CalPERS Rate Hike Will Hit Cities Like Davis Again

pension-reform-stockThose counting on the improving economy and increased investment returns to cushion projected cost increases had better reconsider their projections.  Already the city has budgeted in an additional $437,000 for PERS (Public Employees’ Retirement System) rate increase and that number could go up based on the latest news.

Ed Mendel of CalPensions reported on Wednesday that the CalPERS board in a split vote approved a faster rate hike for the state, a measure supported by Governor Jerry Brown but opposed by public employee unions – and that a proposal was rejected that would have allowed cities seven instead of five years to phase in the rate hikes.

The board voted 7-4 to begin a three-year phase in of the rate hike on July 1.

 This rate hike will cover the costs of retirees who are now living longer than original projections.  It is the third such rate hike in the last two years which included a lower earnings projection and a more conservative actuarial method.  Mr. Mendel reports that government rates could increase by as much as 50 percent by 2020.

“The board today took important and responsible action to strengthen California’s pension system,” Governor Brown said in a statement.

According to a release from the League of California Cities, “CalPERS estimates that the new mortality assumptions will cost local agencies an average of up to 9 percent of payroll for safety classifications and up to 5 percent of payroll for miscellaneous employees by year five of the phase in. Some city officials believe these estimates may be low because of the continued decline in the local government workforce in many cities, reducing the number of active employees contributing to CalPERS.”

During the hearing, League Executive Director Chris McKenzie, Pico Rivera City Manager Ron Bates, Sacramento Finance Director Leyne Milstein and other local government and labor representatives, according to the League, “spoke in favor of the staff recommendation as a default, but also urged the board to approve both a pre-funding option (i.e., a shorter phase in) and a seven-year phase in option for local agencies whose governing bodies adopt a resolution making the request.”

In a February 7 letter to CalPERS Board President Rob Feckner, Mr. McKenzie wrote, “The League supports the CalPERS staff recommended 20-year mortality projection with continuation of the Board’s 20-year amortization and 5-year phasing policy, beginning in 2016-17; however, we respectfully request two additional options: (1) a more aggressive pre-funding option for those few local units that may be able to afford to do so; and (2) a 20-year amortization and 7-year phasing option for those local governing bodies that adopt a resolution requesting that option.”

“We are requesting the additional options because it is difficult and we believe ultimately unwise to fashion a one-size-fits-all approach for all local employers in light of the real disparity in the fiscal capacity of cities to absorb the resulting costs,” he said.  “Further, while the state’s improving fiscal condition may provide opportunities for more aggressive phasing in of payment of the state’s liabilities, our research raises concerns that imposing such an approach on all cities at the same time would likely cause drastic service reductions in some cities and even more dire consequences in others.”

“Since 2007 most cities have struggled to balance their budgets and have reduced services due to the recession, state actions diverting local funds or adding new unfunded mandates, the dissolution of redevelopment agencies, and growing unfunded liabilities for retiree health care, infrastructure maintenance, and other debts,” he wrote.

“In the last six years, cities have spent down reserves, deferred maintenance and capital items, renegotiated contracts, established new retirement tiers, applied for grants, eliminated COLAs, implemented furloughs and layoffs, restructured debt, cut travel and training, reduced operating hours, restructured programs and raised (or attempted to raise) taxes, rates and fees,” Mr. McKenzie added. “As you know, the financial pressures facing some cities have pushed them into bankruptcy, and others are reportedly facing serious insolvency and possible bankruptcy.”

For the city of Davis, increased fees over and beyond what has already been contemplated may mean additional budget cuts.  The city has already taken an aggressive approach on pensions.

In January Mayor Joe Krovoza noted that the city budgets are already taking into account expected hits from the state on increased costs for PERS, finally directing employee shares to be picked up by the employees rather than covered by the city, as it has done for the last decade or so.

Last spring, City Manager Steve Pinkerton noted, “I think there have to be some changes in PERS, I don’t think it’s sustainable. There has to be some point in time where they’re going to have to start looking at changing the system, even for existing employees.”

At the same time, the city is limited in what it can do.  The council last week already voted to put a half-cent sales tax on the ballot that would generate around $3.6 million in additional annual revenue over the next six years.

In theory, the city could use about $1 million that it had been contemplating to go to road maintenance to cover any increase in pension costs.  That would mean that the parcel tax, contemplated for November, would have to cover all of the roads and parks and other foreseeable infrastructure costs.

A parcel tax would require a two-thirds vote, but could be specifically directed to pay for specific infrastructure needs.

