Pensions

PENSIONS: What they were thinking

Michele Ellson

Originally published on The Island, April 27, 2011

Beverly Johnson had been on Alameda's City Council for less than two years in 2000 when city staff approached her and other council members about upgrading public safety workers' pensions.

Three months earlier, Governor Gray Davis and the state Legislature had authorized cities, counties and other agencies participating in the CalPERS retirement system to negotiate new public safety pensions that would allow workers to retire at 50 with 3 percent of their top salary for each year served. The new rules were approved almost unanimously after state leaders were told by CalPERS - which co-sponsored one of the bills authorizing the benefit increases - that the pension fund had a surplus of cash and that municipalities paying into it wouldn't pay a cent more in contribution rates in the decade to come.

After receiving assurances from city staff that the changes wouldn't cost the city anything, Johnson said, the council - unanimously and without debate - approved the benefit bumps, first for police and several months later, firefighters. But eventually, she said, she learned that all those assurances were for naught.

Now city leaders in Alameda, like cities across the state, are trying to cope with pension costs that are expected to grow sharply over the next several years, in part to compensate for investment losses CalPERS suffered when the stock and housing markets crashed in 2008. Alameda's contribution rates are expected to rise to 45 percent of public safety workers' salaries, from 31 percent now and 19 percent for the rest of the city's employees, from 13 percent now, by 2015-2016 the city's projections show. City staffers told the council in late March that they expect their pension contribution costs to rise by $1.75 million next year alone.

"It comes down to having to lay off police and firefighters to pay your PERS costs. That's the choice cities need to make," said Johnson, who has since emerged as one of the council's strongest critics of the cost of public safety workers' retirement benefits. (The city's other employees get 2 percent of their top salary for each year they work and can retire at age 55.)

As part of a series of stories on pension costs, The Island contacted the three surviving members of the City Council that approved the enhanced benefit. Former City Councilwoman Barbara Kerr could not be reached for comment, and former councilman and recent mayoral candidate Tony Daysog declined to comment, saying he was gathering his thoughts in order to write his own opinion piece on the matter.

Daysog, who served on the city's Fiscal Sustainability Committee in 2008-2009, told The Island when he ran for mayor in 2010 that he'd place public safety workers on furlough days in order to save money to pay for pension and retiree health benefits, and also that he would seek to create a two-tiered retirement system for public safety workers that would include a 401(k)-style defined contribution plan, hold down salary increases and open labor negotiations for public view.

Johnson said the pension increases were approved at a time when the state's economy was flush and cities actively competed with each other and the private sector for workers, particularly police officers, who some cities were paying signing bonuses to hire. She said the city needed to offer the benefit in order to effectively compete for workers but that Alameda now needs to adapt to its reduced circumstances.

"At that time the economy was really strong. It was hard to hire people for jobs in the police department and for other city jobs," said Johnson, whose husband is a police officer in another city. "Once you do that on a statewide basis when people are competing for jobs, you have to (do it locally too)."

Johnson said the city's then-manager, Jim Flint, had promised to eliminate police retention pay and freeze positions in order to pay for the enhanced retirement benefit for police; she said those items were put back into police officers' contract after the council approved it. Staff reports generated when the changes were made showed that the benefit would cost close to $854,000 a year for police officers and managers; the roughly $880,o00 a year in increased costs for firefighters and fire department managers was to be covered by freezing and cutting positions and trimming funding.

The city-run pension plan public safety employees had been in before entering the CalPERS system offered cost of living increases and no health care, the city's human resources director, Karen Willis, said; an earlier plan offered to safety retirees raises every time active employees received them, allowing them to earn more in retirement than they had when they were working, Johnson said.

She said former City Manager Debra Kurita, who began working for Alameda in 2007, had tried to convince the council to increase pension benefits for non-safety employees but the council opted not to.

