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HomeMy WebLinkAbout03-13-2012 Communications CarterAGENDA CORRESPONDENCE Date N' 111 Item# L' 2 - 4VW60/ b Memorandum To: City Council, Lichtig, Irons, Bourbeau From: Andrew Carter Re: California Public Retirement Seminar Date: 03/12/12 Introduction RECEIVE MAR 13 2012 5LO CITY CLERK hatrd ent..rr • COUNCIL • CITY MGR v ASST CM o ATTORNEY o CLERKIORIG • PIB • TRIBUNE • NEW TIMES o SLO CITY NEWS G CDD DIR o PIT DIR o FIRE CHIEF V PW DIR 13 POLICE CHIEF • PARKS & RFC DIR • UTILDIR • HR DIR o COUNCIL G CITY MGR o CLERK On 2/22, I attended the 22 "d Annual Southern California Retirement Seminar held in Lakewood, CA. It was put on by the Public Retirement Journal which is a monthly for - profit subscription - only journal which focuses on California public sector retirement programs (primarily Ca1PERS). The journal mixes factual reporting with labor - friendly commentary. Speakers at the seminar included: Karen Green, chief staff person, Public Employment Committee, State Assembly Pamela Schneider, chief staff person, Public Employment Committee, State Senate John Bartel, public employment pension consultant Tim Yeung, labor negotiator for public employers Rocky Lucia, labor negotiator for police unions Terry Brennand, SEIU lobbyist Dwight Stenbakken, League of California Cities staff Vincent Brown, CEO, Alameda County Employees' Retirement Association John Chiang, California State Controller David Lamoureux, deputy chief actuary at Ca1PERS, was scheduled to speak but could not make it due to illness. A host of background materials plus copies of presentations made at the seminar are available online. I will provide a link to that website plus username and password information via internal e -mail. Joint Conference Committee on Public Employee Pensions As you are probably aware, a joint conference committee is meeting this session in Sacramento to discuss public employee pensions. Ms. Green and Ms. Schneider are the senior staff members to that committee. The committee will be submitting a bill by August to both legislative chambers. Since that bill will go straight to the floor in both chambers without the possibility of amendment, an initial draft is expected by June. Per Green and Schneider, that bill "will address all twelve points" of Governor Brown's 12 Point Plan, but not necessarily in the form he submitted them. It will "most likely include other ideas from the legislature." The joint committee will only be focusing on ideas that can be changed via legislation. It will not be addressing potential constitutional changes. Memo on 2122112 California Public Retirement Seminar Page 1 of 5 From both a practical and a political standpoint, the least likely of Governor Brown's twelve points to move forward will be the proposed hybrid retirement plan for new employees (Social Security, defined benefit, defined contribution). Here is some of what Ms. Green and Ms. Schneider had to say: • "Social Security is not cost effective." That's because it is a pay -as- you -go retirement plan as opposed to a pre- funded plan. Payments by current employees and employers are used to pay current retirees. Those payments are not set aside to pay for future retirees as occurs in both defined benefit and defined contribution plans. As a consequence, there is no opportunity for investment earnings. • Hundreds of Ca1PERS permutations exist in California — by retirement age, retirement formula, various add -ons (e.g. level of survivor benefits), pooled funds vs. non - pooled funds, side funds, with Social Security vs. without, etc. Thus it's not clear what permutation should be used to design a hybrid plan to match. There is also an issue of whether the focus of a hybrid should only be on years -of- service or whether it should have entry -age and exit -age variables. • Since those permutations are the outgrowth of labor negotiations over time by employee groups and public sector employers, the Democratic majority is not inclined to impose a one - size - fits -all solution. • The Democratic majority is not inclined to subject public employees to the "whims of the market." For the defined contribution component, employees would take the risk of poor investment earnings. (Any citizen with a 401k or an IRA already faces that risk.) • "The hybrid plan doesn't cost less." On a normal cost basis, this may be true. (Ca1PERS says yes, John Bartell says no.) Whether true or false, this statement ignores the unfunded liability costs of the current system to employers.. The Democratic majority does not seem willing to shift any of that risk to employees. Lamoureux Presentation (Deputy Chief Actuary, Ca1PERS) Although Mr. Lamoureux was not at the meeting due to illness, his PowerPoint was provided to conference attendees. Mr. Bartel provided a brief interpretation of that PowerPoint based on discussions he had had with Mr. Lamoureux. Here are the points Mr. Bartel made: • We should expect high Ca1PERS rates at least 20 to 30 years into the future. In fact, it's more likely that those rates will go up than fall. o That's due to Chief Ca1PERS Actuary Alan Milligan's proposal to the Ca1PERS board to reduce the real discount rate (the assumed rate of future return), reduce the assumed price inflation rate, and increase the assumed wage inflation rate. Memo on 2122112 California Public Retirement Seminar Page 2 of 5 o It's also due to Mr. Milligan's stated belief that Ca1PERS will not be able to meet even a lowered discount rate over the short-term. Sensitivity analysis in Mr. Lamoureux's PowerPoint provides a foreshadowing of what might happen to Ca1PERS rates based on lower returns — a rate increase of +2pp for Miscellaneous and +4pp for Safety. o Finally, it's due to the likelihood that coming Government Accounting Standards Board changes will force Ca1PERS to change how it calculates its unfunded liabilities. Mr. Bartel agrees with Mr. Milligan's proposals to reduce the discount rate and the assumed price inflation rate. He