HomeMy WebLinkAbout3 - PERS Enhanced Retirement FormulaCITY OF NEWPORT BEACH
CITY COUNCIL STAFF REPORT
Agenda Item No. 3
September 11, 2007
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: City Manager's Office
Dave Kiff, Assistant City Manager
949- 644 -3002, dkiff @city.newport- beach.ca.us
Human Resources Department
Barbara Ramsey, Human Resources Director
949 -644 -3303, bramsey @city.newport- beach.ca.us
SUBJECT: Implementation of PERS Enhanced Retirement formula for Fire Safety and
Miscellaneous Employees (including Key and Management).
RECOMMENDATION:
1. Adopt Resolution 2007-_ relating to the City's Intention to Approve an Amendment to the
Contract between the Board of Administration, California Public Employees' Retirement
System (PERS) and the Newport Beach City Council to authorize a 03% @50" retirement
formula for specified safety employees within the Fire Department and an employee- funded
"2.5 % @55" retirement formula for local miscellaneous members, including Key and
Management.
2. Introduce Ordinance #2007- relating to a PERS contract amendment and pass to 2 o
Reading on October 9t', 2007:
DISCUSSION:
The California Public Employees Retirement System (PERS or www.calpers.ca.gov) manages
the largest retirement program for Newport Beach city employees, as well as City employees'
health benefit plans (Newport Beach City employees generally do not receive Social Security,
because the City does not participate in Social Security). The PERS portfolio is one of the
largest in the nation, and provides retirement and health benefits to approximately 1.5 million
public employees, retirees, and their families and to more than 2,500 employers. Newport
Beach contracts with PERS to administer city employees' benefits, including a defined benefit
(DB) retirement plan.
This agenda item implements two separate changes to our contract with PERS. Both changes
adjust the retirement programs for specified city employees. PERS requires that the changes
be done within a "contract amendment."
First Change — 3 % @50 for Fire. The City's existing and approved Memoranda of
Understanding (MOU) with the Firefighters and Fire Management Associations (approved on
November 8, 2005 and November 2.2, 2005 respectively) provide that the City implement a "3%
Implementation of PERS Enhanced Retirement
for Fire Safety and Miscellaneous Employees
September 11, 2007
Page 2
@ 50" retirement program for Fire Fighters and specified Fire Management no later than
December 31, 2007.
"3% @ 50" means that an employee's retirement benefit will be calculated as follows:
At age 50, an employee is eligible to retire. The employee's retirement is then equal to
0.03 multiplied by the employee's years of service multiplied by the employee's annual
salary in the last 12 months that the employee worked. As an example:
Fire Engineer Smith is 50 years old.
She has been an employee within the PERS system for 25 years.
Her salary for the 12 months before retirement was $85,500.
Her PERS retirement will be 0.03 x 25 x $85,500 or $64,125.00 per year (because the
City does not pay into Social Security, this is likely to be the major retirement benefit that this
employee would receive).
The City and its taxpayers fund retirement programs on an ongoing, annual basis and as
directed by our PERS contract. Each year, PERS actuaries estimate the cost of funding the
City's chosen retirement programs as a percentage of the City's overall payroll. For example, in
2007, the City's "PERS rate" was 14.182% of payroll for most non - safety employees and
23.212% of payroll for most safety employees. PERS uses a 20 -year rolling "rate smoothing"
plan to keep cities' rates relatively unchanged over time, despite larger fluctuations in equity
markets and in the value of PERS' investments.
When the City approved an increase in the retirement benefit for Fire employees, it meant that
the cost to implement that benefit through PERS would go up. Going to the 3% @ 50 plan for
Fire, according to the actuarial valuation provided by PERS, will increase the PERS "employer
rate' (meaning what the City pays as a percentage of payroll) for all safety employees by
2.154% (in other words, adding 2.154% to the estimated 23.212% Safety Rate for 2008).
The dollar cost of bringing Fire up to the agreed -upon retirement will be $313,665.00 for
December 2007 through June 2008. For future years, the cost will be approximately
$627,330.00 with increases proportionate to future salary increases. Readers should note that
this cost may be considered in light of salary increases within the Fire MOU. Fire safety
employees — who are now eligible for the 3% @ 50 retirement program — agreed to take a lower
salary increase (2% effective July 1, 2007) in exchange for the 3% @ 50 retirement program.
The City's other "safety" personnel — police officers and police management — received the
same 3% @ 50 retirement benefit in August 2002.
Second Change — 2.5% @ 55 for "Miscellaneous" Employee Groups. Full -time non - safety
( "miscellaneous ") employees within the City are typically represented by one of three bargaining
units — the Newport Beach City Employees Association ( "CEA "), the Newport Beach Employees'
League ("League"), and the Newport Beach Professional and Technical Employees Association
( "Prof- Tech "). These three non - safety units are collectively referred to as the "Miscellaneous"
bargaining units.
