City Council Study Session

Employee Pensions
Part II
April 20, 2010
 Outline

ΠReview of CalPERS

ΠOther Retirement Benefits and Costs

¾PARS
¾Pre-1945 Police and Fire Pension Plan
¾Pension Obligation Bonds

ΠCurrent Pension Cost Issues

ΠOptions for Pension Reform

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 Review of City’s PERS Benefits

Safety Miscellaneous
Formula 3% @ 50 2.5% @ 55 (after 10/1/06)
2.7% @ 55 (before 10/1/06)
Employer Share 16.007%* 11.830%*
Employee Share 9% 8%
Employer Pick Up of Employee 7% 6%
Share (EPMC)

Employee Amount Paid 2% 2%

Total % of payroll sent to PERS 25.007% 19.830%

FY 10 Total Costs (All Funds) $34.8 million $45.6 million

Retirees 1,458 3,573

Average Pension $49,205 $21,997
* Employer Share projected to increase to 20.7% for Safety and 14.5% for Miscellaneous in FY 12
* Employee and Employer Share is based on a percentage of the City’s payroll 3
Other Retirement
Benefits and Costs

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 PARS Retirement Benefits

• Public Agency Retirement System (PARS) – Retirement

plan for Special Status Contractors* and Seasonal and
Temporary employees

• Formula (minimum age of 65):

Years of Highest 36 Consecutive Lifetime Monthly

x x 1.5% =
Service Month’s Salary Average Benefit

5.0 $632 1.5% $47.40

* Closed plan – no new Special Status Contractors eligible for the plan
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 Pre-1945 Police and Fire Pension Plan

• The City administers a Police and Fire Pension Program under

City Charter Section 187 for employees hired before 1945 and
retired with 20 years of service

• As of 12/30/2009, there were 67 participants in the program with

ages ranging from 63 to 103
9 54 were surviving spouses
9 13 were remaining employee participants

• Surviving spouse receives 50% of employee’s salary. Of the 13

remaining employee participants, 8 have spouses who will
qualify for benefits upon the employee’s death.

• Total FY 10 costs in this Plan are an estimated $3.4 million in the

General Fund
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 Sample Pre-1945 Police/Fire Pension Benefit

• Example: Police Sergeant with 33 years of service

33 YOS = 50% + (13*1.66%) of Salary = 71.58%*

In 1979:
$1,117
71.58% X $1,561 / month (Salary) =
Monthly Pension

In 2010:
$4,593
71.58% X $5,997 / month (Salary)** =
Monthly Pension

* Benefit equals 50% of salary. For each additional year of service beyond 20 years, the employee
receives an additional 1.66% of salary
** Salary used in pension calculation based on last classification held during last year of service.
Adjusts with POA and FFA negotiated increases plus an additional 7% for EPMC

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 Pension Obligation Bonds

• Pension Obligation Bonds (POBs) are used to fund pension

costs
• In 1995, the City issued POBs totaling $108.6 million. The
current outstanding liability for the bonds is $94 million,
reflecting $70.3 million in principal and $23.7 million in
interest.
• The average annual debt service payment for FY 10 - FY 11
is $11.4 million (General Fund portion - $4.2 million)
• For FY 12 - FY 21, the average annual payment is $7.1
million (General Fund portion - $4.2 million)

* The 2002 POBs were refunded as the 1995 POB’s debt service had become unaffordable.
Harbor and Water did not participate as they had sufficient cash to make payments

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Current Pension
Cost Issues

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 Trend Analysis

General Fund Expenditures

NOTE: From FY 00 – FY 04, the City did not contribute to PERS as the City was super-funded

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 City PERS Costs

Super-funded

PERS Average Annual Rate of Growth FY 00 – FY 10: 8.7%

NOTE: From FY 00 – FY 04, the City paid $0.00 to PERS because the City was super-funded due to the
POBs and market gains. The amounts listed indicate what would have been paid had the City
not been super-funded.
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 FY 11 Projected PERS Costs

% of All Funds General Fund

Total (in Millions) (in Millions)

Employer Share 62.0% $ 52.1 $ 31.3

Employer Pickup of Employee

29.2% $ 24.5 $ 14.7
Share
TOTAL CITY COST 91.2% $ 76.6 $ 50.4

Employee Contribution 8.8% $ 7.4

TOTAL PERS COST 100% $ 84.0

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 Other Agencies

• Rising pension costs is not isolated to CalPERS alone

• Other Systems’ Unfunded Liabilities:

9 California State Teachers Retirement Association - $22.5 billion

9 LA County Employees Retirement Association - $4.9 billion

9 LA City Employees Retirement System - $2.2 billion

9 Orange County Employees Retirement System - $3.1 billion

9 San Diego City Retirement System - $2.8 billion

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 Summary

• A greater percentage of our budget will be spent on

pensions
9 In FY 10, pension costs comprise 13.1% of GP budget

9 If no action is taken, by FY 14, pension costs are projected to

comprise 17.6% of GP budget

• To ensure fiscal sustainability, the City should start

mitigating rising pension costs

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Pension Reform

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 City Actions Taken To Date
• Reduced the Workforce – General Fund Budgeted FTEs have been
reduced from 3,459 in FY 03 to 2,945 in FY 10
• Reduced formula for miscellaneous employees from 2.7%@55 to
2.5%@55 in 2006
• All employees pay 2% of payroll, contributing $8 million a year
• Led lobbying efforts with PERS to enact rate-smoothing to address 28%
market losses in 2009
• Included a re-opener in the POA/FFA labor agreements allowing
mutually agreeable changes to the pension plan
• Negotiated a trigger in the POA agreement that if any 3 of comparable
agencies convert to a 3% @ 55 formula, the POA would automatically
convert to that formula for new members
• Engaged with legislative committees regarding pension reform
• Evaluated PERS/PARS solution
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 City’s Options – Current Employees

Requires Negotiations

• Employees pay employee share of pension costs

9 Savings from full PERS pick up – All Funds: $25 M

9 Savings from 1% - All Funds: $4 M

9 Savings from full PERS pick up – General Fund: $16 M

9 Savings from 1% - General Fund: $2.4 M

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 City’s Options – Future Employees

Requires Negotiations

• Establish New Tier(s)

• Examples include:
9 Modify PERS benefit formula (e.g. age, percentage, salary)

9 Use highest 3 years of salary vs. single highest year

9 Do not report EPMC to PERS

9 Evaluate other plan changes

9 Review existing agreements for other potential changes

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 Conclusion

• The City Charter states that the City shall participate in the
State Employees’ Retirement System

• Changes to employee pensions will require negotiations with

employee organizations

• Can only amend PERS contracts once every three years

(Miscellaneous, Police and Fire are separate plans)

• Other changes to local government retirement systems will

require changes to State retirement law

• Human Resources, in coordination with the City Attorney, will

continue to look for new alternatives (within existing law)

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 City Council Study Session

Employee Pensions
Part II
April 20, 2010