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City Faces Daunting Economic Future by Funding New Retirement Plans
December 15, 2002

One of the most important decisions the Richmond City Council will ever make  involves the adoption of newly available retirement benefits as a part of contracts with public employee unions. The next shoe to drop is item K-1 on the December 2002 City Council Agenda, which authorizes an amendment with CalPERS to provide 2.7% at 55 Retirement Plan for Miscellaneous Employees.

The benefit formulas are a function of the years of service and the percentage of working salary that retired employees will be paid during retirement. For example, “3% at 55,” which was recently granted to fire and police, provides employees with an opportunity to retire at age 55 at a rate of 3% of their working salary for every year they have worked. For example, an employee retiring at age 55 with 30 years of service would receive 90% of his or her working salary. In the most ambitious plan, a formula of “3% at 50” would result in the same benefit for retirement at age 50.

These benefits are paid through CalPERS, the California Public Employee Retirement System from contributions made during the employees’ working life. In Richmond, the contributions are all made by the employer, the City of Richmond. The amount of the required contribution is determined by PERS periodically based on actuarial analysis of the workforce, projected future cost of benefits and the value of the invested benefits account.

During the 1990’s economic boom, the value of PERS investments had grown substantially, so the idea that increased retirement benefits could be paid by public agencies at little or no additional contribution cost became popular. At the same time, competition from high-paying private sector jobs adversely impacted the entire public sector, particularly public safety, and specifically police. Qualified police personnel were in high demand, and public agencies, like many private sector businesses, found themselves in somewhat of a bidding war. Against this background, legislation was passed and signed into law by Governor Davis that allowed public safety retirement plans to escalate to “3% at 55” and later to “3% at 50” (AB 1937 of 2000, Correa, Government Code Section 21328 and Sections 31664.1) and non-public safety retirement plans to escalate to “2.7% at 55.”

The California Highway Patrol was the first to use an early retirement plan. Other law enforcement agencies that wanted similar, competitive packages, followed suit. It became the case that if one city offered the enhanced plan, others must follow or lose experienced employees. Faced with recruitment and retention challenges, as well as pressure from powerful public safety employee unions, cities and counties were quick to join up. By 2002, a number of local governments had granted 3% at 50 to police, including Alameda, Berkeley, Fremont, Hayward, Palo Alto, San Leandro, Vallejo, Antioch, Brentwood, Concord, El Cerrito, Kensington, Pittsburg, Pleasant Hill, San Pablo and Walnut Creek. Contra Costa County, which performs police services for a number of cities in the county as well as unincorporated areas, is also in the controversial process of implementing 3% at 50 (see Contra Costa Times, November 27, 2002, “Pension Fund Troubles Stymie County Officials”).

Against this backdrop, it was not a question of whether or not Richmond will adopt 3% at 50, it was just a matter of time and under what terms. Earlier this year, Richmond moved up to 3% at 55, and there was an explicit understanding that if Measure J passed, Richmond would move to 3% at 50.

After boosting the public safety retirement benefit to 3% at 55, with the anticipation that it would eventually climb to 3% at 50, a case was made to provide a more modest but otherwise fair recognition to non-safety employees by elevating their retirement plan to 2.7% at 55.

Although many local governments adopted 3% at 50, there is quite a variance in the way they fund it. Some of the earlier adherents who signed on during boom times agreed to pay the entire increase from the general fund and counted on PERS inflated investments to soften the blow. Others negotiated cost sharing with the public safety unions or mitigated the fiscal impact by tying the increase to moderated pay or COLA raises.

The administration has provided fiscal projections of impacts to the general fund for adopting 2.7% at 55 for miscellaneous employees and 3% at 50 for safety employees. According to the most recent projections, if 2.7% at 55 for non-public safety employees and 3% at 50 for safety employees is implemented, the cost for PERS retirement benefits will rise from $8.3 million in FY 2002-2003 to $16.2 million in FY2007-07. This does not include the $3.9 million already booked to pay for 3% at 55 for public safety employees.

The Utility Users Tax (UUT) brought in $19 million in 2000-01 and was originally projected at $20.6 million in 2002-03. The increase from 8% to 10% authorized by Measure J, which will be implemented sometime in the spring of 2003, will most certainly jump the previous 2003-2004 projection by $5.4 million to a total of about $26 million. The projected UUT income through 2006-07 is shown by the administration rising inexplicably to $28.9 million. At the same time the UUt income is going up by $5.4 million, the increased retirement costs are projected to rise by $1.6 million in 2003-04, $6.2 million in 2004-05, $7 million in 2005-06 and $8 million in 2006-07. Of course, all of this is largely dependent on the overall state of the U.S. economy and the performance of the stock market.

The administration has projected a number of other revenue increases to help pay for all this, most of which are either speculative, irrelevant or have already gone by the wayside. An example is a projected $2.4 million sale of former Terminal No. 1 to Shea Homes for a housing development project that Shea recently backed out of. Other future revenue sources mentioned include impact fees, inspection and abatement fees, and business license fees. All except business license fees are restricted and could not be tapped.

On the flip side, the immediate general fund cost could be reduced by the incentive for highly paid veteran employees to retire earlier than they might otherwise, thus either replacing them with lower paid and less experienced employees, or not replacing them at all. This is a double edged sword, taking away the most experienced employees at the peak of their careers but also offering an opportunity to jettison dead wood. The result could also be a slew of promotions, in-house opportunities for advancement and the daunting task in some departments of filling scores of vacant positions. Such savings would accrue in the early years of a program, but in the future the fiscal advantage would disappear.

The bottom line is that an increase in the UUT of $5.4 million is somehow supposed to pay for a projected retirement benefit increase that will exceed the amount raised by the increased UUT before FY2004-05 and surpass it by millions in later years. Some local governments have mitigated the volatility of future potential impacts on general funds by negotiating reduced COLA increases in bad economic years and cost sharing contributions by employees if contributions exceed certain predetermined limits. There is also an opportunity to tap into uncommitted Pension Tax Override funds, but the legality is under litigation in another California city.

Most of us non-public employees have a hard time relating to all this. My pension plan is a 401-K plan that lost nearly half its value the last couple of years. It is still going down faster than I can  replenish it. I was unable to retire at either 50 or 55, and I will likely go on working for many more years. Why public employees should be able to retire earlier at higher benefits when the market is the pits, the State of California $30 in arrears and likely to steal what they can from local government to help make it up and unemployment the highest in over a decade is a real puzzle. And I have the privilege of casting one of nine votes to make it happen. I committed some time ago to support these programs if the taxpayers voted for Measure J to give us something to pay for it with, and I intend to honor that commitment. However, I am reluctant to place the City treasury in jeopardy for amounts beyond what Measure J will justify.