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C I T Y OF SAN LU I S O B I S P O
FROM: Mary Bradley, Interim Finance.and Information Technology Director
Monica Irons, Director of Human Resources
Prepared by: Debbie Malicoat, Finance Manager
Greg Zocher, Risk and Benefits Manager
SUBJECT: REVIEW OF STAFFING COSTS AND TRENDS
RECOMMENDATION
Receive and file a report on the City's staffing costs including:
1. A ten year review of staffing costs with focus on the top three "drivers."
2. An overview of emerging strategies in public sector compensation.
REPORT-IN-BRIEF
This report is intended to educate and guide future discussions regarding containment or
reduction of City of San Luis Obispo staffing costs. The report examines historical trends in City
staffing costs (Staffing Cost Trends, Page 3), the biggest drivers of these costs (Staffing Cost
Drivers, Page 5), and emerging public sector strategies to contain or reduce staffing costs
(Emerging Strategies, Page 8).
Key Observations
1. Total staffing costs increased 102% between 2000-01 and 2009-10. The largest
contributor to escalating staffing costs has been increases in the cost of CaIPERS
retirement benefits and they are expected to continue. Ca1PERS employer contribution
rates are expected to increase 14% for Miscellaneous employees and 15% for Safety
employees in the next five years. Employers are actively seeking sustainable measures to
reduce and control pension costs. Changes are restricted by current legislation; however,
further reforms may be forthcoming.
2. Regular salaries, CalPERS retirement costs, and group health are the three largest
components or "drivers" of staffing costs, attributing to 88% of General Fund staffing
costs in 2009-10. These same three components experienced the most growth during the
ten year period, with Ca1PERS costs experiencing the most significant increase.
3. While group health costs have steadily increased, the rate of increase has been lower than
California health insurance trends.
4. Overtime usage has remained fairly stable, although overtime costs increased in 2007-08
as a result of increases in regular salaries.
5. The City's retiree health obligation is modest in comparison with other California
agencies. In fact, the City's commitment is the minimum level allowed for agencies that
participate in the CaIPERS health care program. While the decision to pre-fund the
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Review and Discussion of Staffing Costs Page 2
retiree health liability in 2008 increased costs substantially in the near term, analysis
indicates it becomes much less expensive than the prior"pay as you go" approach.
6. Emerging trends in public sector compensation are primarily focused on reducing pension
costs, but also include methods to reduce staffing costs and increase employee
contributions to health insurance.
BACKGROUND
Employees are the cornerstone to providing excellent service to the community. From street
maintenance to infrastructure planning and development, recreational programs to wastewater
treatment, public safety to open space, economic development to traffic control; the services are
varied and delivered primarily by City employees. Service delivery is further complicated by the
distributed nature (121 miles of streets, 39 parks, 20,300 homes/rental units, 3,420 acres of open
space, etc.) and need for 24 hour a day, seven day a week coverage in many City operations.
As might be expected, funding costs comprise a significant portion of City-wide expenditures,
not including capital improvement projects and debt service payments. This report focuses on
General Fund funding costs for several reasons: they account for 78% of the 2009-10 total
General Fund actual expenditures, the 10 year trends are very consistent between the General
Fund and Enterprise Funds, and this report provides context for discussions at the April 12, 2011
Strategic Budget Direction Workshop regarding the financial "gap" facing the General Fund.
Further, many community members are already familiar with this breakdown of General Fund
personnel costs as utilized by the Financial Sustainability Task Force (FSTF) during meetings on
this topic.
The City's Comprehensive Annual Financial Report (CAFR) from fiscal years 2000-01 through
2009-10 is the foundation for all data presented in this report. The FSTF examined data from the
2009-10 budget while this reports uses actual amounts, so numbers may vary slightly. For
consistency we have stayed true to the categories reported in the CAFR and a brief definition of
each category is provided below:
1. Salaries - wages for regular and contract employees, including special or incentive pays, paid
time buyouts, and paid time off taken.
2. Overtime — premium payments for hours worked in excess of standard work periods
including minimums paid to employees required to be ready to respond to an immediate call
for service outside normal work hours. Depending upon bargaining agreements, hours
worked may include some paid time off..
3. Temporary Staffing Costs — wages for all temporary employees that fill in for short-term,
typically less than six months, or seasonal needs.
4. Retirement — City contributions to CalPERS pension plans as well as City contributions to
401(a) plans for management employees, department heads, and appointed officials.
Ca1PERS requires an employee and employer contribution. The employer can agree to "pick
up" the employee portion of Ca1PERS and the City does that depending upon bargaining
group agreements. For those groups that pay the employee portion of Ca1PERS costs, an
equivalent pay increase was negotiated in exchange.
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5. Group health and disability— the City contribution towards the total cost of medical, dental,
vision, life, and long term disability premiums.
6. Retiree health care — the minimum amount the City must contribute towards the cost of
retiree health care in order to offer CalPERS health plans to all active employees, as well as
contributions to a trust fund administered by CalPERS to fund the retiree health liability, in
accordance with Government Accounting Standards Board Statement No. 45 (GASB 45), as
discussed in more detail later in the report.
7. Medicare—The City of San Luis Obispo chose not to participate in Social Security, however
it is required to participate in the Medicare Hospital Insurance (Medicare) program. Currently
the City and the employees each pay 1.45% of salary for Medicare coverage.
8. Unemployment Insurance — The Unemployment Insurance Program is 100% funded by
employers who pay tax on wages paid to employees, or in the case of the City, pay the actual
cost of unemployment claims. For the past several years the cost has consistently been less
than 0.4% of salaries. This State mandated program provides weekly unemployment
insurance payments for workers who lose their job through no fault of their own.
Why Review Personnel Costs and Emerging Trends Now?
Decisions about compensation for public employees are complex and sensitive. This is
understandable as public resources should be used wisely and with accountability. With
approximately 78% of the City's 2009-10 General Fund operating expenditures comprised of
personnel costs, it is especially important that this topic be given due consideration.
On March 15, 2011, Council reviewed and modified the City's Compensation Philosophy — an
overarching policy statement that guides compensation decisions. An updated Compensation
Philosophy along with this report on personnel costs provides context in which Council will
provide strategic budget direction to staff on April 12, 2011 for preparation of the 2011-13
Financial Plan. Staff anticipates personnel cost reductions will be an unavoidable and necessary
part of the overall plan to address the City's structural budget gap and ensure financial
sustainability going forward.
Employees have consistently helped address budget gaps through increased efficiency, doing
more with less, good fiscal stewardship, and containing personnel costs. In 2009, City
employees agreed to defer, waive, or not request across the board salary increases resulting in
approximately $1 million in annual savings. Agreements with five of seven employee groups for
calendar year 2011 included no cost of living increases while the Police Staff Officers'
Association agreed to waive contractually required increases in 2011. All but one employee
agreement expires on December 31, 2011, and Council will provide direction to staff in
preparation for those negotiations later in the year. The information in this report will provide a
foundation for discussions with employees..
DISCUSSION
Staffing Cost Trends
As reflected in Chart 1 below, total General Fundstaffing costs increased from $19.9 million in
2000-01 to $40.3 million in 2009-10. The three largest contributors to this increase are: regular :
salaries, Ca1PERS retirement costs, and group health/disability insurance and therefore these will
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be the primary focus of this report. Retiree health costs appear in 2008-09 due to a change in
reporting the liability associated with this benefit and will be explained in more detail later in this
report.
Chart 1: Total Staffing Costs - General Fund
45,000,000
40,000,000
35,000,000
30,000,000 _ E3 Retiree Healthcare
O Unemployment
Total Amount OMedicare
25,000,000 — — — O Group Health/Disability In
O Retirement
20,000,000 O Overtime
OTemporary Salaries
■Regular salaries
15,000,000 --
10,000,000
5,000,000 —
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Fiscal Year
As reflected in Chart 2, General Fund Staffing Cost Detail 2009-10, regular salaries, retirement,
and group health/disability insurance account for 88% of total staffing costs. Overtime,
temporary salaries, retiree health, Medicare, and Unemployment Insurance combined account for
12% of the total staffing costs. A review of overtime usage, driven primarily by the 24 by 7
nature of emergency response services, shows that usage remained fairly stable during the past
ten years at approximately five percent of total staffing costs. Overtime costs increased in 2007-
08 due to increases in regular salaries. In April 2009 staff presented Council with a report on
Overtime Practices (Attachment 1) summarizing overtime usage, examining overtime historical
trends, and recommending the addition of a fiscal policy on Overtime Management in the
Financial Plan Policies. Since that time both the Fire and Police departments have done
additional analysis and continue to carefully monitor overtime usage and costs. Recent analysis
of Police overtime indicates it has steadily declined and was lower in 2009-10 than anytime in
the past five years.
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Chart 2: General Fund Staffing Cost Detail 2009-10
Retiree Health Care Medicare
1% 1%
Group Health/Disability Unemployment
Insurance 0.3%
8%
Retirement
20%
Regular Salaries
60%
Overtime
5.7%
Temporary Salaries
4%
Staffing Cost Drivers
The three primary drivers of staffing costs are salaries, Ca1PERS retirement costs, and group
health/disability costs. Salary costs are influenced by the number of employees and salaries paid
to those employees. Salaries increased incrementally from 2000-01 to 2006-07 due to cost of
living adjustments to ensure competitive salaries and salary ranges. Salaries also increase as
employees progress through salary ranges by receiving step increases of 5.26% or pay for
performance increases that average 3.5%. In examining historical data summarized in Chart 1,
more substantial salary increases in 2007-08 are due primarily to adjustments to management and
general unit employee classifications to address recruitment and retention issues at the time
(recommendations from the 2007 Benchmark Compensation Study) and increases in salaries of
30% for sworn and 37% for non-sworn Police personnel due to the Police binding arbitration
award. The overall increase in 2007-08 is also attributable to adding 24.8 positions to fulfill
Measure Y priorities.
Ca1PERS Costs
In February 2010 staff presented Council with a report on Ca1PERS Retirement Costs: Where
We've Been and Where We're Headed (Attachment 2). This report provided a comprehensive
review of the City's retirement benefits and costs. At that time it was reported that all local
agencies face significant fiscal challenges in the future funding of Ca1PERS pension obligations,
including the City. While increased benefit levels is a factor in these escalating costs, major
investment losses by Ca1PERS were also a driving factor. Chart 3, Employer Contribution Rates:
Fiscal Year Ending 1986 to 2012, reflects how volatile yields along with changes in other
actuarial factors such as participation levels, age of current participants, mortality, salary costs
and inflation, contractual benefit levels, status of current funding, has affected employer rates.
