HomeMy WebLinkAboutFin Retirement Benefit Report____________________________________________________________________________________
FOR CITY CLERK ONLY
Council Meeting: 08/05/2019
Disposition: Accepted report
Agenda Item No: 5.a
Meeting Date: August 5, 2019
SAN RAFAEL CITY COUNCIL AGENDA REPORT
Department: Finance
Prepared by: Nadine Hade, Finance Director City Manager Approval: _______
TOPIC: RETIREMENT BENEFIT REPORT
SUBJECT: INFORMATIONAL REPORT RELATING TO THE SAN RAFAEL 2019
INDEPENDENT COMMITTEE ON EMPLOYEE RETIREMENT BENEFITS’
REPORT DATED JUNE 20, 2019
RECOMMENDATION: Accept informational report relating to the San Rafael 2019 Independent
Committee on Employee Retirement Benefits’ report dated June 20, 2019.
BACKGROUND:
The City Council’s ad hoc Pension / Other Post-Employment Benefits (OPEB) Committee
(“Pension Committee”) was established in 2012 to review pension reform actions taken by the
City, as well as to consider and make recommendations relating to future actions regarding
pension reform and related topics. In October 2013, the Pension Committee created an ad hoc
group, referred to as the "Citizens' Group on Pension Reform" (“2014 Committee”), to serve in an
advisory role to the Pension Committee by conducting an analysis of the options then-available
to the City that would further pension/OPEB reform goals and producing a written report with their
findings.
On March 17, 2014, the 2014 Committee presented a written report (“2014 Report”) to the City
Council to share their findings. The 2014 Report provided information about different types of
pension plans, as well as about the pension plan administered by the Marin County Employees’
Retirement Association (“MCERA”), specifically for the benefit of current, former, and retired City
employees. The 2014 Report found that the City had, through negotiation and agreement with the
City’s employees, made structural changes to the City’s pension plans to reduce future pension
costs. These changes were made before the enactment of the Public Employees Pension Reform
Act of 2013 (“PEPRA”), but the City reforms were consistent with, and in some respects, more
aggressive than those authorized by, PEPRA. The 2014 Report also included suggestions for
additional actions to be taken by the City to address costs of retiree benefits, including repayment
of the substantial unfunded pension actuarial liability. The report characterized the suggestions
for potential further action as additional thoughts and options for consideration.
SAN RAFAEL CITY COUNCIL AGENDA REPORT / Page: 2
ANALYSIS:
In late 2018, the City Council’s Pension/OPEB Sub-Committee formed a new advisory committee,
referred to as the “Independent Committee on Employee Retirement Benefits” (“2019
Committee”) to review and update the work of the 2014 Committee. The scope of the 2019
Committee’s work was to prepare a written report as follows:
• Update any of the findings and other content contained in the 2014 Report
• Explore any additional actions that could be taken to reduce pension liabilities
• Provide answers to potential questions that might arise concerning each of the potential
actions
In preparing the 2019 Report, the 2019 Committee took the following approach. First, the
committee determined which 2014 Report “Additional Thoughts” items have not been eliminated
by actions or events occurring since the publication of the 2014 Report. Second, the 2019
Committee identified ideas for potential approaches or action items not addressed in the 2014
Report. Third, where possible, the 2019 Committee identified the advantages and disadvantages
for each thought or suggestion and the practicality of implementing each. Fourth, the 2019
Committee attempted to categorize each thought or additional potential action by the following:
(i) the time horizon for its implementation; (ii) which decision-making body would be required to
implement the action; and (iii) whether such decision-making body action is exclusive of, or
complementary to, the action of a different body.
On June 20, 2019, the 2019 Committee submitted their findings in a written report (“2019 Report”)
to Mayor Phillips and Councilmember Gamblin (Attachment 1). This report includes the results of
that analysis and, where appropriate, the 2019 Committee’s evaluation of each item. Additionally,
the 2019 Committee identified the following potential options not discussed in the 2014 Report:
1. Eliminate existing positions / do not backfill vacated positions.
2. Analyze effect on City hiring and retention of (i) potential impact of increased PERS
contribution requirements in neighboring jurisdictions and (ii) outcome of pending
California Supreme Court cases.
3. Provide housing benefits within Marin County to fire, safety, and other employees to
improve City’s competitive position.
4. Limit or reduce retiree cost-of-living adjustment (COLA)s.
Each of these four potential actions includes an overview, analysis, and summation section.
Additional details, including the 2014 Report, are provided in the 2019 Report.
After the report was finalized, an inaccuracy was identified in response #6 regarding
“substituting third party negotiators for management negotiators.” For many years, the City has
had the practice of using experienced and independent professionals to fill the role of “Lead
Negotiator” during contract negotiations. The Human Resources Director and Assistant City
Manager are also at the negotiating table when necessary. This model helps staff maintain
cooperative relationships with bargaining unit representatives and avoids potential conflicts of
interest that could arise if only internal staff were involved in negotiations. In the most recent
round of negotiations, the City engaged with the legal firm of Burke, Williams and Sorensen,
LLP for their labor negotiation services. This legal firm has the specialized public sector labor
experience.
FISCAL IMPACT: There is no fiscal impact associated with this action.
SAN RAFAEL CITY COUNCIL AGENDA REPORT / Page: 3
RECOMMENDED ACTION:
Accept informational report relating to the San Rafael 2019 Independent Committee on
Employee Retirement Benefits’ report dated June 20, 2019.
ATTACHMENT:
1. Report from the San Rafael 2019 Independent Committee on Employee Retirement
Benefits’ report dated June 20, 2019
BY HAND
Hon. Gary 0. Phillips
Mayo r
C it y of San Rafae l
C ity Ha ll , Room 203
1400 Fifth Ave nu e
Sa n Rafael , CA 9490 I
San Rafael 2019 Independent Committee
On E mployee Retirement Benefits
Jun e 20,2019
BY HAND
Ho n . Jo hn Gamb lin
Co un c ilm ember
C ity o f Sa n Rafa e l
C ity Ha ll , Roo m 203
1400 Fifth Ave nu e
Sa n Rafael , CA 9490 I
Re: Repo1t by San Rafa e l 20 19 In depe nd e nt Co mmittee on Employee
Retirement Benefits
Dear Mayo r Phillips and Co uncilm e mb e r Ga mb lin :
Enc losed he rewith is report, dated June 20, 20 19, refere nced above.
We t hank yo u fo r the oppo rtun it y to provide o ur se rvice to t he C it y of San Rafa e l.
Yours ve ry trul y,
A lan Pi ombo ~p~~
REPORT BY SAN RAFAEL 2019 INDEPENDENT COMMITTEE
ON EMPLOYEE RETIREMENT BENEFITS
TO: Hon. Gary O. Phillips, Mayor, and
Hon. John Gamblin, Councilmember:
City of San Rafael Council Ad Hoc Pension/Other Post-Employment
Benefits (OPEB) Subcommittee
DATE: June 20, 2019
________________________________________________________________________
I. BACKGROUND
A. 2014 Committee
In March 2014, the Citizens’ Group on Pension Reform (the “2014 committee”)
prepared a written report (the “2014 report”) for the City of San Rafael City Council
Subcommittee on Pension/OPEB [“other post employment benefits”]. The report was
produced in response to the council subcommittee’s request that the 2014 committee to
look into issues related to the costs of pensions and OPEB for City of San Rafael (the
“City”) and the effect of those costs on the City’s ability to fund needed infrastructure
and capital improvements. The subcommittee further asked the 2014 committee to offer
an unbiased opinion as to steps already then taken by the City to reduce pension and
OPEB costs and to identify what further actions might be taken to reduce and manage
such costs.
The 2014 committee report provided factual background about different types of
pension plans generally, as well as about the plan administered by Marin County
Employees’ Retirement Association (“MCERA”) specifically for the benefit of current,
former and retired City of San Rafael employees.
The 2014 report found that the City had, through negotiation and agreement with
the City’s employees, made structural changes to the City’s pension plans to reduce
future pension costs. These changes were made before the enactment of the Public
Employees Pension Reform Act of 2013 (“PEPRA”), but the City reforms were
consistent with, and in some respects, more aggressive than those authorized by, PEPRA.
For ease of reference, a copy of the 2014 report is attached to this report as Appendix A.
The present report should be read in conjunction with the 2014 report, which provides a
more comprehensive discussion of some of the matters discussed in this report.
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The 2014 committee reported it had discussed various suggestions for additional
actions to be taken by the City to address the budget concerns related to the costs of
retiree benefits, including repayment of the substantial unfunded pension actuarial
liability ($134.1 million as of June 30, 2018 – the most recent date for which information
has been made available by MCERA). These suggestions were identified in the 2014
Report as “Additional Thoughts.” (Pages 7-8 of 2014 report.)
