City one step closer to pension reform
Published: Thursday, June 21, 2012 at 3:00 a.m.
Last Modified: Wednesday, June 20, 2012 at 3:37 p.m.
As cities across California grapple with rising employee retirement costs that are consuming an ever larger percentage of the funds for basic services like parks maintenance, public safety and street repair, Petaluma is on the verge of taking a step toward reducing those costs in the long term.
The change could come before the City Council for approval as soon as July 2, and is likely to include a “two-tier” system, where newly hired employees would be offered a less generous retirement package than existing employees.
Paul Gilman, spokesman for the Petaluma Peace Officers Association, and City Manager John Brown announced Wednesday that the POA had tentatively agreed to a new contract and that will include a tiered retirement system. “I'm glad it's done. I think it's fair for everyone involved,” he said.
Ken Dick, spokesman for the Firefighters' Local 1415 union, could not be reached for comment, but based on comments from city staff and councilmembers indicating a strong desire for tiered pensions, it appears likely that other unions will follow suit.
Brown confirmed that the city is currently bargaining with all 10 employee units and could be bringing “a couple” finished contracts before the council at its July 2 meeting if paperwork is completed in time.
But the agreements, arrived at after years of the city bargaining with unions for concessions, include changes similar to two-tier systems that other cities have recently adopted. Currently, Petaluma firefighters and police officers' pensions allow them to retire at age 50, taking 3 percent of their final year's pay for each year they worked. In other words, a firefighter who joined the department at age 20 could retire at 50 earning 90 percent of his final year's salary as a pension.
All other city employees can currently retire at age 55, taking 2 percent of their final year's pay for each year worked.
If approved by the City Council, the new tier will push back the age at which police officers can retire to 55.
While the two-tier system is an initial step in tackling the growing pension problem many cities are facing, pension expert Joe Nation — a former state Assemblyman and current Stanford University public policy professor — said that two-tier systems will not provide economic relief to cities for 15 to 20 years, when a significant number of new employees are in the system.
“Two-tier systems are great long-term solutions, but they don't solve anything in the short term because the attrition rate (of employees) is fairly slow,” Nation said.
Petaluma's anticipated new contracts come at a time when pensions are taking up an unprecedented percentage of the city's general fund budget. In the upcoming fiscal year, Petaluma will pay almost $6.2 million to cover its annual pension obligations, not counting health care benefits.
In the 2003-2004 fiscal year, Petaluma spent only 5.8 percent of its general fund budget paying for pension costs. In the coming fiscal year the city is expecting to use 14.2 percent of the general fund for pension costs, and by the 2015-2016 fiscal year, 16 percent.
Those costs, combined with diminished tax revenues resulting from the recession, have caused the city to struggle to fund basic services like fixing broken street lights and repairing roads.
Faced with the prospect of cutting more services in the future, the council is meeting on Monday to discuss putting a sales or hotel tax, or both on the November ballot to bring in revenue.
Petaluma officials are quick to point out that the city is not alone in creating, or dealing, with escalating pensions costs. Career government worker pensions in Sonoma County have more than doubled in the past decade, led by sheriff's deputies and other public safety workers who by 2011 were retiring with an average pension of more than $94,000 a year.
In 1999, Gov. Gray Davis and legislators approved a bill that gave state workers dramatically increased benefits with the assumption that California could afford it through smart investments and a growing economy. County and city governments soon followed suit, resulting in Sonoma County pensions for recent career workers that can be shockingly higher than those received by career workers who retired just 10 years earlier.
Higher retirement benefits were granted in part to attract and retain workers, but also as a strategy to slow the rising pace of salaries. In Petaluma, the higher pensions promised to current workers, coupled with investment losses, combined to create a long-term retirement shortfall — also called unfunded liability — of now more than $37 million.
Gilman acknowledged that the current police officers operate under a generous pension deal, though he added that those benefits were originally gained in exchange for no pay raises.
Cities and counties around the state, as well as Gov. Jerry Brown, are beginning to tackle pension reform, though Petaluma officials and unions say it is difficult to apply what other cities have done to Petaluma.
In San Jose and San Diego, voters recently passed pension reform measures by large majorities. In San Jose, almost 70 percent of voters approved a plan that gives workers the choice between increasing their pension contribution to 13 percent of their pay (Petaluma employees already contribute between 7 and 9 percent) or switching to a lower-cost plan with reduced benefits. It also embodied a two-tier system, vastly cutting benefits for new hires.
In San Diego, where pension cuts have already been made, 66 percent of voters opted to eliminate standard pensions for new workers and instead give them a 401(k) plan — except for new police officers who retain traditional pensions.
But Mayor David Glass said that such measures are not feasible in Petaluma at this point.
“It's just not something that I have the power to do,” he said. “Those cities are run with a strong mayor form of government.” Glass said that if the city council or the voters wanted to create a ballot measure addressing pensions, it would likely be appealed, as is happening in other cities.
Gilman also pointed out that San Jose and San Diego have independent retirement systems, while Petaluma works with the statewide organization CalPERS — California Public Employee Retirement System — whose rules constrain what the city can do.
Nation says that a first step in addressing Petaluma's pension problem should actually come from CalPERS and not the city. He says that CalPERS is currently formulating pension costs for cities based on a 7.75 percent rate of investment return. He pointed out that CalPERS investments only earned between 1 and 5 percent during the last 10 years.
“As long as they continue to assume such a high rate of return, CalPERS underfunds the system,” he said. “The total debt becomes bigger and bigger each year.”
Nation said that reducing generous retirement packages and adjusting CalPERS assumptions are the two most needed solutions for Petaluma and other cash-strapped cities.
Even if these two things happened, Petaluma would still need to grapple with it's other current pension problem — unfunded liability. Petaluma's pension debt, the amount of money that Petaluma has already agreed to pay to past and current employees that it currently cannot cover through assets or general funds — is more than $37 million.
Brown says that the city is currently making minimum payments on its debt because it does not have any extra money in its general fund budget to pay it down.
But Nation likened this strategy to only making the minimum payment on credit card debt and allowing interest to accrue, increasing the overall cost.
Nation added that in the private sector companies have to pay off their unfunded liability in seven years, while CalPERS typically allows cities 30 years.
“That alone raises some real equity issues,” he said. “If you are paying it off over 30 years, people who had nothing to do with accruing that debt are going to be paying it off.”
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