HomeMy WebLinkAbout04/19/2011, COUNCIL COMMUNICATION 1 - COUNCIL COMMUNICATION -- EMPLOYEE RELATIONS COMMITTEE, LEAGUE OF CALIFORNIA CITIES i
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- MEETING AGENDA
From: Carter, Andrew DATEI, ITEM # Ceudsa. L°ohrd�an.�r
Sent: Saturday, April 16, 20116:37 PM
To: Lichtig, Katie; Dietrick, Christine; Cano, Elaina
Subject: Council Communication -- Employee Relations Committee, League of California Cities
BCC to Council
As you know, I now serve on the League of California Cities Employee Relations Committee. We
meet every two or three months. So far, I've attended two meetings --an organizational
meeting in Sacramento in January and a meeting ten days ago in Ontario.
The Employee Relations Committee is charged to focus on such issues as labor relations
and public employee salaries and benefits (including pensions, active employee healthcare,
retired employee healthcare, etc.)
As you might imagine with public employee pensions in the news, that has been our primary
focus this year. That is particularly the case since one of the League's three 2011 strategic goals
is "sustainable and secure public pension systems."
During my two meetings, we have had presentations from the following individuals on the
following topics:
* Staff members from the Employee Relations committees of the State Senate and the State
Assembly regarding likely topics these two committees will cover this year. In addition to public
pension measures, topics include salary and benefit transparency measures which are an
outgrowth of the occurrences in Bell.
* David Lamoureux, Deputy Chief Actuary, CalPERS, and Dan Brown, Chief, Office of
Governmental Affairs, CaIPERS. Discussion centered on the likelihood of the CalPERS board
changing its assumptions on the assumed rate of future return (the Board ended up deciding not
to do this) and the likelihood of CalPERS introducing new pension formula options including a
hybrid defined benefit/defined contribution plan (uncertain).
* Dan Pellisier, political adviser to the California Pension Reform organization. Mr. Pellisier is a
former Schwarzenegger staffer. California Pension Reform is a conservative group liable to place
a pension reform measure on the fall 2012 ballot.
* Stuart Drown, Executive Director, Little Hoover Commission. Mr. Drown discussed the
Commission's recent report and recommendations on public sector pensions in California.
Perhaps the most significant recommendation of the Little Hoover Commission is that the
legislature should pass legislation giving state and local governments the authority to change the
going-forward pension formulas of current public employees.
I've attached a PDF of the Executive Summary of the Little Hoover report. It includes all of the
Commission's recommendations. At our June meeting, the Committee will decide whether to
endorse,the Little Hoover'recommendations in whole or in part. For context, we'll also look at
Governor Brown's recent "12-point plan" and recommendations put forth by the
Republican caucus in the State.Senate. (See attached for a bullet point comparison of those two
proposals.)
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I have no idea what the committee majority will decide. It's a large committee, and many
members do not.speak during the meetings. It's also important to note that there are many
members who are either active or retired public sector employees.
In case you are not already aware, I would like to draw your attention to the new "Pension
Information Center" on the League's website. The link is http://www.cacities.am/pensions The
"Learn About Pensions" tab and the "Guidelines, Principles, and Best Practices" tab have a lot of
useful information, but book in some reading time.
Andrew Carter
Council Member
City of San Luis Obispo
PUBUC PENSiONS FOR
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February 2011
EXECUTIVE SUMMARY
Executive .Summary
P"he 2008-09 stock market collapse and housing bust exposed the
structural vulnerabilities of California's public pension systems
and the risky "political behaviors that have led to a growing
retirement obligation for state and local governments, the scale of which
taxpayers are just beginning to understand.
Treated like another speculative house during the boom, the state
allowed public agencies and employees to pull equity in the e form of
increased retirement benefits from the pension funds whose value was
inflated by optimistic market return estimates. The retirement promises
that elected officials made to public employees over the last decade are
not affordable, yet this is a mortgage that taxpayers cannot walk away
from easily.
When the economy crashed, another lesson from the housing bubble
became just as important. A public pension, like a house, is not a get-
quick-rich investment. As a house is for shelter, a pension is for long-
term financial security. Even the "teaser rates" reflecting aggressive
investment assumptions are re-setting, revealing a higher cost to
maintain a level of benefits that have become more generous than
reasonable.
Boom and bust cycles are natural, if unpredictable, but political leaders
agreed to changes in the pension system at the peak of a boom, and as a
major demographic event began unfolding - the start of the retirements
of the Baby Boomers.
Pension benefits promised to retirees are irrevocable, as are the promised
benefits that current workers have accrued since their employment
began. It also remains difficult to alter the theoretical, yet-to-be:earned
benefits for current workers. This situation, reinforced by decades of
legal precedent, leaves little room for state and local governments to
control mounting retirement costs, particularly when the only venue for
change is the bargaining table.