—David M. Greenwald reporting

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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23 Comments

  1. Jim Frame

    It’s news like this that makes me wonder why we don’t switch to a defined-contribution plan instead of defined-benefit plan for staff. I realize that the latter *can* be managed properly, but the management track record isn’t very impressive.

    1. David Greenwald

      I still don’t believe we need to shift to a defined-contribution plan, but I do think needs to happen is reduce the rates 3% at 50 and 2.5% at 55. Also the longer the city holds the line on salaries, the more inflation will reduce that hit.

        1. hpierce

          There are some differences between defined contribution (DC) and defined benefit (DB) plans:
          In defined contribution plans, as I understand them, the employer’s contribution belongs to the employee as soon as it is paid. They do not lose the employer’s contribution if they separate from employment, their estate gets the money whether they die working, or die in retirement
          In the PERS defined benefit plan, if an employee separates, other than for retirement, from covered service, if the employee dies in service, or in retirement, their estate is only entitled to a refund of the employee share of the contributions (not the employer’s), unless the employee had retired, and chosen a lower pension option (which is limited to a single beneficiary).
          In the PERS DB plan, and if the designated beneficiary has pre-deceased the employee, the estate gets nothing.
          When PERS pays pension benefits, as I understand the system, they draw first from the employee’s share, so it is entirely possible that an employee who retires, dies w/o ‘special’ provisions, their estate would only be entitled to the remaining balance of the employee’s contributions. None of the money paid by their employer.
          Not advocating one way or the other (for now), but I believe people should know the differences.

          1. Frankly

            This is all accurate. There are a lot of employee protections within ERISA laws and rules. In addition, the balance of a DC account is a personal asset. And as a personal asset, it contributes to the net worth of its owner.

            DB plans are like immediate life annuities… they pay only through the life of the owner and maybe his/her spouse. But they have no cash value after life ends.

            Also, as a lender, the income stream from a government pension is considered more at risk these days as the longer-term funding problems are irrefutable.

            It is interesting… DB plans seem to appeal to those more risk averse in personality. And I think as a general rule, government employment in general attracts the more risk averse. Job security, for example, is something that government employees highly value.

            But let’s look at another of Nancy Pelosi’s “brilliant” comments “job lock”. She was responding to the revised CBO report that Obamacare would eliminate 2.5 million jobs… making the point that it was a good thing since people were otherwise locked into jobs only for the healthcare.

            So, what about DB plans?

            Ironically I think DB plans in government were responsible for the Obamacare website fiasco. If you attract a too high percentage of people having a strong aversion to risk, you will reduce the amount of out-of-the-box creative problem solving and people taking initiative to get something done. You also end up with too many employees that are burned-out and uninspired, or that were never a good fit for the job. They are “job locked” waiting for their pension.

            If instead they had a DC plan, they could leave for a better-fit job, and take their retirement account balance with them.

    2. J.R.

      People have spread a lot of misinformation about Defined Contribution plans. They have both advantages and disadvantages to the workers. I’m sure that a lot of workers who are looking at having their Defined Benefit payments cut drastically wished that they had paid into Defined Contribution plans.

      1. Jim Frame

        The primary advantage of a defined-contribution plan, at least from the employer’s perspective, is certainty of obligation. We wouldn’t have to play this guessing game about how much money we’ll need to pay out and when if we went to DC, and the temptation for ethically-challenged politicians to award unreasonably high OPEBs to supportive bargaining groups would be substantially reduced, because the pols wouldn’t be able to shove the bill off into the future when they’ll already have left for higher office.

      2. Rich Rifkin

        “a lot of workers who are looking at having their Defined Benefit payments cut drastically.”

        J.R., who are the public employees who are having their defined benefit payments cut drastically? There is not one in California I have ever heard of.

          1. Jim Frame

            My understanding is that only through bankruptcy can a California city cut CalPERS earned benefits. Since Davis isn’t anywhere near filing for bankruptcy (that could change, but nothing I’ve seen indicates an imminent threat of bankruptcy), retired city staff aren’t likely to see any cuts.

          2. David Greenwald

            I don’t believe that is correct Jim – the courts have not ruled that. This is CalPERS release from December responding to Detroit’s court ruling:

            CalPERS Issues Statement on Detroit Bankruptcy Ruling
            December 3, 2013

            In response to Judge Steven Rhodes ruling today that Detroit can impair current employee and retiree pensions as it moves through the bankruptcy process, the California Public Employees’ Retirement System (CalPERS) issued the following statement:

            “The Detroit court failed to recognize the difference between a two party contract and the unique nature of a state public employee retirement system, which creates a three-way relationship among a public agency, its employees and the retirement system. In California, our members’ vested rights to their pensions are protected by the California constitution, statutes and case law.