B. 2019 Committee Charge
In late 2018, Mayor Gary Phillips asked five community members from varied
backgrounds to form a new committee to review and update the work of the 2014
committee. On January 28, 2019, Mayor Phillips met with this newly formed committee
(the “2019 committee”) and explained his desires with respect to the committee’s work.
First, the Mayor asked that the committee update any of the findings and other
content contained in the 2014 report.
Second, the Mayor asked that committee to explore any additional actions that
could be taken to reduce pension liabilities.
The Mayor asked that whatever report issued from the 2019 committee’s work
provide answers to potential questions that might arise concerning each of the potential
actions.
C. Committee Mission Statement
Upon acceptance of the Mayor’s charge, the 2019 committee adopted the
following mission statement to guide its work:
The committee will review existing reports related to past investigations into
current and unfunded future liabilities for City of San Rafael employee retirement
benefits. The committee will analyze the existing and any alternative means to manage
such liabilities, taking into account the City’s future employee hiring and retention needs
or requirements.
D. 2014 Committee Unfinished Business
Since the 2014 committee could not reach unanimous agreement to recommend
the adoption or implementation of the report’s suggestions, the 2014 report characterized
the suggestions for potential further action as additional thoughts and options for
consideration.
The current committee analyzed and evaluated each of the numbered additional
thoughts in the 2014 report. This report includes the results of that analysis and, where
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appropriate, the current committee’s evaluation with respect to each item. Additionally ,
the 2019 committee identified potential options not discussed in the 2014 report.
II. 2019 COMMITTEE APPROACH
In preparing this report, the committee took the following approach.
First, the committee determined which 2014 report Additional Thoughts items
have not been obviated by actions or events occurring since the publication of the 2014
report.
Second, the committee identified ideas for potential approaches or action items not
addressed in the 2014 report.
Third, where possible, the committee identified and articulated the pros and cons
for each thought or suggestion and the practicality of implementing each such item.
Fourth, the committee attempted to categorize each thought or additional potential
action by (i) the time horizon for its implementation; (ii) which decision making body
would be required to implement the action, e.g., the City; MCERA; the state legislature;
courts; voters; employees/bargaining unit representation organizations (unions); and (iii)
whether such decision-making body action is exclusive of, or complimentary to, the
action of a different body.
A table summarizing results of this approach is attached to this report as Appendix
B.
A. Materials Reviewed and Discussed in Connection with Preparation of
2019 Report
The 2019 committee reviewed the following written materials:
(i) 2014 report;
(ii) 2018 and 2019 MCERA Actuarial Valuation Reports prepared by Cheiron;
(iii) MCERA Financial Statements with Independent Auditor’s Report for
fiscal Year ended June 30, 2017;
(iii) City of San Rafael Retiree Healthcare Plan June 30, 2017 Actuarial
Valuation Plan Funding for 2018/19 and 2019/20;
(iv) Numerous Marin County Grand Jury reports, dated beginning in 2005,
related to pension and other post employment benefits (OPEB) and
responses by MCERA and City of San Rafael thereto;
(v) MCERA Retirement System Overview prepared for City of San Rafael,
dated January 2019;
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(vi) California League of Cities City Managers Department Pension
Sustainability Working Group White Paper, dated January 2019;
(vii) California Supreme Court decision in CalFIRE Local 2881 v. California
Public Employees Retirement System (March 4, 2019) _____ Cal. 4th
____, (no. S239958) [the air time case] and media reporting related
thereto and to other pension-related cases pending before the California
Supreme Court; and
(viii) the California Department of Tax and Fee Administration (CDTFA)
website discussion of sales tax collection from out-of-state sellers
following the United States Supreme Court decision in South Dakota v.
Wayfair, Inc. (2018) 585 U.S. ____, (Docket no. 17-494), and
California’s enactment of Revenue and Taxation Code section 6203.
In addition, City Manager Jim Schutz, Assistant City Manager Cristine Alilovich,
City Finance Director Nadine Atieh Hade, and City Economic Development and
Innovation Director Danielle O’Leary provided oral briefings to, and answered questions
posed by, the committee.
B. Recently Decided and Pending California Supreme Court
Cases Affecting Pension Obligations
Following the enactment of the Public Employees Pension Reform Act of 2013
(“PEPRA”), some California public employee retirement benefit providers applied
PEPRA reforms to employees hired before the reforms were enacted. These reforms did
not generally affect the core pension, but rather benefits granted earlier by the local
entities that had the effect of boosting the manner in which the final compensation base
was calculated. Public employee unions have challenged the application of the reforms
to the calculation of pensions due employees hired before the reforms took effect.
The California Supreme Court recently decided one case involving the removal of
the right of pre-reform hires to enhance their pension amount calculations by purchasing
credit for years not actually worked, so called “air time”. In that case, CalFIRE Local
2881 v. California Public Employees Retirement System, __ Cal. 4th __, (no. S239958),
decided March 4, 2019, the court ruled the right to purchase such credits was not a vested
contractual right and therefore the pension enhancement benefit could be eliminated by
statute.
Other cases pending before the California Supreme Court will provide additional
opportunities for the court to address and refine the contours of the judicially created
doctrine called the California Rule, which provides constitutional protection to vested
pension rights. The outcome of those cases could affect the amounts of pension benefits
due retired City of San Rafael employees and, thus, the City’s required contributions to
the MCERA-administered retirement plan. However, at this point, there is no clear
indication about how, or how broadly, the Supreme Court will rule on the issues raised in
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the now pending cases. For a further explanation of the cases remaining to be decided,
see the March 11, 2019 online blog post by San Diego Union-Tribune reporter, Ed
Mendel: “New pension-cut rulings begin with little change,” found at
https://calpensions.com/ 2019/03/11/new-pension-cut-rulings-begin-with-little-change/
[explaining court decision analysis of difference between unchangeable vested
contractual pension rights and statutorily granted rights, which can be modified].
C. Additional Thoughts Implemented to Date or Combined with Other Items
for Discussion
Some of the items identified in the 2014 report as Additional Thoughts have been
implemented or are naturally included in the discussion of one or more other Additional
Thoughts. For example, Additional Thought number 6 called for items 1 through 5 to be
implemented in combination. For this report, the chart, attached as Appendix B,
indicates whether any of the measures discussed would be exclusive of another, or
complementary to one or more other measures.
2014 report Items numbers 7 and 8 both relate to negotiations with bargaining
groups and are thus discussed jointly under item number 6 below.
2014 report Item number 9, related to a public educational effort, is part and parcel
of the discussion of the proposal to increase taxes and is thus subsumed into the
discussion of item number 5 below.
Item number 11 called for the implementation of GASB 68 rules for financial
reporting of accrued actuarial liabilities and for public education of the meaning of such
reporting. The City and MCERA have implemented this accounting standard. In
addition, the City has implemented the similar financial reporting standard, GASB 75, for
the City’s unfunded OPEB obligations. (See section below re: OPEB at pages 6-7.) The
discussion of the public education recommendation with respect to GASB 68 or GASB
75 disclosures would take part in the context of any tax increase ballot measure
campaign, discussed below in the context of item number 5, “Increased Sales Tax.”
D. Analysis of 2014 Report Additional Thoughts
1. Freeze or reduce salaries (2014 report Additional Thought no. 1)
Overview: The 2014 report identified salary freezes or reductions as possible ways to
free up money “to pay into the pension fund.” This committee considered what the
potential benefits and drawbacks of these ideas might be.
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Action to date: The City has frozen or reduced salaries for two positions in 2018, both
of which are non-represented roles.
Analysis: Freezing or reducing salaries could reduce City costs as soon as the freezes or
reductions were implemented, and they could reduce some associated pension costs in the
future for new hires brought in at lower starting salaries.
However, salary freezes or reductions could end up lowering employee morale, as
employees are unlikely to be happy to perform the same work for less or without the hope
of pay raises. Additionally, pay freezes or reductions could lead existing employees to
leave for higher paying jobs in other municipalities or the private sector. Finally, lower or
frozen pay could result in potential new hires taking jobs elsewhere.
Additionally, the majority of City jobs are unionized, so changes to pay for most
City positions would require negotiation with the unions, which could result in the City
having to give more elsewhere to make up for reduced or frozen salaries if the unions
were even to agree at all.
Summation: Reducing or freezing salaries would reduce costs immediately but would
be an extreme measure that could have immediate negative impacts on City functioning
by reducing morale for existing employees, by causing employees to leave for higher
paying jobs, and by making positions less attractive to potential new hires. The City has
frozen or reduced salaries for two non-union positions in the past year, so evaluating the
effects of those salary changes could inform future decisions regarding salary reductions
or freezes.
In order for salary freezes or reductions to be a practical option, the City would
have to: (1) compare its salaries with other municipalities to determine whether frozen or
reduced pay would allow it to remain competitive; (2) consider its existing contractual
obligations and future negotiating positions; and (3) determine how it would market this
as a positive change to keep employee morale up and to retain and attract employees in
the future.
