12. Local govt. retirement benefits policy statementOFFICE OF THE CITY MANAGER
CUPERTINO
CITY HALL
10300 70RRE AVEi~UE • CUPERTINO, CA 95014-3255
TELEPHONE: {408) 777-3212 • FAX: (408) 777-3366
SUAZMARY
Agenda Item No. 1 ~ MEETING DATE: January 19, 2010
SUBJECT
Adopt a resolution authorizing the adoption of a policy statement on local government retirement
benefits, Resolution No. 10- (;pg
BACKGROUND
Local governments generaily use a defined ben<;fit pension plan as their primary retirement vehicle.
Under a defined benefit plan, a retired employes receives a guaranteed annual fixed amount for life
based upon retirement age, salary and years of service. Most do not participate in Social Security. In
California, most municipalities, including the City of Cupertino, belong to the California Public
Employees' Retirement System (Ca1PERS), which acts as a trustee to administer the defined benefit
pension plans on behalf of each government employer.
The benefits paid out to retirees from defined l:~enefit pension plans are fitnded from three sources:
employee contributions, employer contributio;crs and investment earnings, with the last source
accounting for roughly 75% of the total funding. Employees contribute a fixed percentage of pay
and employers contribute the remaining balance needed based on an annual actuarial valuation
study.
During the height of the "dot coin boom" of the late 1990x, many of these plans were deemed
"super funded" meaning that plan assets significantly exceeded projected benefit payouts. This led
to many governments enhancing the retirement. benefit formulas based an the assumption that the
increased cost of the benefit would be paid four by past investment earnings and no out-of-pocket
costs would be necessary for many years. Unfortunately, this assumption did not hold true for very
Long. With the "dot coin bust" and stock market crash in 2000, and the economic recession in 2008
that is still lingering, the pension portfolios experienced significant losses in value, wiping out the
surpluses from previous years. In fact, Ca1PEF:S, which assumes a 7.75% return on investments,
suffered a 23% loss last year. This combination of investment losses, enhanced benefits, and
increased payroll expenditures resulted in dramatic increases to employer contribution requirements
with little relief in sight.
With many cities experiencing ongoing and significant budget deficits, the continued escalation of
pension costs is adding to reductions in services, layoffs and ,cutbacks in capital spending.
Government officials from around the State h~~ve been engaged in discussion about the >r~~ed for
pension reform in order to prevent this issue from continually impeding programs and services.
The City Manager associations of Santa Clara and San Mateo counties have drafted the attached
policy statement that contains guiding principles and a commitment to creating a new level of
pension benefits that would apply to all new hires. The issue paper has been endorsed by the Santa
Clara County Cities Association and the League of California Cities' Peninsula Division. Similar
efforts have been undertaken across the State.
Retirement benefits play a key role in attracting and retaining city employees, however, current
retirement benefit formulas are not fiscally sustainable. In order to achieve long term sustainability,
what is needed is a fair but reduced level of benefits that would apply to new employees (current
employees are considered to have a vested right to their benefits, which can not be reduced).
If cities do not take pro-active steps to address the pension issue, it is very possible a solution will
be determined through the initiative process by the public. In fact, such a proposal was recently
submitted to the Attorney General's Office by the California Foundation for Fiscal Responsibility
for the November, 2010 ballot, and seeks to significantly change the benefit levels and requirements
of existing defined benefit plans for local governments.
The ci#ies in Santa Clara and San Mateo counties are in the process of placing this issue before their
respective Councils. Having all, or at least most, cities in the region move forward on his issue will
make the implementation of a two-tier system easier to achieve, as we all compete for the same
labor market.
FISCAL IMPACT
There is no direct fiscal impact to this report. However, the City is budgeted to spend
approximately $3 million on its retirement pension funding in FY 10-11 (8 percent of total
expenditures). This is expected to increase between 1.2 percent to 2.4 percent each of the next four
years based on current information from PERS. A lower benefit for new hires would save the City
money over the long term, but since is the average tenure of our employees is twelve years, savings
would not be realized for some time.
STAFF RECOMMENDATION
Adopt the attached resolution and policy statement on local government retirement benefits,
Resolution No. 10-~.
Approved for submission to the City Council:
David W. Knapp, City Manager
Attachment A: Resolution No. 10- ~4~
Attachment B: Policy Statement on Local Government Retirement Benefits
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_- ~ ATTACHMENT A
RESOLUTION NO. 10- lXkg
A RESOLUTION OF THE Ci;~PERTINO CITY COUNCIL
AUTHORIZING THE ADOPTION OF 1~ POLICY STATEMENT ON LOCAL
GOVERNMENT RETIJREMENT BENEFITS
WHEREAS, for more than 70 years, the ;Mate of California and local governments have
offered a "defined benefit" retirement plan to emIloyees which has provided a guaranteed annual
pension based upon retirement age, salary and ye~~rs of service; and,
WHEREAS, the City belongs to the California Public Employees' Retirement System
(Ca1PERS), that sponsors and administers a defin~;d benefit pension plan for its employees; and,
WHEREAS, the cost of funding the pension plans has escalated significantly over the
past six years and is expected to continue to i~lerease even further in the foreseeable future
requiring a large amount of resources from the General Fund; and,
WHEREAS, the revenues of the City are: limited and must be used to fund many vital
programs and services to the community; and,
WHEREAS, the City is committed to finding ways to reduce its long term costs; and,
WHEREAS, cities around the region an<l State are working together to create a more
sustainable level of retirement benefits paid to r~ew employees while still providing a fair and
equitable benefit.