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Chart 3: Employer Contribution Rates: Fiscal Year Ending 1986-2012
45%
40%
35% - - - - - - -
30% - - - - -
25% - - - - - - - -
20% - - - - - - - - -
15% - - - ---
5% -10% rh
5%
0%
m N m O ON M Q O m N m m O N
m m m m w w m rn m m rn M m M 0 0 0 0 0 0 0 0 0 0
rnm m of m m wmo 0 0 0 0 0 0 0 0 0 0 0
- - - - - - 0
r � � � � � � � N N N N N N N N N N N N N
O Safety O Uscebneous
In recent fiscal forecasts staff has signaled continuing increases in CalPERS employer rates with
some level of uncertainty. Chart 4, Employer Contribution Rates: Actual 2009-11 Financial Plan
and Projected Through 2015-16 reflects the most recent news from Ca1PERS. Rates for 2011-12
are higher than previously projected due to changes in underlying demographic assumptions. The
two additional estimated rates from Ca1PERS for 2012-13 and 2013-14 continue to reflect the
effects of the earlier extraordinary investment losses. While we have recently learned that
CaIPERS will be keeping the assumed investment return rate at 7.75% and not lowering it, this is
only one factor and there is still much uncertainty about the projected rates.
Chart 4: Employer Contribution Rates: Actual 2009-11
Financial Plan and Projected though 2015-16
45% 0 45% 45%
39% 40%
36% 36%
35%
° 25% 25% 25%
25/0 22% 22%
180 18%
15%
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Fiscal Year
a Safety O Miscellaneous
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Group Health/Disability Insurance
Of the 449 cities in California that contract with Ca1PERS for retirement benefits, 302 including
the City, contract with Ca1PERS for medical insurance. When the City joined the CalPERS plan
in 1993, it immediately experienced an increase in the plan choices available along with a
significant reduction in rates. And due to Ca1PERS purchasing power, the City has continued to
experience competitive health care rates since then. Chart 5, Health Premium Increases
Compared to Inflation, is based on data from a 2010 California Healthcare Foundation survey.
The graph indicates that California health premium increases track consistently above the
inflation rate. The City's premium increases driven mainly by increases in Ca1PERS medical
insurance have been primarily lower than the California trend.
Chart 5: California Health Premium Increases
Compared to Inflation
16.0%
16.0% ffi
1 .
t2.o°i0%
°
10.0% ♦Overall lnBakn
6.0% \ \ - — Premium Increases California
6.0% - —s--City Premiums
4.0% —
2.0% -
0.0%
-2.0%
ti ti ti ti ti ti ti ti ti
In 2009, the City requested quotes from other medical insurance providers in order to compare
the cost of Ca1PERS coverage. Demographic data was provided and quotes were requested from
Aetna, Anthem Blue Shield, Cigna, Healthnet, and United Healthcare. Unfortunately only two
quotes were received as the other companies declined to quote because they could not compete
with Ca1PERS rates. Of the two companies to respond Aetna was an average of 34% above
Ca1PERS and Cigna was an average of 23.5% above Ca1PERS for comparable health
maintenance(HMO) and preferred provider(PPO) options.
While the City is managing health insurance costs effectively, the other component affecting
group health/disability costs is the proportion of cost borne by the City versus the employee. The
trend data reviewed indicates the City contributed approximately 90% of the total cost of health
insurance in 2009-10 with employees contributing 10% on average. The employer-employee
cost sharing has shifted steadily from 80% employer about ten years ago to 90% in 2009-10.
However, many employee groups have agreed to "freeze" the City contribution to group health in
recent years while health premiums increased almost 10% in 2011. Therefore, we expect to see a
reduction in the employer contribution to around 81% with the employee contribution increasing
to 19% in 2011.
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Retiree Health
In 2004, the Governmental Accounting Standards Board (GASB) issued Statement No. 45, which
established standards for measurement, recognition and display of Other Post Employment
Benefits (OPEB) expenditures and related liabilities, note disclosures and required
supplementary information in the financial statements of state and local government employers..
For most employers, including the City, the only significant OPEB liability is for retiree health
insurance coverage.
The primary obligation comes from the City's requirement, under contract with Ca1PERS for
health coverage, to provide a modest contrition towards retiree health premiums for those who
choose to retain coverage through CaIPERS after retirement. This is currently$97 per month and
is the lowest contribution allowed by Ca1PERS. Prior to 2008, the City's OPEB obligation was
funded on a pay-as-you-go basis. In May 2008, based on Council direction, the City began pre-
funding the obligation via an irrevocable trust. As reflected in Charts 6 and Chart 7 below, the
cost becomes less expensive in the not-so-distant future. Moreover, at the end of the
amortization period, costs become much less expensive, as there are no longer any unfunded
liabilities. Under the pay-as-you-go approach, the unfunded liability never goes away. In fact, as
shown in Chart 7, it continues to grow. Pre-funding in 2008, accounts for the seemingly
significant increase in retiree health costs. However, this move is fiscally prudent and
sustainable in the long-term and the City's obligation to retiree health remains minimal and
unchanged.
Chart 6: Annual Cost Trends Chart 7: Unfunded Liability Trends
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Emerging Strategies—Controlling or Reducing Public Sector Compensation
As public sector agencies face continuing budget deficits and search for sustainable methods to
address them, changes in public sector compensation are emerging in three primary areas: 1)
Pension cost reductions, 2) Staffing cost reductions, and, 3) Increases in employee contributions
to health insurance. This is not meant to be an exhaustive list of personnel cost containment or
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reduction options but rather a summary of emerging strategies in public sector compensation.
Further, there are many variations that can be explored based on the fundamental concepts
presented below.
Pension Cost Reductions
Attempts to control pension costs are the primary focus of most public sector agencies these
days. In reviewing the 10 year trend in personnel costs for the City this focus is understandable
and reasonable as retirement costs is the area that has experienced the most significant growth.
Further, Ca1PERS expects costs to continue to rise despite cost control measures such as
smoothing, not lowering the investment rate, etc.
In examining emerging strategies, there appears to be two fundamental approaches to addressing
retirement costs: 1) Implementing a reduced second tier pension for new hires, and 2) increasing
the amount current and/or future employees contribute towards the cost of their pension.
Second Tier Pension
Currently, Public Employment Retirement Law only allows agencies to establish a second tier
reduced retirement formula for employees hired after a future date. In other words, it is not
currently legal to reduce the pension benefits (e.g. retirement formula or components such as
method for determining final compensation) of active or retired employees. It can only be done
for employees not yet hired. According to The League of California Cities City Manager Survey
(Attachment 3) conducted January 2011, 62% of the 296 responding cities are considering
negotiating changes to their pension offerings. Seventy three percent of the new tiers adopted are
for Miscellaneous employees and move to the 2% @ 60 formula. The most common second tier
for Safety employees is 3% @ 55 with the second most common being 2% @ 50. The shift back
to pension formulas with normal retirement ages of 60 for Miscellaneous employee and 55 for
Safety employees address not only cost issues but also more philosophical discussions around the
appropriate age of retirement. The move to increase normal retirement age, takes agencies back
to the early 2000's when the State Legislature first approved "enhanced" retirement formulas
such as 3% at 50 for Safety and 2.7% at 55 for Miscellaneous.
As agencies have negotiated second tier pensions, they have also examined all aspects of their
CalPERS contract in an effort to reduce other cost drivers such as the determination of final
average salary. The League Survey indicates 12% of responding cities negotiated changes to
their final compensation calculations with the overwhelming majority moving.from highest one-
year to an average of the highest three years for Safety and Miscellaneous employees. The City's
current contract provides for the highest one year for determination of pension benefits.
The main drawback to a second tier retirement is that it establishes two classes of employees;
with more senior employees receiving higher level retirement benefits and newer employees
receiving lesser benefits. Another concern about a second tier is an agency's ability to attract
employees with a lower benefit. As more agencies move to lower benefit levels, this argument is
reduced. Agencies moving to a second tier are doing so because. they are focusing on
sustainability, they are able to negotiate a second tier more easily than concessions that directly
affect current employees, and they expect more significant near term cost savings than once
imagined.
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Staff recently completed a preliminary analysis to provide a "ballpark" estimate of savings
resulting from a second tier pension benefit for future employees. This analysis was done to
estimate potential near-term savings because this option has been described as contributing.
savings more heavily in the long term when a large portion of employees have been replaced with
employees at the lower benefit level. Although changing to a second tier would not have an
effect on the existing unfunded liability for current employees, it would have a measurable
impact on the normal cost of future employees going forward. The normal cost is the amount of
an employee's retirement cost that is associated with his or her current service. Assuming a
savings of four percentage points of salary for normal cost, and a modest turnover rate, it is
estimated that total savings would exceed $100,000 annually by the third year after
implementation and $500,000 annually within ten years. These assumptions are based on a
second tier of 2%@55 formula for new Miscellaneous and a 3%@55 formula for Safety
employees as well as calculating retirement income on a three year average rather than single
highest year. Savings could be higher or lower depending upon the actual turnover rate, the
benefit factor, and retirement age selected in the new formulas. For example, 2% @60 would
yield a higher savings, whereas, 2.5%@55 would yield a lower savings for Miscellaneous
employees. In order to truly understand potential savings an actuarial analysis should be
conducted and this analysis has not been done at this time.
Increased Employee Cost Sharing
CaIPERS costs are made up of employee and employer contributions. The employee
contribution is set by state statute and has remained unchanged for many years. The employee
contribution depends upon the retirement formula offered which varies between Safety and
Miscellaneous plans and whether the employer participates in Social Security. Currently the
City's employee contribution is nine percent for Safety plans and eight percent for the
Miscellaneous plan. In the past, it was very common for employers to "pick up" the employee
contribution to CalPERS and therefore, bear the entire burden of pension costs.
According to the recent League of California Cities Survey 38% of responding agencies have
adopted some form of cost sharing. Of those agencies making a change in cost sharing, most are
having the employee pay the full employee share. The survey does not indicate whether this is
being negotiated only for new hires in the"second tier" or whether it affects current employees as
well.
Other Changes in Pension Benefits, Not Currently Available
The Little Hoover Commission began a study of California 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. The Commission concludes that even with the introduction
of second lower tier pension plans, costs will still continue to escalate due to increased life
expectancy where retirees may live longer than they worked, and insufficient investment returns
to fund the benefits. There is much discussion about the need for longer term reform with many
proposing a hybrid retirement model that retains a defined benefit formula at a lower benefit rate
and higher normal retirement age, along with a defined contribution, 401(k) style plan. Some
propose a "third leg" to the hybrid model that includes participation in Social Security. This
would require Federal legislation as agencies, such as the City, that opted out of participating in
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Social Security are not currently allowed to opt back in. Even if the City was able to opt back in
to Social Security, the City and employees would each have to pay 6.2% of salary for the benefit.
Further recommendations are focused on capping retirement benefits. There are various ways to
do this including: adopting a flat dollar cap on the benefit amount, adopting a cap on the salary
used to determine retirement benefits, expanding the basis of average salary earnings from one or
three years to five years, increasing the normal retirement age, restricting or eliminating the
purchase of service time, etc.
All of these options include legislative change to affect. In addition, it is important to recognize
that CalPERS currently requires the City to fully fund its liability and provide an "equivalent"
benefit to employees if an agency terminates their contract with CalPERS. . The funding of the
liability alone makes this option undesirable as part of a cost containment strategy. In consulting
with the City's actuary, it is estimated that the "'withdrawal liability' to leave CalPERS would
exceed S 139 million. It is CalPERS policy that this liability would need to be paid within ten
years. Given the significant liability and the relatively short period to pay it, leaving CaIPERS is
not a cost effective solution. However, as the City charts its course to Financial Sustainability it
is important to continually monitor changes and developments in public sector compensation and
weigh in on these discussions.
Staffing Cost Reductions
Staffing costs are being reduced in a variety of ways with the most popular short-term reduction
being furloughs or holiday closures and the most common long-term action being reduced
staffing levels.. Most cities with obligations to provide cost-of-living increases are attempting to
defer or eliminate them through negotiations with labor groups.
Furloughs
Furloughs are required days off without pay regardless of whether an employee has accrued paid
time off or not. Typically, an agency determines the percent by which they wish to reduce salary
costs and then implements an equivalent number of furlough days. For example, if an
organization implements one furlough day per month, wages would be reduced 4.6%. While
some agencies choose to close non-essential City offices during furlough days, others choose to
remain open and allow employees to "self-select" furlough days by providing them a "bank" of
furlough days that must be taken within a specified timeframe. Scheduled furlough days may
result in additional operating savings (e.g. electric, water, janitorial, etc.) and may be easier to
communicate to citizens with less negative impact on service levels. The"bank" approach is how
many agencies have implemented furloughs for personnel whose services are required twenty
four hours a day, seven days a week, such as in public safety.
Furloughs provide equivalent time off in exchange for reduced pay and employees generally
consider them more palatable than a pay reduction alone. Due to potential service level
reductions, furloughs are typically considered short-term solutions and not considered
sustainable. Further, furloughs can be difficult to effectively design, administer, and track to
ensure savings. For example, reduction of a management employee's salary may interfere with
their exempt status under the Federal Labor Standards Act (FLSA) making them eligible for
overtime pay during the affected pay period.
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One furlough day would reduce General Fund personnel costs by approximately $135,000, not
including potential facility savings. Furloughs reduce reportable earnings to CalPERS and as
such would potentially reduce retirement benefits if the period in which the furloughs took place
was the retiring employees' highest year of compensation. However, furloughs do not impact
service credit for the purposes of calculating CalPERS (unless an absence is two months or more,
service credit is not adjusted for CalPERS reporting).
Holiday Closures
Some agencies find the demand for service during the week of Christmas or New Year's
significantly lower than at other times of the year and implement mandatory closures of non-
essential City offices and services. Implementation varies among agencies depending upon the
objective. Some agencies allow employees to use accrued paid time off during these holiday
closures. This lowers the accrued liability of paid time off and many employees will take time
off without pay during these closures as they won't have sufficient time off to cover. Other
agencies implement holiday closures in the same manner as furloughs to achieve salary savings.
In this case, agencies may implement proportional salary reductions during the year to avoid a
week of non pay for employees at the holidays, while still achieving savings. Operational
savings as discussed under furloughs are also cited as a reason to implement holiday closures as
general feedback is that employees feel more "refreshed" because work has stopped during their
absence.
Holiday closures are simpler to implement and clearer to communicate to the public affected by
the closures than intermittent closures throughout the year. The potential reduction in
compensation does not pose issues under the FLSA for exempt or management employees
because they would not work for an entire week and therefore, even if their exempt status was
compromised during that period, no overtime would be due. Organizations are viewing holiday
closures as a sustainable alternative to furloughs because there is less service impact to the
community than furloughs.
Reduced Staffing Levels
Staffing reductions can be done through elimination of line item positions or employee layoffs.
Most agencies implemented hiring "chills" or "freezes" during the past two years that require
additional justification by staff to replace existing positions. Unfilled vacancies result in a
temporary reduction of staffing costs; however, many agencies have eliminated vacant positions
during subsequent financial planning processes to achieve ongoing savings. Some agencies
have resorted to employee layoffs with corresponding service reductions and reduced personnel
costs. However, in other cases, the reductions are coordinated with potential reorganizations or
restructuring aimed at maintaining or improving service delivery by operating more effectively
and efficiently.
Cost savings are difficult to estimate as it is dependent upon what position is "frozen'' or
eliminated. However, in the 2009-11 Financial Plan 17.2 full time equivalent positions were
eliminated saving approximately$1.4 million.
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Increases in employee contributions to health insurance
In 2007 the City conducted a Benchmark Compensation Study of general unit and management
classifications. This study examined public sector market pay and benefit data. Data at that time
indicated the median employer contribution to the cost of full family health coverage (e.g.
medical, dental, and vision insurance) varied from 79% to 89% depending upon classification.
Since that time, more public sector employers are freezing the contribution to health insurance
causing increases in premiums to be borne by employees, thus reducing the employer
contribution to health costs. CaIPERS recently indicated most participating public sector
employers contribute between 80% to 85% towards health costs, while the 2010 California study
indicates California employers (presumably public and private sector) average about 70%
employer contribution to health premiums.
FISCAL IMPACT
There is no fiscal impact of receiving this report.
ATTACHMENTS
1. Overtime Practices
2. CalPERS Retirement Costs: Where We've Been and Where We're Headed
3. The League of California Cities City Manager Survey
GACouncil\Agenda reports\2011\Personnel Costs\StaffingCosts&Trends.doc SCI-13
ATTACHMENT 1
council , o
j acenoA nepom
CITY OF SAN LUIS OBISPO
FROM: Monica Irons,Director of Human Resources
SUBJECT: OVERTIME PRACTICES
RECOMMENDATION
Modify the City's Budget and Fiscal Policies to be included in the 2009-11 Financial Plan to clearly
define the use and management of overtime costs throughout the organization.
DISCUSSION
Background
Council reviewed and discussed the City's Budget and Fiscal Policies, which are contained as a
section of each Financial Plan at its December 16, 2008 meeting. Discussion included direction
to staff to consider adding a "generic statement that sets forth a principle regarding the use of
overtime and how it is managed'in the City's 2009-2011 Financial Plan..
The City defines, schedules and compensates overtime in accordance with federal and state laws,
as well as internal polices and procedures. The Federal Labor Standards Act (FLSA) was
extended to all public employers effective April 15, 1986 and established minimum wage,
overtime compensation requirements, recordkeeping, and child labor standards. It also defines
work weeks and provides some exemptions from paying overtime.
FLSA Requirements
The FLSA requires employers to pay overtime compensation, at not less than one and a half
times the regular rate of hourly pay, for all hours worked beyond a specified number(usually 40
hours in a seven consecutive day workweek), unless otherwise exempted from this provision.
FLSA overtime may also be compensated through compensatory time off(CTO). CTO must be
credited at time and one-half for every hour of FLSA overtime worked. The FLSA established
"caps" on accumulated CTO hours beyond which FLSA overtime must be paid in cash.. These
caps vary based on the type of work regularly performed by an employee. For work in "public
safety", "emergency response", and "seasonal" activities, the cap is 480 hours of CTO, or 320
hours of FLSA overtime hours worked, per year. The cap is 240 hours of CTO, or 160 FLSA
overtime hours worked, for all other jobs.
�3r- �
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The FLSA exempts executive, administrative, and professional — or "white collar" employees
from the Act's overtime requirements. The FLSA itself does not define these terms; it delegated
this responsibility to the Department of Labor(DOL). The DOL established salary and duties
tests to determine whether a position is exempt from the FLSA. The City refers to positions that
meet the standards established in these exempt status tests as "management" positions. In other
words, management employees (including Police Lieutenants, Police Captains, and Fire Battalion
Chiefs) are exempt from the FLSA and overtime compensation is not required.
Defining the Work Week
One of the cornerstone provisions of the FLSA is its requirement to pay premium overtime pay to
nonexempt employees for all hours worked over specified maximum hours within a designated
work period. For the majority of employees outside of public safety, this means overtime must
be paid for all hours worked over forty in a seven day work period. The FLSA provides for some
flexibility in defining a work week and allows for "flexible" or "compressed" work week
schedules such as a 9/80 or 4/10 work schedule.
The City supports voluntary participation in flexible or compressed work schedules if approved
by a department head and the City Manager. The City's standard compressed work schedule is
the 9/80 schedule; it is compliant with the FLSA, supports the City's desire to reduce green
house gas emission through the reduction of commuting, and does not incur overtime for regular
hours worked within the schedule. Employees on a 9/80 schedule are scheduled to work eight
nine-hour days, one eight-hour day, and have one day off every two weeks. By establishing the
start of the work week as mid way through the eight-hour work day, the City does not incur
overtime.
Because of the special scheduling problems inherent in police and fire departments, Congress
authorized longer work periods, if elected by the public employer, for employees employed in
law enforcement activities or fire protection activities. These work periods, known.as 7(k) work
periods, may be for periods of between seven and 28 consecutive days. For example, City
Firefighters, Fire Engineers, and Fire Captains are assigned to eight, 24-hour shifts, in 24 day
work period. Police utilizes a 3/12 work schedule for patrol and dispatch where operational
services are provided 24 hours a day, seven days per week.
Overtime Requirements in Memorandums of Agreement
The City has four employee associations that represent employees eligible for overtime. These
employee associations are the San Luis Obispo City Employees' Association (SLOCEA), the
International Association of Firefighters, Local 3523 (Fire Union), the San Luis Obispo Police
Officers' Association (POA), and the San Luis Obispo Police Staff Officers' Association
(SLOPSOA). Memorandums of Agreement (MOAs) between each employee association and the
City define the work period in hours, what constitutes overtime, whether non-work hours (paid
time off) are considered in computing overtime hours, caps associated with CTO, pre-
authorization required to work overtime, and special circumstances when overtime compensation
G:\Hgenda reports\2009\0vertime\0vertime Policy.doc
SS1=15
ATTACHMENT 1
Page 3 of 6
may be used. These circumstances include the following: 1) standby; 2) call back; 3) court time;
4) training; 5)FLSA Overtime for Fire; and 6) Constant Staffing Overtime for Fire.
1. Standby. Circumstance which requires an employee so assigned to: be ready to respond
immediately to a call for service; be readily available at all hours by telephone or agreed-upon
communication equipment; and refrain from activities which might impair his/her assigned
duties upon call. Employees assigned to standby are compensated at a flat rate to compensate for
the inconvenience of standby. Overtime is paid for hours actually worked as a result of standby
(e.g. an employee is called to work while on standby). Standby is typically used to ensure
evening and weekend coverage of critical services such as support by information technology of
911 systems, support of water and wastewater operations, or emergency response due to
accidents,repairs, storms,or natural disasters.
2. Callback Circumstance that require an employee to unexpectedly return to work after they
have left at the end of the work shift or work week. The employee is paid a guaranteed minimum
number of hours(typically four or four and a half)at straight time or paid at time and one-half for
time actually worked, whatevcr is greater.
3. Court Time. Police employees who report to court to testify as witnesses in cases outside of
their normally scheduled shifts are guaranteed three hours minimum payment at time and one-
half.
4. Training. Training is generally planned and scheduled to avoid overtime if at all possible.
However, training is mandated in many departments such as police, fire, and utilities where shifts
may vary and minimum staffing levels are required to ensure essential services are not
interrupted. In some cases, scheduled training involves overtime for an employee or overtime is
incurred to backfill for an employee attending training.
S. FLSA Overtime for Fire Firefighters, Fire Engineers and Fire Captains assigned to 24-hour
shift duty are assigned to a 56 hour work week. For hours over 53 in a week, the FLSA requires
premium payment. As a practical matter, it is recommended that departments absorb premium
pay obligations above the 53 hours per week rather than increase staffing.
6. Constant Staffing Overtime for Fire. Constant staffing provides for a mandated fourteen
firefighters on-duty everyday including the Battalion Chief. Mandated overtime is used to
maintain the fourteen firefighters per day minimum.
How is Overtime Managed at the City?
Each department is responsible for budgeting and managing overtime costs. All departments
require pre-approval of overtime by a department head or delegate, unless the overtime is
assumed to be pre-approved by the nature of the overtime. For example, a police officer who is
required to appear in court on his or her day off or a utilities employee who is called back to
G:\Agmda reports\2009\0vertime\0vvtime Poticy.doc
91 -3
SS1-16
ATTACHMENT 1
Page 4 of 6
repair a broken water main. Departments have the leeway to shift schedules during the defined
work period in order to avoid overtime.
Assignment of overtime typically is based on necessary skills and/or a seniority or rotational
process if multiple employees have the same skill set (e.g. police patrol, dispatch, and fire
suppression). Personal needs of the employees are considered whenever possible in order to
avoid undue hardship of repeated overtime assignment which can lead to burnout.
The City timecard system includes the reason for overtime and timecards must be approved by a
manager before being submitted to payroll for payment. Finance reports show overtime incurred
and most departments regularly monitor overtime costs to ensure that amounts stay within those
budgeted or that unforeseen overruns are addressed.
What Does Overtime Cost?
As a percent of total operating costs, overtime expenditures have remained stable during the past
five years at between three and four percent.
Overtime as Percentage of Operating Cost
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Fiscal Years 2003-04 to 2007-08
G:\Agenda reports\2009\0vertime\0vertime Policy.doc
SS1-17
------------
ATTACHMENT 1
Page 5 of 6
All departments except Police and Fire incur less than two and a half percent of their total
operating costs through overtime.
Overtime By Department
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0.0% 2.5% 5.0% 7.5% 10.0% 12.5%
2007-08 Overtime as Percentage of Total Operating Costs(Excluding Mutual Ale Reimbursements)
An analysis of the past five years of overtime costs at the City indicates the primary drivers of
overtime are: 1) vacancies, 2) call back, 3) standby, 4) special events, and 5) mutual aid.
Vacancies may result when employees leave the City and the position remains unfilled for some
time (e.g. while a replacement is recruited or a vacancy is held during a hiring "chill" or
"freeze"). Short-term absences such as vacations, industrial injuries or illnesses, or medical,
military, or personal leaves of absences may drive overtime. Overtime is used most extensively
in departments where it is critical to maintain minimum staffing levels to ensure essential service
levels such as utilities laboratory, water and wastewater plants, police patrol, emergency
dispatch, and fire suppression.
Call back and standby were discussed earlier in this report, and are primarily used by Information
Technology,Utilities, Public Works, and Police.
Overtime for special events are primarily used by Police and Fire for traffic control, additional
patrols and response due to increased activity during Mardi Gras, Saint Patrick's Day, Fourth of
July, Halloween, festivals, and parades.
Mutual aid overtime is used exclusively by the Fire Department and the City is fully reimbursed
for these costs. Employees responding to disasters out of the City's jurisdiction receive overtime
for hours worked on the incident. The City is reimbursed for these hours at the employee's
overtime rate as well as hours necessary to backfill the employee while they are on out of county
GAAgenda reportsl2009\OvertimelOvettime Policy.doc
SS1-18
ATTACHMENT 1
Page 6 of 6
assignment. The City also rcceives an additional administrative fee that varies by agency and
may also receive reimbursement for Workers Compensation, unemployment, and Medicare
benefits.
Added Fiscal Policy—Human Resources Management
Staff proposes adding Section D Overtime Management to the Hunan Resources Management
section of the 2009-2011 Financial Plan Budget and Fiscal Policies (see below).
D. Overtime Management
1. Overtime should be used only when necessary and when other alternatives are not
feasible or cost effective.
2. All overtime must be pre-authorized by a department head or delegate unless it is
assumed pre-approved by its nature. For example, overtime that results when an
employee is assigned to standby and/or must respond to an emergency or complete an
emergency response.
3. Departmental operating budgets should reflect anticipated annual overtime costs and
departments will regularly monitor overtime use and expenditures.
4. When considering the addition of regular or temporary staffing, the use of overtime as an
alternative will be considered. The department will take into account:
a. The duration that additional staff resources may be needed.
b. The cost of overtime versus the cost of additional staff.
c. The skills and abilities of current staff.
d. Training costs associated with hiring additional staff.
e. The impact of overtime on existing staff.
FISCAL IMPACT
There is no fiscal impact of adding the proposed language.
GAAgenda reports\2009k0vertime\0vertime Policy.doc - f
SS1-19
ATTACHMENT 2
Counck • .D� 2-23-10
acEnaa Report
CITY 00 SAN LUIS O B I S P O
FROM: Monica Irons, Director of Human ResourceSA-
Bill Statler,Director of Finance& Information Technology
SUBJECT`. CALPERS RETIREMENT COSTS:
WHERE WE'VE BEEN AND WHERE WE'RE HEADED
RECOMMENDATION
Review and discuss City retirement costs and trends under its participation in the California
Public Employees Retirement System(CalPERS).
REPORT-IN-BRIEF
The purpose of this report is to provide a comprehensive review of the City's retirement benefits
under its contract with CalPERS.. It discusses the City's history with CalPERS, which goes back
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 Observations
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 funding
CalPERS pension obligations—and this includes the City.
2. While increasing benefit levels is certainly a factor, major investment losses by CalPERS are
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 CalPERS cost for employer contributions is $7.6 million.
While this is certainly a significant cost, it does not reflect an undue portion of total City
expenditures: it accounts for 10.7% of the City's total 2009-10 operating budget of $71
million.
4. That said, while employer contribution rates have been stable for the past six years, this is
likely to change at the end of the 2009-11 Financial Plan when the City will begin to see
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 CalPERS plans. Accordingly, while this report can serve as a solid base in
developing strategies for the future, it would be premature to attempt to do so at this point. For
SS1-20
ATTACHMENT 2
Ca- ERS Retirement Costs and Trends Page 2
this reason, no action is proposed at this time. However, staff does recommend the following
next steps:
1. Continue to actively engage in a dialogue with local city and county managers regarding
potential regional pension reform efforts.
2. Continue to participate and support broader reform efforts in keeping with the League of
California Cities' guiding principles.
3. Consider CalPERS cost trends in the context of upcoming labor negotiations and discussions
with unrepresented employee groups.
DISCUSSION
Background
At its December 15, 2009 meeting, the Council discussed the results and key findings of the
Comprehensive Annual Financial Report for 2008-09, which included audited financial
statements. In that context, Council members asked about the impact of increasing retirement
costs on the City's financial outlook. In response to the Council's direction at that time to return
to the Council this report provides a comprehensive review of the City's retirement plans and
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 pursue
in the future.
CalPERS Pension Benefits: A General Overview
Ca1PERS is a separate and distinct legal entity from the City, and serves as an independent
fiduciary in managing_ the City's retirement plan assets. It is an agency in the State of
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 CalPERS for the City's "defined benefit"retirement plan,which
covers all of the City's regular employees (except in rare circumstances, temporary employees
are not covered by the CalPERS 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 CalPERS in 1952 to provide a defined benefit retirement plan to its
employees. These defined benefit plans guarantee a benefit amount based upon a "formula" that
considers retirement age, years of service credit and final compensation for two groups of
employees: sworn fire and police employees ("Safety") and all other employees
("Miscellaneous"). These plans reward a commitment to public service, promote stability and
low turnover, and help attract employees to public sector employment. CalPERS plans are
funded through employee and employer contributions and earnings on those investments.
SS1-21
ATTACHMENT 2
CaIPERS Retirement Costs and Trends Page 3
Safety employees include police officers, police lieutenants, police captains, firefighters, fire
captains, fire battalion chiefs, and the police and fire chiefs. The City's "sworn" employees are
covered under the Safety contract while all other employees, including non-sworn safety
employees (such as fire inspectors, communication technicians and police records clerks),
general employees, management and appointed officials, are covered under the Miscellaneous
contract with CaIPERS.
Only employees that work more that 1,040 hours per year (half of the hours of a full-time
employee) are eligible to participate in CaIPERS. Under the City's temporary employee policy,
this means this benefit is typically only _
available to regular employees; men -M • I - -. . . -
however, temporary employees are There are two basic types of retirement plans:
eligible for participation in those limited defined benefit and defined contribution:
circumstances where they work more
than half-time. Any such circumstances • Under a defined benefit plan,an employer
require approval by the City Manager on promises a specified monthly benefit upon
a case-by-case basis. retirement that is predetermined by a formula
based on the employee's earnings history,tenure
CalPERS retirement benefits are based of service and age. Annual contributions are
on three key factors at retirement: made to the plan in an amount actuarially
required to fund the plan. The benefit level is
1. Age defined: and contributions will vary as needed to
2. Service credit fund them.
3. Final compensation • On the other hand,defined contribution plans do
not commit to a specific benefit,but rather,to a
These three factors then determine the specific contribution amount by the employee and
pension amount based on the plan in employer. In this case,pension benefits will vary
place. For example, under the "2.7% at depending on the contributions made and
55" plan, retired employees will receive investment earnings on them. The contribution
2.7% for each year of service credit, level is defined; and pension benefits will vary
times their final compensation if they
retire at age 55. Under this plan, an CaIPERS is a defined benefit plan.
employee with 25 years of service credit
with final compensation of$4,000 per month that retires at age 55 would receive a retirement
pension of$2,700 per month (0.027 x 25 x $4,000).
The following describes how each of these factors is determined by CalPERS.
1. Age. To be eligible for retirement, a CalPERS member must be at least 50 years of age and
have a minimum of at least five years of CalPERS credited service. The"normal"retirement
age is the age indicated in the agency's benefit formula. For example,"2.7% at 55" indicates
that 55 is the normal retirement age. Benefits are reduced if an employee retires between age
50 and the normal retirement age.
2. Service Credit. This is determined by the number of years an employee has worked for a
CalPERS agency. Some public agencies — counties as well as cities — have other retirement
i3l-/-3
SS1-22
ATTACHMENT 2
Ca1PERS Retirement Costs and Trends Page 4
programs that may have a reciprocity agreement with Ca1PERS, allowing service credit to be
transferred or retirement benefits coordinated. In addition, Ca1PERS allows members to
convert a portion of unused sick leave at retirement; and purchase prior military service
credit, prior unvested Ca1PERS service or additional years of service not worked for a public
agency(referred to as"airtime").
3. Final Compensation. The "PERSable" compensation is defined by CalPERS as base pay
and special compensation. Special compensation includes pay for performing and
maintaining skills for normally required duties. For the City, special compensation includes
uniform allowance, paramedic pay, hazardous materials pay, bilingual pay and holiday pay,
which are included in final compensation. However, compensation for services outside
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 final
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 retirement
formula an employee would need to work over 33 years (with all of his or her Ca1PERS
service under the 2.7% at 55 formula) to attain 90% of final compensation. If a portion of the
33 years was under a lower formula, such as 2%at 55, the employee would not attain 90% of
final compensation.
CaIPERS Pension Benefits: A Brief History
Since the inception of Ca1PERS, the State legislature has continued to pass laws amending and
updating the retirement system and pension benefit formulas. With the adoption of new pension
formulas by the State legislature, the"normal'retirement age has decreased over time from 60 to
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 employee
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:
F I —V
SS1-23
ATTACHMENT 2
CaIPERS Retirement Costs and Trends Page 5
As the chart indicates, some
retirement formulas are only available ' ' '
at 50 Safe l
for Safety employees, while others are % On
3
available for only Miscellaneous 3at 50 Safe Only
employees. Very few agencies have 3/%at 55 Safe Only
2.
the same retirement formula for both 07/o at 55 Miscellaneous Only
2/o at 60 Miscellaneous Only
Safety and Miscellaneous employees. 3%at 60 Miscellaneous Only
2%at 55 Safe and Miscellaneous
Negotiating Pension Benefit 2.5%at 55 Safety and Miscellaneous
Changes at the City
Pension changes have taken place in the context of overall contract negotiations within total
compensation economic parameters set by the Council. At the time of negotiations, foreseeable
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. The
five represented employee groups are:
1. The San Luis Obispo City Employees Association (SLOCEA) represents approximately 152
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 evidence
technicians.
S. The San Luis Obispo Police Staff Officers Association (SLOPSOA) represents 17 police
lieutenants, captains, communication and records manager, communications supervisors, and
records supervisor.
The City's management group has been unrepresented since the mid 1990s and includes 71
employees in a variety of senior professional, supervisory and mid-management classifications as
well as department heads. Four confidential employees who provide administrative support to
the City Manager, City Attorney and Human Resources are also unrepresented.
SS 1-24
- ATTACHMENT 2
CaIPERS Retirement Costs and Trends Page 6
The following summarizes participation in the two plans by employee group for all funds:
CaIPERS Em to ee Participation Summary
Employee Group Miscellaneous Safety Total
� >. :hy ri. �,.r� iuv ✓, �+x�•�i .1' l�i��*gs.-: �,Aiw _wv ,,..� .r6�,
SLOCEA 152 152
Fire 5 39 44
BC 4 4
POA 20 45 65
SLOPSOA 4 13 17
Management 69 2 71
Confidential 4 4
Total 254 103 357
As reflected in this summary, negotiating changes to the pension program can be complex
because multiple bargaining groups must agree on potential contract changes. For example, the
Miscellaneous contract with CaIPERS covers 254 regular employees in four bargaining groups
and two unrepresented employee groups. The City must meet and confer with the represented
groups prior to making any changes to wages, hours, benefits, or working conditions. While
meeting and conferring is not required with unrepresented groups, it is customary to discuss the
groups' concerns and goals.
The Safety contract with CalPERS covers sworn employees in four represented groups and the
two chiefs, who are unrepresented employees. Over 80% of employees in the Safety group are
also covered by binding arbitration; this represents about 65% of General Fund employer
contribution costs.
CalPERS Pension Benefits: Miscellaneous Employees
The 112.7% at 55"retirement formula was implemented for Miscellaneous employees in February
2003, one year after the State legislature approved this benefit formula. At the time, CalPERS
earnings were healthy and cost estimates low. Many cities moved to the newly-offered benefit
formulas. In order to remain competitive with other public sector agencies and negotiate in good
faith, the City agreed to implement "2.7% at 55" in exchange for employee salary and benefit
concessions. The City's largest group of employees represented by SLOCEA extended their
labor agreement, deferred a scheduled 2% salary increase and forfeited a committed one percent
contribution to deferred compensation. In turn, unrepresented management employees agreed to
a six month, three percent salary reduction and an ongoing one percent salary reduction. These
salary and benefit reductions were based on paying the full actuarial cost of the improved benefit
as quoted by CalPERS at the time.
Before implementing this improved benefit, the miscellaneous employees' retirement formula
was"2%at 55"from 2000 to 2003; and 2%at 60,prior to 2000.
SS1-25
ATTACHMENT 2
CaIPERS Retirement Costs and Trends Page 7
Ca1PERS Pension Benefits: Safety Employees
The State legislature's approval of the "3% at 50" formula for Safety employees in 2000
coincided with the expiration of the POA contract in June 2000 and the Fire contract in June
2001. The improved formula was ultimately negotiated in long-term contracts with both the
POA and Fire. The "3% at 50" Safety benefit formula was implemented in February 2003, the
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, the
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 "super
funded"), due to high investment returns. Because of this, CalPERS predicted the enhanced
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 and
retention concern.
3. Binding arbitration for sworn police and fire employees —which was approved by the voters
of San Luis Obispo in November 2000 — created a bargaining environment that made it
difficult not to meet the statewide standard.
Funding Ca1PERS: Employee and Employer Contributions
Employees Contribution Rates. These are set by State statute and vary between five and nine
percent of employee earnings depending upon the contracted pension formula and whether the
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 CaIPERS 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 employee
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 employee
contribution in-lieu of salary increases.
On the other hand, certain groups negotiated salary increases instead of having the City pick-up
the employee contribution because the employee contribution paid by the City was not included
in final compensation. In the mid-1990s, tax laws were changed allowing employee
contributions to be deducted on a pre-tax basis. State law also changed allowing the Employer
Paid Member Contributions (employer pick-up) of employee contributions to be included in final
compensation. Today, the POA, SLOPSOA and BC groups pay the employee portion while the
City pays the employee portion for all other groups. While this may appear inconsistent, salary
increases were negotiated to offset. the impact. Further, when comparing salaries with other
SS1-26
Ca1PERS Retirement Costs and Trends Page 8
agencies, the City always factors in who pays CalPERS contributions to ensure an "apples to
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 and
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 and
down, have played the largest role in rate fluctuations that Ca1PERS members have seen over the
past 25 years. In evaluating the other actuarial factors and their impact on the City's plans, the
City's Safety plan is "pooled" (as required by CaIPERS) with all other Ca1PERS agencies that
have less than 100 employees in the plan. On the other hand,these actuarial factors are evaluated
for the City's Miscellaneous plan based solely on the City's specific experience.
Current Employer Contribution Rates. CaIPERS employer contribution rates are comprised of
two components:
1. The normal rate is what's required to actuarially ensure that current contributions will meet
future benefit requirements, assuming there are currently no excess assets or unfunded
liabilities.
2. The unfunded liability rate is what's required to amortize past unfunded liability costs over
time. Unfunded liabilities are accrued to an employer when unforeseen circumstances, such
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:
Unfunded
Plan Normal Liabili Total
Miscellaneous 10.1% 7.6% 17.7%
Safety 15.6% 20.3% 35.9%
Past Ca1PERS Cost and Employer Contribution Rate Trends
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 leading
role in the roller coaster ride that the City's rates have been on for the past 25 years: compared
with a current actuarial assumption of 7.75%, (Ca1PERS reviews and potentially adjusts this
assumption every three years)yields have ranged from a high of 35%to a loss of 24%. . Q �/
V�'U
SS1_2
ATTACHMENT 2
CaIPERS Retirement Costs and Trends Page 9
CalPERS Investment Yields-Last 25 Years
40% 76A% '
x
30%
ry 24.6%
20.116183% 19.1%
20% 18.7% 143% 18 7%18.3%
13.8% 1L5% 12.7%12.3%
12.7%12.3%
10% 1 4
3.9%
t ] _� 2.0% 4
1• g:
ov° 0 T
tx .4.9%
u
-20%
-24.9
-30% -----......--- .—....... — -......-.-.--....... --....._.......... -- .... ---- ....----
Fiscal Year Ending June 30
Employer Contribution Rates. As reflected in the changes in the chart below,these volatile
yields, along with changes in the other actuarial factors identified above,have resulted in similar
swings in employer contribution rates.