Taxpayer groups, citizen grand juries and think tanks have sounded the
alarm for reform, a call that is beginning to resonate in city councils,
i
LITTLE HOOVER COMMISSION
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EXECUTIVE SUMMARY
county boards of supervisors, school boards and among trustees of
specials districts now that they face the prospect of increasing required
contributions into their pension funds by 40 to 80 percent of their
payroll costs for decades to come. It is practically enough money to fund
a second government, and it will-a retired government workforce.
Public employees might appear to have little incentive to push for
reforms, yet they will pay a price for inaction: salary freezes, layoffs,
increased payroll deductions and the threat of a city or county
bankruptcy. Doing nothing to current pension obligations will cost
public employees everything. A pension cannot grow without a job
attached to it.
Public employees also share in the prospect of a very different California,
as cities such as Los Angeles, San Diego, San Francisco and San Jose
prepare to spend one third of their operating budgets on retirement costs
in coming years. Pensions are at the center of what will be an
intensifying fight for diminishing resources from which government can
pay for schools, police officers, libraries and health services. With 86
percent of the retirees and beneficiaries of the California Public
Employees' Retirement System remaining in the state, in what sort of
communities do they want to live? Without reform, it will be
communities with dwindling services and less police and fire protection.
The Little Hoover Commission began its study of California's public
pension systems in April 2010 to understand the scale of the problem
and develop recommendations to control growing pension costs in state
and local governments. Over a six-month period, the Commission held a
series of hearings at the State Capitol and conducted several other public
meetings with stakeholders to address these issues. Through these
hearings and additional research, the Commission found:
Pension costs will crush government. Government budgets are
being cut while pension costs continue to rise and squeeze other
government priorities. As the Commission heard during its
hearings, the tension between rising pension costs and lean
government budgets is often presented today in a political
context, with stakeholders debating the severity of the problem
and how long it will last. In another five years, when pension
contributions from government are expected to jump and remain
at higher levels for decades in order to keep retirement systems
solvent, there will be no debate about the magnitude of the
problem. Even with the introduction of two-tiered pension plans,
barring a miraculous market advance, few government entities -
especially at the local level - will be able to absorb the blow
without severe cuts to services.
iii
LITTLE HOOVER COMMISSION
The math doesn't work. Investment losses in 2008-09 certainly
shocked the system, but several other factors have contributed to
an unsustainable pension environment. Payroll growth-in terms
of both compensation for public employees and the number of
employees - has ballooned pension liabilities. The minimum
retirement age has dropped to 55 - earlier for public safety
employees - as people live longer, creating an upside-down
scenario where governments potentially will send retirement
checks to an employee for more years than they earned
paychecks. At the same time, state and local governments have
increased what used to be considered a good pension into
pensions that are the most generous in the country. Banking on
high fund returns and an aggressive investment strategy,
employers and employees also have failed to contribute
sufficiently - and on occasion, stopped paying into the system at
all. Today, the state's largest pension systems are dangerously
underfunded.
The system lacks discipline. The purpose of the public pension
system has shifted away from providing retirement security to
public employees. Today, the pension system is regarded as
deferred compensation - the perceived tradeoff of earning a lower
salary in the public sector in exchange for a good retirement
package. The retirement systems invest aggressively to help
workers accumulate wealth, which leaves taxpayers facing all the
risk when returns fail to meet system needs. A lesson from
history would suggest that, when the market eventually recovers,
the pressure from employees will return to ramp up pension
formulas and undo any reforms being made today. The ability or
willingness of elected officials to hold the line on their own is in
serious doubt.
The system lacks oversight and accountability. Ca1PERS, the
largest pension plan in the country, covers state workers and
many city, county and school district workers - roughly half of all
public employees in California, 1.6 million altogether. Two
million other public workers in universities, cities, counties,
school districts and special districts receive retirement benefits
through dozens of other independently run pension plans. The
collective-bargaining environment also allows numerous employee
unions within each government entity to negotiate separately for
benefits, resulting in thousands of different retirement packages
across the state. Since 2008, fewer than 30 of the 1,500 local
public agencies in the Ca1PERS network have adopted a lower
level of pension benefits for new hires. As pension portfolios
iv
EXECUTIVE SUMMARY
shrunk and tax revenues plunged, nearly 200 public agencies in
CalPERS continued to increase retirement benefits for current
workers. This lack of uniformity:
■ Clouds transparency.
■ Invites mischief and abuse, such as pension "spiking."
■ Creates a compensation arms race among communities.
■ Delegates complicated decisions to often inexperienced,
local officials.
With needed reforms, defined-benefit pensions can remain a core
component of public employee retirement plans.