NOW, THEREFORE BE IT RESOLVED, that the City Council of the City of Cupertino
hereby adopts the attached Policy Statement on L~~cal Government Retirement Benefits; and,
BE IT FURTHER RESOLVED that City :staff meet and confer with employee bargaining
groups to discuss implementing a second tier retirement benefit plan for new employees hired.
PASSED AND ADOPTED at a regular meeting of the City Council of the City of Cupertino on
the 19th day of January 2010, by the following vote:
Vote Members of the Citv Council
AYES:
NOES:
ABSENT:
ABSTAIN:
ATTEST: APPIEi`OVED:
City Clerk Mayer, City of Cupertino
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ATTACHMENT g
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Policy Statement on Local Government Retirement Benefits
Background
For more than 70 years, the State of California and [oval governments have offered ~a
"defined benefit" retirement plan to employees. This system provides a guaranteed
annual pension based upon retirement age, salary, and years of service. Most, but not
a11, municipalities in California are part of the Public 1=mployees' Retirement System
(PERS).
Over the years, local government retirement costs have risen and fallen based on two
key factors: investment returns and the level of benefit payments provided to
employees. In the late 1990's the California legislature enacted significant benefit
enhancements for public employees in the PERS system that were optional for
participating focal governments. At that time, some retirement plans were deemed to be
"super funded" and many local governments adopted benefit enhancement plans. For
example, most public safety personnel are on the "3% @ 50" plan, which provides a
.pension benefit of up to 90% of salary after 30 years of service as early as age 50.
When the retirement system suffered serious investment losses in the early part of this
decade, these losses, combined with newly approved beneft enhancements, caused
dramatic increases in employer contribution rates. Cities in. our two counties have seen
the percentage of their General Fund budget dedicated to PERS casts increase while
their retirement liability funding had decreased from over the past decade. Fob
example, in Mountain View, General Fund PERS costs have gone from $2.8 million in
FY00 to $7.7 million in FY10; in San Bruno, it has gone from $240,000 to $4 million.
Daly City's percent of the General Fund budget spent on retirement benefits has
increased from 4.3% to 10.4% between FY00 and FY10; in Belmont, it has gone from
.5% to 11.4%. And Campbell has seen its public safety retirement system fall from
122% funded to 70% funded over ten years.
In the past five years, a number of proposals have been introduced to reform or
dramatically revise the public pension system in California. In 2004, a task force of the
League of California Cities began an extensive study of the defiined benefit system and
proposed reforms. In 2005, the League board of directors accepted a report on pension
reform from the task force as an initial assessment and for consideration in the ongoing
debate of this issue. The report included a number of "general principles" and specific
reform recommendations. To date, no concrete action has been taken by the
legislature.
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Recently, the city managers of San Diego County have prepared a white paper on this
issue calling for a ne~nr and lower second tier retirement benefit for new hires. Other
manager groups across. the state have begun a similar dialogue in recognition that the
costs of the current . system are not sustainable. Additionally, Governor
Schwarzenegger has proposed returning pension formulas to 1999 levels for new hires
-~ a move he says will save the state $74 billion through 2040. The City of Sunnyvale
has done a preliminary analysis of a lower tier and has estimated it could save a total of
$44 million over 20 years. The cities of San Carlos and Brisbane have already initiated
a lower, second tier for new hires (among other cities statewide).
Discussion
While the debate is ongoing, no clear consensus has been achieved on addressing the
high cost of pension benefits and no action appears imminent. The city managers of
Santa Clara and San Mateo counties believe it is important to take a proactive stance
on this issue which has long-term implications for the fiscal stability of our cities. This
issue is even more important now, given the tremendous losses suffered in the stock
market in the past year. At fiscal year end irE June 2009, PERS annual returns were
down 23.4% from the previous year. This is on top of losses of 5.1 % in Fiscal 2008.
PERS assumes a 7.75% gain annually to maintain its pension obligations, but clearly
there is no guarantee this rate can be achieved. Based on this year's negative returns,
employer rates are expected #o jump significantly as of July 1, 2011.
Therefore, as a matter of public policy, we endorse the following principles for a revised
pension system.
Guiding Principles
Our residen#s deserve 17scaf policies that preserve local government's ability to meet
community needs, while attracting competent and motivated employees to public
service.
~ Providing adequate retirement benefits is an important part of attracting and
retaining public employees; this continues to be an issue as, demographically, there
are fewer young people to enter the public :>ector.
~ Current retirement benefit formulas are riot fiscally sustainable. The costs are
escalating beyond our ability to fund them ~md diverting limited resources from direct
service delivery to our communities. In addition, current pension benefits exceed
what private sector employees receive and what is reasonably needed to attract
public employees.
A Ideally, this situation would be addressed at a statewide level and there would be
consistent standards for all. We cannot, however, afford to wait for a statewide
solution. Therefore, the cities of Santa Clara and San Mateo counties support
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implementation of a reduced and sustainable level of retirement benefits for all new
employees of agencies in the region.
~ Each city has different histories, perspectives, and fiscal conditions; a "one size fits
all" approach may not be realistic, but ail cities in the region compete for the same
employees and therefore should move in the same direction to a lower-cost benefit.
v Each city has the legal duty to meet and confer in good fai#h with its recognized
bargaining unit representatives concerning changes to existing terms and conditions
of employment.
Every city is committed to moving toward a two tier system for ail new contracts.
Any new system or tier should be fair to employees, sustainable for taxpayers and
employers, and based on objective actuarial data.
Action Steps
The city manager associations of Santa Clara County and San Mateo County support
the statements in this document and their members pledge to work with their elected
officials and labor groups to implement its principles. We further pledge to work with
other city managers across the state and the League of California Cities to advocate for
changes consistent with this document.
~~ ~~_
Dave Anderson, SGCCMA
Connie Jackson, SMCCMA
Adopted July, 2009
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