HomeMy WebLinkAboutMS Pension Reform Report 2014t 1
FFIT.- I
Agenda Item No: 5. e
I'la'.3 Z I ZT.Al 1.3 4 Wei 11 W&010111 ik, M I W.AT_C1:_4 11, 1 81.A11 :1;4:101 n i
Prepared by: JimSchutz
City Manager Approval
Assistant City Manager
SUBJECT: REPORT FROM THE CITIZENS' CROUP ON PENSION REFORM
I q
L 1k"WTM'
RECOMMENDATION:
Staff recommends that the City Council accept the informational report from the Citizens' Group
on Pension Reform.
BACKGROUND:
The City Council's Subcommittee on Pension and Other Post -Employment Benefits (OPEB) has
been meeting since January 2012. Made up of Mayor Gary Phillips and Councilmember
Andrew McCullough, the Subcommittee's charge was to review pension reform actions taken by
the City as of that date and consider future actions as appropriate.
The Subcommittee has been very active and has made numerous recommendations which
resulted in City Council actions such as a pension/OPEB reform resolution, a pension funding
policy, the creation of a pension/OPEB webpage to maximize transparency, and fully funding
retiree health costs and the creation of an OPEB Trust, just to name a few.
In October 2013, the Pension/OPEB Subcommittee desired to create an ad-hoc group as a
"Citizens' Group on Pension Reform" in order to serve in an advisory role to the Subcommittee
by making an objective analysis of the discretionary actions available to the City of San Rafael
that would further the City's goals for Pension/OPEB reform.
The Subcommittee asked Dirck Brinckerhoff to be the Chairperson of the Citizens' Group and
select the other members. The Subcommittee suggested several steps that the Citizens' Group
• Review the current legal framework regarding pension and OPEB benefits.
• Review the City's actions to date regarding Pension/OPEB reform.
• Review any pertinent past studies such as the MCCIVIC Report or others.
Receive input, as needed, from experts in the field such as actuaries, attorneys, pension
system administration, etc.
I&I Z" 11 Vas] 4 4:1 F&C 1L I
Council Meeting. -
Disposition:
Make findings regarding discretionary actions available to the City of San Rafael (within
the direct control of the San Rafael City Council) that would further the City's goals for
Pension/OPEami Reform and present them to the Subcommittee.
ANALYSIS:
After studying the issues for several months, the group submitted its report to the Subcommittee
in March 2014. The report includes the membership of the group and how they went about their
work, background information on types of pension plans and how they function, background on
legal and legislative issues, some of San Rafael's recent pension changes, how benefits are
funded, the group's findings, and additional thoughts.
The Subcommittee would now like to present the report to the full City Council for their
I
FISCAL IMPACT:
There is no fiscal impact to accept this informational report.
OPTIONS:
Accept the report
Decline to accept the report and/or request further study or analysis
ATTACHMENTS:
Report from the Citizens' Group on Pension Reform
Mayor Gary Phillips
Councilmember Andrew McCullough
San Rafael City Hall
1400 Fifth Avenue
San Rafael, CA 94901
Re Citizens'Group on Pension Reform
Report to the City of San Rafael City Council Subcommittee Pension Sub -Committee on
Pension/OPEB Benefits
i��I Iliq
*n behalf of the members, enclosed is the final report of the Citizens' Group on Pension
Reform.
We were honored to have the opportunity to take a close look at the issues involved and offer
what little we could in the way of suggestions for amelioration, if not resolution of the problem.
As a group, we started with the acceptance that the pension system has put an exceptional
economic burden on the City, and that there is much work to be done to resolve the problem.
All are in agreement with the analysis of steps apparently available under the law as it now
exists. As indicated in the report, not all are in agreement with the possible moves indicated ir
the last section of the report.
Most of us believe that the reporting required by GASB 68 will provide a good opportunity to
bring the facts of the current economic situation (rather than emotions) in front of all those with a
stake: the employer, the employees and the public which ultimately pays the bill
We hope you will find the report helpful
Sincerely,
Dirck Brinckerho""
Chair I
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 • 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 Heilman, David Holsberry and Michael Lotito.
The members studied materials produced by others conversant with the issues, including,
among other •
' 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 •
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.
