CC Resolution No. 10-008 Adoption of policy statement on local government retirement benefitsRESOLUTIONf NO. 10-008
A RESOLUTION OF THE CU_PERTINO CITY COUNCIL
AUTHORIZING THE ADOPTION OF A, POLICY STATEMENT ON LOCAL
GOVERNMENT RETIF[EMENT BENEFITS
WHEREAS, for more than 70 years, the State of California and local governments have
offered a "defined benefit" retirement plan to employees which has provided a guaranteed annual
pension based upon retirement age, salary and years of service; and,
WHEREAS, the City belongs to the California Public Employees' Retirement System
(Ca1PERS), that sponsors and administers a defined 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 increase 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 and State are working together to create amore
sustainable level of retirement benefits paid to ne:w 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 Local 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 oi'the City Council of the City of Cupertino on
the 19th day of January 201 O, by the following vote:
Vote Members of the Citv Council
AYES: Wang, Wong, Chang, Mahoney, Santoro
NOES: None
ABSENT: None
ABSTAIN: None
ATTEST:
City Clerk ~~/,~--
APPR~'IVFTI-
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Policy Statement on Local Goven~ment Retirement Benefits
Background
For more than 70 years, the State of California and focal governments have offered •a
"defined benefit" retirement plan to employees.. This system provides a guaranteed
annual pension based upon retirement age, sal2~ry, and years of service. Most, but not
all, municipalities in California are part of the Public Employees' Retirement System
(PERS).
Over the years, local government retirement co:~ts 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 sfgn~cant benefit
enhancements for public employees in the I~ERS system that were optional for
participating local governments. At that time, sorne retirement plans were deemed to be
"super funded" and many local governments adlopted 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 tosses in the early part of this
decade, these losses, combined with newly approved benefrt enhancements, caused
dramatic increases in employer contribution rater. Cities in. our two counties have seen
the percentage of their General Fund budget desdicated to PERS costs increase while
their retirement liability funding had decreased from over the past decade. Fot
example, in Mountain View, General Fund PER:S costs have gone from $2.8 million in
FY00 to $7.7 million in FY10; in San Bruno, it I'~as 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 proposaE:> 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 defined 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 specifrc
reform recommendations. To date, no concrete action has been taken by the
legislature.
Recently, the city mar~.agers of San DIego County have prepared a white paper on this
issue calling for a ne~rv and lower second tier retirement beneftt 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 sand 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 tieen achieved on addressing the
high cost of pension benefits and no action aK>pears imminent. The city managers of
Santa Clara and San Mateo counties believe i~: 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 in 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 to 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 residents deserve fiscal policies that preserve local government's ability to meet
community needs, while attracting compe~te:nt 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 ;;e:ctor.
~ Current retirement benefit formulas era riot fiscally sustainable. The costs are
escalating beyond our ability to fund them and diverting limited resources from direct
service delivery to our communities. In addition, current pension benefts exceed
what private sector employees receive and what is reasonably needed to attract
public employees.
Ideally, this situation would be addressed at a statewide level and there would be
consistent standards for a11. 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
al[" approach may not be realistic, but ali cities in the region compete for the same
employees and therefore should move in the same direction to a lower-cost benefit.
~ Each city has the legal duty to meet and confer in good faith with its recognized
bargaining unit representatives concerning changes to existing terms and conditions
of employment.
v Every city is committed to moving toward a twro tier system for ati 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 merr:bers 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.
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Dave Anderson, SCCCMA
Connie Jackson, SMCCMA
Adopted Juty, 2009
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