Johnson and other city leaders later discovered the new pensions were "not sustainable," she said. And cities and other agencies that invest in the PERS system - and by extension, the taxpayers in those places - are now stuck covering those losses, she said.

"They were falsely reassuring cities, 'don't worry about paying pensions' - our investments will pay," Johnson said of CalPERS.

Johnson said she's encouraged by efforts that have been made at the bargaining table to address pension and retiree health care costs. So far, Alameda's firefighters have hammered out a tentative contract with the city, but the details have not yet been made public.

"We can't fix everything in one fell swoop. But there are significant steps forward," Johnson said. "And we will keep working on the issue."

PENSIONS: Alameda's $100k club

Michele Ellson

Originally published on The Island, April 22, 2011

Craig Ojala retired from the Alameda Police Department in 2008, after 30 years on the job. Ojala started working in the department as an officer in 1979, when he was 20 years old, and rose to the rank of interim chief in 2005 before leaving the department as a captain.

For his service, Ojala earns a pension of $179,730 a year, according to a database compiled by the conservative California Foundation for Fiscal Responsibility that lists retired public employees earning pensions of $100,000 or more a year – more than any other retiree from the City of Alameda.

Ojala is one of 50 people who have retired from the city with six-figure pensions, the database shows, with the CalPERS pension fund's annual payouts for those employees alone totaling $6,248,187. The list is topped by former police and fire brass and includes an assortment of former managers and even some members of the city's rank and file.

The figure is a “squeal point” for taxpayers, a report on pensions issued recently by the state’s Little Hoover Commission said, and it is being used as a tool to further pension reform efforts that include tighter limits on benefit payouts, higher employee contributions and the creation of a “hybrid” system that includes 401(k)-style defined contribution plans for new public employees.

But defenders of the existing defined benefit pension plan said they’re working to make changes that will help cities manage rising pension costs, including some of the changes reformers seek. And a spokesman for CalPERS, the public pension fund where Alameda invests its employees’ retirement money, said investment losses and increased staffing, not benefit increases, are the primary drivers of cities' increased benefit costs.

"Benefit enhancement is part of the picture. But it's not a primary driver," CalPERS spokesman Brad Pacheco said, offering a chart that showed that payroll increases accounted for more than half of cities’ rising pension bills.

Staffing for the City of Alameda, for example, grew from 594 positions in 1993 to 738 a decade later, city budget records show (the city now has 659 positions).

The City Council voted in 2000 – unanimously and without any public discussion – to increase retirement benefits for its police officers and police management to allow them to retire at age 50 with 3 percent of their top salary for each year served instead of the 2 percent they had been getting, minutes of the meeting where the benefit was approved show, with a cap of 90 percent. (The council voted to provide firefighters the same benefit in 2001, meeting minutes show, though in that case they cut and froze positions and trimmed funding in order to pay for it.)

But at the same time city leaders increased benefits, their annual payments jumped from the 9 percent of employees’ salaries they had been paying – the same rate public safety employees pay into their own pensions – to 25.8 percent in mid-2003, a staff report written in 2002 shows. City staffers estimated that the increased value of the benefit the council had promised – $10.2 million for police and $8.6 million for fire – would be paid over 20 years.

A string of retirements of top police and fire officials hit the city in the years after the benefits were raised: All of Alameda’s top 10 pension earners are former police or fire brass, and each of them retired after the new rules went into effect.

Former Alameda Police Capt. Rich McWilliams, who served a stint as acting police chief, retired in 2005 after 30 years on the force, with earnings of $173,370.36 a year, a City Council resolution issued as he retired showed. Former Fire Chief Tim Reilly, who left as the new benefits were put in place, earns $167,770.20.

The new rates allowed some of the city's top earners to retire with most of their pay intact. Chris Reilly, who’s on the top 10 list, spent five and a half years as a deputy chief at the Alameda Fire Department before retiring in March of 2009. In 2008, he had total earnings of $190,889.16, records obtained by The Island for an earlier investigation and a LinkedIn profile for Reilly show. After he retired, he began earning a pension of $166,926.96, the California Foundation for Fiscal Responsibility database shows, or about 88 percent of what he made in his last full year of work in Alameda.