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). I
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
'rormulas (called "tiers") have changed over the years and have been different depending on the
T
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 "27% 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):
10 14-26 15,22 16.28 17.42 18.66 20.00 20.52 21.04 21.56 22-10 22.62 23-14 23.66 24.18
11 16.69 16.74 17.91 19.16 20.53 22.00 22.57 23.14 23-72 24-31 24.88 25.45 26.03 26.60
12 17.11 16,26 19.54 20.90 22-39 24.00 24.62 25.25 25.87 26.52 27.14 27-77 28.39 29.02
13 18.54 19.79 21.16 22-65 24.26 26 00 26.68 27.35 28.03 28.73 29.41 30.08 30,76 31-43
14 19-96 21.31 22.79 24.39 26.12 28.00 28.73 29.46 30.18 30.94 31.67 32.40 33.12 33.86
i5 21,39 22,83 24,42 26A3 27-99 30.00 30.78 31.56 32.34 33.15 33.93 34.71 35.49 36.27
16 22,82 24.35 26.05 27,87 29.86 32.00 32.83 33.66 34.50 35.36 36A4 37-02 37.86 38-69
17 24.24 25,87 27.68 29,61 31.72 34-00 34.88 35.77 36.65 37.57 38.45 39.34 40.22 41.11
i8 25.67 27,40 29,30 31.36 33-59 36.00 36.94 37.87 38-81 39.78 40.72 41,65 42.59 43.52
19 27.09 28.92 30,93 33.10 35A5 38.00 38.99 39.98 40.96 41.99 42.98 43.97 44-95 45-
20 2&52 30.44 32,56 34,84 37-32 40.00 41. 42.08 43.12 44.20 45.24 46-28 47.32 48.36
21 29.95 31.96 34.39 36-58 39.19 42-00 43.09 44-18 45.28 46-41 47.50 48-59 49-69 50-78
22 31.37' 33.48 35.82 38.32 41.05 44.00 45.14 46.29 47.43 48.62 49.76 50-91 52.05 53.20
23 32.80 35.01 37,44 40.07 42,92 46°00 47.20 4&39 49-59 50.83 52.03 53-22 54.42 56-61
24 34.22 36,53 39.07 41.81 44.78 48.00 49.25 50.50 51-74 53-04 54.29 55-54 56.78 68.03
25 35-65 38.05 40.70 43.55 46.65 50.00 51,30,E 52.60 53.90 55.25 56.55 57.85 59.15 60.45
26 37-08 39.57 42.33 45.29 48.52 52.00 53.35 54.70 56-06 57.46 58.81 60-16 61.52 62.87
27 38.50 41.09 43.96 47.03 50.38 54.00 55.40 56.81 58.21 59.67 61.07 62-48 63.803 65.29
28 39.93 42.62 45.58 48-78 52.25 56.00 5746 58.91 60.37 61.88 63.34 64.79 66.25 67.70
29 41,35 44-14 47.21 50.52 54.11 58.00 59.51 61.02 62.52 64.09 65.60 67.11 68.61 70-12
30 42-78 45-66 48.84 52.26 55.98 60.00 61.56 63.12 654,68 66.30 67-86 69.42 70-98 72.54
31 44.21 47.18 50:47 54.00 57.85 62.00 63.61 65.22 $6.84 68-51 70.12 71,73 73.35 74.96
32 45.63 48.70 52.10 56.74 59,71 64,00 65.66 67 33 68.99 70.72 72-38 74.05 75.71 77.38
33 47.06 50-23 53.72 57-49 61,58 66-00 67.72 69.43 71-15 72,93 74.65 76.36 78.08 79.79
34 48.48 51.75 55.35 59.23 63.44 68.00 69.77 71.54 73.30 75.14 'M91 78.68 80.44 82.21
35 49.91 53.27 56,98 60,97 65.31 70.00 71-82 73.64 75-46 77.35 79.17 80-99 82.81 84-63
36 51.34 54.79 58.61 62.71 67.18 72.00 73.87 75.74 77.62 79.56 81.43 83.30 8S.18 87-05
37 52.76 56.31 60.24 654.45 69.04 74.00 75-92 77.85 79.77 81.77 83.69 85.62 87.54 89.47'
38 54-19 57.84 61.86 66.20 70.91 76.00 77.98 79.95 81.93 83.98 85.96 87.93 89.91 9'1.813
39 55.61 59.36 63.49 67.94 72-77 78.00 80-03 82.06 84.08 86.19 88.22 903.25 92.27 94.30
40 67.04 60.88 65.12 59.68 74-64 80.00 82.08 84.16 86.24 88.40 90-48 92,56 94.64 96-72
41 58.47 62-40 66.75 7"1.;42 76-51 82.00 134.13 86.26 88.40 90.61 92.74 94.87 97-01 99-14
U4
IIIIIq 111111111q iiiiiiiii�r�illillilli� 1111M
UK OM �p M M I III I i I III? 1 0"1
EMS 0=14,
The compensation to which the tier percentages are applied is the al 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
i L aking 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.