The City reached tentative agreement with the three Miscellaneous units as a result of
negotiations conducted in accordance with the Myers - Milias -Brown Act ( "MMBA" — state law
relating to the labor negotiations process with public employees) on July 19, 2007. Among
other things, the tentative agreement provided that the City would be willing to amend its
Implementation of PERS Enhanced Retirement
for Fire Safety and Miscellaneous Employees
September If, 2007
Page 3
contract with PERS to implement a "2.5% @ 55" retirement benefit with the City's miscellaneous
employees effective January 1, 2008, if the employees would pay for the benefit by forgoing
certain salary increases.
2.5% @ 55 means that an employee's retirement benefit will be calculated as follows:
Librarian I/ Jones is 55 years old.
He has been an employee within the PERS system for 25 years.
His salary for the 12 months before retirement was $69,264-00.
His retirement will be 0.025 x 25 x $69,264. 00 or $43,290. 00 per year (because the
City does not pay into Social Security, this is likely to be the major retirement benefit that this
employee would receive).
The City Council directed that the employees pay for the benefit by requiring that the so- called
"employee rate" portion of the PERS rate (which the City now pays on behalf of the employees,
a relatively common practice in municipalities) be changed to clearly show that the net increase
in cost (PERS puts this cost at about 3.42% of eligible payroll) resulting from the 2.5% @ 55
plan be put on the employee rate side of the PERS payment. For example:
How it works today
Employer (City) part of the rate: 7.00% of payroll
Employee (yet still paid by the City) part of the rate: + 7.00% of payroll
City's overall non - safety rate: 14.00% of payroll (est)
How it would work on and after January 1, 2008
Employer (City) part of the rate:
Employee (yet still paid by the City) part of the rate:
City's overall non - safety rate, before employee contri
Additional employee -paid part of City non - safety rate
City's overall non - safety rate:
7.00% of payroll
+ 7.00% of payroll
Dution: 14.00% of payroll (est)
+ 3.42% of payroll
17.42% of payroll (est)
As a part of negotiations, the Miscellaneous units agreed to forgo 3.42% in salary increases and
instead have 3.42% of an overall 3 -year, 11% salary package applied directly to PERS to cover
the full cost of the 2.5% @ 55 plan. In effect, this employee -paid benefit will serve as a Defined
Contribution ( "DC ") component of the PERS "DB" plan, because the employees can take their
accrued 3.42% of payroll payment with them should they leave the PERS system.
This benefit will, if approved, apply to "Key and Management" employees (who are not
represented and do not have an MOU). Department directors are part of the Key and
Management classification.
This Agenda Item. The attached Resolution of Intention is required by PERS and is the first
step in implementing the two described enhanced retirement plans. The resolution's purpose is
to notify the public that the City Council intends to amend the City's contract with PERS — it also
shows what the cost of the amendment will be.
The PERS contract amendment cannot become effective until the adoption of an ordinance.
The ordinance will be heard today for 1' reading. Second reading may not occur until at
s
J
Implementation of PERS Enhanced Retirement
for Fire Safety and Miscellaneous Employees
September 11, 2007
Page 4
least twenty (20) days have passed since the Council adopted the proposed Resolution of
Intention. Therefore, 2nd reading of the ordinance approving the PERS contract amendment is
expected to be on the City Council's agenda for October 9, 2007. The ordinance takes effect 30
days after 2nd reading. The effective date of the PERS contract amendment would be
December 22, 2007.
Funding Availability:
Funding for the fire safety contract amendment is in the current Fire Department Budget for
salary and benefits. The enhanced retirement for miscellaneous employees is fully funded by
the employees. The Council's adopted FY 2007 -08 Budget already includes the 3% @ 50 cost
for Fire and included an assumption consistent with the salary and benefit package negotiated
with the Miscellaneous units. No budget amendment is required for either retirement proposal.
Prepared by:
ndolyn Bduffarfand -Dave Kiff
Human Resources Manager
Assistant City Manager
Attachments:
Resolution NO.2007-
Ordinance NO. 2007 -
Draft Contract Amendment
Submitted by:
Dave Kiff and Barbara Ramsey
Assistant City Manager
Human Resources Director
U
RESOLUTION NO. 2007-
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT
BEACH DECLARING ITS INTENTION TO APPROVE AN AMENDMENT TO
CONTRACT BETWEEN THE BOARD OF ADMINISTRATION, CALIFORNIA
PUBLIC EMPLOYEES' RETIREMENT SYSTEM AND THE CITY COUNCIL,
CITY OF NEWPORT BEACH
WHEREAS, the Public Employees' Retirement Law permits the
participation of public agencies and their employees in the Public Employees'
Retirement System by the execution of a contract, and sets forth the procedure
by which said public agencies may elect to subject themselves and their
employees to said Law; and
WHEREAS, one of the steps in the procedures to amend this contract is
the adoption by the governing body of the public agency of a resolution giving
notice of its intention to approve an amendment to said contract, which resolution
shall contain a summary of the change proposed in said contract; and
WHEREAS, the following is a statement of the proposed change:
To provide Section 21354.4 (2.5% @ 55 Full formula) for local
miscellaneous members and Section 21362.2 (3% @ 50 Full
formula) for local fire members only.
NOW, THEREFORE, BE IT RESOLVED that the governing body of the
above agency does hereby give notice of intention to approve an amendment to
the contract between said public agency and the Board of Administration of the
Public Employees' Retirement System, a copy of said amendment being
attached hereto, as an "Exhibit" and by this reference made a part hereof.
Passed and adopted by the City Council of the City of Newport Beach at a
regular meeting held on the 11th day of September 2007.
Steven Rosanksky, Mayor
ATTEST:
LaVonne M. Harkless, City Clerk
,J
ORDINANCE NO. 2007-
AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH
AUTHORIZING AN AMENDMENT TO THE CONTRACT BETWEEN THE CITY AND THE
BOARD OF ADMINISTRATION OF THE CALIFORNIA PUBLIC EMPLOYEES'
RETIREMENT SYSTEM
The City Council of the City of Newport Beach does hereby ordain as follows
Section 1. That an amendment to the contract between the City of Newport Beach and the
Board of Administration, California Public Employees' Retirement System is hereby
authorized, a copy of said amendment being attached hereto, marked "Exhibit ", and by such
reference made a part hereof as though set out in full.
Section 2. The Mayor of the City of Newport Beach is hereby authorized, empowered and
directed to execute said amendment for and on behalf of the City.
Section 3. This Ordinance shall take effect thirty (30) days after its adoption, and prior to
the expiration of fifteen (15) days from the passage thereof shall be published once in the
Daily Pilot, a newspaper of general circulation, published in Costa Mesa and circulated in the
City of Newport Beach, and thenceforth and thereafter shall be in full force and effect.
Adopted and approved this 9th day of October 2007 by the following vote
AYES, COUNCILMEMBERS_
NAYS, COUNCILMEMBERS _
ABSTAIN, COUNCILMEMBERS
Steven Rosansky, Mayor
Attest:
LaVonne M. Harkless, City Clerk
Ca1PERS
California
Public Employees' Retirement System
..� .010
AMENDMENT TO CONTRACT
EXHIBIT
Between the
Board of Administration
California Public Employees' Retirement System
and the
City Council
City of Newport Beach
.010
The Board of Administration, California Public Employees' Retirement System, hereinafter
referred to as Board, and the governing body of the above public agency, hereinafter referred to
as Public Agency, having entered into a contract effective July 1, 1945, and witnessed April 27,
1945, and as amended effective March 1, 1948, November 1, 1951, April 1, 1956, October 31,
1970, September 18, 1971, December 11, 1971, September 24, 1977, December 18, 1977,
June 17, 1978, March 24, 1979, June 30, 1979, January 12, 1989, December 2, 1989, June 12,
1996, July 12, 2000, August 26, 2000, June 15, 2002, November 30, 2002, November 13, 2004
and July 23, 2005 which provides for participation of Public Agency in said System, Board and
Public Agency hereby agree as follows:
A. Paragraphs 1 through 13 are hereby stricken from said contract as executed effective
July 23, 2005, and hereby replaced by the following paragraphs numbered 1 through 14
inclusive: .
1. All words and terms used herein which are defined in the Public Employees'
Retirement Law shall have the meaning as defined therein unless otherwise
specifically .provided. "Normal retirement age" shall mean age 55 for local
miscellaneous members, age 55 for ocean .beach lifeguards and age 50 for local
fire members and local police members.
2. Public Agency shall participate in the Public Employees' Retirement System from
and after July 1, 1945 making its employees as hereinafter provided, members of
said System subject to all provisions of the Public Employees' Retirement Law
except such as apply only on election of a contracting agency and are not
provided for herein and to all amendments to said Law hereafter enacted except
those, which by express provisions thereof, apply only on the election of a
contracting agency.
1
PLEASE DO NOT SIGN "EXHIBIT ONLY"
3. Employees of Public Agency in the following classes shall become members of
said Retirement System except such in each such class as are excluded by law or
this agreement:
a. Local Fire Fighters (herein referred to as local safety members);
b. Local Police Officers (herein referred to as local safety members);
c: Ocean Beach Lifeguards (included as local safety members);
d. Employees other than local safety members (herein referred to as local
miscellaneous members).
4. In addition to the classes of employees excluded from membership by said
Retirement Law, the following classes of employees shall not become members of
said Retirement System:
a. POLICE CADETS; AND
b. RESERVE OFFICERS.
5. The percentage of final compensation to be provided for each year of credited
prior and current service as a local miscellaneous member in employment before
and not on or after the effective date of this amendment to contract shall be
determined in accordance with Section 21354 of said Retirement Law
(26/6 at age 55 Full).