The problem, however, cannot be solved without addressing the pension
liabilities of current employees. The state and localgovernments need
the authority to restructure future, unearned retirement benefits for their
employees. The Legislature should pass legislation giving this explicit
authority to state and local government agencies. While this legislation
may entail the courts having to revisit prior court decisions, failure to
seek this authority will prevent the Legislature from having the tools it
needs to address the magnitude of the pension shortfall facing state and
local governments.
The situation is dire, and the menu of proposed changes that include
increasing contributions and introducing a second tier of benefits for new
employees will not be enough to reduce unfunded liabilities to
manageable levels, particularly for county and city pension plans. The
only way to manage the growing size of California governments' growing
liabilities is to address the cost of future, unearned benefits to current
employees, which at current levels is unsustainable. Employers in the
private sector have the ability and the authority to change future, un-
accrued benefits for current employees. California public employers
require the ability to do the same, to both protect the .integrity of
California's public pension systems as well as the broader public good..
Freezing earned pension benefits and re-setting pension formulas at a
more realistic level going forward for current employees would allow
governments to reduce their overall liabilities - particularly in public
safety budgets. Police officers, firefighters and corrections officers have
to be involved in the discussion because they, as a group, are younger,
retire earlier and often comprise a larger share of personnel costs at both
the state and local level. Public safety pensions cannot be exempted
from the discussion because of political inconvenience.
v
LITTLE HOOVER COMMISSION
Hybrid model. A new "hybrid" model for public employee retirement
should be made available to state and local agencies to reinforce the
principles of retirement security and shared responsibility. The model,
being tested in Orange County for miscellaneous workers, combines a
lower defined-benefit pension with an employer-matched 401(k)-style
plan. The 401(k) element is risk-managed to protect employee
investments from market volatility in order to generate an adequate
retirement income.
The idea is not new. The federal government adopted a similar approach
more than 25 years ago for federal employees. Federal employees hired
after 1987 have joined a three-tiered retirement plan that provides a
defined-benefit formula up to 1.1 percent of final compensation for every
year of service; a 401(k) plan with an employer match of up to 5 percent
of salary (the first 1 percent is automatic); and, Social Security benefits
(previously not provided) to augment the workers' retirement income.
The newer defined-benefit pension plan requires lower contributions for
employees and federal agencies - and it was 100 percent funded as of
2009. Employees hired after July 1, 2010 are automatically enrolled in
the 401(k) element, with a 3 percent payroll deduction unless they
change the contribution level.
Roughly half of all public employees in California do not participate in or
receive Social Security benefits, so many public employees rely more
heavily on state and local governments to provide larger retirement
benefits. Serious consideration must be given to extending Social
Security to non-covered, public-sector workers, toward the goal of
building a three-part retirement strategy as has the federal government.
Uniformity. The state also must establish standards for more uniform
and reasonable pensions. The public outrage over the "spiking" of
benefits to provide a larger retirement income cannot continue to be
ignored, nor can the increasing number of six-figure pensions for some
managers and high-wage earners. The gaming and abuses of the
pension system must end. To restore public confidence in the public
pension system, the state must impose a cap in the $80,000 to $90,000
range on the salary used to determine pension benefits, or alternatively,
a cap on pensionable income. Under such an arrangement,
compensation above the cap would be factored into contributions toward
an employee's 401(k)-style plan.
Transparency. The Legislature also must take steps to improve
transparency of the state and local government costs of providing
retirement benefits to current and future retirees. The debate over
discount rates used to determine unfunded pension liabilities has laid
bare the volatility of pension assets and raised important questions
vi
EXECUTIVE SUMMARY
about the public's exposure to systemic pension obligation risk. A
measure of liability is a way for the public to understand and start a fact-
based discussion about solutions to the problem. It is reasonable to try
to come up with a "bottom line" on how much taxpayers owe, but it is an
imperfect process. Numbers that have been used by think tanks and
researchers to estimate the unfunded liabilities of California public
pension plans can vary by hundreds of billions of dollars. Methodologies
across studies are often inconsistent - using different asset bases,
investment assumptions, the number of pension plans captured in the
estimates, and the inclusion of retiree health benefits - leading to more
confusion. There is no one "right" number that the state should
mandate to determine actuarial liabilities. But an honest and public
assessment of the risks and options about determining obligations can
inform decision-makers when setting contribution rates and making
investment strategies. Adding more independent, public members to
retirement boards can help broaden perspectives to facilitate this
conversation.
The Commission offers its recommendations in the spirit of Governor
Brown's call in his State of the State address for pension reforms to be
"fair to both taxpayers and workers alike." The Commission asks the
Governor and the Legislature to take immediate and bold steps to put the
state's pension plans on a path to sustainability and to add oversight to
protect current employees, retirees and taxpayers. Delay will continue
to create concern over California's ability to pay for its promises, distort
local government budgets and further erode California governments'
standing in the municipal bond market. The stakes are too high to
continue making temporary changes at the margin.
