ABSTRACT: The PUBLIC EMPLOYEES’ RETIREMENT SYSTEMIN MONTEREY COUNTY – CALPERS section of the 2010 MONTEREY COUNTY GRAND JURY FINAL REPORT JANUARY 10, 2011, is reproduced. The City Council of Carmel-by-the-Sea is required to respond to all Findings and Recommendations, including 12 Findings (F1.1 - F1.12) and 12 Recommendations (R1.1 0 R1.12), as follows:
F1.1. The CalPERS retirement system is worth retaining.
F1.2. Those local agencies that have binding arbitration have ceded their collective bargaining authority and responsibility to an individual arbitrator.
F1.3. A vote of the electorate before granting increased retirement benefits has not been implemented as a check on overspending.
F1.4. Some agencies may allow retired employees to come back to work part time at the same agency and receive retirement and a salary, provided they don’t work more than 960 hours per year, the maximum allowed by CalPERS.
F1.5. Some agencies may have practices that allow employees to increase or “spike” their base year salaries by converting unused sick leave or vacation leave to salary during their last year of employment.
F1.6. The practice of offering an employee up to two years unearned credit for retirement in exchange for taking an early retirement (“a Golden Handshake”), as authorized by Section 20903 of the Government Code, may be subject to abuse.
F1.7. Some employees do not pay an appropriate CalPERS retirement share.
F1.8. Some employees may pay for all optional CalPERS benefits. Some employees may pay for some or a portion of some of these benefits, and some may pay nothing for optional benefits received.
F1.9. Some agencies have no caps on the maximum amount of time one can accumulate in sick leave or vacation leave.
F1.10. The California Legislature could enact changes that would limit new employees to 2% @ 55 for Safety with a 90% of salary retirement cap and 2% @ 60 for Miscellaneous in the CalPERS system with a 36-month salary base for each.
F1.11. CalPERS could be made more affordable to the agencies if new employees were provided, in lieu of benefits accorded to existing employees, a second-tier of benefits of 2% @ 55 for Safety employees with a 90% of salary retirement cap and 2% @ 60 for Miscellaneous employees, each with a 36-month salary base.
F1.12. Some MOUs may not allow the reopening of negotiations to make prospective changes to salary and benefits in the event of unforeseen dire economic circumstances.
R1.1. Continue to participate in the CalPERS retirement system. [Related Finding: F1.1]
R1.2. Abolish binding arbitration in labor matters. [Related Finding: F1.2]
R1.3. Require a vote of the electorate as a prerequisite to increase retirement benefits and thereby limit spending. [Related Finding: F1.3]
R1.4. Do not allow those who have retired from the agency to be re-employed by the same agency on a part-time basis. [Related Finding: F1.4]
R1.5. Prevent “spiking” the base salary. [Related Finding: F1.5]
R1.6. Do not offer a “Golden Handshake.” [Related Finding: F1.6]
R1.7. Require employees to pay the CalPERS employee contribution rate. [Related Finding: F1.7]
R1.8. Require employees to pay for all optional CalPERS benefits. [Related Finding: F1.8]
R1.9. Place a cap on the maximum amount of sick leave and vacation leave an employee can accumulate. [Related Finding: F1.9]
R1.10. Urge passage of legislation that new hires are limited to 2% @ 60 for Miscellaneous employees, 2% @ 55 for Safety employees with a 90% of salary
retirement cap, and a 36-month salary base for each. [Related Finding: F1.10]
R1.11. Contract for a CalPERS retirement benefit for newly hired employees of 2% @ 55 for Safety employees with a 90% of salary cap and 2% @ 60 for Miscellaneous employees with a 36-month salary base for each. [Related Finding: F1.11]
R1.12. In all future MOUs, reserve the right to reopen negotiations in the event of unforeseen dire economic circumstances to make changes to salary and
benefits with no reduction to salary and/or benefits already earned. [Related Finding: F1.12]
2010
MONTEREY COUNTY
GRAND JURY
FINAL REPORT
JANUARY 10, 2011
PUBLIC EMPLOYEES’ RETIREMENT SYSTEM
IN MONTEREY COUNTY – CALPERS
SUMMARY
PURPOSE OF THE INVESTIGATION
The 2010 Monterey County Civil Grand Jury investigated the feasibility of maintaining the retirement system for public employees that is currently used by the County of Monterey and the twelve cities within Monterey County, i.e., the California Public Employees’ Retirement System (CalPERS). The Civil Grand Jury also investigated the viability of alternatives to continued participation by local agencies in CalPERS. This investigation was conducted in an attempt to suggest how local agencies can maintain a sustainable retirement system that is beneficial and fair to employees while continuing to provide a desirable and affordable level of public service.