6. The percentage of final compensation to be provided for each year of credited
prior and current service as a local miscellaneous member in employment on or
after the effective date of this amendment to contract shall be determined in
accordance with Section 21354.4 of said Retirement Law (2.5% at age 55 Full).
7. The percentage of final compensation to be provided for each year of credited
prior and current service as a local fire member and local police member shall be
determined in accordance with Section 21362.2 of said Retirement Law (3% at
age 50 Full). .
8. The. percentage of final compensation to be provided for each year of credited
prior and current service as ocean. beach lifeguards shall be determined in
accordance with Section 21363.1 of said Retirement Law (3% at age 55 Full).
9. Public Agency elected and elects to be subject to the following optional provisions:
a. Section 20421 ( "Local Safety Member" shall include ocean beach lifeguards
of a city as described in Government Code Section 20421).
b. Section 21574 (Fourth Level of 1959 Survivor Benefits).
c. . Section 21024 (Military Service Credit as Public Service).
PLEASE DO NOT SIGN "EXHIBIT ONLY"
d. Section 21389 (Second Opportunity to Elect 1959 Survivor Benefits):
Legislation repealed said Section effective September 27, 1979.
e. Section 20965 (Credit for Unused Sick Leave) for local miscellaneous
members only.
f. Section 20042 (One -Year Final Compensation).
g. Section 21548 (Pre- Retirement Option 2W Death Benefit).
10. Public Agency, in accordance with Government Code Section 20790, ceased to be
an "employer" for purposes of Section 20834 effective on September 24, 1977.
.Accumulated contributions of Public Agency shall be fixed and determined as
provided in Government Code Section 20834, and accumulated contributions
thereafter shall be held by the Board as provided in Government Code Section
20834.
11. Public Agency shall contribute to said Retirement System the contributions
determined by actuarial valuations of prior and future service liability with respect
to local miscellaneous members and local `safety members of said Retirement
System.
12. Public Agency shall also contribute to said Retirement System as follows:
a. Contributions required per covered member on account of the 1959
Survivor Benefits provided under Section 21574 of said Retirement Law.
(Subject to annual change.) In addition, all assets and liabilities of Public
Agency and its employees shall be pooled in a single account, based on
term insurance rates, for survivors of all local miscellaneous members and
local safety members.
b: A reasonable amount, as fixed by the Board, payable in one installment
within 60 days of date of contract to cover the costs of administering said
System as it affects the employees of Public Agency, not including the
costs of special valuations or of the periodic investigation and valuations
required by law.
C. A reasonable amount, as fixed by the Board, payable in one installment as
the occasions arise, to cover the costs of special valuations on.account of
employees of Public Agency, and costs of the periodic investigation and
valuations required by law.
13. Contributions required of Public Agency and its employees shall be subject to
adjustment by Board on account of amendments to the Public Employees'
Retirement Law, and on account of the experience under the Retirement System
as determined by the periodic investigation and valuation required by said
Retirement Law.
9
14. Contributions required of Public Agency and its employees shall be paid by Public
Agency to the Retirement System within fifteen days after the end of the period to
which said contributions refer or as may be prescribed by Board regulation. If
more or less than the correct amount of contributions is paid for any period, proper
adjustment shall be made in connection with subsequent remittances.
Adjustments on account of er in contributions required of any employee may
be.made by direct payment en the employee and the Board.
B. This amendment shall bee on the 22nd day of December 2007
BOARD OF ADMINIST `t
PUBLIC EMPLOYE�,�TIRJEMENT SYSTEM
BY
LORIX11MARTLAND, CHIEF
EMPLOYER SERVICES DIVISION
PUBLIC EMPLOYEES' RETIREMENT SYSTEM
AMENDMENT ER#60
PERS- CON -702A (Rev. 10105)
CITY COUNCIL
CITY OF NEWPORT BEACH
BY "
PRESIDING OFFICER
401
Witnes
Clerk
io
CITY OF NEWPORT BEACH
MEMORANDUM
TO: Mayor and Members of the City Council
FROM: Dave Kiff, Assistant City Manager
DATE: September 10`", 2007
RE: Agenda Item #3 — PERS Contract
This memorandum is a correction to two aspects of the Staff Report for Agenda Item #3.
1 — On page 2 of the staff report (Item #3), 1 wrote:
The City and its taxpayers fund retirement programs on an ongoing, annual basis
and as directed by our PERS contract. Each year, PERS actuaries estimate the
cost of funding the City's chosen retirement programs as a percentage of the
City's overall payroll. For example, in 2007, the City's `PERS rate" was 14.182%
of payroll for most non - safety employees and 23.212% of payroll for most safety
employees. PERS uses a 20 -year rolling "rate smoothing" plan to keep cities'
rates relatively unchanged over time, despite larger fluctuations in equity markets
and in the value of PERS' investments.