2. Reduce OPEB (retiree healthcare) commitments (2014 report Additional Thought
no.2)
Overview: The 2014 report discussed retiree health care benefits and suggested cost
savings could be achieved through reducing health care benefits and applying the savings
to the pension issue. (See “Retiree Health Benefit Costs,” at page 7 of the 2014 report.)
The committee believes the City has reduced its future OPEB liabilities to the greatest
practical extent, and that the section 115 funding mechanism to reduce accrued liabilities
over time (discussed below) is appropriate. Moreover, the amount of any further benefit
reduction would be relatively small when compared to other pension costs. Thus, any
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budgetary impact from further benefit reduction would likely be minimal and could affect
the City’s competitive hiring and retention status.
Action to date: The 2014 report described the City’s efforts to cap retiree benefits and
the establishment of a trust, tax exempt under section 115 of the Internal Revenue Code,
to fund future liabilities for those benefits. (A detailed description of the City’s efforts in
this regard is contained in the City’s response, dated August 8, 2013, to the Marin County
Civil Grand Jury Report entitled “Marin's Retirement Health Care Benefits: The Money
Isn't There,” dated May 21, 2013, and in the updated grand jury report entitled “Marin's
Retirement Health Care Benefits: The Money Still Isn't There,” dated May 10, 2017 and
the City’s response, dated July 17, 2017. (The reports and the City responses are
available online at https://www.marincounty.org/-/media/files/departments /gj/reports-
responses/ 2012/opeb_report.pdf [2013 report]; https://www.marincounty.org /-/media/
files/ departments/gj/reports-responses/2012/responses/ san_rafael_retirement_
health_care.pdf [2013 City response]; http//cityofsanrafael.granicus.com/MetaViewer.
php?viewid =38&event_id=801&meta_id=109143 [2017 report and City response].
Information about section 115 trusts generally is available online at http://www.gfoa.
org/establishing-and-administering-opeb-trust
.)
In 2017, the City Council adopted a formal policy with respect to funding OPEB,
reducing the OPEB accrued actuarial liability (the unfunded future obligations) and the
financial reporting related thereto. The 2017 council resolution also identified the actions
to be taken to implement the policy. The policy and action plan adopted by the council is
described in the staff report entitled “Retiree Healthcare Reporting and Funding,” dated
September 18, 2017. The staff report is available online at http://cityofsanrafael.
granicus.com/DocumentViewer.php?file=cityofsanrafael_1fab60cd70c93627274a8c9c6d
b9f329.pdf.
Analysis: While these reforms were needed and appropriately implemented by the City,
the reduction in the unfunded actuarial liability related to retiree health care costs has not
been immediately obvious. Beginning in 2013, the City began making payments into the
trust to reduce the outstanding accrued actuarial liability. This amount is being amortized
over 23 years. As of the date of the 2014 report, the City section 115 trust was
approximately 35% funded. As of June 30, 2017, the unfunded actuarial accrued liability
for retiree healthcare benefits was $33.524 million, representing a trust funding ratio
(calculated in accordance with GASB 75 accounting standard) of 35%.
Summation: While the City’s efforts to fully fund future OPEB obligations are a step in
the right direction, the failure to increase, in the short term, the funding ratio for the
section 115 trust shows the intractable effects of investment earning and demographic
change sensitivities. However, the City must maintain its annual efforts to reduce the
OPEB unfunded accrued actuarial liability if it hopes to avoid a future funding crisis.
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3. Outsource certain functions with acceptance of existing pension obligations (2014
report Additional Thought no. 3)
Overview: The 2014 report suggested outsourcing certain functions of City government
in order to transfer pension liabilities to a third party and cap existing obligations. The
2014 committee did not address this suggestion in depth. Given the pension costs
associated with each City position, this committee deemed it worth considering
outsourcing certain functions (particularly those that are not unique to City business) if
such a move could lower pension obligations in the future.
The committee’s expectation is that certain roles currently filled by City
employees could be performed at a cost savings (now and in the future) because the work
could be performed for less by someone in the private sector or because the City would
not accrue any new pension obligation for employees in the private sector. This is of
unknown value, as the committee has not compared the current salary and pension
obligations for any particular City job with what the City would have to pay a private
sector company to perform the same work.
Action to date: The City has staffed some of its information technology functions with
technicians who are not City employees and has some other, specific roles filled by fixed-
term employees where the nature of the work is temporary in some sense and where the
employees participate in the Public Agency Retirement Services pension plan, which is a
less costly pension plan than MCERA. The majority of City positions are union positions,
so the City is required to meet and confer with the union before changing a position from
a union-represented bargaining group position to some other categorization.
Analysis: Since the majority of City positions are unionized, the committee believes the
city would not likely be willing to expend the time and resources needed to engage in the
bargaining process to effect meaningful payroll and pension contribution reductions
through outsourcing. Accordingly, the outsourcing solution, while it might ultimately
save money, seems impractical at this time.
Aside from the practicality of its implementation, there are a number of potential
drawbacks to outsourcing. These include: (i) loss of administrative control; (ii) the
potential negative effect on morale; and (iii) potential negative political repercussions.
The potential for these negative outcomes would likely be more concerning for - and
therefore less suitable for certain City functions, such as those where the community
expects a particular quality of service that the City could not guarantee if such services
were provided by private sector contractors. Additionally, outsourcing any functions
could have the negative effect of lowering remaining employees’ morale, as employees
might disagree with the positions selected for outsourcing or might fear their jobs could
be the next to be outsourced.
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While there might be negative political repercussions to outsourcing work, there is
also the possibility that the public would see this as a positive step toward governmental
efficiency.
To make this a practical option for cost-savings, the City would have to analyze its
workforce to identify which roles are less necessary for the City to exercise control over
and, which, if any, of those roles could be performed by private sector contractors at a
lower rate without violating agreements with the unions.
This option could potentially be implemented at any point for non-union positions,
but the exact timing of implementation could depend on existing employment contracts.
Without contractual obstacles, the cost reduction could be immediate with associated
lower pension costs in the future.
Summation: The City could consider whether any current City positions could be
performed by private sector companies for the same or less than what the City currently
pays its employees in salary and benefits to perform that work, without reducing the
quality of the services the City provides and without violating union or other employment
agreements. If functions can be performed by the private sector for less or equal to what
current employees receive in pay and benefits without a decline in quality (and assuming
all contractual obstacles are addressed), then outsourcing those positions would allow the
City to stop accruing additional pension obligations. Eliminating payroll expense would
reduce the amount of the annual normal cost contribution of the City to MCERA.
However, it would not reduce the amount of the annual City contribution to the reduction
of the UAL balance, which would continue to be calculated in the same manner with no
variation due to a change in the size of the current city payroll.
4. Combine services and facilities with other jurisdictions to reduce ongoing and
future costs. (2014 report Additional Thought no. 4)
Overview: The 2014 report suggested combining services with other municipalities and
using the payroll savings to pay down pension obligations. This committee believes
combining appropriate services and facilities with other jurisdictions will save payroll,
pension, and operating costs. Nonetheless, such combinations could prove to be
politically difficult and the City may not be willing to cede direct control of certain
services and their attendant facilities and equipment costs.
Action to date: After many years of discussions, the City of San Rafael recently agreed
in writing to provide fire chief services to the fire agency of the Marinwood Community
Services District. Shared services with other jurisdictions are informal and relatively
insignificant.
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Analysis: The balkanization of municipal services among Marin County jurisdictions
results in the over-staffing for some services and unnecessary duplication of physical
facilities. Although the staffing and facilities within each jurisdiction may be appropriate
for it standing alone, the combination of San Rafael’s services with one or more other
jurisdiction’s services would allow for the reduction in staffing and facility requirements
and accordingly payroll, pension, and facility costs. As a practical matter it may be
politically difficult to arrange for the combining of services, since each jurisdiction would
lose its direct and exclusive control over the shared personnel and the priorities for them.
In any event it does not appear to be an action readily available.
Summation: Combining services and facilities with other jurisdictions presents
seemingly obvious cost savings opportunities. The committee believes the City should
continue to pursue opportunities as they arise and take the lead in encouraging other
jurisdictions to participate. However, the committee recognizes the long entrenched
barriers to service consolidation with the City and does not view this approach as likely
to produce near term pension obligation savings.
5. Increase sales tax (2014 report Additional Thought no. 5)
Overview: Both the 2014 committee and the current Mayor have suggested the
possibility of increasing the sales tax rate in San Rafael to generate revenue. The current
San Rafael sales tax of 9% can be broken down as shown in the table below.
Sales Tax Distribution for San Rafael, CA
State of California General Fund 3.94%
County of Marin (Health and Safety) 1.56%
City of San Rafael 1.00%
City of San Rafael Transactions & Use Tax 0.75%
County of Marin (Public Safety) 0.50%
Transportation Authority of Marin (TAM) 0.50%
County-Wide Transportation 0.25%
SMART (in Marin County) 0.25%
Marin Parks/Open Space/Farmland
Preservation
0.25%
Total 9.00%
State law limits the total sales tax rate to 10.25%. Thus, the difference between
the current 9% and the ceiling of 10.25%, i.e., 1.25%, represents is what is legally, if not
pragmatically, available for a sales tax increase in San Rafael.