SUMMARY OF FINDINGS
The CalPERS retirement system is a defined benefit system, not a defined contribution system. As it operates locally it is funded by the taxpayers of agencies which participate in the system. CalPERS, many newspapers, syndicated columnists, and various governmental and private agencies have characterized the present public retirement system as unaffordable. The Civil Grand Jury concurs that the present system is unsustainable because the benefits are too costly.
The public retirement system is broken and needs fixing rather than replacing. Simple legislative enactments at the state level would go a long way to fixing the problems, but such statutory amendments applicable to local agencies may be unlikely at this time. Accordingly, desirable changes affecting Monterey County agencies need to occur at the local level if they are to be effective in the near term.
SUMMARY OF RECOMMENDATIONS
All 13 local agencies should remain in the CalPERS system. However, respective city councils and the Board of Supervisors should seek a legislative sponsor for, and support adoption of, amendments to the Public Employees’ Retirement Law (Government Code Sections 20000 et seq.) to limit CalPERS basic benefits to 2% @ 55 for new Safety (i.e., law enforcement and fire) employees with a 90% of salary retirement cap, 2% @ 60 for new Miscellaneous (i.e., non-law enforcement and fire) employees, and a 36-month benefits base for both categories. Concurrently, each agency, following the guidance of its legal counsel, should adopt a two-tier system that limits the retirement benefits accorded to new employees as recommended above.
In addition, all future Memoranda of Understanding (MOUs) with employee bargaining units should provide that the agency reserves the right to reopen negotiations during the term of the agreement if it determines that dire economic circumstances warrant it doing so. Further, all future MOUs should require each new employee to pay his or her fair share of CalPERS basic benefits and pay the entire costs of any optional CalPERS benefits. Lastly, any increase in retirement benefits should not occur without a vote of the electorate.
BACKGROUND FOR THE INVESTIGATION
CalPERS is a retirement system for public employees in the state of California. It has 1.6 million members who in the aggregate work for over 2,500 public agencies. The system classifies employees into one of two categories: (1) “Safety”- consisting of law enforcement personnel and firefighters, and (2) “Miscellaneous”- consisting of all others.
In Monterey County, all twelve cities and the County of Monterey contractually
participate in the CalPERS system for both categories. Usually, both the agency and its employees contribute to funding the system. In 1999, the California Legislature enacted Senate Bill 400 (signed into law by the governor and enrolled as Chapter 555 of the Statutes of 1999) allowing an increase in retirement benefits for public employees if the employing agencies chose to do so.
Many agencies subsequently increased retirement benefits for Safety employees to 3% at 50 and for Miscellaneous employees at a lesser but increased rate in order to stay competitive with other agencies. CalPERS retirement benefits are funded 63% from the return on its investments mostly in the stock market, 22% from the CalPERS member agencies’ taxpayers, and 15% from agency employees. In 1999, at a time when CalPERS was experiencing exceptionally strong investment portfolio performance, the profits from the CalPERS investments were available to be used to fund increased benefits contracted for by the agencies without any requirement that the agencies increase contributions to the system to cover the increase in benefits. This situation radically changed in 2001 when the “dot com” bubble burst and the stock market “tanked.” Benefits which were once super-funded at 138% became only 80% funded. Member agencies were then required to make up the 20% deficit through an increase in contribution rates paid by the agencies. Rather than requiring that the full deficit be funded immediately, CalPERS allowed the agencies to “smooth” the increases over a 30-year period beginning in 2010, thereby avoiding an immediate drastic jump in contribution rates. Nevertheless, pension costs today remain 7% unfunded, and such costs are not “sustainable” according to CalPERS’ chief actuary.
INVESTIGATIVE METHODOLOGY
• Interviewed various public employees and members of the public
• Communicated with CalPERS staff orally and in writing
• Reviewed newspaper articles in the Los Angeles Times, the Monterey Herald, the Carmel Pine Cone, the Pacific Grove Hometown Bulletin, and the San Francisco Chronicle
• Reviewed the following documents:
CalPERS- Optional Benefit Listing
CalPERS- Actuarial Valuations
CalPERS- Rate Table
CalPERS- PERSPECTIVE- Fall 2010
CalPERS- Employer Rate Smoothing Policies by Ron Seeling, Chief Actuary
CalPERS- miscellaneous documents
Monterey Bay Area Managers’ Group, Pension Reform Draft, February 24, 2010
Various MOUs and ordinances
City council agenda packets from Pacific Grove and Vallejo
Responses to Civil Grand Jury questionnaires sent to local agencies
Summary of Testimony of Girard Miller before the Little Hoover Commission
Employee Benefits and City Budgets: “Can the Planets Align?” presented by
Jeffrey C. Chang, Esq. at the League of California Cities Spring
Conference in Santa Barbara, May 2010
McCauley Public-Employee Pension Reform Act Initiative (as amended)
Pacific Grove Pension Reform Initiative
How California’s Public Pension System Broke (and How to Fix it) by Adam B.
Summers
League of California Cities documents:
A Framework for Public Pension Reform
Pension Reform in California, City Manager’s Department, November 1, 2009
San Diego Division, Proposal for Regional Pension Standard, June 29, 2009
Ventura County Grand Jury Report 2008-2009 – Ventura County Pension, “An
Uncontrollable Cost”
Local agency budgets
“Sanity in the offing?” The Economist Magazine, p.35, June 26, 2010
DISCUSSION
DEFINED BENEFIT vs. DEFINED CONTRIBUTION
The CalPERS plan is a defined benefit plan. It provides a defined monthly benefit amount to each retiree. The amount payable is determined by multiplying (1) the years of service rendered by the employee by (2) the highest salary earned by the employee (averaged over either a 36-month or 12-month period, depending on the CalPERS contract), further multiplied by (3) the applicable rate under the retirement plan contract in force. For example, an employee with 25 years of service whose highest salary was $50,000 and who retired at age 55 in a 2% @ 55 plan would receive a retirement pay of $25,000 per year.
In contrast, a defined contribution plan is one in which the employer contributes a fixed amount and the returns are based on contribution and investment earnings. These plans put the risk largely on the employee to amass and manage assets to ensure an adequate pension after retirement. Defined contribution plans, such those established under Internal Revenue Code Sections 457 and 401(k), have not performed well in recent years due to turmoil in the markets. Most private business pension plans, if they exist at all, are defined contribution plans.
The defined benefit form of plan should be retained for several reasons. First, such plans have proven to be more efficient than defined contribution plans for delivering fixed pension benefits. Defined benefit plans may offer lower fees and cover disability retirements and death benefits that are not included in defined contribution plans. Further, according to the League of California Cities, defined benefit plans offer a hedge against inflation and manage longevity risk better than defined contribution plans by pooling larger numbers of people.
Moreover, the League states that moving from a defined benefit plan to a defined contribution plan may entail substantial startup costs and may force a change in asset allocations which would likely produce lower investment results in the defined benefit plan which remains for existing employees. Hence, it may likely cost the taxpayers more for many years to place future government employees into a defined contribution system.
In addition, there is a compelling financial reason for not buying one’s way out of CalPERS at this time. State law requires that all new employees in a CalPERS agency be enrolled in CalPERS. An agency can buy its way out of CalPERS only after a twelvemonth waiting period and after the completion of a CalPERS actuarial study showing how much is needed to fund the pensions of the retirees and employees already in the system. The City of Pacific Grove commissioned such a study in May 2010. It showed that 30 to 34 million dollars were needed to buy the city’s way out of CalPERS. This covered 276 Miscellaneous active and retired members, 159 Safety active and retired members, and was in addition to the 19 million dollars applied to the deficit funded by a bond issue previously authorized by voters of Pacific Grove. For a city experiencing difficult financial times, the prospect of amassing some 50 million dollars to exit the CalPERS system is not a practical one. The Civil Grand Jury is not aware of any
CalPERS actuarial studies prepared for other local agencies but does not expect that results would be substantially different.
BINDING ARBITRATION
When a local agency and employee union cannot agree, the matter is submitted to binding arbitration if required by contract or law. It is then decided by an arbitrator whose decision is final. In such situations the authority of the governing board of the agency has been delegated to a third party. It was an adverse decision in binding arbitration on a wage issue concerning Safety employees that prompted the City of Vallejo to file for Chapter 9 bankruptcy protection. Vallejo voters subsequently repealed binding arbitration and placed the ultimate authority in labor matters back in the hands of its elected officials.
VOTER APPROVAL OF INCREASE IN RETIREMENT BENEFITS
Because the burden of paying for the benefits accorded to public employees ultimately rests on the shoulders of the local citizenry, it may be fitting to have all proposed increases in public employee retirement benefits subject to ratification by the voters. If such a requirement had been in place in the 1990s, the rush to spend the surplus CalPERS balance may have been avoided, thereby obviating the present need to reform CalPERS.
FORMER EMPLOYEES
Former employees are sometimes re-employed on a part-time basis (not to exceed 960 hours per year, the CalPERS maximum) and continue to receive retirement benefits. This type of “double dipping,” drawing a salary and a pension concurrently from the same agency, is subject to abuse.
SPIKING
Some employees may be allowed to convert accumulated sick leave and/or vacation leave or other benefits to cash during their last year of employment in order to inflate or “spike” their salaries, thereby increasing their retirement payments. Currently, there is a bill before the legislature, SB 1425, to prevent “spiking.”
GOLDEN HANDSHAKE
Government Code Section 20903 allows an agency to add up to two years of unearned retirement credit (a “Golden Handshake”) to induce an employee to retire early. This is a hidden cost.
SHARED CALPERS CONTRIBUTION
In the CalPERS system, a Safety employee’s contribution rate (i.e., the share of the employee’s salary that goes to fund the employee’s retirement benefit) is normally 9%. The employing agency normally pays another 9%. The contribution rates for a Miscellaneous employee are typically 7% and 7% respectively. Due to poor CalPERS investment performance, the normal combined contribution of 18% of salary for Safety has gone as high as 26% for police and 36% for firefighters. Miscellaneous employee rates have gone as high as 29.8% of salary in one local agency and almost 17% in another. Despite these rate increases, some employers have, as a recruitment inducement, agreed to pay the employer’s and employee’s share. Local municipalities and the county can ill afford that kind of expense in today’s environment.
OPTIONAL BENEFITS
The Civil Grand Jury notes that CalPERS has issued a 41-page booklet [PERS – CON – 40 (REV1/09)] entitled “Optional Benefits Listing.” Among these benefits are increased disability and Cost of Living Adjustment (COLA) options, survivor allowance, supplemental income 457 plan, and others. Payment for these optional benefits is subject to collective bargaining.
SICK LEAVE AND VACATION LEAVE
Unlimited accumulation of sick leave and vacation leave can result in an employee actually retiring while still on the job if he or she judiciously accumulated them and uses them in the last year of employment. Accordingly, a cap on both can prevent the “retirement while on the job” problem.