Recommendations
Recommendation 1: To reduce growing pension liabilities of current public workers, state
and local governments must pursue aggressive strategies on multiple fronts.
❑ The Legislature should give state and local governments the authority
to alter the future, unaccrued retirement benefits for current public
employees.
❑ State and local governments must slow down pension costs by
controlling payroll growth and staffing levels.
Recommendation 2: To restore the financial health and security in California's public
pension systems, California should move to a "hybrid"retirement model.
.❑ The Legislature must create pension options for state and local
governments that would retain the defined-benefit formula - but at a
vii
LITTLE HOOVER COMMISSION
lower level - combined with an employer-matched 401(k)-style
defined-contribution plan.
✓ The 401(k)-style component must be risk-managed to provide
retirement security and minimize investment volatility.
Recommendation 3: To build a sustainable pension model that the public can support,
the state must take immediate action to realign pension benefits and expectations.
❑ To provide more uniform direction to state and local agencies, the
Legislature must:
✓ Cap the salary that can be used to determine pension allowances,
or cap the pension, at a level that is reasonable and fair. Once
the employee exceeds the threshold, employees and employers
could make additional retirement contributions into a risk-
managed, 401(k)-type defined-contribution plan.
✓ Set appropriate pension eligibility ages to discourage early
retirement of productive and valuable employees.
✓ Set a tight definition of final compensation, computed on base
pay only, over a five-year average to prevent and discourage
pension "spiking."
✓ Set uniform standards for the maximum hours that retirees can
return to work and continue to receive public-sector pensions.
✓ Set uniform standards and definitions for disability benefits.
✓ Restrict pension allowances to exclude service in an elected office.
✓ Eliminate the purchase of"air time."
✓ Strengthen standards for revoking or reducing pensions of public
employees and elected officials convicted of certain crimes
involving the public trust.
❑ To minimize risk to taxpayers, the responsibility for funding a
sustainable pension system must be spread more equally among
parties.
✓ The Legislature must prohibit employees and employers from
taking contribution "holidays," except under rare circumstances.
✓ The Legislature must prohibit retroactive pension increases.
✓ The Legislature must require employees and employers to
annually adjust pension contributions based on an equal sharing
of the normal costs of the plan..
✓ State and local governments must explore options for
coordinating pension benefits with Social Security.
viii
EXECUTIVE SUMMARY
Recommendation 4. To improve transparency and accountability, more information
about pension costs must be provided regularly to the public.
❑ The Legislature must require government retirement boards to
restructure their boards to add a majority or a substantial minority of_
independent, public members to ensure greater representation of
taxpayer interests.
❑ All proposed pension increases must be submitted to voters in their
respective jurisdictions. .
✓ The ballot measures must by accompanied by sound actuarial
information, written in a clear and concise format.
❑ The Legislature must require all public pension systems to include in
their annual financial reports:
✓ The present value of liabilities of individual pension funds, using
a sensitivity analysis of high, medium and low discount rates.
✓ The government entity's pension contributions as a portion of the
general operating budget and as a portion of personnel costs,
trended from the past and projected into the future.
❑ The State Controller must expand the Public Retirement Systems
Annual Report to include the above information. Administrative fees
to pension systems should be considered as a funding source to
support actuarial expertise and the timely production of the report.
❑ The Legislature must require pension fund administrators to improve
procedures for detecting and alerting the public about unusually high
salary increases of government officials that will push pension costs
upward.
ix
Comparing Pension Reform Plans
Governor's 12-Point Plan vs. Senate Republican Proposal
GOVERNOR BROWN 12- SENATE REPUBLICAN
POINT PLAN PROPOSAL
Eliminate the purchase of Airtime ✓ ✓
Prohibit pension "holidays" ✓ ✓
Prohibit employers from making ✓ ✓
employee pension contributions
Prohibit retroactive pension increases ✓ ✓
Prohibit pension spiking: three year ✓ ✓
final compensation
Prohibit pension spiking: define ✓ ✓
compensation as only regularly, non-
recurring pay (i.e. vacation pay)
Prohibits payment of pension benefits ✓ ✓
to those who commits a felony related
to their employment.
Impose pension benefit cap ✓ ✓
Improve retirement board governance ✓ ✓
Limit post-retirement public ✓ ✓
employment
Place pension changes before the Has not addressed this ✓
voters issue
Mandatory hybrid pension system Keep hybrid,plans optional ✓
Require employees to pay fair share Has not addressed this ✓
of unfunded pension obligations issue
Ability to change unaccrued pension No - ✓
benefits for current employees
Require 213 vote to make salary and No ✓
pension changes Keep simple majority