Employer Contribution Rates:Fiscal Year Ending 1986 to 2011
40% --- — ... --- - --
35% -
30%
25%
20%
15% -
F k'
10% 3 "
5%
Y
0%
m r m rn o N c� a n m o0 0 o N 0 0 0 m 0 0 m o
m ao ao rn rn rn m m 0 0 0 0 0 0 0 0 0 0 0
a, a, o o rn rn rn m rn 0 M 0 0 m o 0 0 0 0 0 0 0 0 0 0 0
N N N N N N N N N N
o Safety ■Uscebneous
SS1-28 .
ATTACHMENT 2
CaIPERS Retirement Costs and Trends Page 10
As reflected in the chart, while rates are higher than in the past, the very low rates in the late
1990's and early 2000's were an exception —not the rule—to employer contribution rates. And
beginning in 2006,the City's employer contribution rates have stabilized.
Employer Retirement Cost Contributions. These changes in employer contribution rates along
with changes in "PERSable" compensation determine the City's annual employer retirement
contributions to Ca1PERS. As reflected in Retirement
the chart (which reflects employer ' ' Contributions
contributions for all funds), no contributions Fiscal Year Safety Miscellaneous Total
for Miscellaneous employees were required 1998-99 $235,800 $0 235,800
for four years (1998-99 through 2001-02); 1999-00 - -
and no contributions were required for Safety 2000-01 - -
employees for three years. 2001-02 - - -
2002-03 498,000 264,100 762,100
This chart also shows the impact of 2003-04 1,660,100 1,397,300 3,057,400
compensation changes on employer 2004-05 2,422,500 1,987,700 4,410,200
contribution costs. For example, in 2008-09 2005-06 2,796,100 2,550,200 5,346,300
while rates were stable, costs significantly 2006-07 3,159,100 2,747,100 5,906,200
increased due to increases in compensation 2007-08 3,385,800 3,145,200 6,531,000
resulting from the binding arbitration 2008-09 4,484,300 3,629,800 8,114,100
decision. 2009-10* 4,403,400 3,243,100 7,646,500
Placing these costs in context, the City's 2010-11* 4,510,400 3,347,300 7,857,700
estimated Ca1PERS cost for employer *Budgetfor1009-10 and 1010-11.
contributions in 2009-10 is $7.6 million. 1008-09 refleetsretroactie costsforbinding arbitradion decision.
This represents 10.7% of the total City
operating budget for 2009-10 of$71 million. So, while it's certainly a significant cost, it is not
an undue portion of total City costs.
That said, while retirement costs have stabilized in 2009-11, this is likely to change.
Prospects for the Future
As discussed above, employer contribution rates have been stable for the past six years. Based on
confirmed rates from CaIPERS for 2010-11, the City will not incur any unexpected costs for the
balance of the 2009-11 Financial Plan period as the actual Ca1PERS rates are very close to
Financial Plan assumptions. However, based on rate projections provided by Ca1PERS, the City
can expect significant rates increases over the next five years from 2009-10, summarized as
follows:
SS1-29
ATTACHMENT 2
Ca1PERS Retirement Costs and Trends Page 11
Employer Contribution Rates:Actual 2009-11 Financial Plan.
and Projected though 2014-15
46.9°k- f
40°k 35.9%
wa
30% ..
20 9°h 23.1%
20%
G, I
0
0%
2009.10 2010-11 2011-12 2012-13 2013-14 2014-15
Fiscal Year
Safety ■Miscellaneous.
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. CalPERS then expects rate increases to
level-off in 2014-15. Based on 2009 compensation, this would result in added cost to the
General Fund of about$2.5 million by 2014-15.
City Defined Contribution Programs
The City also offers its employees access to programs where employees are allowed to "defer
compensation"per Internal Revenue Codes 457(b) or 401(a). Defined contribution plan benefits
are dependent upon contributions made by the employee and employer (if applicable) and any
investment gains or losses on those contributions. Unlike defined benefit plans, these defined
contribution plans offer no predictability of benefits paid upon retirement and are therefore
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 State
Income Taxes. Taxes become payable when the deferred income plus earnings are distributed to
the participant. The City offers "457" deferred compensation plans to its employees through three
providers: Hartford, ICMA, and Nationwide. A 401(a) plan through Public Agency Retirement
System(PARS)is also available for management employees and department heads.
Regular employees that are eligible for Ca1PERS pension benefits may voluntarily contribute to
a deferred compensation plan. The City does not make contributions on behalf of employees to
these plans. A participant may defer up to $16,500 (or$22,000 if the employee is 50 years of age
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.
SS1-30
ATTACHMENT 2
CaiPERS Retirement Costs and Trends Page 12
Temporary, part-time, or seasonal employees of the City who are not participating in Ca1PERS
retirement program must defer an amount equal to 7.5% of salary up to the base wage for Social
Security during the year of contribution. This mandate satisfies the requirements of Section 218 of
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 be
contributed each year (i.e. by the employee; the employer or both), vesting schedules and
eligibility requirements that may be tied to job performance as a way to retain key employees. In
2000, Council approved establishing the PARS defined contribution supplemental retirement
plan for department heads and managers. Employees may contribute from zero to 14% to the
401(a)plan. The City contributes one percent of salary for management employees, two percent
of salary for department heads, and three and a half percent of salary for appointed officials. The
City also pays an annual administration fee of$4,800 while the annual asset fee is paid from
participant accounts.
Options and Strategies Under Consideration by Others
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 to
explore options to control or reduce costs now and in the future. This is also true of other
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 considered
when examining options. Further,before an agency can begin to consider negotiating reductions
to its retirement benefits, it must also understand its employees' rights to existing retirement
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 by
retired employees. The City potentially could change the retirement benefits current employees
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 successful
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 Fire
groups, those negotiations would be subject to binding arbitration and as noted above, this
represents about 65%of General Fund employer contribution costs.
Regardless, an association or agency does not have the authority to negotiate away vested
benefits. At best, an agreement to change benefits with the provision of alternative benefits may
13 q -��--
SS1-31
ATTACHMENT 2
CaIPERS Retirement Costs and Trends Page 13
be permissible. However, for future employees not yet vested, an agreement may be negotiated
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 to
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 materialize
until the workforce experiences significant turnover; it typically takes at least 10 to 15 years
for that turnover to occur. Further, this strategy brings with it morale issues in that it
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 employee
contribution and/or the employer contribution. Some agencies have negotiated
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 Positions
In 2005, the Council adopted Resolution number 9667 (Attachment 1) supporting the League of
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 and
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 whether
the public employee had prior public agency experience.
This significant disincentive to move from one agency to another would have posed major
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 be
administered by the private sector, where administrative costs are likely to be higher than those
charged by CalPERS. 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 Ca1PERS
to undertake a study of potential defined benefit reforms. The task force also included
representation from appointed and elected officials and public safety unions. Reform efforts
under consideration included changes to benefit levels, improved management of rate volatility,
and limiting excessive retirement benefits. Since 2004, the League has adopted policies and
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 pensions
should be fiscally sustainable and politically defensible. They recommend that to get there, the
League should support regional efforts to address the growing pension problem.
SS1-32
ATTACHMENT 2
CalPERS Retirement Costs and Trends Page 14
Initiative Reform Proposals
Currently, three public sector pension reform initiatives have been processed and are entering the
signature-gathering stage to potentially qualify for the November 2010 ballot. All three measures
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 and
firefighters to 2.3%multiplied by years of service at age 58. Miscellaneous employees' pensions
would be limited to social security retirement age and a formula of 1.65% multiplied by years of
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 of
4%and provide other restrictions.
The third measure limits the pension of any new state or local public employee to $100,000 per
year with an annual cost of living escalator up to a maximum benefit of$165,000 annually.
Regional Strategies
There has been significant local and regional activity in the area of pension reform. Groups in
San Diego, Mann, Santa Clara/San Mateo; San Joaquin Valley and Gateway/Orange County
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 compensation
and an older normal retirement age. Consider formulas such as 1.5% to 2% at 55 or 60 for
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 enhanced
benefit formula Ca1PERS regulations require the formula be adopted for all existing
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 agency
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 be
adjusted to make up the actuarial cost difference.
4. Use the average of the three highest years as the method for determining final compensation
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.
f�rl'f
SS1-33
ATTACHMENTS 2
CaIPERS Retirement Costs and Trends Page 15
Long and short-term implications of any proposed changes must be carefully considered and
weighed. Most groups begin by establishing clear objectives related to pension reform that may
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 Ca1PERS
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, no
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 regarding
potential regional pension reform efforts.
2. Continue to participate and support broader reform efforts in keeping with the League of
California Cities' guiding principles.
3. Consider Ca1PERS cost trends in the context of upcoming labor negotiations and discussions
with unrepresented employee groups.
ATTACHMENTS
1. City resolution on pension reform
2. League of California Cities pension reform framework: March 2005
TABudget Folders\2009-10 Mid-Year Review\CaIPERS Trends\CAR,CaIPERS Costs and Trends,2-23-IO.doc
SS1-34
ATTACHMENT 2
Attachment 1
RESOLUTION NO.9667(2005 Series)
A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN LUIS OBISPO
SUPPORTING THE LEAGUE OF CALIFORNIA CITIES TASK FORCE IN PURSUING
APPROPRIATE PENSION REFORMS AND EXPRESSING CONCERNS WITH ACA 5
AND OTHER SUMLAR INITIATIVES
WHEREAS, the League of California Cities welcomes a comprehensive discussion
about pension reform, focused on curbing the increased costs of providing public pensions in the
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 in
place for about sixty years in California, and has ensured that California residents receive high
quality services from motivated,highly professional public employees;and
WHEREAS, the League recognizes that problems exist and must be addressed in the
defined retirement benefit plans in California; such concerns are: a) Increased cost to the public
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 in
retirement law;and
WHEREAS, solutions to problems in the defined benefit retirement plans require a wide
variety of options and strategic approaches and should avoid one-size-fits-all solutions, which
fail to take into account the complexity of the issues,such as ACA 5 and ACA 1-1x; and
WHEREAS, defined contribution plans as the only alternative raise the immediate costs
of public pension plans and seriously erode the ability of public employers, such as the City of
San Luis Obispo,to retain and recruit skilled public employees.
NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis
Obispo as follows:
SECTION 1. League Task.Force Recommendations. The Council hereby supports the
League of California Cities' task force in developing recommendations that address the
necessary and required reform of the public pension system.
SECTION 2. Opposition to ACA 5 and ACA 1-lx. The Council hereby 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.
It 9667
A0
SS1-35
ATTACHMENT 2
Attachment 1
Resolution No.9667 (2005 Series)
Page 2
Upon motion of Council Member Settle, seconded by Council Member Mulholland, and on the
following roll call vote:
AYES: Council Members Brown, Mulholland and Settle, Vice Mayor Ewan and
Mayor Romero
NOES: None
ABSENT: None
The foregoing resolution was adopted this 5th day of April 2005.
Mayor David F.Romero
ATTEST:
�u�re
Audrey Ho
City Clerk
APPROVED AS TO FORM:
P. Lowell
City Attomey
SSI-36
ATTACHMENT 2
Attachment 2
PENSION REFORM IN CALIFORNIA
League of California Cities
March 1,2005
For close to 60 years California state and local governments have offered "defined
benefit" retirement plans to their employees which provide a guaranteed annual pension
based upon retirement age, years of service, and some period of highest salary (typically
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 power
over time at a specified minimum level. The Public Employee's Retirement System
(PERS), the State Teachers' Retirement System (STRS), and a variety of individual cities
and counties administer these retirement plans.
Over the years local and state government retirement costs have risen and fallen based on
two principal factors: (1) the investment returns of the various systems; and (2)the level
of benefit payments provided to employees. In the late 1990s the California legislature
enacted dramatic benefit enhancements for public employees in the PERS system that
were optional for participating local governments. Some local governments adopted these
benefit enhancement plans—for a variety of reasons, typically to retain employees and at
times at a shared cost with the employees. When the retirement systems suffered serious
investment losses in the early part of this decade, these losses combined with the benefit
enhancements to cause dramatic increases in employer contribution rates.
Defined Contribution Mandate Proposed
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 retirement
plans. Defined contribution plans provide fixed annual employer contributions to
employee accounts that are invested, along with employee contributions. Unlike defined
benefit plans, the employee has no guaranteed pension benefit and employers never incur
any unfunded liabilities.
The initiative (which has a legislative counterpart by Assembly Member Richman)would
establish maximum employer contributions of 9 percent for police officers and
firefighters and 6 percent for other employees, assuming participation in federal Social
Security(3 percent higher if no Social Security). Local agencies could exceed these limits
with a two-thirds vote of their electorate. The state could do so with a three-fourths vote
of both houses of the Legislature in two consecutive sessions. Mr. Richman has informed
the League in a letter dated February 17 that he is willing to enter into negotiations to
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,
{ r{ V
SS1-37
ATTACHMENT 2
Attachment 2
Director of Finance, explained the Governor's proposal contains no caps on employer
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 by
requiring that all new state and local employees be provided a defined contribution plan
in place of the traditional defined benefit plan. Mr. Campbell indicated that in all other
respects (e.g., PERS administration, employer contributions, employer contributions,
etc.)the plans would be identical. .
League Pension Reform Task Force
In late 2004 the Executive Director asked the City Manager's Department's standing task
force on PERS to undertake a study of the defined contribution proposal and potential
other defined benefit reforms. A group of other appointed and elected officials were
subsequently added to the task force to provide broader input, and since early December
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 by
Bob LaSala, Lancaster City Manager.
The League also retained the services of a retirement actuary, John Bartel of Bartel
Associates, LLC, who worked with the Task Force to ensure its recommendations for
reform of the defined benefit system were actuarially sound. He assisted the Board in its
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 Sought
The task force report was reviewed by subcommittee of the Public Employee Relations
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 board
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 in
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 labor
organizations, state legislators and the Administration. Comments should be sent to the
League.of California Cities, c/o Anthony Thomas, Legislative Representative, 1400 K
St., Sacramento,CA 95814 athomas(icacities.ort*.
2
051/-/9
SS1-38
ATTACHMENT 2
Attachment 2.
A Framework for Public Pension Reforms
March 1,2005
General Pension Reform Principles
Any serious discussion of public pension reform must begin with a set of principles/goals
to guide any following recommendations. Until questions about the appropriate role and
purpose of public pension benefits in local government compensation packages are
answered, it would be at least premature and perhaps self-defeating to make any specific
benefit recommendations. In keeping with this philosophy, it is recommended that the
following principles precede any benefit recommendations:
• The primary goal of a public pension program should be to provide a full-career
employee with pension benefits that maintain the employees' standard of living in
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 for
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 establish
pension benefits that bear no relation to proper actuarial assumptions and work.
• Pension benefits should be viewed in the context of an overall compensation structure
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 retirement
benefitsmust be evaluated in concert with other adjustments in compensation
necessary to continue to attract and retain an experienced and qualified workforce.
• The reciprocity of pension benefits within the public sector should be maintained to
ensure recruitment and retention of skilled public employees -particularly in light of
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 be
addressed. Benefit plans which result in retirement benefits which exceed the levels
established as appropriate to maintain employees' standard of living should be
reformed. It is in the interest of all public employees, employers and taxpayers that
retirement programs are fair, economically sustainable and provide for adequate
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 accepted
by the League of California Cities Board of Directors for distribution as a discussion draft.
3
SS1-39
ATTACHMENT 2
Attachment 2.
• The obligation to properly manage public pension systems is a fiduciary
responsibility that is shared by PERS, employers and employees. This joint
responsibility is necessary to provide quality services while ensuring long-term fiscal
stability. These parties need to be held responsible to ensure a high level of
protection against mismanagement of public resources that could jeopardize a
community's ability to maintain services and provide fair compensation for its
workforce.
• Charter cites with independent pension systems should retain the constitutional
discretion to manage and fund such pension plans.
Reform Recommendations
Public employee defined benefit programs have been appropriately criticized in a number
of areas. The following reform recommendations address short-comings within some
defined benefit retirement programs, while preserving the aspects of the program that
have served the employees, employers and taxpayers of California well for over 60 years.
Pension.Benefit Levels
Principles: Public pension benefit plans should:
➢ Allow career-employees to maintain standard of living post-retirement.
➢ Be designed with consideration of age at retirement, length of service, compensation
level and applicability of Social Security.
➢ Be supported with proper actuarial work to justify pension levels. The Legislature
should reject any and all attempts to establish pension benefits that bear no relation to
proper actuarial assumptions and work.
➢ Promote career public service without creating incentives to work past retirement age,
nor disincentive to early retirement. Employees who voluntarily choose to either work
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 in
California.
• Rollback/repeal public retirement plans that provide benefits in excess of levels
required to maintain a fair, standard of living that are not financially sustainable and
may have no actuarial justification. The new and exclusive benefit formulas to
achieve these goals should be:
=This should be determined in accordance with a Cal PERS 2001 target replacement benefit study and/or
the Aon Georgia State Replacement Ration Study(60'update since 1988).
4
SS1-40
Attachment 2
1. Safety Emnloyees: 3% @ 55 formula, offset by 50% of anticipated social
security benefit for safety employees with social security coverage. Safety
employees retain the current cap on retirement at 90%of final compensation..
2. Miscellaneous Emnlovees(Nou-safety): 2% @ 55 formula, offset by 50%of
anticipated social security benefit for miscellaneous employees with social
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 "final
compensation" calculation. All "Highest Final Year" compensation calculations
would be repealed for newly-hired employees.
• Provide alternatives to a defined benefit plan for job classifications not intended
for career public service employment.
• Give employers greater flexibility to determine when a part-time employee is
entitled to public pension benefits. The current hourly threshold in PERS is too
low.
Rate Volatility
Principles
➢ Responsible fiscal planning suggests the need to "manage" volatility in defined
benefit plan contribution rates.
➢ Rates have historically been relatively constant and comparable to rates currently paid
by most public agency employers.
➢ Recent rate volatility is primarily due to large fluctuations in annual investment
returns for the retirement plan investment portfolios, causing significant changes in
plan funding status.
Normal Costs for defined benefit plans have remained relatively constant over time.
Recommendations
• Public Agency retirement contribution rates, over time, should be constructed to stay
within reasonable ranges around the historical "normal cost" of public pension plans
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 the
volatility of pension benefit costs. Plan surpluses are to be retained within plan
5
I✓ T0�22--
SS1-41
ATTACHMENT 2
Attachment 2
assets, but should be reserved for amortization of future unfunded liabilities, and
should not be used to offset plans' normal cost contribution rates.
Shared Risk
Principles
➢ Currently, in most local jurisdictions, employers shoulder the burden of rate volatility
risk — both positive and negative. This principle should be carefully examined with
the intent of better spreading the risk of rate volatility among both employers and
employees.
➢ Negotiated labor agreements containing language whereby employers "pick-up"
employees' retirement contributions are assumed to be part and parcel of a "total
compensation" package; this implies that agencies with Employer Paid Member
Contributions would also typically reflect correspondingly lower base salaries.
Recommendations
When employer contribution rates exceed the "normal costs" threshold, employees
should be expected to take some of the financial responsibility for those excessive
increases.
Disability Retirement
Principles
➢ Retirement-eligible employees who are injured in the workplace should be entitled to
full disability retirement benefits; disability retirement benefits should, however, be
tied to individual's employability and be structured so as to encourage return to work,
where applicable.
➢ Larger disability reform measures should be considered outside of the scope of
general pension reform.
Recommendations
• Full tax-exempt disability retirement should be retained for employees who are
injured and can not work in any capacity
• Reform the disability pension provisions of public retirement systems to restrict
benefits when a public employee can continue to work at the same or similar job after
sustaining a work-related injury.
6
gv_b.3
SS1-42
_ ATTACHMENT 2
Attachment 2
• Employees eligible for disability retirement should be first afforded applicable service
retirement benefits, and THEN provided disability retirement benefits up to
applicable"cap"on total retirement benefits.
Portability of Plan Benefits
Principles
➢ Reciprocity of public agency retirement benefits is critical to recruitment of qualified,
experienced public sector employees.