CALPERS FOR NEW EMPLOYEES
A survey done by the Monterey Bay Area Managers’ Group in October 2009 showed that most cities within Monterey County are at 3% @ 50 for Safety employees, 2% @ 55 for Miscellaneous employees, use the highest 12 months of salary rather than highest 36 months as a base, and pay all or a portion of employee costs for both classifications. Three of the cities ask their employees to cover all costs. The study also showed that 81% of the agencies statewide were at 3% @ 50 for Safety while the most popular formula for Miscellaneous employees statewide was 2% @ 55.
If all new employees were hired at the pre-existing 2% @ 55 for Safety employees with a 90% of salary retirement cap and 2% @ 60 for Miscellaneous employees with a 36-month highest salary as a base, a rollback to pre-1999 standards would occur. The retirement ages of 55 and 60 for Safety and Miscellaneous employees, respectively, are feasible because of the longer life expectancy existing today. Eventually, as a greater portion of the workforce is comprised of employees with second-tier retirement benefits, the savings should become substantial. The proposed retirement rollback would be limited to new employees because the courts have stated that when persons enter public employment they have a vested right in the retirement plan in existence at the time of hire.
The 3% @ 50 formula would allow a Safety employee who makes $100,000 per year, is 50 years old, and has 25 years of service to retire with an annual retirement benefit of $75,000. If the second-tier retirement benefit discussed in the previous paragraph is implemented, a new Safety employee who makes $100,000 per year, is 55 years old at the time of his or her retirement, and has put in 25 years of service can retire with a yearly retirement benefit of $50,000. The public saves an additional $25,000 per employee per year, receives an additional five years of public service per employee, and the employee still receives a substantial pension.
MOU RESERVATION OF RIGHTS
By reserving in its MOU with labor union or employee groups the right to reopen
negotiations concerning salary and benefits during the term of the agreement (providing that no earned benefit shall be lost), an agency can preserve its ability to deal with its fiscal concerns in the event of unforeseen dire economic circumstances.
FINDINGS OF THE INVESTIGATION
F1.1. The CalPERS retirement system is worth retaining.
F1.2. Those local agencies that have binding arbitration have ceded their collective bargaining authority and responsibility to an individual arbitrator.
F1.3. A vote of the electorate before granting increased retirement benefits has not been implemented as a check on overspending.
F1.4. Some agencies may allow retired employees to come back to work part time at the same agency and receive retirement and a salary, provided they don’t work more than 960 hours per year, the maximum allowed by CalPERS.
F1.5. Some agencies may have practices that allow employees to increase or “spike” their base year salaries by converting unused sick leave or vacation leave to salary during their last year of employment.
F1.6. The practice of offering an employee up to two years unearned credit for retirement in exchange for taking an early retirement (“a Golden Handshake”), as authorized by Section 20903 of the Government Code, may be subject to abuse.
F1.7. Some employees do not pay an appropriate CalPERS retirement share.
F1.8. Some employees may pay for all optional CalPERS benefits. Some employees
may pay for some or a portion of some of these benefits, and some may pay nothing for optional benefits received.
F1.9. Some agencies have no caps on the maximum amount of time one can accumulate in sick leave or vacation leave.
F1.10. The California Legislature could enact changes that would limit new employees to 2% @ 55 for Safety with a 90% of salary retirement cap and 2% @ 60 for Miscellaneous in the CalPERS system with a 36-month salary base for each.
F1.11. CalPERS could be made more affordable to the agencies if new employees were provided, in lieu of benefits accorded to existing employees, a second-tier of benefits of 2% @ 55 for Safety employees with a 90% of salary retirement cap and 2% @ 60 for Miscellaneous employees, each with a 36-month salary base.
F1.12. Some MOUs may not allow the reopening of negotiations to make prospective changes to salary and benefits in the event of unforeseen dire economic circumstances.