The average benefit paid to Alameda's retirees is much lower, though it is growing - and being offered to a growing number of people. Actuary reports supplied by CalPERS show that the pension fund paid an average benefit of $66,486 to Alameda's 204 public safety retirees for 2009, and that they started taking the benefit, on average, at the age of 63. A year earlier, the fund paid 192 safety retirees an average of $62,623. Some 538 non-safety workers got an average of $16,128 in 2009, up from $15,223 a year earlier for 525 former city workers. They started taking the benefit, on average, when they were nearly 71, the reports show.

Meanwhile, the rates the city pays for employee retirement benefits are rising to cover the losses CalPERS suffered when in the stock market and housing crashes of 2008. The city’s public safety contribution rate is now 31 percent, and forecast to rise to 45 percent by 2015. Other city employees, who get 2 percent of their top pay for each year served, with no cap, can retire at 55; the city pays 13 percent of their salary toward their retirement now, and expects to pay 19 percent by 2015.

The city's retirement contribution for its top-paid public safety employee - Acting Police Chief Mike Noonan - was $63,383.75 in 2010, or close to 31 percent of his base salary of $155,984 plus specialty pay add-ons. At 45 percent, the city's annual retirement costs for Noonan alone would be roughly $92,000, or the cost of a full-time police officer or firefighter based on city employee pay records.

For its top non-safety employee, Interim City Manager Ann Marie Gallant, the city made a $31,943.73 payment in 2010. For a police officer who earned roughly $89,000 in 2010, the city made a PERS payment of $29,745.81.

Some 126 current city employees made a base salary of $100,000 or more in 2010, the city's records show; a little more than half of them, or 68, were public safety workers. Overall, the city contributed $10.4 million toward its workers' retirement funds in 2010, and the city’s controller, Fred Marsh, expects the city's bill to rise by $1.75 million this year (though this year's tab was less than what the city paid in 2008 and 2009).

California Foundation for Fiscal Responsibility president Marcia Fritz said the list of top retirement benefit earners is growing by 60 to 70 percent a year, and faster than the list of public pensioners as a whole. She said the group’s list is littered with city managers who had direct access to policy makers and who helped drive decisions on growing their own benefits. And she said the new benefit rules – allowed by a state legislative change made in 1999 – provided a perverse disincentive for top managers to retire early.

Fritz said that while CalPERS’s investments have recovered, the rate of early retirements and wage increases exceeded what actuaries had predicted.

“You’ve got guys that may have a position for one year. And then they retire at that salary,” Fritz said.

Jeff DelBono, a firefighter/paramedic and the political director for Alameda's firefighters union, acknowledged there are problems with the pension setup, but he is resisting calls to convert city workers' current pensions to a 401(k) plan. He said he's willing to work with the city to save money, but there are a lot of cost-saving concessions workers can't make unless the state Legislature changes the law to allow them. (He also stressed that his union doesn't represent the management employees who dominate the city's top-earning pension slots.)

While he said he couldn't divulge details of the tentative contract the union has hammered out with the city until his members vote on it, he said one fix could be bigger employee contributions for benefits.

DelBono said other potential cost-cutting moves - including caps on retiree earnings and different contribution rates for existing and new employees - can't be made at the bargaining table unless state legislators, who set the parameters for benefits, retirement formulas and eligibility ages, change laws that would allow those items to be renegotiated. And other strategies - like raising the retirement age for new hires who haven't yet been promised a specific benefit level, as existing employees have - wouldn't save the city any money up front, according to an actuarial study commissioned by the city.

"It's a statewide problem," he said.

DelBono said the benefits were added at the height of the dot-com boom as CalPERS was flush with cash, and that they came in lieu of pay raises and firefighting positions that had been frozen in previous budget cycles.