Action to date: Since the 2014 report, no action has been taken to increase the City’s
sales tax revenue.
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Analysis: A sales tax increase can generate substantial additional City income which
may or may not be attributed to a specific use, e.g., the defrayment of future pension
costs. A one-quarter percent (.25%) additional sales tax will generate about $4 million
using the current sales volume. To give this perspective, note that an infusion of four
million dollars into the projected revenues for fiscal year 2018-19 would increase the
current total revenue by about 5.1%.
However, there are potential downsides to increasing the San Rafael sales tax. Any
sales tax increase will make shopping in San Rafael more expensive for all shoppers
regardless of the size of the purchase.
The sales tax is a regressive tax: it takes a greater percentage of the pay of low-
and middle-income citizens than it does of higher income citizens. Thus, low- and
moderate-income residents of San Rafael are more negatively impacted by an increased
sales tax.
The sales tax Increases the cost of doing business. Businesses now face a
significant sales tax burden in San Rafael, and business purchases account for roughly
40% of all sales and use tax collected by state and local governments.
Finally, the sales tax is subject to fluctuation caused by changes in the volume of
sales in San Rafael. While the once anticipated loss of sales tax collections due to
untaxed online purchases may now be largely prevented by the Wayfair decision and
subsequent California rules, there is still one negative economic factor that should be
recognized and given due weight. The inevitable recession stemming from the current
business cycle would reduce the amount of new sales tax collected from the original
projection because economic activity, particularly the purchase of large-ticket items such
as vehicles, would be reduced, albeit by an unknown amount. This circumstance will, of
course, also reduce the current sales tax.
Economic markers, such as the recently inverted yield curve and the six-month
slowing of the advance in the Leading Economic Index suggest the real possibility of an
economic downturn (a euphemistic term for a recession) in the next several years. We are
overdue, having been in an economic expansion for over ten years. The person who says
“this time it’s different” has been mistaken every time.
Recessions occur when economic output declines after a period of growth. They
are a natural and necessary part of every business cycle. However, as one consequence,
when unemployment rises, consumers typically reduce spending, which further pressures
economic growth and fuels a negative cycle that exacerbates the economic downturn. Our
concern here is that the next recession, whenever it comes, will cause a reduction in the
sales revenue of San Rafael merchants and, consequently, San Rafael’s sales tax revenue,
both existing and any new.
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It behooves our City Council to prepare to deal with this real possibility of a
reduction in the projection of new and existing sales tax revenue when deciding whether
to seek voter approval for an increase in the sales tax rate.
Summation: As a practical matter, the ability to pass a new sales tax measure may be
limited. A new sales tax measure will require majority support by the San Rafael City
Council plus a 50% or 2/3 approval by voters depending on whether the tax is “general
purpose” or “special purpose.” San Rafael voters may be feeling tax fatigue following
both recent and future local (wildfire protection parcel tax, e.g.), regional and statewide
tax measures.
Depending on political will, the earliest time frame for enacting an new sales tax
measure is estimated at one and a half to two years.
6. Substitute third party negotiators for management negotiators (2014 report
Additional Thought nos. 7 and 8)
Overview: The 2014 report suggested the manner in which the City conducts labor
negotiations with union-represented City employees is flawed and leads to higher labor
costs. The 2014 report suggested two potential solutions to the perceived negotiation
problems. First, the report suggested the City employ an “independent” third party
specialist negotiator. Second, the report, suggested that management representative
negotiators not have the manager’s compensation increased in parity with the negotiated
raises for the bargaining unit employees. The committee believes the City Council has
always had the power to hire third party negotiators when it deems it desirable. Since the
City council sets the parameters of a negotiator’s power, in general it should not be
necessary to hire third parties. The city manager and council should be able to oversee
and prevent any other perceived negotiation shortcomings.
Action to date: None.
Analysis: Negotiators, whether management or third-party, are operating under the
instructions and parameters set by the city council and presumably in concert with the
attorneys hired by the City. In general, it does not seem that management negotiators
would have significant self-interest in the outcome that would outweigh the
responsibilities inherent in their jobs. The city council always has the power to hire third
party negotiators when it deems it necessary to do so, for reasons of skill or perceived
self-interest or bias on the part of existing management negotiators.
Summation: The committee does not believe that implementation of the suggested
negotiation reforms would produce negotiation results superior to those currently
conducted under the supervision of the city manager and the city council.
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7. Support Reed initiative or similar legislative efforts to modify California Rule (2014
report Additional Thought no. 10)
Overview: The 2014 report discussed attempts to change legislatively the judicially
created California Rule. This rule gives constitutional protection to pension rights as of
the date of first employment and prevents a public employer from later reducing the
formula by which such pensions are calculated. (See “Vested Rights” at page 3 of 2014
report.)
Action to date: In 2013-2014, then-San Jose Mayor Chuck Reed, and former San Diego
City Council member, Carl DeMaio proposed an amendment to the state constitution
which would alter the California Rule. Their proposed amendment (sometimes referred
to as the “Reed-DeMaio initiative,” or, more simply, as the “Reed initiative”) would have
allowed workers to keep already earned retirement benefits, but also have permitted
public entity employers to modify the accrual of future benefits through the collective
bargaining process or by public referendum.
As a constitutional amendment, the proposal would have required statewide voter
approval. The Reed initiative never made it to the ballot, however, based in part on the
description of the measure drafted by the California Attorney General for inclusion in the
ballot pamphlet. That language informed voters that the proposal “eliminates
constitutional protections for vested pension and retiree healthcare benefits for current
public employees, including teachers, nurses, and peace officers, for future work
performed.” For further information see the Los Angeles Times article (Apr. 7, 2017)
“The cost of California’s public pensions is rising fast. But efforts to fix the problem by
ballot measure have fizzled,” discussing the proposed initiative and the reasons its
sponsors declined to move forward with seeking voter approval of the state constitutional
amendment. (Available at https://www.latimes.com/projects/la-me-pension-crisis-
initiatives/.)
Analysis: The 2014 committee identified as Additional Thought number 10 the support
of the Reed initiative, or other like modifications to state law, whether by initiative or
legislative action. The 2019 committee believes this thought continues to be worthy of
consideration, but believes such legislative change is unlikely to occur given the current
state political climate.
The 2019 committee is unable to predict the financial effect on San Rafael’s
pension liabilities of reforms like those proposed in the Reed initiative. Such liabilities
could be reduced if the City could bargain for reduced benefits. However, reduced benefit
accrual for future work could have an adverse effect on the City’s ability to attract and
retain employees, depending upon what competing employer jurisdictions would choose
to do if statewide law permitted changes like those proposed in the Reed initiative.
Summation: Statewide reforms like those proposed in the Reed initiative offer the best
hope for leveling the playing field among all jurisdictions that compete to hire and retain
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the best possible workforce. Nonetheless, these efforts appear to face an uphill battle in
the current political climate.
8. Raise retirement age (2014 Additional Thought no. 12)
Overview: The 2014 report suggested the retirement age could be raised (meaning,
presumably, the age at which the full amount of the pension benefit could begin to be
collected could be deferred beyond age 55, 57, or 62, depending upon tier). The 2014
committee suggested the upward change because people are living longer.
Action to date: Since the date of the 2014 report, neither the City nor any of the
surrounding jurisdictions appear to have made efforts to raise any retirement age.
Analysis: Raising the retirement age would require legislative action to create new
pensions formulas for safety and non-safety employees. The increased retirement age
could serve to lower pension costs by extending the period of time the employee and
employer contribute to the retirement system and lowering the amount of time the
employee would collect a pension. Any new retirement formulas would only apply to
future employees, unless there were favorable rulings in the pending court cases, which
could allow changes for existing employees, prospectively.
Legislative action supporting such changes could occur within a two-year
timeframe but would require broad support at the state-level. Any associated saving or
cost reductions would be realized in the 3-10 year range as current employees enter
retirement and new employees enter the system at lower contribution rates. Additionally,
unless there is an opportunity reduce benefits for current employees, there is no impact
on the current unfunded actuarial liability (UAL). The increased retirement age may
impact costs associated with worker compensation claims and disability retirements,
particularly for safety employees.
Summation: Without statewide action and a comprehensive cost/benefit analysis, this
suggestion seems unlikely to advance further at this point in time.
9. Move toward defined contribution retirement system (2014 report Additional
Thought no. 13)
Overview: The 2014 report suggested the City switch from a defined benefit retirement
plan to a defined contribution system, if and when such changes become possible, in
order to bring the City retirement benefit program more in line with the kinds of benefits
provided by private employers. Such a change could shift the risk of adequately funding
future retirement benefits, and thus their current costs, from the employer to the
employee.
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Action to date: Nothing has occurred to date with respect to switching from a defined
benefit to a defined contribution form of retirement plan. Nonetheless, while not a
defined contribution plan, and not one calling for a City contribution, the 457 plan should
be mentioned. The City offers to all City employees the opportunity to enroll in a 457
deferred compensation plan through one of two providers, either of which invests the
employee’s money based on given choices. Contribution is voluntary by the employee
and the City does not contribute. Employee contributions are tax-deferred until
withdrawn as are the earnings on the contributions.
The normal contribution limit for elective deferrals to a 457 deferred
compensation plan is increased from $18,500 to $19,000 in 2019. Employees age 50 or
older may contribute up to an additional $6,000 for a total of $25,000. Employees taking
advantage of the special pre-retirement catch-up may be eligible to contribute up to
double the normal limit, for a total of $38,000.
Withdrawals are generally taxable but, unlike other retirement accounts, the 10%
penalty tax does not apply to distributions prior to age 59 ½ (the penalty tax may apply to
distributions of assets that were transferred to the 457 plan from other types of retirement
accounts). In other words, participants could access the assets in their 457 account upon
separation of service without a penalty, no matter what their age.
Required Minimum Distributions (“RMD”) are required beginning at age 70 1/2,
based on the IRS Uniform Lifetime Table or the Joint Uniform Lifetime Table.
This plan is likely to most benefit the higher paid employee who can afford to
make significant contributions.
Analysis: A defined contribution plan calls for the employer to guarantee the
contribution as a percentage of the employees’ salary, thus defining what the employer
pays into the plan. This gives the employer the ability to budget for a known quantity as a
percentage of total base payroll.
Since it behooves the employee to make the investment decisions, the City does
not assume the investment risk, thereby relieving it of (i) any guarantee of retirement
income for the employee and (ii) criticism for the performance of the investments.
Arguments against are few to nil for the employer, but for the employee are
several. The employee must assume the investment risk, since the employee must make
the investment decision. Some will like that control, while others who do not wish to
make those decisions and/or who do not wish to understand the relative risks and
machinations of the stock and bond market will not. In a downturn, such employee may
unwittingly and undeservedly criticize the employer and that criticism may lead to
disharmony.
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The employer may not sufficiently fund the plan (as a percentage of pay), leaving
the employee with less than an adequate pension at retirement when the employee wishes
to convert the employee’s lump sum account into a lifetime annuity. In short, a defined
contribution plan requires that the employee fully understand the consequences of his
investment decisions and the outcome of such.
The practicality of this change is low. For the City to change from a defined
benefit plan to a defined contribution presumably would require changes by the
legislature and the Governor plus a buy in by the public employee unions and any other
stakeholders. Changes of this nature would likely require that the City be on the brink of
bankruptcy.
While defined benefit (“DB”) plans have proven to be overly costly to government
agencies to the point of service insolvency, and while the defined contribution (“DC”)
plan concept does not offer the guaranteed retirement income upon which employees
have relied, adoption of a combination of the two could achieve a satisfactory outcome
for both employer and employee.
A base DB plan, offering benefits reduced substantially from current formulas,
will still provide a floor of guaranteed retirement income for the employee for which the
employer will still have a cost that varies by actuarial factors and investment yields
beyond its control. The DC plan, on the other hand, establishes a known contribution (as
a per cent of salary) for the employer which the employee can invest to supplement the
DB plan: the account can be converted to retirement income at the time of retirement or
later, thereby allowing the fund to continue to grow and giving the employee flexibility in
his retirement income planning. In short, a combination of the two allows the employer
more budgeting control (the DC plan) and the chance for cost savings while still giving
the employee a guaranteed basic floor of retirement income (the DB plan).
Moreover, a well-promoted voluntary 457 plan, which is tax-deferred, can further
an employee’s ability to accumulate funds for retirement.
To know what the potential outcomes might be both for the employer and the
employee would require actuarial calculations and conservative investment projections,
both of which are beyond the scope of the analysis presented in this report.
It should be noted that the League of California Cities City Manager’s Department
supported a combination retirement plan in its January 2019 white paper, to wit,
reasonable, dependable, and financially sustainable, employer-employee funded Defined
Benefit plans for career employees, supplemented with other retirement savings options
including personal savings (e.g. 457 Plan” and/or 401a Defined Contribution Plan
(DCP)).
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The timeframe for accomplishing a change would be long and indeterminate. It
would depend on the state of the City in the long view.
Summation: A defined contribution plan does not offer the guarantees to the employee
which a defined benefit provides. But when the cost of a defined benefit plan becomes
unsustainable and creates service insolvency (meaning the City can no longer provide the
level of services mandated and necessary), the issue of whether the benefits of a defined
benefit plan are excessive becomes problematic and consequential.
10. Extend income averaging period used to calculate pension payment (2014 report
Additional Thought no. 14)
Overview: The 2014 report suggested extending the final compensation calculation
period from one year or three years to five to seven years.
Action to date: Since the date of the 2014 report, neither the City nor any of the
surrounding jurisdictions appear to have made efforts to extend the final average
compensation calculation period as suggested.
Analysis: Extending the income averaging period from three years to five to seven years
would require legislative action to create new pensions formulas. The extended income
averaging could serve to lower pension costs by lowering final compensation for
retirement benefit calculations. The significance of any new retirement formulas would
only apply to future employees unless there were favorable rulings in the pending court
cases, which could allow changes for existing employees, prospectively.
Legislative action could occur within a two-year timeframe but would require
broad support at the state-level. Any associated saving or cost reductions would be
realized in the three to ten year range as current employees enter retirement and new
employees enter the system at lower contribution rates. Additionally, unless there is an
opportunity to reduce benefits for current employees, there would be no impact on the
current unfunded actuarial liability (UAL).
E. New Potential Actions
1. Eliminate existing positions/Do not backfill vacated positions
Overview: There are two options within this item: eliminating positions or not filling
positions as they are vacated. Although the 2014 report did not address the possibility of
reducing pension obligations in the future by eliminating positions or not filling positions
as they become open, this committee identified these as two possible ways to reduce
future pension obligations and to reduce costs in the present.
Action to date: The City has not performed a comprehensive audit to determine if
positions should be eliminated or not backfilled, but it does an iterative, reevaluation of
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the need for positions, especially when they become open. In this process, the City
identifies the needs of the position and determines if the work needs to be realigned or
reorganized and if the position needs to be filled or not. The City has found this to be an
effective method of evaluating positions and needs. The City has not decreased its total
number of authorized positions (Full Time Equivalent “FTE” count), but it has eliminated
positions as part of department reorganizations, rather than because of budget cuts.
Specifically, the City has had three positions unfilled in the past three years.
Analysis: Assuming every position currently filled is important to the City serving its
residents, eliminating positions or not filling positions as they are vacated could have
significant drawbacks. First, reducing positions or not filling available positions could
result in remaining employees taking on greater workloads, which could affect morale.
Not back-filling vacated positions would likely have less of a negative effect on morale,
as it would at least not involve the City eliminating existing employees’ positions.
Additionally, either eliminating positions or not filling vacated positions could result in
increased overtime pay due to the additional work employees would have to take on, and
such pay could affect these options’ potential cost-savings. Finally, reducing or not filling
positions could also lead to reduced services, which (depending on the service) could be
unpopular and/or could affect effective City management.
On the other hand, assuming that not every position filled is critical to the City
serving its residents, evaluating positions to identify inefficiencies would be in the public
interest and could result in immediate cost-savings in terms of current salaries and future
pension obligations.
Importantly, most City positions are unionized, so the elimination of positions
would be complicated but not impossible.
Summation: Not backfilling positions as they are vacated would allow the City to avoid
taking on new pension obligations, and eliminating positions could limit associated
pension obligations to those accrued to date, but these potential benefits would have to be
considered in light of potential overtime costs, lower morale, and reduced City services.
To make eliminating or not backfilling positions a practical option for cost-savings, the
City would therefore have to analyze its workforce to identify where employees have
room to take on more work to make up for eliminated or vacant positions and/or which
roles may have become less necessary. It has been reported that the City is evaluating
positions as they become open, so this may not be a new way for the City to save money.
It would also be difficult to eliminate many positions because they are unionized and
would therefore require discussion and negotiation with the union. Moreover, because the
City reduced its FTEs by 12% during the recession, it is operating in a manner it already
considers to be lean, so position elimination may not be a realistic way to save
significantly. Finally, as with the potential for cost savings through outsourcing (pages 8-
9, above) further reductions in force would not reduce the City’s ongoing annual UAL
payment to MCERA.