I misstated the PERS rates that we pay, primarily by neglecting to add on the employer -
paid employee contribution to the PERS safety rate. The paragraph should read with
chanqes underlined):
The City and its taxpayers fund retirement programs on an ongoing, annual basis
and as directed by our PERS contract. Each year, PERS actuaries estimate the
cost of funding the City's chosen retirement programs as a percentage of the
City's overall payroll. For example, for Fiscal Year 2007 -08, the City's °PERS
rate" will be 15.691% of payroll for most non - safety employees and 35.098% of
payroll for most safety employees. PERS uses a 20 -year rolling "rate smoothing"
plan to keep cities' rates relatively unchanged over time, despite larger
fluctuations in equity markets and in the value of PERS' investments.
For your information, the projected FY 2008 -09 Employer Contribution Rates are
expected to go down slightly (notwithstanding the proposed employee- funded 2.5% at
55 PERS plan).
2 — The above information also changes another section of the Staff Report (page 3).
The Staff Report reads:
City Hall • 3300 Newport Boulevard • Post Office Box 1768 • Newport Beach, California 92659 -1768
Memo regarding Agenda Item #3
September 10, 2007
Page 2
How it works today
Employer (City) part of the rate: 7.00% of payroll
Employee (yet still paid by the City) part of the rate: + 7.00% of payroll
City's overall non - safety rate: 14.00% of payroll (est)
How it would work on and after January 1, 2008
Employer (City) part of the rate:
Employee (yet still paid by the City) part of the rate:
City's overall non - safety rate, before EE contribution:
Additional employee -paid part of City non - safety rate
City's overall non-safety rate:
That section of the Staff Report should read instead:
7.00% of payroll
+ 7.00% of payroll
14.00% of payroll (est)
+ 3.42% of payroll
17.42% of payroll (est)
How it works today
Employer (City) part of the rate: 8.691% of payroll
Employee (yet still paid by the City) part of the rate: + 7.000% of payroll
City's overall non - safety rate: 15.691% of payroll (est)
How it would work on and after January 1, 2008
Employer (City) part of the rate:
Employee (yet still paid by the City) part of the rate:
City's overall non - safety rate, before EE contribution:
Additional employee -paid part of City non - safety rate
City's overall non - safety rate:
8.691% of payroll
+ 7.000% of payroll
15.691% of payroll (est)
+ 3.420% of payroll
19.111% of payroll (est)
Please note that the dollar cost to the City of the PIERS changes as shown in the Staff
Report for Agenda Item #4 (MOUs) and shown again here remains correct.
Miscellaneous MOUs -- Cost Estimate (FY 2007 -08)
Salaries
$
1,013,202
2% retroactive to July 2007
172,334,677
Cash Value % of City Operating Budget
2.5% in Jan 2008
Retirement
$
-
-- 2.5% at 55 Plan - effective 1 -1 -08
Medical Benefit
— MERP ($1.50 to $2.50 /month)
$
4,190
— Cafeteria ($100 /mo more in January 2008)
$
252,600
Certification Pay (rough esfimate)
$
7,000
2 Half -Day Holidays
$
120,924 '
Total Value of Proposed Changes $ 1,397,916
Total Cash Value of Proposed Changesl $
1,276,992 '
FY 2007 -08 City Operating Budget $
172,334,677
Cash Value % of City Operating Budget
0.74%
' Holiday estimate represents value of benefit, not cost. City budget
already includes funding for hours worked.
PERS and MOU Issues
Newport Beach City Council
Tuesday, September 11, 2007
PERS Contract and MOUs
o PERS requests one contract amendment
per year. This one includes:
■ 3.0% at 50 for.Fire (agreed to previously)
■ 2.5% at 55 for Miscellaneous units and Key
and Management (pending in MOU) -
Employee -paid.
o MOUs are summarized in Item #4
PERS Contract Timeline
• Resolution Adoption (tonight)
• 1St Reading of Ordinance amending PERS Contract (tonight)
o Employee Vote (a majority of all Misc employees must
approve) - vote tentative for tomorrow.
o MOUs take effect retro to 7 -1 -07 (tonight if approved).
0 2nd Reading of Ordinance not less than 20 days from now
(therefore the Council's October 9th meeting)
o November 9th = ordinance becomes effective.