"These benefits were put in place when the economy was going gangbusters and people were earning a lot more money in the private sector," DelBono said.

PENSIONS: A brief history

Michele Ellson

Originally published on The Island, April 20, 2011

California's pension system got its start in 1932, as an incentive for older, less efficient workers to leave public service. At that time, workers could expect to retire with about half of what they earned in their final years of service. But that has changed, according to a pension reform report issued by the state's Little Hoover Commission in February.

The report details how public pensions became increasingly generous through the decades, at the same time that CalPERS - the nation's largest pension fund and the one Alameda invests in for its city employees - adopted increasingly risky investment strategies in order to increase returns. Its authors say the 2008 market crash and real estate bust helped expose what they see as the pension system's flaws.

The crash also forced local governments to cover the system's losses in order to meet their obligations to retired employees. This year, the city is looking at increased pension rate payments of about $1.75 million, a presentation delivered to the City Council on March 29 shows. Locally, opinions differ on how dramatic the increases will be and how long they will last.

Benefits increased gradually over the years since CalPERS opened for business, rising from a retirement age of 65 and 1.43 percent of an employee's salary for each year served to retirement at 63 with 2.5 percent of a worker's salary for each year in 1999. But a key turning point came in 1999 when the state Legislature - which sets parameters for benefits, retirement formulas and eligibility ages, according to the report - overwhelmingly approved SB 400.

The new law allowed local governments and the state to lower retirement ages and increase benefits for public safety workers. CalPERS, which was overfunded at the time - meaning they had more money than they needed to cover benefit payouts - had argued they had enough money to keep payments into the system below 1999 levels for the next decade. And they even gave the state a rate "holiday," lowering its contribution into the fund.

The changes, the report says, caught on like wildfire, with cities quickly boosting benefits in order to retain workers. Benefit changes account for close to half of governments' increased pension costs, the report says; rising pay and increased workforces make up the other half.

In December 1990, Alameda decided to move its public safety workers from its self-funded pension plans into the CalPERS system, a move that Jeff DelBono, a firefighter/paramedic and the political director for the local firefighters union, said ultimately saved the city $3 million. (Some cities, like San Francisco and San Diego, manage their own pension funds.) But after SB 400 passed, the city changed its retirement plan for public safety workers so that they could retire at age 50 with 3 percent of their top salary for each year served. Other city workers get 2 percent for each year served and can retire at age 55.

Meanwhile, the city's workforce grew dramatically: Alameda had 594 workers in 1993-1994, including workers at Alameda Municipal Power, the Housing Authority and other agencies. By 2003-2004, the city's workforce had grown to 738 workers (it has since declined to 659). The fire department saw its ranks grow from 99 workers in 1993-1994 to 119 in 2004-2005 (falling to 110 in 2009-2010), while the police department grew from 149 workers in 1993-1994 to 161 in 1999-2000 (the department had 144 staffers in 2009-2010).

It's not clear what the city's average pension payout is; the city's controller, Fred Marsh, said that would be tough to calculate because many of the city's employees have worked at other agencies, and their PERS pensions include those years of service. (A CalPERS spokesperson did not respond to a request for more information.) DelBono said Alameda's firefighters serve an average of 27 years. Public safety workers - who make up a third of the city's workforce - account for $1,335,000 of its increased pension payment for next year, while the rest of the city's workers account for an additional $413,000 payment.

In 2008-2009, the city paid $11.1 million into CalPERS that year, the city's 2009 comprehensive annual financial report shows. Overall, the city paid 30 percent of its public safety employees' salaries toward their retirement, while the employees pay nine percent; for the city's other employees, contribution rates were 13.2 percent and seven percent, respectively. (The city's payment rates are forecast to grow to 45 percent for public safety workers and 19 percent for other municipal employees by 2015-2016, a chart presented to the council shows.)