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2. Analyze effect on City hiring and retention of (i) potential impact of increased
PERS contribution requirements in neighboring jurisdictions and (ii) outcome of
pending California Supreme court cases
Overview: Contribution rates for the statewide CalPERS retirement system are projected
to increase over the next few years, which may serve to mitigate or balance the
competitive disadvantage that currently exists between MCERA participant employers
and local PERS agencies. The cost comparisons are not significantly difficult
calculations and could provide a better understanding of projected employer costs
differences in the local market over the next three to ten years.
Analysis: Favorable decisions on the pending court cases could allow employers to
renegotiate future benefits for current employees, which could serve to lower retirement
costs. It could also create a favorable environment for additional legislative changes (i.e.,
PEPRA 2.0). However, there are potential risks associated with waiting for the CalPERS
changes or further legislation to take effect. Delaying action to lower current retirement
costs or raise additional revenue to balance compensation in the local market could result
in further deterioration in competitive salaries and further losses of experienced personnel
to other regional agencies.
Summation: The City must balance the risk of short term loss of competitiveness in the
employee hiring and retention arena against the substantial long term benefits that could
accrue from waiting to increase employee compensation until the CalPERS/MCERA
playing field has leveled.
3. Provide housing benefits within Marin County to fire, safety, and other employees
to improve City’s competitive position
Overview: High housing costs in Marin County force some City employees to leave
their employment by San Rafael for employment by lower housing cost jurisdictions
closer to their homes with shorter commutes. A housing benefit in the form of financing
and/or down payment benefits to employees for the purchase of homes in Marin might
prevent movement of employees to lower housing cost jurisdictions by making employee
housing in Marin more affordable and significantly reducing employee commute times.
It could also reduce the necessity of higher wages and pension benefits, but the
advantages produced by the benefits in total would have to be weighed against the costs
of the benefit program.
Action to date: None.
Analysis: The object of a financing or down payment benefit to enable the purchase of
homes within Marin County would be to mitigate (i) the high cost of housing within
Marin County (ii) lengthy commute times, both of which have been causes of employee
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loss to lower cost jurisdictions. Such benefits might eliminate or mitigate the competitive
disadvantage to a great extent and perhaps reduce, to some extent, the necessity of raising
wages, assigned percentage for COLA increases, and other pension costs deemed
necessary to compete.
Housing benefits for residences within the County could be provided potentially in
essentially two areas, financing and/or down payment, although a third more complicated
area might be to develop housing for City employees on existing City property. This
analysis will discuss only financing and down payment benefits.
a. Financing. The committee has been informed it may be possible for MCERA
to provide low cost financing (perhaps under 3%) for City employees so long as loan
repayment is guaranteed by the City. Alternatively, the City could arrange for financing
from an institutional home lender (probably at a higher rate), once again with a City
guaranty. The City could make such financing available to personnel who had completed
a specified number of years of employment by the City, for instance five years, and
contract to keep the financing in place for so long as the employee continued (i) to be an
employee of the City and (ii) to own and reside in the financed home as the employee’s
primary residence. The portion of the financing provided by the city or MCERA could
be limited to an amount acceptable to the City, presumably with a dollar limitation on the
amount financed. The City would contribute a proportion of the monthly payment
according to a pre-determined schedule. In the event that prior to a specified term the
employee’s employment by the City was terminated voluntarily or involuntarily or the
employee ceased to own and reside at the home as the employee’s primary residence, the
debt would become due within one year following the termination event and paid off
proportionally between the employee and the City in accordance with a scheduled
allocation. The City could arrange for insurance to pay off the debt in the event of early
death.
b. Down payment. The City could pay/lend all or a portion of the down payment
for a residence within Marin County. In general, it would carry the same conditions as
the financing above, except that in the event of employment termination or cessation of
residence before the specified term, the portion of any down payment made or financed
by the City would be allocated for repayment in accordance with a pre-determined
schedule.
The housing benefit would be attractive only to certain employees. There would
be some complications, foreseen and unforeseen, from its use. The cost of any benefits to
be gained would have to be carefully considered against the costs of the program, both
monetarily and otherwise. If appropriate, it would be used to retain important seasoned
employees who now leave the City employment on or soon after the five year mark. The
City could join with other jurisdictions with high housing costs to seek any legislation
required to make the housing benefit effective, if PEPRA limits its implementation as a
pension cost savings tool.
21
Summation: Without statewide action allowing exemptions to the PEPRA mandated
pension floor, this suggestion seems unlikely to advance further at this point in time.
Moreover, federal law governing non-discrimination in the offer and provision of
employee benefits, could hamper the City’s ability to implement such a change to the
current pension regime.
4. Limit or reduce retiree COLAs
Overview: Cost of living adjustments (“COLA”) to pension benefits have a compound
effect over time and can greatly increase the cost of providing such pensions as retirees
live longer and collect benefits over their longer lifetimes. Some advocacy groups have
suggested that a reduction in the COLA benefit is necessary to prevent a potential
collapse of the state’s pension systems. The committee believes it is not practical to try
to reduce potential COLA benefits for current and former employees and retirees already
collecting MCERA benefits. Nonetheless, a potential negotiation of such a benefit
reduction for future hires could reduce long term pension plan funding costs.
Analysis: City of San Rafael retirees are entitled to an annual upward cost-of-living
adjustment to the amount of the pension benefit. The percentage amount of the COLA
depends upon the tier to which a retiree belongs. (See chart at page 4 of 2014 report.)
The maximum percentage amounts (3% or 2%) are determined by reference to increases
in the Consumer Product Index, as published by the federal government. Since
anticipated COLA’s are included in the actuarial assumptions used to determine both the
employer and employee portions of the normal cost contribution, employees are
prefunding, to a certain extent the COLA’s they will eventually receive when they begin
to collect retirement benefits.
The 2014 report did not address COLA adjustments as a way to strengthen the
financial stability of the pension plan and the amount of the City’s required annual
contributions to the plan. Recently, however, the League of California Cities, City
Managers Department Pension Sustainability Working Group produced a white paper on
the subject of the COLA in the context of the CalPERS retirement system.
In that paper, the working group advocates attempting to scale back the COLA
percentage for current CalPERS retirees to avoid the deleterious effects of the
compounding COLAs and the effect of increasing retiree longevity. Arguably, the
MCERA CPI increases history and changing longevity assumptions have similar effects
on the MCERA plan finances.
The committee thinks the likelihood of achieving pension funding costs saving
through either (i) a voluntary reduction in the COLA percentage or (ii) through Reed
initiative type modification for future work, is low. Although, as demonstrated in the
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League white paper, the cost savings could be significant and have an immediate effect,
such measures face serious political headwinds, as discussed above with respect to the
Reed initiative. Moreover, retirees would seem unlikely to agree to forego a benefit they
are currently receiving at this time, without being pressured to do so by the threat of a
retirement system insolvency. Finally, any reduction in potential retirement benefits
could adversely impact the City’s ability to hire and retain employees, if other
jurisdictions did not either lead the way or follow suit with similar COLA limitations.
Summation: The prospects for a short term or immediate reduction in COLA benefits
for either future hires, or those employees and retirees whose benefits have already
vested, seems very unlikely at this point in time. That situation might change if, and
when, the MCERA pension plan appears to be in danger of failing to be able to meet its
ongoing payment obligations.
Respectfully submitted,
San Rafael 2019 Independent Committee
On Employee Retirement Benefits
Page 1 of 8
CITIZENS’ GROUP ON PENSION REFORM
Report to the City of San Rafael City Council Subcommittee on Pension/OPEB Benefits
For a number of years, the City has been concerned that the costs of pensions and other post
employment benefits (OPEB) have been taking resources which might otherwise be used to
provide services to the public and repair and improve the City’s infrastructure and capital assets.
In that past several years the City has taken action to reduce those costs to some extent, and
formed a City Council Subcommittee on Pension/OPEB Benefits to look into the issues.
Looking for an unbiased opinion on the steps already taken and what actions the City might still
take to contain those costs, The subcommittee called for formation of a citizen group to study
the issues and report its thoughts.
Dirck Brinckerhoff was asked to choose and chair the group. The other members are Laura
Bertolli, David Hellman, David Holsberry and Michael Lotito.
The members studied materials produced by others conversant with the issues, including,
among other things,
Analyses of the current state of pension and health benefit funds of various entities,
including San Rafael, by the Marin County Civil Grand Jury, the Marin County Council fo Mayors
and Councilmembers, the Committee for Sustainable Pension Plans, the actuarial consultant for
the Marin County Employees’ Retirement Association, City of San Rafael staff and others;
Summaries and analyses of portions of pension law by the League of California Cities
and by SEIU;
Legal analyses of the vested rights theories;
The Reed Initiative;
Staff reports to the San Rafael City Council on the progress made in negotiations with
employee groups within the city.
The members also met with City staff and with Jeff Wickman, administrator of the Marin County
Employees’ Retirement Association.
The report below summarizes what the group learned, the actions so far taken by the City, the
members’ analysis of what may still be possible within the current legal structure, and a listing of
additional approaches, not as suggestions, but as thinking points.