RECOMMENDATIONS OF THE CIVIL GRAND JURY
R1.1. Continue to participate in the CalPERS retirement system. [Related Finding: F1.1]
R1.2. Abolish binding arbitration in labor matters. [Related Finding: F1.2]
R1.3. Require a vote of the electorate as a prerequisite to increase retirement benefits and thereby limit spending. [Related Finding: F1.3]
R1.4. Do not allow those who have retired from the agency to be re-employed by the same agency on a part-time basis. [Related Finding: F1.4]
R1.5. Prevent “spiking” the base salary. [Related Finding: F1.5]
R1.6. Do not offer a “Golden Handshake.” [Related Finding: F1.6]
R1.7. Require employees to pay the CalPERS employee contribution rate. [Related Finding: F1.7]
R1.8. Require employees to pay for all optional CalPERS benefits. [Related Finding: F1.8]
R1.9. Place a cap on the maximum amount of sick leave and vacation leave an employee can accumulate. [Related Finding: F1.9]
R1.10. Urge passage of legislation that new hires are limited to 2% @ 60 for
Miscellaneous employees, 2% @ 55 for Safety employees with a 90% of salary retirement cap, and a 36-month salary base for each. [Related Finding: F1.10]
R1.11. Contract for a CalPERS retirement benefit for newly hired employees of 2% @ 55 for Safety employees with a 90% of salary cap and 2% @ 60 for Miscellaneous employees with a 36-month salary base for each. [Related Finding: F1.11]
R1.12. In all future MOUs, reserve the right to reopen negotiations in the event of unforeseen dire economic circumstances to make changes to salary and
benefits with no reduction to salary and/or benefits already earned. [Related
Finding: F1.12]
REQUIRED RESPONSES
City Council of Carmel-by-the-Sea:
All Findings and Recommendations
City Council of Del Rey Oaks:
All Findings and Recommendation
City Council of Gonzales:
All Findings and Recommendations
City Council of Greenfield:
All Findings and Recommendations
City Council of King City:
All Findings and Recommendations
City Council of Marina:
All Findings and Recommendations
City Council of Monterey:
All Findings and Recommendations
City Council of Pacific Grove:
All Findings and Recommendations
City Council of Salinas:
All Findings and Recommendations
City Council of Sand City:
All Findings and Recommendations
City Council of Seaside:
All Findings and Recommendations
City Council of Soledad:
All Findings and Recommendations
Monterey County Board of Supervisors:
All Findings and Recommendations
Responses must comply with the following:
CALIFORNIA PENAL CODE SECTION 933.05
(a) For purposes of subdivision (b) of Section 933, as to each grand jury finding, the responding person or entity shall indicate one of the following:
(1) The respondent agrees with the finding.
(2) The respondent disagrees wholly or partially with the finding, in which case the response shall specify the portion of the finding that is disputed and shall include an explanation of the reasons therefor.
(b) For purposes of subdivision (b) of Section 933, as to each grand jury recommendation, the responding person or entity shall report one of the following actions:
(1) The recommendation has been implemented, with a summary regarding the implemented action.
(2) The recommendation has not yet been implemented, but will be implemented in the future, with a time frame for implementation.
(3) The recommendation requires further analysis, with an explanation and the scope and parameters of an analysis or study, and a time frame for the matter to be prepared for discussion by the officer or head of the agency or department being investigated or reviewed, including the governing body of the public agency when applicable. This time frame shall not exceed six months from the date of publication of the grand jury report.
(4) The recommendation will not be implemented because it is not warranted or is not reasonable, with an explanation therefor.
(Source: 2010 MONTEREY COUNTY GRAND JURY FINAL REPORT JANUARY 10, 2011, PUBLIC EMPLOYEES’ RETIREMENT SYSTEM IN MONTEREY COUNTY – CALPERS, pgs. 12-24)
No comments:
Post a Comment