o November 9th -ish transmit information to PERS
o PERS processes contract amendment (Nov -Dec)
o Two benefits take effect (January 1, 2008)
How the 2.5% at 55 Plan Works
How it works today
Employer (City) part of the rate: 8.691% of payroll
Employee (still paid by the City) part of the rate +7.000% of payroll
City's overall non - safety rate: 15.691% of payroll
How it would work on and after January 1, 2008
Employer (City) part of the rate: 8.691% of payroll
Employee (still paid by the City) part of the rate: +7.000% of payroll
City's non - safety rate, before EE contribution: 15.691% of payroll
Additional employee -paid rate:
+ 3.420%
of
payroll
City's overall non - safety rate:
19.111%
of
payroll
MOU Implementation Costs
Salaries $ 1,013,202
— 2% retroacti\e to July 2007
Jan 2008
Retirement i $ -
- 2.5% at 55 Plan - effective 1 -1 -08
Medical Benefit __.._
—
ME RP ($1.50 to $2.50/month) $ _ 4,190
-- Cafeteria ($100 /mo more in January 2008) $ 252,600
Certification Pay (rough estimate) $ 7,000
2 Half-Day Holidays $ 120,924
Total Value of Proposed Changes $ 1,397,916
Total Cash Value of Proposed Changes $ 1,276,992
_ FY 2007 -08 City Operating Budget $ 172,334,677
Cash Value % of City Operating Budget 0.74%
Holiday estimate represents value of benefit, not cost. City budget
already includes funding for hours worked.
Where Newport Would Land
Retirement Benefit
Agencies
City
Benefit
Notes
Anaheim
2.7 at 55
Mission Viejo
2.7 at 55
Orange
2.7 at 55
Irvine
2.7 at 55
Santa Ana
2.7 at 55
pending Jan 2009
La Palma
2.7 at 55
Los Alamitos
2.7 at 55
OCFD (non - safety)
2.7 at 55
San Juan Capistrano
2.7 at 55
Costa Mesa
2.5 at 55
pending
Fountain Valley
2.5 at 55
Garden Grove
2.5 at 55
Laguna Beach
2.5 at 55
pending 2010
RSM
2.5 at 55
Santa Marg H2O Dist
2.5 at 55
Brea
2.0 at 55
Dana Point
2.0 at 55
Fullerton
2.0 at 55
Huntington Beach
2.0 at 55
Newport Beach
2.0 at 55
Lake Forest
2.0 at 55
Tustin
2.0 at 55
Seal Beach
2.0 at 55
Newport Beach City Council
3300 Newport Boulevard
Newport Beach CA
Re: 9/11/07 Newport Beach Retirement and Health Care Benefits
�07 --*3 - f
Richard A. Nichols
519 Iris Avenue
Corona del Mar, 92625
September 11, 2007
Ref: 907NBRtemnt&I-lIthCr
Retirement Benefits
Most retirement benefits have been:
Defined Benefit- A contractual commitment to pay a certain amount each year.
Defined Contribution- An agreement to pay benefits from a pot of employer and
employee contributions. There is no legal commitment to pay forever, whatever the costs. When
the funds run out the contributions are zero.
Many of our large corporations and private businesses, have gone bankrupt and or have
reorganized in order to lose this defined benefit retirement and/or health care commitment.
90% of the nations 16 million public service workers have a binding commitment to
receive defined benefit contributions. 65% are slated to receive continued health benefits.
Retirement Health Care benefits are estimated as high as $100K/ covered worker.
The Government Accounting Standards Board, GASB, now requires larger state and
local plans to estimate unfunded liability. The problem is the GASB cannot force sate and local
plans to do so.
Cato Institute estimated, in a survey of 16 state and 11 local governments that the average
accrued liability of $135K for every covered worker. This debt was about 3 times the
conventional debt of these cities. This unfunded debt should be estimated and is now being taken
into account in rating new bonds issued by such public agencies. San Diego recently Passed
generous retirement benefits and found their ability to issue new bonds at all was questioned.
We would like to see a Financial Report as called out by GASB for our Retirement &
Health Plans and particularly we would like to see discussed the handling of retroactive liability
and how these provisions are applied to retirees. Supervisor Moorlach also asked a good
question, can the Council commit the electorate to new tax without a vote of the people.
Finally, there is no discussion of health care costs now or how we are handling them for
retired personnel in the future.
Sincerely, D 0
Richard Nic o
/%
907 N B Rt rm nt & H I th C sts
Safety Personnel
Full Time, NonSfty
Program Ave Slry$K
3%050 50 85.5
2.5055 69.264
Present
Yrs Wkd Ret$K/Yr Sm72 -RA PrsRt%
25 64.125 1410.75 23.212
25 43.29 735.93 14.182
w /FQ+
Pers *Slry
PrsRt%
K$/yr
25.366
16.266
14.182
6.139
Published by
AMERICAN INSTITUTE
for ECONOMIC RESEARCH
RESEARCH
REPORTS
Great Barrington, Massachusetts 01230 www.aier.org Vol. LXXIV No. 10 June 4, 2007
Retiree Health Benefits: Dancing with
the 800 -Pound Gorilla*
The twin trends of an aging population and rising health care costs
have long been pointing toward an escalating problem: the ballooning
cost of retiree health benefits. In the private sector, businesses are
shifting costs to their workers and retirees. But in the public sector,
benefits remain exceptionally generous. Their future cost to taxpayers
is an enormous liability — unfunded and, until now, largely hidden
from the public. A new accounting rule will soon require state and
local governments to disclose this cost. The sticker shock could create
pressure to cut benefits or set aside reserves to pay for them. But
political pressures being what they are, it is just as likely that taxpay-
ers, having finally been given the bill, will be left to pay it.