Page 2 of 8
BACKGROUND INFORMATION:
There are Two Basic Types of Pension Plans:
1. Defined Contribution plans, under which the employer and employee contribute specified
percentages of the employee’s pay during the course of employment, and the retiree is entitled
to collect, in one manner or another, the payments and the amounts they have earned by virtue
of investment by the pension administrator.
In a defined contribution plan, the obligation of the employer to make payments into the plan
lasts only as long as the employee is employed. The employer must simply deposit the correct
amount monthly during employment. The pension administrator is then obligated to pay out,
according to schedules, the total of the contributions and whatever gains the administrator has
been able to garner by investment.
2. Defined Benefit plans, which are the type common for public employees, provide the retiree
with monthly payments for life in an amount calculated on formulas based on years of service,
type of service, retirement age, and the amount of earnings at retirement.
In this case, if the contributions plus the investment earnings are not enough to make those
payments, the employer (in this case the City) must make up the difference.
Recently, governmental entities have come to realize that the obligations to which they have
been bound by law and by agreement with employees, whether directly, through union
agreements, or by virtue of the rules of their pension administrators, are taking and will take in
the future, so much of their income that they will not be able to continue to provide the services
expected and deserved by the citizens.
In reaction, the California legislature has passed laws which allow for, and in some cases
mandate, changes in the entitlement formulas and funding processes for pensions for newly
hired employees in particular and for all employees in some cases.
We will first look at how the defined benefits for retirees are expressed and calculated (Benefit
Formulas), and then how they are paid for (Funding the Benefits).
Benefit Formulas:
Tiers --
Pension benefits are defined by formulas which provide for payments of a certain percentage of
the employee’s salary for each year served, depending on the age at retirement. These
formulas (called “tiers”) have changed over the years and have been different depending on the
category of employee (Safety Fire, Safety Police, Miscellaneous).
The tiers are usually described by the percentage of final average salary which would be
payable per year of employment to an employee retiring at a particular age after having worked
within the system for 10 years. Thus “2.7% at 57” is the shorthand reference to a whole chart
showing benefit amounts payable to retirees depending on retirement age and years of service
where an employee retiring at age 57 after 10 years of service is entitled to 27% of final average
salary. Below is an example of a tier chart for a “2% at 55” tier, in which the intersection of the
age column and the years of service row indicate that the benefit for a 55 year old employee
retiring after 10 years of employment would be 20% of the employee’s final average salary (2%
X 10 years):
Page 3 of 8
“Compensation” for purposes of Tiers:
The compensation to which the tier percentages are applied is the “Final Average
Compensation” for a specific period. That had commonly been the last 12 months of
employment.
The compensation included in that average (called “Pensionable Compensation”) has been
comprised of regular salary, payments for additional services outside normal working hours,
certain types of unused leave, and certain other payments. By saving up these add-ons and
taking them in their last year of employment, employees were able to increase dramatically the
Final Average Compensation used to calculate their pensions. This practice is known as
pension spiking.
Vested Rights:
Currently, the unions and most courts take the position that the benefit tier (and definition of
Final Average Compensation) applicable to any employee at retirement is the most beneficial
one applicable to members of his or her category during the period of his or her employment.
The theory, supported by the Constitutions of the United States and of California, is that, as a
part of the employee’s whole compensation package, the employee accepted (or continued)
employment based on the promise of that tier’s benefits. As a result, it is said that the
employee’s rights to the benefits in that tier become “vested” and irrevocable once he or she
has worked under it, even though new employees may be entitled only to less beneficial tiers,
and regardless whether the employee and employer had, during the period of employment,
contributed enough to the pension administrator to fund those payments.
State Legislative Moves:
Page 4 of 8
While it was somewhat like shutting the barn door after the cow has left, when people realized
that the promised benefits were unsustainable without either increasing taxes or reducing
services, the California legislature passed The Public Employee Pension Reform Act of 2013
(“PEPRA”), which made a number of changes in public pensions in California. Because of the
vested rights theory, these changes affect mostly “new employees”, who are those hired on or
after 1/1/2013.
Among other things, PEPRA established:
1. New tiers, which provide for pensions calculated at a lower percentages of
salary and at higher retirement ages,
2. A 36 month Final Average Compensation period rather than the12 month
period which had been the previous standard.
3. A cap on “Pensionable Compensation” at 120% of the maximum salary used
to calculate Social Security contribution for the rest of the population
4. Exclusions of certain types of payments (mentioned earlier) from the
calculation of “Pensionable Compensation” to prevent pension spiking.
5. A cap on cost of living increases (COLA) which pension administrators are
allowed to pay.
San Rafael’s Progress:
The chart below shows the changes in benefit tiers, final average compensation and maximum
cost of living increases applicable to San Rafael’s employees depending on the date of their
employment. As can be seen, the City and the employees had agreed to significant reductions
in benefits before the passage of PEPRA.
Min Age to Max FAC*
Dates Retire Formula COLA Period
Before 7/1/11
Safety 50 3% at 55 3% 1 yr.
Miscellaneous 50 2.7% at 55 3% 1 yr.
7/1/11 to 12/31/12 (Negotiated before PEPRA)
Safety 50 3% at 55 2% 3 yrs.
Miscellaneous 55 2% at 55 2% 3 yrs.
1/1/13 to Present (PEPRA)
Safety 50 2.7% at 571 2% 3 yrs.
Miscellaneous 52 2% at 62 2% 3 yrs.
*Final Average Compensation
1Safety Option Plan Two (required by PEPRA based on prior formula)
Lower tier could be applied to new hires if agreed in collectively bargained MOU
without impasse.
Page 5 of 8
Funding the Benefits:
The retirement plans are funded by a combination of contributions by the employer and
employee paid to a pension administrator. For many government entities the administrator is
the California Public Employee’s Retirement System. For San Rafael and numerous other
Marin entities, the Marin Employees’ Retirement Association (“MCERA”) which invests the
contributed money with the goal of having enough funds available when employees retire to
make the promised payments to them and to any eligible beneficiaries for the rest of their life.
Normal Cost
Using assumptions as to the rate of return on the invested funds, the rate of inflation, and the
expected retirement age of employees, the pension administrator calculates the amount of
contributions needed each year to invest so that there will be enough in the fund to make the
pension payments. The contribution needed if we were starting with a clean slate is called the
“Normal Cost”.
Normal Cost is the amount needed to be contributed in each year to have enough available to
pay the defined benefits when the employees retire. (Assuming past contributions had been
sufficient.)
In making its projections of the amount needed, the actuaries for MCERA currently calculate the
needs based on the following assumptions:
It is common with most governments that the employer and employees each pay a portion of
the Normal Cost.
As a result of negotiations with the employee unions, most of the San Rafael employees are
paying very close to half of the Total Normal Cost.
Cost Sharing: The PEPRA requirement is that new employees pay at least half of Total Normal
Cost. For pre-1/1/2013 employees, that is a “goal”.
Unfunded Liability:
In the case of most every government entity’s pension fund, a history of benefit increases,
optimistic actuarial assumptions, and investment losses has created a situation in which the
past contributions have not built the fund’s assets to sufficient size to make the benefit
payments required by the formulas. The difference between the amounts now in the funds and
the amounts needed to cover the expected pension obligations to retirees is referred to as the
“Unfunded Liability”.
The shortfall arose for many reasons, among them:
Investment Return/Discount Rate
Inflation:
7.50%
3.25%
(Investment minus Inflation) Real Rate Of Return 4.25%
Salary Growth 3.25%
Membership Growth (# employees) 0.00% i.e., total number of
employees remains stable
Page 6 of 8
1. In the past, to attract and keep good employees, cities have agreed to
increase benefits beyond what they originally planned for (the result is like saving for a
trip to Disneyland and then paying for an excursion to Europe instead),
2. people have lived longer than projected, thus collecting payments longer than
expected,
3. the value of investments has not grown at the projected rate (and in recent
years, dramatically decreased)
4. employees have negotiated or found ways to increase their income just before
retirement (“pension spiking”) so that the contributions during their regular employment
income turn out not to be enough to cover the retirement payments under the defined
benefit formulas (which use only the final year(s)’ compensation to determine benefits).
To assure payment of the promised pension benefits, it is necessary to make payments in
addition to the Normal Cost to make up the Unfunded Liability.
To make up the Unfunded Liability, MCERA is requiring contributions in addition to Normal Cost
to bring the plan to 100% funded within 17 years. (I.e., based on a 17 year amortization.)
Because the 2008 loss in asset value was so great, and making it up would put such a strain on
the City’s finances, to soften the load, MCERA is requiring contribution for half of the 2008
losses based on a 30 year amortization.
Last year, in addition to its portion of the Normal Cost and the two portions of the Unfunded
Liability, San Rafael made an additional contribution of $1,000,000.
FINDINGS:
1. Before the passage of PEPRA, the City had, through negotiation and agreement with its
employees, taken many of the measures required or allowed by PEPRA.
