At the request of Councilman John Mirisch, the City Council will soon listen to an update on the state’s current pension reform effort.
Sustainability is a big buzzword these days when it comes to cities, said Mirisch. But we shouldn’t only try to achieve environmental sustainability; we must also focus on economic sustainability. The current pension and retirement health care system for public employee sector is simply not sustainable not in this economy, not in any economy. The issue is a ticking time bomb and we should address the matter sooner rather than later.
The City’s pension plans are administered by the state’s Public Employees Retirement System (CalPERS). The defined benefit retirement plan provides a guaranteed annual pension based upon retirement age, years of service and some period of the high salary
City employees do not contribute towards the cost associated with their pension.
In recent years, government retirement expenses have risen dramatically and been compounded by a 25 percent loss in CalPERS investment income.
Pension costs are unsustainable, as pointed out by the CALPERS chief.
Thus, several state initiatives have been proposed to achieve pension reform. These include: state legislative initiatives, proposed constitutional ballot measures, and individual city/county efforts.
Although, several factors have made it challenging to achieve immediate reform.
Vested pension rights are generally regarded to have ironclad protection under contract law, according to the City’s CFO Scott Miller. Courts in California have ruled that reductions in pensions can only be approved in exchange for something of equal value. As a result, proposed two-tier programs would only impact newly hired employees.
The City’s pension costs are partially dependent on CalPERS market performance. From 1999-2003, CalPERS investments performed well, creating a surplus of assests, according to Miller. This is also known as superfunding. Superfunding is a condition where the actuarial value of assests exceeds the present value of benefits.
When this condition exists, contributions for the rate year covered by that valuation might be reduced or waived.
During 1999-2003, CalPERS assests were greater than the amount the City was responsible for paying resulting in no City contribution for miscellaneous employees and a lower contribution level for public safety employees.
The City didn’t attain superfunding status beginning in 2004 and as a result, the contributions for miscellaneous and public safety employees increased.
The City Council will now look at where it wants to place this item on the City’s legislative platform including major elements to support, such as a tiered system related to defined contribution as opposed to defined benefit. The Council could also authorize an interested council member to participate on behalf of the City.
Mirisch suggests moving from the current system of unsustainable defined benefits to a system of defined contributions, or a combination of defined benefits and defined contributions.
While it’s extremely important for municipal and state employees to have competitive salaries and solid retirement benefits, the system needs to be affordable to the taxpayers on a long-term basis. Reform is not only needed at the municipal level, but also on the state level. I’m hoping that we can take a lead in these important reform efforts.