disagrees with the proposal to increase the wage inflation rate. The rationale for this last proposal is that Ca1PERS assumed wage inflation rate has been very low (just 0.25 %) for a very long time (14 years) and increasing it to 0.5% as proposed would still make it less than the 0.75% assumed wage inflation rate Ca1STRS is now using. (Until recently, CaISTRS was using 1.0 %.) Please note, the assumed wage inflation rate is on top of price inflation. That's why we're dealing with such low percentages. Bartel Presentation Because most of the attendees at the conference were public sector employees, Mr. Bartel began his presentation by saying, "I will say things you don't want to hear." He also urged participants to "talk to your neighbor" to understand how the general public views public employee retirement benefits. Here are some of the points Mr. Bartel made: Governor Brown's proposal to change the make -up of the Ca1PERS board is not getting the attention it deserves. One can agree or disagree with whether the new appointees should be appointed by the governor, but having more appointees with proven financial expertise will change the nature of the discussions that take place at the Board and probably change at least some of the decisions being made. • Mr. Bartel is skeptical of the recently issued Ca1PERS review of the Governor's 12 -Point Plan. That's because the Ca1PERS review was not signed by a Ca1PERS actuary. It also adds in costs for things not actually proposed in Governor Brown's recently submitted sample legislation. In Mr. Bartel's opinion, the Ca1PERS review should be viewed as an "advocacy document." • Mr. Bartel noted that moving toward a hybrid plan for Safety employees would significantly increase the incentive Safety employees already have to seek a disability retirement. • The current Ca1PERS assumed rate of return is 7.75 %. It's likely the Board will decrease that rate to 7.5 %. Mr. Bartel believes it would be more prudent for the Board to reduce the rate to 7.0% or 7.25 %. Doing so would increase the likelihood that CalPERS actual returns will match the assumed rates. If returns don't match the assumed rates, unfunded liabilities will grow. Memo on 2122112 California Public Retirement Seminar Page 3 of 5 • Mr. Bartel recommends that anyone with a side pool (SLO has one) should pay it off. He even recommends borrowing to do so. That's because municipalities can borrow at a much lower rate than the 7.75% interest rate Ca1PERS is currently charging on the side pools. • He also recommended that municipalities with a healthy reserve and a non - pooled pension plan (true for SLO Miscellaneous, not true for SLO Safety) should consider making additional PERS contributions now in order to save money over the long- term. (He did not indicate how quickly the pay back might come.) Labor Negotiator Point - Counterpoint Mr. Yeung, a labor negotiator for public employers, and Mr. Lucia, a labor negotiator for police unions engaged in a point - counterpoint discussion. The discussion was dominated by Mr. Lucia, who did 80% of the talking. Much of that was over - the -top hyperbole. Brennand Remarks Mr. Brennard is a SEIU lobbyist. He provided the standard union viewpoint. Of interest is his belief that the Governor's specific recommended 12 -Point legislation "was written by people who don't know what they're talking about and who don't understand the impact of their proposals." This view was shared earlier in the day by Ms. Green and Ms. Schneider, but in a more understated manner. Stenbakken Remarks Mr. Stenbakken is on the League of California Cities staff. He talked about the League's 2011 Pension Reform Action Plan. Here's a link to that plan: htt :Ilwww.cac ities.or resource files129939.]ul %202011 %20Pension %20Reforcn'%20Action %o20Plan.pdf He pointed out that the pension problem is greater for cities than for any other government group. That's because personnel costs are a higher portion of the budget for cities than for the state and counties. Also a higher portion of city employees are public safety employees. Those employees have the richest pension formulas and the highest pension costs. Mr. Stenbakken said if pension reform occurs, it's more likely to happen at the local level at the bargaining table than at the state level via legislation. Mr. Stenbakken advocated for a change in Ca1PERS rules so that each bargaining group could potentially negotiate a different pension formula. As we know, that is not allowed right now. Brown Remarks Mr. Brown is CEO of the Alameda County Employees' Retirement Association. (California counties are not part of Ca1PERS. Each has its own independent pension trust.) He talked about Memo on 2122112 California Public Retirement Seminar Page 4 of 5 the "crowding out" that will occur if the pension issue isn't "fixed." Public services will be reduced in order to pay for public pensions. He also talked about "the elephant in the room," which is the need to lower the pension formulas for current employees on a go- forward basis. "This is the only way to deal with the unfunded liability issue." Chiang Speech Mr. Chiang gave his standard stump speech about the financial issues he's had to deal with as Controller. That includes borrowing money in a difficult economic environment and simply paying the state's bills. He did not talk about pensions. He did talk about the current $60 billion unfunded state liability for retiree healthcare. At the state level and in most municipalities (not SLO, thankfully), retiree healthcare is handled on a purely pay -as- you -go basis. In response to a question from the audience, Mr. Chiang did say that he feels the Ca1PERS assumed rate of return will be lowered at the next board meeting. Other Information I learned that Ca1PERS will be looking at its pooled plans this fall. Rates for those plans may change, but it's not clear if rates will go up or go down. (The SLO public safety plan is a pooled plan.) Memo on 2122112 California Public Retirement Seminar Page 5 of 5