2. Possible Additional Measures for the City:
For New Members:
Under PEPRA, the City can agree with New Members in a MOU to pay some or all of the
employer’s share of Normal Cost. (Negotiation and agreement is required; unilateral imposition
is not allowed.)
New employees can also agree to pay some or all of the payments toward the Unfunded
Liability
This agreement may be reached with individual bargaining units; agreement with the whole
classification is not required.
Payment of part of the unfunded liability may seem fair if it is for that portion of the unfunded
liability which relates to the costs for that employee’s future benefits (i.e., not that part which
covers benefits for employees already retired.
New tiers for new employees could be devised, but they would have to be certified as having no
greater risk or cost than the PEPRA tiers and must be approved by the Legislature. Presumably
they would also have to be negotiated with employees, and with the requirement of legislative
approval, it would be foolhardy to try to obtain that without first having agreed with employees.
Page 7 of 8
For Members hired before 1/1/2013:
It appears that, after Jan 1, 2018, similar negotiating is allowed with existing members with
respect to payment of some or all of the employer’s share of Normal Cost and some or all of the
payments toward the Unfunded Liability.
Also, after January 1, 2018, the City can, after exhausting impasse, impose a requirement that
employees pay 50% of Normal Cost, provided the employee contribution doesn’t exceed 8% of
salary for misc., 12% for safety and 11% for other employees. – San Rafael is near or at those
maximums already.
General:
Since the structure of government pensions and the allowable changes to them are so tightly
prescribed by state law, the most effective way to accomplish dramatic changes will be to
pressure our legislators to pass laws which go beyond PEPRA and somehow allow changes to
benefits for those who have worked or are working under more advantageous tiers and rules.
Reduce rights in emergency
Retiree Health Benefit Costs:
For all past employees, San Rafael is committed to paying anywhere from $386
per month to the full premium for retirees’ health insurance. In 2009 and 2010, the City
negotiated to cap those benefits so that they would not increase over time. Starting with
employees hired in 2009, the City will be paying the legal minimum (currently $115 per month)
for retirees to use toward purchasing their own coverage, regardless of employment category,
age of retirement, or health status.
The City has a trust fund, currently administered by CalPERS, to fund the liability
for these benefits. This liability is currently approximately 35% funded.
Additional Thoughts:
The following ideas, outside the pension laws as they now stand, have been suggested by
some, but are not agreed by all. They are not presented as recommendations of the group, and
may not be desirable or feasible, but are mentioned as options for consideration.
1. Salary freezes or reductions from what might be agreed to so those funds are used to pay
into the pension fund;
2. Since the health care benefits are not 'vested' in accordance with law, consider reducing that
benefit in some fashion and use those funds towards the pension issue (consider, however,
whether “promissory estoppel” may prevent this – see Retired Employees Assn of Orange
County v. County of Orange and IBEW Local 1245 v. City of Redding,);
Page 8 of 8
3. Consider outsourcing certain functions to transfer the liability to a third party or cap the
liability to those who have accrued 'benefits' and have the private sector employer assume the
risk instead of the taxpayer (however, see unpublished appellate decision in Costa Mesa City
Employees’ Assn. v. City of Costa Mesa, which questions a city’s ability to contract out essential
services);
4. Consider combining services with other towns to reduce costs and place the savings into the
pension fund (though, depending on the benefits available in each of the combined agencies,
consider whether Govt. Code Sec. 31,485.9 may require increasing all benefits to the highest of
the combining agencies);
5. Increase taxes;
6. Any combination of the above;
7. Consider retaining an 'independent' third party specialist to negotiate the agreements to
avoid the emotional pain that comes from the current system;
8. Ensure that the management representatives who negotiate the deals do not receive parity
to improvements agreed to with the unit employees;
9. Engage in a massive educational effort for all voters to have them understand how the
quality of services are being and will continue to be impacted by the debt which exists;
10. Support the Reed initative, or other like modifications to state law, whether by initiative or
legislative action.
11. Use the GASB68 standards requiring the City to report pension unfunded liabilities on the
Statement of Net Assets as an opportunity to educate the public and the public employees so
that all may be more receptive to taking actions necessary to resolve the issues we now face.
12. Since people are living longer, raise the age at which people can retire (this would likely
require creation of new tiers – see above on the practicality);
13. Move towards defined contribution when/if this ever becomes possible, and bring
agreements for new hires be more in line with private industry, where benefits are being cut.
14. Extend the wage average used to calculate the pension amount, over a longer period, say 5
or 7 years?
1
Appendix B
Potential Solutions Table
Proposed
Solution
Pros Cons Practicality Timeline* E/C**
City Actions Without Legislative Changes
1. Salary Freeze
or Reductions
Could reduce costs now and
in the future
Potential employee losses,
reduced morale, retention
issues and difficulty in
hiring replacements
Low - could be difficult
to negotiate with unions,
could be difficult
politically, and could
negatively affect
morale, retention, hiring
(a) C
2. Reduce
OPEB
Reduce required payments
by City for current and
future healthcare expenses.
Accelerate paydown of
unfunded retiree healthcare
actuarial liability
City has already taken
actions to amortize
paydown of unfunded
actuarial liability; reduce
money available for other
purposes; reduce
competitive hiring and
retention advantage.
Low, unless investment
earnings or retirement
demographics show
favorable changes in the
future.
(a), (b) C
3. Outsource
Work
Potential to reduce current
costs and future pension
liabilities
Varies according to type of
service outsourced, but all
would involve loss of
administrative control,
might affect remaining
employees’ morale, and
could have negative
political repercussions
Medium, as could be
difficult politically and
certain city functions
might not make sense to
outsource
(a) C
4. Combine
Services
Cost savings Loss of local control Low to medium,
depending on type of
service to be combined
(b) C
2
Proposed
Solution
Pros Cons Practicality Timeline* E/C**
5. Increase
Taxes
Will provide new revenue:
each ¼% sales tax increase
will equal about $4 million
Voter opposition, may not
pass; regressive tax: may
suffer reduction due to
economic downturn
Medium; depends on
voter approval by one-
half or two-thirds,
depending on stated
purpose
(a) C
6. Outside
Negotiators
Reduce potential conflicts
of interest; potential
improvement in negotiation
skills
Shifts responsibility from
leaders directly
responsible for
negotiations
Depends entirely on
management and
council desire to
implement changes
(a) C
City Actions Requiring Legislative Support or Changes
7. Reed
Initiative
Would allow modification
of pre PEPRA hire pension
rights resulting in potential
significant Normal Cost
and UAL paydown expense
City could lose
competitive hiring and
retention advantages if
other jurisdictions did not
follow suit.
Low - would require
statewide voter approval
and be subject to further
litigation challenges
(a) C
8. Raise
Retirement Age
Lowers retirement costs Requires legislative
changes; would only apply
to future employees; may
have cost impacts related
to workers comp claims
Medium. Will require
broad legislative
support.
(b) C
9. Defined
Contribution
Remove investment
risk for employers: easier to
budget for pension outlay
Puts investment risk on
employee: no guaranteed
retirement benefit
Low: all stakeholders
have to agree. May
require legislative action
(b)-(c) E
10. Extend
Averaging
Lowers retirement costs Requires legislative
changes; would only apply
to future employees; may
have cost impacts related
to workers comp claims
Medium. Will require
broad legislative
support.
(b) C
3
Proposed
Solution
Pros Cons Practicality Timeline* E/C**
2019 Report New City Actions Without Legislative Changes
1. Elimination
of existing
positions/No
backfill
Immediate savings; could
streamline the city’s
functions by eliminating
any positions that may have
become unnecessary
Increased workload for
remaining employees
could lead to overtime pay
and could lower employee
morale; could be
politically difficult.
Medium, depends
greatly on the position
and existing employees’
workloads
(a)-(c) C
2. Do nothing Rising PERS costs may
level costs with MCERA.
Positive court decisions
may allow flexibility to
alter current agreements
and lower costs.
Waiting to take action may
create greater imbalance in
local job market and
increased loss of
experienced personnel.
Court decisions may not
be favorable to employers.
High. PERS rates and
court decisions will
likely be recognized
within the timeframe of
potential tax measures.
(a) C
2019 Report New City Actions Requiring Legislative Support or Changes
3. In Lieu
Housing
Benefit
Reduce City MCERA
normal cost contribution;
retain skilled employees
May not be authorized
under PEPRA; may not
appeal to employees;
administrative burden;
loan default risk
Low to medium (b) [to
implement
]; (c)
[realize
benefits]
C
4. Reduce
COLAs
Reduce Normal Cost and
UAL payments
Loss of inflation protection
for retirees; COLA’s
already partially paid for
by employees; reduce
hiring and retention
competitiveness
Low (a) C
*For timeline column (time for impact to be felt): (a) Short term: one to two years; (b) Medium term: three to ten
years; and (c) Long term: longer than ten years
**E = Exclusive / C = Complimentary