The year 2006 saw two major revi-
sions in the rules governing retirement
benefits for American workers. The fast
and more publicized overhaul was the
Pension Protection Act. Its net effect
will likely be to hasten the shift by pri-
vate- sector companies away from tra-
ditional defined-benefit pensions to ever
more reliance on defined- contribution
plans, such as 401(k)s.
The second change has now begun
to hit the public sector, specifically
state and local governments. Here, tra-
ditional pensions remain the norm, a
binding commitment made to nearly
90 percent of the sector's 16 million
workers. And here, also in contrast to
the private sector, generous retiree
health benefits remain the order of the
day. Some 65 percent of state -local
employees are slated to receive con-
tinued health insurance upon retire -
mem, a far larger share than for pri-
vate- sector workers.
The potential costs to taxpayers of
the health care benefits that have been
promised to retired public-sector work-
ers have long been hidden, even as they
have ballooned along with the rising cost
"This article is by Dr. 2D. Norton. an AM
Visiting Resemrh Fellow.
of health care. Now, however, state and
local governments are being required,
for the first time ever, to disclose their
estimated cost.
The price tag may be remarkably
high —mare than $100,000 per covered
worker, according to initial estimates.
This is party because government work-
ers often "retire" when they are rela-
tively young, in their 50s or even their
40s. Thus the benefits must be paid for
decades. Moreover, unlike pension
funds, these liabilities are rarely if ever
backed up by reserve funds (because no
law requires it), thus it costs govem-
ment officials almost nothing up -front
to promise generous.future benefits.
From their perspective, it's cheaperthan
paying higher wages, generosity is
costiess, and they'll be out of office
when the bills come due.
Requiring public disclosure of this
hidden liability will highlight its enor-
mity. It has also made clear that paying
for retiree health care could drain tax.
dollars away from other public services
or require higher taxes.
How did state and local benefits plans
get into this fix? Partly because govern-
ments require far less oversight of their
own civil service retirement plans than
they require of private- sector plans.
53
Tke Regulatory vacuum
Rfiremem benefits for state and lo-
co workers include pensions, which are
overwhelmingly of the traditional, de-
fied- benefit variety, and health insur-
ance. Our focus here is on the second
category, but it may help to take a brief
look at pensions first, to get some idea
of how lax the regulatory environment
has been.
Some six million state and local gov-
ernment retirees are now drawing pen-
sions. The average annual pension has
reached $20,000 --and in individual
cases can exceed six figures. Not only
are such pensions often generous, they
are also free from Congress's reach. The
state -local domain is exempt from many
of the laws that govern the private sec-
tor, including the Pension Protection Act
of 2006.
Nor is there effective oversight (in
terms of enforcement) by any single
agency monitoring accounting stan-
dards. As an actuary with a national ac-
counting firm observes of state and lo-
cal pension practices "rbere's no over-
sight; there's on requirements; there's
no enforcement"
The Government Accounting Stan-
dards Board (GASB, pronounced gaz-
be), an independent board, is respon-
sible for proposing retirement -plan ac-
counting standards for states and locali-
ties to follow. But GASB is a toothless
tiger, because it lacks enforcement pow-
ers or even the ability to speak out about
duhious practices.
In a telling historical footnote, in
1994 GASB gave carte blanche to state
and local governments to pick virtually
whatever accounting practices served
their purposes: Its own director at the
time was se appalled that he wrote a
10 -page dissenting note. He pointed om
that the absence of clear guidelines was
an invitation for state and local govern-
merits to finagle the books.
GASB's weak oversight was high -
lighted by a recent pension-fund scan-
dal in San Diego—and the inability of
GASB to publicize the problem.
Brought in to clean up the mess, former
SEC head Arthur Levitt concluded. in
2006 that city officials had deliberately
fudged the books to cover up deficits in
its pension funds, and criminal charges
have been filed. Well before that, GASB
had come to the same conclusion. Ac-
cordingly, when asked to sign off on
such shady practices, GASB refused.
But its charter prohibited it from erid-
cizing or even publicly commenting on
San Diego's tricky practices - Instead,
the outside world learned of the scandal
only after a whistle- blower from the
pension board sounded an alarm.
It is within this environment, marked
by a lack of oversight and the ease of
making promises someone else will
have to pay for, that retiree health in-
surance benefits have been lavishly con -
ferre"ut not financed. And unlike
their pension commitments, state and
local plans have had no obligation even
to disclose the future cost of retiree
health benefits.
77W $? Trillion Surprise
Now that has changed. Last year, in
a surprising move, GASB decided to
shine a spotlight on unfunded retiree
health benefits. Specifically, it now re-
quires larger state and local plans to
come clean by esumatmg:and disclos-
ing their estimated' future costs, begin-
mng this year GASB cannot force state
and local plans to do so. But many states
require their benefit plans to adhere to
GASB's guidelines.
The new rule does not require that
state and local plans fund retiree health
benefits. It simply requires that the costs
be made public. The hope is that greater
transparency will eventually lead to
greater accountability, both in promis-
ing and in funding these benefits. .
The costs that will be disclosed un-
der the new rule led economist Richard
Mattoon of the Federal Reserve Bank
of .Chicago to describe retiree health
benefits as `°Ihe 800 Pound Gorilla in
the Room. ", In odor words, the newly
disclosed liabilities are a huge unfunded
liability that can no.longer be ignored;
How big is the pricetag? Estimating
the cost is difficult - after all, nobody
knows what health care will look like,-
let alone cost, 20 years from now. Pre-
liminary estimates range from $700 bit-
Am to $1.4:rillion -. The latter figure,
from the Cato Institute, is based on a
survey of unfunded health costs in 16
state and 11 local governments, which
found an average accrued liability of
$135,000 for every covered worker.
Cato points out that this estimate
dwarfs the conventional debt of state
and local governments, which reached
$568 billion in 2005.
This raises another issue. Unfunded
health benefits constitute a kind of hid-
den debt that property should be taken
into account when rating a
municipality's ability to meet its obli-
gations. Until now, bond -rating agen-
cies such as Moody's, Standard and
Poor, and Fitch have paid little atten-
tion to this looming liability, partly be-
cause they lacked firm data. They are
taking a keen interest in the new esti-
mates, however, and high unfunded
costs could potentially influence their
ratings. The specter of spiraling.un-
funded health benefits could lead to rat-
ings downgrades and higher interest
costs —or, as in San Diego's pension
scandal, the inability to float new bond
issues at all.
One Sohrtion: Cap the Liability
It is legally difficult for employers
to wriggle out of promised pension ben-
efits, but retiree health care benefits are
different. The courts have consistently
ruled that workers do not have the same
legal claim to them. Given the legal
green light, private - sector, employers
have already cut back sharply on such
benefits; as their costs in the public sec-
tor become known, they may offer a
vulnerable target for cutbacks.
Another option would be to emulate
private companies and close such ben-
efits to new hires, atacticknown as "tier-
ing." Promises made t-6 the existing:
population of retirees and workers could
be left untouched, while new employ-
ees would get less generous benefits.
However, this sort of gradualist ap-
proach would still leave some state and
local plans facing enormous unfunded
liabilities.
A. more creative solution to over -
psomised retiree health benefits can be
gleaned from a plan already introduced
by Goodyear Tare and Rubber Co. In an
accord reached with the United Steel-
workers union; Goodyear has agreed to
pay $1 billion into a trust fund to cover
future benefits, with the union essen-
tially controlling the plait. The net ef-
fect is to cap Goodyeaes:liability, and
thereby eliminate uncertainty (and re-
54
sponsibility) for the company as to the
size of future health care obligations.
This innovation, known as a "volun-
tary employees beneficiaries associa-
tion" (VEBA), is also being considered
by Detroit's Big Three car companies
and the United Auto Workers union. A
"Big Three VEBA" would entail pay-
ments by the companies of perhaps $65
billion (or about two-thirds of the $95
billion the Big Tbree owe retirees in
health benefits) to the UAW. The union
would then manage the retiree health
plan itself.
(The financial burden of retiree
health benefits was central to Daimler
Chrysler's May 2007 "sale" of Chrysler
to Cerberus- The latter, a private -equity
company, in effect paid Daimler noth-
ing for Chrysler beyond the promise to
take on the company's $18 billion com-
mitment to retiree health care.)
The goad for the Big Three would be
to cut in half the estimated $30 -per -hour
labor cost disadvantage they face vis -i-
vis Japanese companies operating with
U.S. plants but free of heavy burdens
for retiree benefits.
Maybe a similar arrangement could
be worked out in the public sector. Are
such unions as the American Federa-
tion of State, County, and Municipal
Employees likely to cooperate in any
such experiment? Perhaps we should
stay tuned to.what the UAW decides to
do. Both unions have reputations for
militancy, but they may yet conclude
that fresh arrangements are called for in
the current competitive climate.
A key difference, however, . is that
businesses in the private sector are sub-
ject to the discipline of the market: If
their costs. continually exceed their rev-
efiiid tM ed a&from productive ac-
tivity, they lose money and eventually
go out of business. By contrast, state
and local governments face no such
pressure. Nor do they face the same
regulatory oversight as private busi-
nesses. (The latest eye- rolling example:
lawmakers in Texas have just proposed
a bill that would allow government bod-
ies in that state to ignore the new dis-
closure rules for retiree health: care
costs.) Free of proper oversight, elected
officials can win'friends by raising ben -
efits:without worrying about paying the
bill. When the bill. eventually conies due,
they will probably have left office (tak-
ing along their own generous retirement
packages), and it will be left to taicpay-
ers to decide how to pay it. ❑