But as the city added more workers and increased benefits, they entered a pension fund that had adopted increasingly risky investment strategies since its founding.

CalPERS originally invested in government bonds, a stable but low-yield investment. But over the years, additional investments were added, allowing the fund to put money into the stock market, foreign markets and real estate.

The 2008 stock market crash and a plummeting real estate market hit CalPERS heavily: The fund's assets dropped 30 percent, from an October 2007 high of $260 billion, the report says. (The fund's assets have rebounded to $234.4 billion, its website shows, but its earnings are reliant on a smaller asset base, the report says.)

Still, the losses were so bad that the fund looked for ways to continue paying pensions without bankrupting the cities and other public agencies that invest in it. If the fund loses money and has less than it needs to cover employees' pensions, it reaches out its member cities to make up the difference.

It hit upon a "smoothing" formula that spread the losses out over 15 years so that its members wouldn't be hit with massive bills all at once in what have been challenging economic times. City Treasurer Kevin Kennedy said in an interview last week that he thinks this will mean high pension payments for Alameda for years to come, though DelBono said the pension fund's returns have been higher than its target of 7.75 percent since the crash. (Marsh said that the increased returns still won't make up for PERS' recent losses, which are reflected in the city's rising rates.)

The pension fund's board considered lowering its return target to 7.5 percent but opted not to in March on a 10-3 vote.

The city has been talking about how to manage its growing pension costs - and the cost of retiree health benefits, which it has not been paying for - for several years, with Kennedy detailing the problems in a 2009 report of the fiscal sustainability committee he chaired. Still, city leaders have yet to hit upon solutions, though Mayor Marie Gilmore and union leaders say they are coming.

Alameda isn't the only city grappling with pension and benefit costs, and CalPERS isn't the only pension fund facing financial troubles. San Francisco, which manages its own retirement fund, reportedly has competing proposals from Public Defender Jeff Adachi and a group headed by investor Warren Hellman that includes union leaders that could trim benefit costs by between $100 million and $200 million; officials in San Jose, facing a $110 million deficit by June 30, 2012, are looking at cutting salaries by 10 percent. City leaders in Oakland, which gave itself a 15-year break from paying into its pension fund for public safety officials and is facing a $42 million deficit, are trying to figure out how to pay the $46 million bill that comes due on July 1.

Across California, city leaders are demanding cuts and labor leaders are considering concessions, though others are arguing that the existing pension system needs a radical restructure. The Little Hoover Commission report's authors recommend rolling back existing benefits, adding a 401(k)-style plan to the mix and providing the public more information about retirement benefits and their costs. (The federal government introduced a 401(k) plan in 1986; they also give their employees Social Security, something Alameda's employees don't get).

"California’s pension plans are dangerously underfunded, the result of overly generous benefit promises, wishful thinking and an unwillingness to plan prudently. Unless aggressive reforms are implemented now, the problem will get far worse, forcing counties and cities to severely reduce services and layoff employees to meet pension obligations," the report's authors said.

More to come.

PENSIONS: Peril is in the eye of the beholder

Michele Ellson

Originally published on The Island, April 19, 2011

Kevin Kennedy and Jeff DelBono agree that Alameda’s pension and retiree benefit costs are a problem that must be addressed. Where they differ is on the scope of the problem – and of the solutions needed to fix it.

Kennedy, a financial planner and self-described “numbers guy” who has served as the city’s elected treasurer for the last decade, and DelBono, a firefighter/paramedic and the political director of the local firefighters union, are key voices in the debate over how to address growing benefit and pension costs – a problem that has been decades in the making.

The arcane financial drama exploded into the public consciousness in late March when Kennedy claimed the city would go bankrupt without major, structural budget changes – a claim that left Mayor Marie Gilmore and union leaders scrambling to assure residents that Alameda is solvent and that unions are doing their part to try to fix the problem. It’s a drama that is playing out all over California, as policymakers and labor leaders try to come to terms over the rising cost of pensions and millions of dollars in retiree health care benefits that public agencies offered, but in many cases never saved money for.