➢ Limiting portability of retirement plan benefits to non-public sector employment
helps in the retention of senior and management level employees.
Recommendation
■ Any pension reform package should retain transferability of retirement benefits across
public sector employers. No employee currently in a defined benefit plan should be
required to involuntarily give up a defined benefit formula before retirement.
Tiered Plans
Principles
➢ Agencies should strive to avoid multi-tiered compensation structures where there are
large discrepancies in benefits accruing to employees. In addition to having adverse
impacts on recruitment and employee morale, multi-tiered approaches can raise issues
of comparable worth and equity.
Recommendations
• Any pension reform measures should seek to minimize disparity between current and
prospective public agency employees.
• Any reduction(s) or change(s) to current Defined Benefit plans should be considered
in context of other compensation issues that will tend, over time, to "equate"
compensation plans within and across public agency employers.
Management Oversight
Principles
➢ The obligation to properly manage public pension systems is a fiduciary
responsibility that is shared by PERS, employers and employees. This joint
responsibility is necessary to provide quality services while ensuring long-term fiscal
stability.These parties need to be held responsible to ensure a high level of protection
RLI'aY
SS1-43
ATTACHMENT 2
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 27
should be made subject to appropriate oversight.
• The membership of the Public Employees and Retirement System Board should be
changed to achieve both a better balance of employer and employee representatives as
well as a better balance of public agency representatives.
Conclusion
Defined benefit retirement plans have been the traditional approach for close to 60 years
in California and have produced fair and sustainable retirement benefits that have been
central to recruiting and retaining quality public employees. Defined benefit plans should
be retained as the central component of public pension systems in California.
8
SSl-44
ATTACHMENT 3
2011 City Manager Pension Survey
The League of California Cities (League) City Mangers Department in January 2011 sent a
survey to the 481 cities in California and asked that they respond to questions that
would help in determining the latest trends in pension changes across the state. This is
the first in what will be an annual survey conducted by the League. For other pension
resources and information please visit the League's Pension Information Center at
www.cacities.org/pensions.
DEMOGRAPHIC INFORMATION
Survey Respondents: 296 out of 449 cities that contract with CalPERS
Regional Division Representation:
Every regional division in the League was represented
Divisions with more than 20 cities responding include:
Central Valley (23)
East Bay (26)
Los Angeles County (49)
North Bay(26)
Orange County(22)
Peninsula (23)
Sacramento Valley (33)
Divisions with fewer than 10 cities responding include:
Imperial County(1)
Redwood Empire (5)
Riverside County (9)
TIERING
Cities were asked to indicate whether they adopted a new tier of benefits and when the
new tier was adopted. They were also asked to indicate both the previously offered
benefit level as well as the new level of benefits.
• 22% or cities responding have adopted a new pension tier and it appears that
most of the new tiers were adopted in the last two years.
• 73% of the new tiers adopted are for miscellaneous employees.
Page 11 March, 2011
SS1-45
- ATTACHMENT 3
Trends in Fire Plans
Most cities that negotiated changes to their fire plans reduced benefit levels. Most
cities that provided the 3% at 50 plan adopted a lower benefit of 3%at 55 plan. The 2%
at 50 plan is the second most commonly adopted new formula.
Trends in Police Plans
Most cities that negotiated changes to their fire plans reduced benefit levels. Most
cities that provided the 3% at 50 plan adopted a lower benefit of 3%at 55 plan. The 2%
at 50 plan is the second most commonly adopted new formula.
Trends in Miscellaneous Plans
The survey indicates that there is no commonly offered benefit level to miscellaneous
employees. The 2% at 55, 2.5% at 55, and the 2.7%at 55 plans were equally provided
by cities that responded. However, what is common among miscellaneous employees is
that they are being offered a lower benefit level of 2% at 60.
COST SHARING
Cities were asked to provide information on whether they had negotiated an increase in
employee cost sharing of pension costs.
• 38%of cities responding have adopted some form of cost sharing with many of
those changes occurring over the last two years.
Trends in Fire Plans
57%of cities that said they negotiated an increase in employee cost sharing indicated
that their fire units will be picking up more of the pension costs. Formerly the common
trend among these employees was to contribute 0%toward pension costs and now they
are contributing 9%.
It also appears that 10%of these agencies have asked their fire units to pick up a portion
of the employer contribution rate. Agencies have negotiated a 2-4% pick up of the
employer contribution.
Trends in Police Plans
73%of cities that said they negotiated an increase in employee cost sharing indicated
that their police units will be picking up more of the pension costs. Formerly the
common trend among these employees was to contribute 0%toward pension costs and
now they are contributing 9%.
It also appears that less than one-percent of these agencies have asked their police units
to pick up a portion of the employer contribution rate. Agencies have negotiated a 1-
4% pick up of the employer contribution.
Page 2 March, 2011
SS1-46
ATTACHMENT 3
Trends in Miscellaneous Plans
89% of cities that said they negotiated an increase in employee cost sharing indicated
that their miscellaneous employees will be picking up more of the pension costs.
Formerly the common trend among these employees was to contribute 0%toward
pension costs and now they are contributing 8%.
It also appears that just about one-percent of these agencies have asked their
miscellaneous employees to pick up a portion of the employer contribution rate.
Agencies have negotiated a 2-6% pick up of the employer contribution.
FINAL AVERAGE EARNINGS (FAE)
Cities were asked to provide information on changes they negotiated to the FAE formula
(also referred to as the final compensation calculation).
• 12%of cities responding have negotiated changes to their final compensation
calculations. It appears that an overwhelming majority of these cities negotiated
a change in formula from the highest one-year to an average of the highest three
years for future fire, police, and miscellaneous employees.
CONCLUSION
There is strong indication that we will continue to see changes adopted at the local
collective bargaining table. The survey results show that 62% of responding cities are
currently considering negotiating changes to their pension offerings.
CONTACT
For questions regarding this survey please contact Natasha Karl, legislative
representative, at nkarl@cacities.org.
Page 13 March, 2011
SS1-47
_ hard copy, ate:
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a MUM a FMECMEF
a ATTORNEY aFWDIR
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From: Irons, Monica a rRtE M a UMDIR
a NEyPTOM a RRDIR
Sent: Monday, April 04, 20115:00 PM a SLOCr1fNEM aCooxca.
CrrYMGR
To: Smith, Kathy; Bradley, Mary a CUM
Subject RE: Questions . . .
BCC: CC
Hi Kathy—thanks for the questions regarding the April 5t"Staffing Cost report. Below are my
answers. Please let me know if you have others.
• When an employee signs up to participate in Calpers, what specific
programs are they required to participate in? Are retiree health
benefits required?
Agencies contract with CalPERS for retirement benefits and/or health insurance. The City
contracts with CaIPERS for both retirement benefits and medical insurance. All Regular City
employees must participate in the CalPERS retirement system. Temporary employees of the City
are excluded from the CalPERS Retirement system if they: 1) have never been a CaIPERS
member, and 2)work fewer than 1000 hours in a fiscal year.
Regular City employees may elect to enroll in CalPERS medical plans or to opt out if they have
other medical coverage. When employees retire from the City they may elect to continue that
coverage during retirement. In that case, the City is required by law to make a contribution
toward their insurance expenses (retiree medical). That contribution is currently$97 per month.
• Contract employees . . . how many do we have . . . what % of total
staffing . . . in what specific departments. Expect they receive no
benef its?
Contract employees are typically used to fill in for needs of more than six months but no more
than two years. We currently have 6 contract employees; 1 in Fire, 4 in Public Works, and 1 in
Finance and IT.
Contract employee can receive benefits. It may depend upon how long they are needed, whether
the work is part time or full time, etc. Of the 6 current contract employees, three receive benefits.
• Does our PTO system congregate: vacation time, holidays, sick time,
etc. in 24/7 departments? What about regular admin. depts.?
Time off is governed by the Personnel Rules and Regulations and specific employee
Memorandums of Agreement. In general, all Regular employees of the City are eligible for sick
time,vacation, and holidays. They are tracked, allotted, and/or accrued separately and may have
different rules regarding use, ability to"cash out", maximum accrual, etc. For example, there is
no maximum accrual for sick leave, but there is for vacation. Holidays are handled a little
differently for"sworn" public safety personnel. Because they are expected to work many
holidays, they are paid for a portion of their holiday time each pay period.
• See no mention of the following for wage reductions: % for step
increases; % for pay-per-performance; # holidays; Administrative
Leave reduction or elimination.
We felt as if we couldn't cover everything possible in the April 5th report, so we chose to focus on
what we believe are"emerging trends"—things we are seeing repeatedly. You are correct that
there are a number of other ways to reduce staffing costs and as we get further into negotiation
strategy development we may consider these. However, the emerging strategies also appear to
address more significant cost drivers such as PERS costs.
RED FILE
- MEETING AGENDA
DATE —11 ITEM # SS
We are not hearing much about reducing or eliminating step increases at this point. A few
agencies have temporarily suspended them, but to eliminate or reduce them would mean a
complete overhaul of the agency's compensation system. We don't hear much about pay for
performance as most agencies do not have pay for performance systems, even for their
management employees. It is still most common to have a step system in the public sector.
We are hearing more about.leave time and possible reductions, but where I hear this the most is
in the perspective of reducing payouts that are included when an agency is determining final
compensation for retirement benefits (non CalPERS agencies that have their own retirement
system). CalPERS does not include cash out of vacation and sick leave in determining final
compensation.
From: Smith, Kathy
Sent: Sunday, April 03, 2011 11:34 AM
To: Irons, Monica; Bradley, Mary
Cc: Lichtig, Katie
Subject: Questions . . .
Monica/Mary
So many of the reductions seem miniscule to what we must achieve in this
and succeeding years.
Some of these questions likely require checking files, etc., so here goes:
• When an employee signs up to participate in Calpers, what specific
programs are they required to participate in? Are retiree health
benefits required?
• Contract employees . . . how many do we have . . . what % of total
staffing . . . in what specific departments. Expect they receive no
benefits?
• Does our PTO system congregate: vacation time, holidays, sick time,
etc. in 24/7 departments? What about regular admin. depts.?
• See no mention of the following for wage reductions: % for step
increases; % for pay-per-performance; # holidays; Administrative
Leave reduction or elimination.
Thanks for all your good work helping us look at the needed reductions. Not
the fun part of public service!
Thanks - Kathy