            “Unlike Detroit, CalPERS is not a city pension plan. CalPERS is an arm of the state and was formed to carry out the state’s policy regarding public employees. The Bankruptcy Code is clear that a federal bankruptcy court may not interfere in the relationship between a state and its municipalities. The ruling in Detroit is not applicable to state public employee pension systems like CalPERS.

            “The ruling is short-sighted and does not take into account the promises made in exchange for the financial and physical investments that public employees and retirees make in our communities.

            “CalPERS will continue to protect and champion the public employees and retirees who serve California every day.”

          3. Jim Frame

            That makes pension protection stronger than I thought — which isn’t unreasonable, in my opinion.

            What kind of reductions did Vallejo achieve in the course of its bankruptcy?

          4. David Greenwald

            Actually the pension costs in Vallejo were left untouched by the bankruptcy and they are still struggling to deal with the issue.

          5. hpierce

            Think you might be reading too much into it. The assumption of what future COLA’s would be are proposed to be zero, until the ‘floor’ was hit, but nothing in the article said that current pension payments would decrease. Only loss would be no COLA’s to offset inflation.

  2. Robb Davis

    David – Perhaps I am not reading this correctly but it is not clear to me whether the CM’s projections on pension contributions (found in his budget presentation of December 17–which, perhaps you could link to again) include the specific decision discussed in this article. Any help you can provide is appreciated.

    1. Dan Carson

      Robb, It is my understanding that the five-year projections presented to the City Council by the City manager on Dec. 17 assumed that the longevity increases would go into effect starting in 2015-16 for local agencies. What the CalPERS Board of Administration did yesterday was implement the longevity increases for the state government employees starting in 2015-15, but, as previously recommended by CalPERS staff, implement them for localities in 2016-17 so they could better accommodate them. So, the city of Davis projections appropriately reflect these big increases in pension contribution rates, but modestly overstate them ifor 2015-16 through 2017-18. My rough estimate was $100,000. That said, the city manager was right to try to build these growing costs into the projections. They are real costs coming our way.

      1. hpierce

        And, perhaps even if PERS isn’t billing them the higher rates as soon as anticipated, the budgeted funds should be transmitted to PERS sooner, rather than later, to leverage the time value of money to smooth out future rates. Just a thought.

  3. SouthofDavis

    David wrote:

    > CalPERS estimates that the new mortality assumptions will cost
    > local agencies an average of up to 9 percent of payroll

    Some pay in Davis may be a little out of line, but since we are in CalPERS wi will need to pay more to fund the “retirements” of all the “public safety” guys I know in other areas that pay WAY more that are going to all “retire” in their 50’s and get close to $200K from CalPERS (plus health care that is worth a fortune and going up faster than almost anything).

    This morning on AM 650 they were talking about this guy (who is not getting by on $200K+):

    “Bob Brooks, whose salary as Ventura County sheriff was $227,600 a year when he retired in January 2011, received an annual pension of $283,000. He filed a suit last September seeking an additional pension of $75,000 under a supplemental plan.”

    http://calpensions.com/2014/01/27/ventura-county-pension-reform-has-poster-child/

  4. Frankly

    Related to public sector employee risk aversion (related to their general resistance to conversion from a DB to a DC plan) this is interesting and makes sense…

    http://ftp.iza.org/dp4401.pdf

    Summarizing, we have found clear support for the hypothesis that public sector employees are more risk averse than private sector employees. However, in contrast to our expectations, we have also found that public sector employees are on average less inclined to make charitable contributions than private sector employees. This effect is partly due to the fact that many more people in the public sector feel underpaid. Moreover, we have found that feelings of underpayment have much larger repercussions for the odds of donating to charity in the public sector than in the private sector, suggesting that public sector employees consider the contributions they make on the job as a substitute for charitable donations. Our findings suggest that many public sector employees feel that they already donate a lot to society by exerting effort on the job for relatively little pay and, therefore, are less willing to make any further contributions than their private sector counterparts. Lastly, we have found a clear effect of tenure on pro-social inclinations in the public sector, which arises independently of feelings of dissatisfaction about pay. As public sector employees’ tenure increases, they become less and less inclined to make charitable contributions, while there is no tenure effect for private sector employees. Such evolution of preferences for public sector employees is well in line with studies by Blau (1960), Van Maanen (1975), and De Cooman et al. (2009) documenting swift declines in altruistic motivations with tenure among public sector employees.

    I really am not trying to pick on public-sector employees with this. Although I am guessing that being told you belong to a group that is more risk averse might not sit well. My interest is to help explain why 85-90% of of workers are happily on DC plans and have been for decades, but public-sector workers still demand their DB pensions.

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