City leaders have inked a tentative deal with firefighters, but the terms – which will go up for a vote before both the firefighters union and the City Council – have not yet been announced. Contracts recently approved for management employees and electrical workers don’t offer any concessions on pensions or benefits, however.

Kennedy, who first sounded the alarm about pension and benefit costs in 2009, said he believes they are “enveloping everything else” in the city with no end in sight. And he believes budget numbers offered by city staff in late March – the night of his bankruptcy claim – back him up.

“(The City Council) has to realize this probably can’t be kicked down the road any longer,” Kennedy said. “We clearly don’t have enough money to pay what we’re paying.”

Those financial projections show Alameda suffering a budget deficits of $6.2 million next year and larger ones in the four years to come – deficits which would exhaust the city’s reserves inside of three years unless expenses are reduced. Next year’s deficit projection includes an additional $3 million in pension and health benefit costs, and it shows pension costs – particularly for public safety workers – rising through 2015-2016.

Kennedy said health care costs are rising beyond projections – 14 percent versus the 9.5 percent predicted by the city’s actuarial – and he thinks return expectations offered by CalPERS, the state retirement system Alameda uses, are rosier than they should be.

CalPERS is charging its member cities and counties more money this year to cover previous investment losses, and barring some miracle in the market, Kennedy said the increased payments could continue over 15 years: The losses were so bad that the pension fund opted to spread them out over time, in order to spare public agencies who bought into it massive payments they couldn’t afford.

But the big issue, Kennedy said, is retiree health care, which the city has yet to fund. If the bill were due today, the city would owe more than $75 million, he said.

“I don’t know how that’s going to work,” Kennedy said. “We’ve never saved any money toward this.”

To fix the problem, Kennedy said policymakers should consider a range of solutions, including layoffs, wage reductions and increased benefit contributions – along with a 401(k) retirement plan for new hires in place of the pensions city employees now get, which pay a fixed amount regardless of how the city’s pension investment performs.

DelBono concedes there’s a problem, but he says it’s not as bad as Kennedy thinks. And he is adamant that pensions be preserved.

“I believe everybody in this country should have health care and retirement,” said DelBono, who said pensions allowed his grandparents, both machinists, to live comfortably in retirement.

He said he thinks employees should consider paying more for their benefits, and that health care plans should be restructured for new employees.

“We’re working hard to restructure the benefit and it will probably look different from what a retiree has now to an active (employee) to a new hire,” DelBono said during an interview last week.

DelBono said public safety employees are already contributing 9 percent of the cost of their pensions, and that they did so even as CalPERS, flush with cash a decade ago, lowered public agencies’ payments to zero. And he said actuarial projections of health care costs assume everyone will take the most expensive benefit plan available and that they don’t account for things like Medicare, which he said employees are required to apply for at age 65, lowering the city’s costs. He thinks the city can continue with its pay-as-you-go approach, since its employees won’t retire all at once.

He said CalPERS’ return projections are lower than their actual returns: The pension fund has set a standing expectation of a 7.75 percent return on its investments, but this past year, it earned 12.5 percent.

DelBono said city leaders offered public safety workers enhanced retiree medical benefits after they agreed in 1992 to move from a city-funded pension plan into CalPERS, a move that he said saved Alameda $3 million. He said that money was supposed to help pay for the new benefit. But it wasn’t.

While he thinks workers need to make concessions, DelBono said he also wants the city to pay into a rainy day fund to cover benefit costs when times are bad.

On this Kennedy and DelBono agree on: Alameda’s pension problem didn’t happen overnight. And while they disagree on the solutions to the problem, they know that whatever they are, they won’t come quickly.

“I do agree with Kevin that what we do need to be – need to work toward funding benefits we do have,” DelBono said. “It’s a slow process. And we didn’t get here overnight.”