Pension Revisions

Posted October 3, 2011

Update - City Council Enacts Pension Revisions
The following is a summary of information about the pension revision decisions made by the City Council on September 20, 2011
  • The City Council decided (3-2 vote) to transfer the responsibility for the remaining 6.5% employer paid “member” contribution (referred to as “EPMC”) to employees in exchange for a 1-time 5% salary increase, resulting in a 1.5% decrease of net pay to employees. The EPMC for a 1-time salary increase is expected to save the City about $60,000 (net of salary increases) during the remainder of Fiscal Year 2011-2012 (about $81,000 annualized).
  • Prior to City Council action, the Fiscal Year 2011-2012 Budget for Pension was $1.03 million, about 4% of total budgeted general fund expenditures and transfers. As a result of the City Council’s September 20th action, the City’s actual Fiscal Year 2011-2012 pension cost is expected to be about $0.75 million; although, offset by a proportional increase of salaries based upon the 5% / 6.5% cost sharing by employees.
  • On September 20, 2011, the City Council also decided (5-0 vote) to establish a 2% / 60 benefit formula for new employees, with new employees paying the entire employee portion of pension cost. The City Council did not increase the pension benefit formula.
  • In the Pension Revisions White Paper published by Management Partners and presented to the City Council on September 4, 2011, it was reported “Therefore, the total pension savings over the initial 6 years would range between $1.2 million and $1.6 million”.  The savings estimates were prepared by staff and reviewed by management partners.
Participation
The City participates in a 2.5% / 55 benefit risk pool in CalPERS with more than 160 other agencies with fewer than 100 employees. New employees will participate in a separate 2% / 60 benefit pool. The employer contribution rate and the calculation of the Unfunded Actuarial Accrued Liability (the “UAAL” and commonly referred to as the “unfunded pension obligation”) is calculated annually for the entire risk pool, not each respective agency (including the City). Based upon an estimate prepared by the City’s pension advisor, the unfunded pension obligation as of June 30, 2009 (the most current information available) was $2.7 million, based upon the actuarial valuation for the pool. As of June 30, 2009, the City’s share of the 2.5% / 55 risk pool’s assets, liabilities and net actuarial liability was about 1%.  There is no direct impact on the City’s future employer contribution rates and the future UAAL resulting from the 1-time 5% exchange for the 6.5% EPMC transfer. The fiscal impact will be borne by the entire risk pool in the future.

Staff Reports
Proposed Pension Revisions
The City Council Pension Subcommittee (Mayor Long and Council member Wolowicz) developed proposed revisions to the City’s employee pension plan during 2010-2011. At its meeting on November 4, 2010, the City Council:
  • Directed that the City select and retain a retirement plan consulting firm to assist in the identification of feasible and viable alternative pension plans for new employees aimed at achieving cost controls; and,
  • Appointed a 2-member City Council subcommittee consisting of [immediate past] Mayor Wolowicz and Mayor Pro Tem [current Mayor] Long to
    • (a) work with City Staff in the selection of the consulting firm
    • (b) work with City Staff and the consultant in completing the analysis of the possible alternatives to the City’s existing pension
    • (c) by January 31, 2011 present the preliminary findings and recommendations for further study, as appropriate, to the City Council.

      The work culminated in the decision by the City Council on September 20, 2011.
Background
Since 1974, the City has contracted with CalPERS to provide employees with a defined benefit pension plan. CalPERS refers to the plan as a Miscellaneous Plan (with no police or fire employees). Based upon the 2.5% at 55 benefit formula, employees are eligible to receive full pension benefits upon retirement at age 55, while receiving a defined benefit equal to the number of years worked multiplied by their annual salary (referred to as “final compensation”) multiplied by 2.5%.

Employee Contribution Rate
The City’s plan is funded with an employee contribution that remains constant at 8% of covered payroll and employer contribution that fluctuates with the plan’s funding status and the actuarial assumptions set by CalPERS. Employees voted to approve the increase of the employee contribution rate from 7% to 8% and pay 1.5% of the 8% employee contribution when the benefit formula was improved from 2% at 55 to 2.5% at 55 in 2007. Until the pension revision was enacted on September 20, 2011, the City paid the remaining 6.5% portion of the employee contribution, commonly referred to as the employer paid member contribution (“EPMC”). The EPMC was paid by the City for about 20 years.
 
Provisions
Other significant provisions of the current plan include:
  • No integration with federal Social Security retirement benefits therefore, neither the City nor its employees make contributions based upon 6.2% each and employees do not earn Social Security credits;
  • A Level 4 1959 pre-retirement Survivor (death) Benefit (spouse receives an allowance of $950 per month for life upon member’s death); and
  • A COLA adjustment not to exceed 2% each year.
  • The Fiscal Year 2011-2012 budget includes an appropriation of $1,069,000 for pension contribution payments to CalPERS on behalf of employees.  This includes the Employer contribution of 13.353% (12.882% after pre-payment discount) of covered payroll (base salary), and the Employee pick-up of 6.5% of covered payroll. Subsequent to the decision made by the Council on September 20, 2011, it is expected that the City’s actual Fiscal Year 2011-2012 pension cost is expected to be about $0.75 million; although, offset by a proportional increase of salaries based upon the 5% / 6.5% cost sharing by employees.
City Council Pension Workshop – November 30, 2010
Presentations
The City Council conducted a Pension Workshop on November 30, 2010. At the Workshop, the following presentations were made by Kung-pei Hwang, ASA, MAAA, Senior Pension Actuary, CalPERS and John Bartel, Bartel Associates, LLC
Status Reports by the Pension Subcommittee
Next Steps
As described in its 3rd Report, the Subcommittee is currently working with a consulting firm, Management Partners, on the following goals
  • Consider recommendations to the Council for possible changes in RPV's pension structure to assure long term sustainability that does not expose the City to risk of litigation or deteriorated employee relationships.
  • Provide the Subcommittee with advice and confirmation of issues that the Subcommittee has encountered during the preliminary gathering of information. Also include comments and advice as to the potential implementation or probable roadblocks of the adoption of a defined contribution type plan.
  • Sustainability generally means ensuring that pension expenditures become a predictable and generally flat percentage of payroll.
  • Management Partners will assist the Council Subcommittee in reaching a recommendation and will prepare further interim reports after each meeting with the subcommittee.
  • Present a final report to the City Council in September, ideally at the 1st meeting of that month. [An agenda item is tentatively scheduled for the September 6, 2011 City Council agenda]
If the City Council ultimately decides to modify the City’s existing employee pension plan, an amendment to the current contract with CalPERS may be necessary. The amendment process generally takes 90 to 120 days to complete.

Additional Information
Other Pension Information prepared by others: