HomeMy WebLinkAboutMinutes - May 2, 2006 SSCITY OF LODI
INFORMAL INFORMATIONAL MEETING
"SHIRTSLEEVE" SESSION
CARNEGIE FORUM, 305 WEST PINE STREET
TUESDAY, MAY 2, 2006
An Informal Informational Meeting ("Shirtsleeve" Session) of the Lodi City Council was held Tuesday,
May 2, 2006, commencing at 7:00 a.m.
A. ROLL CALL
Present: Council Members — Beckman, Hansen, Johnson, Mounce, and Mayor Hitchcock
Absent: Council Members — None
Also Present: City Manager King, City Attorney Schwabauer, and City Clerk Blackston
B. TOPIC(S)
B-1 "Pension issues"
Janet Hamilton, Management Analyst, reported that pension plans were established in the
early 20"' century and were designed to help organizations retain employees and keep
direct compensation and taxes lower. Originally, most pensions were defined benefit plans.
In 1978, passage of the Revenue Act added section 401K, which allowed individuals to
invest retirement savings. She noted that employer-sponsored plans typically have a team
of professionals making the investments with significantly larger sums of money compared
with individuals with far less purchasing power. Defined contribution plans are more mobile
since they allow workers to take their pensions with them as they change jobs. The
California Public Employees Retirement System (PERS) was established in 1931, and the
City of Lodi began participating in 1966. In the late 1990s, the State Legislature enacted
benefit enhancements for public sector employees. Lodi and many other agencies moved
to 3% at 50 years for public safety employees and remained at 2% at 55 years for
miscellaneous employees. Subsequent investment losses coupled with enhancements
caused a substantial increase in employee contribution rates. PERS manages pensions
and healthcare benefits for more than 1.4 million employees and has collected $3.2 billion
in employee contributions and $5.8 billion in employer contributions. Defined benefit plans
promise a specific benefit at retirement. Investment risk and portfolio management is the
responsibility of the employer. In Lodi, the employees' share is 9% for public safety and
7% for miscellaneous employees, though the City of Lodi pays both. Employee
contributions are usually fixed, while employer contributions usually exceed the employee
contribution and vary depending on returns. The annual employer contributions include the
normal cost and unfunded liability. Normal cost is what the plan costs without taking into
account actuarial losses or gains. If pension fund assets fall short of the liability due to
lower than expected investment returns, the result is unfunded liabilities. Administrators of
pension funds spread out payments of unfunded liabilities over a period of years to smooth
the impact on rates. Defined contribution plans require that a specific amount of money be
set aside for the benefit of the employee. Employees accrue benefits over their work life
and receive a life annuity at retirement.
Deputy City Manager Krueger reported that in 1995-96 member contributions in PERS
totaled over $1.3 billion and employer contributions were $1.8 billion. Investments and other
income of the entire PERS system was just over $13 billion. In 2004-05, the member
contribution increased to $3.176 billion, employer contributions were $5.8 billion, and
investments and other income for the entire PERS system was $21.9 billion. In Lodi,
employer contributions have been as low as $1.6 million in 1999-00 to as high as
$7.2 million in 2005-06. PERS investment performance is the main reason why employer
rates have changed. The PERS board has stated it will use a 30 -year period of time to
smooth out investment gains and losses so that, in the future, there would not be dramatic
reductions or increases in rates.
Continued May 2, 2006
Mr. Krueger reported that the League of California Cities formed a task force, which has
made the following recommendations:
➢ Use a defined benefit plan;
➢ Roll back and repeal plans providing benefits that are not financially sustainable;
➢ Offset in the pension payoff in PERS, 50% of the amount that would be received under
social security;
➢ Cap payout for miscellaneous employees at 100% of what the employee's salary was
at the time they retired and 9% for public safety employees;
➢ Move retirement age from 50 to 55 years for public safety employees and retain 55
years for miscellaneous employees;
➢ Repeal the highest one-year compensation with the highest three -years compensation
for public safety employees;
➢ Employees should have responsibility for rates that are needed above the normal cost
threshold;
➢ Establish resources that help smooth the volatility of the pension benefit costs;
➢ Restrict benefits of the disability pension provision of the public retirement system
restrict benefits when a public employee can continue to work;
➢ Retain transferability of benefits across public sector employers;
➢ Minimize any disparity between current and prospective public agency employees;
➢ Any reductions or changes to current defined benefit plans should be considered in
context with other compensation issues across all public agency employers; and
➢ The membership of the public employees and retirement system board should be
changed to achieve a better balance of employer, employee, and public agency
representatives.
Mr. Krueger noted that Lodi's contract with PERS states that part-time employees will not
be enrolled in PERS. PERS has stated that part-time employees working more than 1,000
hours a year should be enrolled in PERS. The task force recommendation was that
employers have flexibility in determining when part-time employees are entitled to public
pension benefits.
City Manager King explained that employees have realized that if the 7% (employee's
contribution that the City pays) is added to the base and employees pay their share, it
moves the base up for retirement purposes, which is advantageous to them. He reported
that the City pays into social security for part-time employees. The Public Agency
Retirement System has a product that costs less than social security and is fully qualified
to meet the City's legal obligation. In the mid-1980s, it was common for PERS contracts to
exclude part-time employees. The PERS board stated that employees who work in excess
of 1,000 hours a year should be part of the PERS system. Lodi's contract with PERS
states that its plan excludes persons compensated on an hourly basis. He felt that the
City should reaffirm the language of its contract with PERS and exclude part-time
employees and that they not be enrolled in PERS when exceeding 1,000 hours. He
anticipated that miscellaneous employees will want an equivalent to public safety
employees 3% at 50 years, which would be 2.7% at 55 years. He mentioned that it might
be beneficial to ask for a "fresh start" on the City's actuarial, as it may decrease the level at
which to begin the 30 -year smoothing. The PERS board stated that 90% of assets need to
be maintained at all times to keep the portfolio whole, though with a longer smoothing, it is
now stating that it can be dropped to 80%. PERS is setting the high end of the portfolio at
120%.
Police Chief Adams reported that last year while serving as President of the California
Peace Officers Association he regularly met with the Governor, Presidents of CalChiefs and
CalSheriffs, the League of California Cities, California Fire Chiefs Association, and actuaries
2
Continued May 2, 2006
from PERS, and found that this issue was market driven and that the enhanced benefits
contributed only a small percentage to the increase in 2000-01. If the State of California
had a rate stabilization plan in place ten years ago, the situation today would not be as
dire. He felt it was important that the City stay competitive so that it can continue to attract
and retain employees.
Public Works Director Prima stated that the pension rates in 2004-05 were at or lower than
the 1980s and into the early 1990s. He felt that this issue was not the crisis that some
were making it out to be. He pointed out that dollars and percentages should be
considered separately because dollars will increase over the years due to inflation, salaries,
number of employees, etc. He noted that projections were not presented today and hoped
that Council would take it into consideration as well.
Community Development Director Hatch stated that the competitiveness of the total benefit
package is very important for recruitment and retention of employees.
Fire Chief Pretz hoped that Council would not consider any type of defined contribution
program.
Mayor Hitchcock asked the City Manager to report back on actual costs related to the
program.
C. COMMENTS BY THE PUBLIC ON NON -AGENDA ITEMS
oo Georgiana Reichelt spoke against recent immigration rallies and felt that illegal aliens should be
treated as criminals. She stated that billions of dollars have been wasted trying to teach
English in schools, when parents refuse to speak the language at home to their children.
D. ADJOURNMENT
No action was taken by the City Council. The meeting was adjourned at 8:32 a.m.
ATTEST:
Susan J. Blackston
City Clerk
AGENDA ITEM O`r I
CITY OF LODI
COUNCIL COMMUNICATION
TM
AGENDA TITLE: Pension Issues
MEETING DATE: May 2, 2006
PREPARED BY: Jim Krueger, Deputy City Manager
RECOMMENDED ACTION: City Council has requested an analysis of the City's Costs for
providing retirement benefits to employees and options for
mitigating future cost increases. This has been and will continue to
be an important topic of discussion at local, state and national levels. The challenge faced by Lodi in
particular is that the cost for providing retirement benefits for City employees has risen from $2.4 million
in fiscal year 2002-03 to an estimated $ 7.2 million for fiscal year 2005-06. Staff will make a power point
presentation to outline the financial challenge the City of Lodi faces in this area and to provide Council
with a preview of possible alternatives for resolving these long term issues. Staff invites your comments
on possible future Council discussions on this subject.
BACKGROUND INFORMATION: The main reason for this increase in costs is that employer rates
have increased from 0% of salaries (as of 2002103 for both public
safety and miscellaneous employees) to 12% and 30% of salaries
for miscellaneous and public safety employees respectively (as of 2005106). The Public Employees
Retirement System (PERS) is a defined benefit system. The retirement payout in a defined benefit
system is based on a formula that multiplies three factors together. The three factors are: 1) number of
years of service, 2) the highest salary over one or three years (one for public safety and three for
miscellaneous employees) and 3) a percentage of base salary (3% at 50 years -old [public safety] and 2%
at 55 years -old [miscellaneous employees]).
The cost to the employer for funding this retirement payout is based on three factors which vary over the
course of time and cause the cost to vary over time as well. The rates paid by employers to fund the
payout of the benefits are determined actuarially and take into account, the average age of employees,
earnings on the investments held by PERS and any changes in the benefits formula described above. Of
these three factors, the one that has resulted in the greatest impact to all cities is that PERS investments
suffered losses of $12.2 billion in 2001 and $9.7 billion in 2002. These losses were not fully reflected until
the employer rates for fiscal year 2005106 were implemented by PERS. There is very little that employers
can do to affect the earnings rates on PERS investments and therefore must take other actions to
effectuate a change in the cost for funding the current retirement system. The challenge is to address the
areas which the City has some control over the underlying factors contributing towards the rising costs of
retirement.
OPTIONS TO MEET THE CHALLENGE
The challenge faced by all California public agencies is to identify areas for which they can control rising
costs of retirement. These areas have been identified in the "Pension Reform Task Force of the League
of California Cities." The report from this Task Force is attached.
APPROVED: i
Bla' W, City Manager
Fallowing are some options available to mitigate these costs as recommended by the League's Task
Force:
• Maintain the deferred benefit plan as the central pension plan for public employees in California
and rollback/repeal public retirement plans that provide benefits in excess of levels required to
maintain a fair, standard of living that are not financially sustainable and may have no actuarial
justification. Subsidiary recommendations `to this main recommendation are follows: 1) Offset by
50% the anticipated benefit from Social Security for those employees covered by Social Security;
2) Change the cap amount for highest compensation to 100% for miscellaneous employees; 3)
Change the earliest retirement age to 55 for public safety employees.
• Repeal highest "one year compensation" retirement with highest "three years compensation for
new public safety employees."
• Provide alternatives to a defined benefit plan for job classifications not intended for career public
service employment.
• Give employers greater flexibility to determine when a part-time employee is entitled to public
pension benefits.
• Public Agency retirement contribution rates, over time, should be constructed to stay within
reasonable ranges around the historical "normal cost" of public pension plans in California. Sound
actuarial methods should be adopted to limit contribution volatility while maintaining a sound
funding policy.
• Establish "reserve" funding for public pension systems that will help smooth the volatility of
pension benefit costs. Pian surpluses are to be retained within plan assets, but should be
reserved for amortization of future unfunded liabilities, and should not be used to offset plans'.
normal cost contribution rates.
• When employer contribution rates exceed the "normal costs" threshold, employees should be
expected to take some of the financial responsibility for those excessive increases.
• Full tax-exempt disability retirement should be retained for employees who are injured and can
not work in any capacity.
• Reform the disability pension provisions of public retirement systems to restrict benefits when a
public employee can continue to work at the same or similar job after sustaining a work-related
injury.
• Any pension reform package should retain transferability of retirement benefits across public
sector employers. No employee currently in a defined benefit plan should be required to
involuntarily give up a defined benefit formula before retirement.
• Any pension reform measures should seek to minimize disparity between current and prospective
public agency employees.
• Any reduction(s) or change(s) to current Defined Benefit plans should be considered in context of
other compensation issues that will tend, over time, to "equate" compensation plans within and
across public agency employers.
• Public agencies that do not make the Annual Required Contribution under GASB 27 should be
made subject to appropriate oversight.
• The membership of the Public Employees and Retirement System Board should be changed to
achieve both a better balance of employer and employee representatives as well as a better
balance of public agency representatives.
CONCLUSION
Many of these options would require that the City of Lodi meet and confer with bargaining units in order
to effectuate the changes in accordance with rules associated with negotiating labor contracts with
unions. Some require action at a higher level than the City of Lodi. There are also other options to
meeting this challenge that were not included in the League Task Force recommendations. For example,
one option which City staff would like to bring to Council at a future meeting is the augmentation of
retirement benefits for miscellaneous employees by other means such as a 401A plan. Most of the
options deal with long-term rate stabilization and cost mitigation measures that may take many years to
achieve desirable results. There appear to be no "quick fixes" to this financial challenge. As such, each of
these options should be viewed as dealing with the actuarial benefits of mitigating factors that effect the
long term employer retirement costs; but which may have little effect on short-term costs.
FISCAL IMPACT: Not Applicable
FUNDING AVAILABLE: Not Applicable
' Krueger, Deputy City Manager
Attachments