp\GW}00003.HTM 2/24/2005
Resolution opposing state-mandated retirement.two-tiered retirement
system for California's state and local government employees
WHEREAS, The citizens of [INSERT JURISDICTION NAME] have a clear
interest in attracting and retaining the highest caliber of employee to public
service in order to insure that taxpayers get the quality of service they deserve
and have come to expect; and
WHEREAS, A defined benefit pension system — as provided by [INSERT
YOUR PENSION FUND NAME HERE (i.e. CalPERS or your '37 Act county or
independent retirement system)] —that offers nurses, teachers, firefighters, police
officers and other public employees the security and dignity of a guaranteed
pension upon retirement has been central to our efforts to recruit and retain the
best and the brightest to serve our taxpayers; and
WHEREAS, A privatized defined contribution retirement system, such as
that proposed by Assemblyman Keith Richman in his Assembly Constitutional
Amendment 5 and Assembly Special Session Constitutional Amendment 1, will
dramatically increase an employee's risk of losing their hard-earned retirement
and result in additional retirement costs for already fiscally strapped state and
local governments; and
WHEREAS, California's defined benefit retirement systems have afforded
public employees retirement security that is unmatched in the private sector. By
imposing a privatized defined contribution retirement system, state and local
government's ability to offer attractive incentives for the best and brightest to
choose public service will be effectively eliminated; and
WHEREAS, Imposing a defined contribution retirement system on new
employees creates a two-tiered retirement system that would devastate
employee morale and likely, over time, impose unacceptable additional costs on
02-
taxpayers to maintain the existing retirement systems given that the funding base
for the current defined benefit retirement plans will diminish,• and
WHEREAS, A privatized retirement system encourages employees to
change jobs more rapidly and jump to the private sector more quickly, creating a
potentially devastating talent drain and higher ongoing costs for training and
human resource development; and
WHEREAS, Studies performed by the Nebraska Retirement Systems and
the Colorado Public Employees Retirement Association, as well as numerous
studies from the financial community, conclude that defined contribution
retirement plans are likely to provide inadequate retirement benefits, which could
force many of our retirees into the social safety net, especially those in lower-
wage occupations, thereby imposing an additional economic burden on California
taxpayers; and
WHEREAS, The people of [INSERT NAME.OF JURISDICTION], through
their elected officials, have determined to offer and extend and enhance defined
benefits to public employees; and,
WHEREAS, ACA 5, ABX1 1 and a similar proposal submitted as an
initiative for the upcoming statewide special election ballot, would substitute the
judgment of local government with a state mandate that [INSERT
JURISDICTION NAME] create an entirely new defined contribution system for
new public employees and require that taxpayer dollars be invested in private
investment accounts for purposes of providing employee retirement; and
WHEREAS, This mandate violates a value that lay at the heart of local
control —that decisions regarding compensation and benefit levels are, and
should remain, the province of local government, without interference from the
state or federal governments; and
r
WHEREAS, The effort to convert defined benefit pensions to defined
contribution plans is part of a concerted national attack on worker's retirement
security and social safety net, including efforts to privatize Social Security; now,
therefore, be it
RESOLVED, That [INSERT JURISDICTION NAME] strongly opposes the
imposition of any mandatory defined contribution retirement system —whether for
new or existing employees — as well as any mandate to create an optional plan
for converting employees from a defined benefit plan to a defined contribution
plan; and be it further
RESOLVED, That [INSERT JURISDICTION NAME] specifically opposes
Assembly Constitutional Amendment 5, Special Session Assembly Constitutional
Amendment 1, as well as any and all measures proposed for the upcoming
special election statewide ballot that would mandate the replacement of the
current defined benefit retirement system with a private defined contribution
system —whether for new or existing employees; and be it further
RESOLVED,That [INSERT JURISDICTION NAME] will take all
appropriate action within the Legislature, other local governments and the
general public to actively oppose the imposition of a mandated defined
contribution retirement system upon our taxpayers and our employees; and be it
further
RESOLVED, That [INSERT JURISDICTION NAME] urges California
lawmakers and other stakeholders to develop meaningful reform within the
current defined benefit retirement structure that assists in stabilizing employer
contribution rates, while also protecting our ability to recruit and retain skilled
public servants to serve California taxpayers.
(D2
League of California Cities Page 1 of 2
2005-02-25
Pension Reform Likely to Heat Up Quickly
Assemblyman Keith Richman informed members of the League's Employee
Relations Policy Committee yesterday that he will take his public employee
--` pension proposal directly to the voters in its current form if legislators and
stakeholders fail to work with him on alternative approaches.
I, Mr. Richman's remarks came during his presentation on ACA 5,a
constitutional amendment he introduced last month that would require that
new state and local government employees(beginning in 2007)be provided
I' a"defined contribution" pension package-a 401 (k)self-directed savings
package-in lieu of the"defined benefit" pension currently available to
r a virtually all public sector employees working in federal,state and local
governments.
After explaining the details of his proposal to the committee and answering
_ n v questions,the assemblyman urged committee members and the League to
come to him with alternative approaches. He told the committee that he was
working with the Howard Jarvis Taxpayers Association,which has submitted
o his proposal to the Attorney General in the form of a statewide ballot
initiative.The Attorney General is likely to issue a title and summary for the
jyj measure by mid-to late-February,clearing the way for signature gathering to
Assemblyman Keith Richman explains his start to qualify the measure for the ballot..
pension reform proposal to League's Employee The governor has also put forward a proposal to privatize employee pensions
Relations Policy Committee. that would apply to new hired state and local employees. Introduced by
Assemblyman Richman as ACAXi 1,the measure is similar to ACA 5,but
does not mirror it precisely.The govemor has also said that if the Legislature fails to act on his proposal he would take an
initiative to the voters.
A Two-Track Strategy
Assemblyman Richman said that he planned to move both his ACA 5 and the Howard Jannis-sponsored initiative on a
parallel track,following a similar approach to that which the League and the LOCAL coalition had taken last year with
their efforts to obtain a constitutional amendment to protect local revenues: pushing both the initiative route,and leaving
the door open for a compromise approach developed through the legislative process.
He urged the League and all stakeholders to come forward with suggestions for alternative approaches that could be
amended into ACA 5. He cautioned, however,that he plans to move directly to the signature gathering and fundraising
necessary to place an initiative on the ballot, and will work for its passage if ACA 5 is not passed by the Legislature in a
form that he and his allies consider appropriate.
Firefighters,Employee Unions Challenge Savings Assumptions
Earlier in the day the committee had an extensive presentation and follow-up discussion with Christy Bouma,a lobbyist
for the California Professional Firefighters Association.Ms..Bouma described in detail the concerns that her members
have the Richman proposal,including the impact that it would have on recruiting and retaining the"best and brightest°of
public sector employees.
She repeatedly cautioned the city officials on the committee to look closely at whether pension privatization proposals
would actually save cities money.The CPF asserts that privatization will actually cost the PERS retirement system more,
thanks to increased administrative costs and the reduction in employee contributions to the retirement system.They
believe that the proposal could also dramatically increase the pressure on California's fragile safety net,as employees
outlive their retirement benefits or,worse, neglect to save at all.
League Task Force to Analyze System Cost Drivers
Following the presentations,the committee had a lively and freewheeling discussion of the details of the privatization
proposals and how they would impact their cities.A number of ideas were discussed;these will be forwarded to the
League's Pension Reform Task Force for review and analysis.
Comprised of city finance officers,city managers and other city staff with detailed knowledge
of the pension systems
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League of Califomia Cities Page 2 of 2
employed by cities,the group has been asked to analyze the various cost drivers in the current pension system,so that
the League will be better able to provide recommendations that respond effectively to real and specific problems.
The task force recommendations will be sent to the Employee Relations Policy Committee for their consideration and
input before they are sent to the board of directors for adoption and transmittal to the governor,Assemblyman Richman,
employee groups and other stakeholders.
last updated:1/21/2005
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