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 ti vested 11 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.
1111 11111111q!1111111111 I I I I � I � � I I I I � I' � � � � I I � � I I I I 111 T
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 Cinew employeesly , who are those hired on or
Ifter 1/1/2013.
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 thel 2 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 s I piking.
5. A cap on cost of living increases (COLA) which pension administrators are
allowed to pay.
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 signcant reductions
in benefits before the passage of PEPRA.
'Safety Option Plan Two (required by PEPRA based on prior formula)
Lower tier could be applied to new hires if agreed in collectively bargained MO
without impasse. I
90MUM
Min Age to
Max
FAC*
Dates
Retire
Formula
COLA
Period
Before 7/1/11
Safety
50
3% at 55
1 yr.
Miscellaneous
50
2.7% at 55
3%
1 yr®
7/1/11 to 12/31/12
(Negotiated before PE
Safety
50
3% at 55
2%
3 yrs.
Miscellaneous
55
2% at 55
2%
3 yrs.
1/1 /13 to Present (PEP
)
Safety
50
2.7% at 57'
2%
3 yrs.
Miscellaneous
52
2% at 62
2%
3 yrs.
'Safety Option Plan Two (required by PEPRA based on prior formula)
Lower tier could be applied to new hires if agreed in collectively bargained MO
without impasse. I
90MUM
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 ("MCERK) 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.
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:
Investment Return/Discount Rate
•
• Rate Of Return
Salary Growth
Membership Growth (# employees)
7.50%
3.25%
4.25% (investment minus Inflation)
3.25%
0.00% i.e., total number of
employees remains stable
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
iL
Cost. For pre -1/1/2013 employees, that is a goal
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.*
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 tha
expected,
3. the value of investments has not grown at the projected rate (and in recent
years, dramatically decreased)
r
4. employees have negotiated or found ways to increase their income just befor,
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.
VNIORIC-M
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.
I IIiIIIIIIi r
i� [OWN
finder 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 n
greater risk or cost than the PEPRA tiers and must be approved by the Legislature. Presumabl
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.
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.
Mi _
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.
g-7_WW1M3=
A
For all past employees, San Rafael is committed to paying anywhere from $38w
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. 11
I The City has a trust fund, currently administered by CalPERS, to fund the liability
for these benefits. This liability is currently approximately 35% funded.
1 !rMU01MV.S9 0 0
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, anit,
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 tt promissory estoppeill may prevent this — see Retired Employees Assn of Orange
County v. County of Orange and IBEW Local 1245 v. City of Redding,),
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 essentia.1
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;
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
itr 7 years?
1 • 1 l
INSTRUCTIONS: USE THIS FORM WITH EACH SUBMITTAL OF A CONTRACT, AGREEMENT,
ORDINANCE OR RESOLUTION BEFORE APPROVAL BY COUNCIL 1 AGENCY.
SERA 1 SRCC AGENDA ITEM NO. 5•e
DATE OF MEETING: 03117114
March 12, 2014
�1►c�c�k *�c* �c�c* �k�►r�k *fir* **�►c **�k *�►r* **�c �ic�ic�►c �k�c�k **fir �k�k�k �c�c�c �k�k�k *�c*
. . i j . . . jam
APPROVED AS COUNCIL / AGENCY
AGE N:
-City ne er (signature)
Biu � iim iii �i
o l i . �►
i..•0 i j1 • 0'
[olizill _