City limited in efforts to trim pensions

City limited in efforts to trim pensions

Michele Ellson

The failure of the Measure C sales tax initiative brought a trickling of residents into Alameda’s City Hall on June 12 who said they think city leaders should pursue a different strategy for attacking the city’s persistent budget deficits: Cut city workers’ pensions and salaries.

But the city’s leaders are limited in what they can do to address rising pension costs, particularly for current employees and retirees, interviews and documents detailing the rights of pension holders and recent efforts by other cities to cut pension costs show.

“We are in this situation because of pension promises that have been made over the years which are not sustainable. But having said that, people have to understand that employees vested in pensions are entitled to those pensions,” Mayor Marie Gilmore said on June 12. She and other council members said they are doing everything they can to address rising pension and health benefit costs.

Voters in San Diego and San Jose have taken what has been deemed the unusual step of trimming pensions for current employees of those two cities, and that has renewed the frustrations of some residents over what they believe are Alameda’s too-generous pensions and high pension costs. But those cities operate their own pension plans, a move that is costlier than contracting the job out to the state’s pension system but one that gives them a little more room to negotiate the terms of employees’ pension deals.

Even so, San Jose’s city auditor noted in a September 2010 report on pension costs that the city had “limited legal maneuverability” in how it could change pension plans for existing employees. And both measures are facing lawsuits from employee groups who say the cities had no right to ask voters to approve changes to benefits granted to existing employees, or to make the changes without negotiating with employee groups.

Like most California cities, Alameda contracts with CalPERS – the nation’s largest pension system – to manage its workers’ pensions. And when CalPERS’s investment losses leave the system without the money its managers believe it will need to cover workers’ pensions, cities that invest with the system must pick up the slack.

This year, the city paid an amount equal to 15 percent of non-safety workers’ salaries and 37 percent of police and firefighters’ salaries toward their pensions, amounts that are expected to climb to 18 percent and 41 percent by 2015, a recent city budget presentation showed. The rates, which include payments to cover both current and future retiree benefit costs, were 17.078 percent for safety workers and zero for non-safety workers in 2000, a chart provided by the city showed.

Cities are legally required to provide some sort of retirement plan to their employees. And contracts clauses in both the state and the U.S. constitutions prohibit cities from taking away benefits granted retirees, a notion the California Supreme Court has upheld in a number of cases, a July 2011 paper from CalPERS said.

The cases offer a narrow exception to those rules – that the cuts need to be made in order to save a retirement system – but it’s one that has never been used, CalPERS’s paper said. Even the City of Vallejo, which filed for bankruptcy protection in 2008 in part to get out from under high pension and health benefit costs, was reportedly unable to reduce benefits for existing retirees or employees; the city ended up slashing its public safety workforce instead and cutting benefits for future workers.

City leaders have some ability to change benefits for existing employees, but that, too, is limited. The city can’t unilaterally change or eliminate current employees’ retirement benefits – even if they haven’t worked here long enough to take them yet. Retirement formulas for current employees can be raised but not reduced, even if employees say they’re willing to take less. But there are changes the city can – and has – negotiated with employees that have some impact on costs.

If it withstands court challenges, San Jose’s just-passed Measure B will allow that city to take 16 percent of employees’ pay to cover pension costs unless city workers accept less generous benefits, and sets up slimmer benefit packages for future employees. But since San Jose operates its own pension plan, the city has a slightly freer hand in setting employees’ contributions toward their retirement.

In 1990, the city moved its police and firefighters’ pensions into CalPERS from a city-sponsored, pay-as-you-go pension plan (the city’s other employees were already in CalPERS). The move was intended to save the city money. But it also restricted the city’s ability to negotiate employees’ contributions toward their own retirement.

All of Alameda’s city employees have agreed to pay more toward their retirement in their most recent contracts. But CalPERS caps the amount employees can pay to cover those costs.

Public safety workers have contributed nine percent of their salaries toward their retirement since the city joined CalPERS, Assistant City Manager Lisa Goldman said, and last year, police and firefighters agreed to pay an additional two percent – a cost that’s typically paid by public employers but is increasingly being picked up in part by workers. The cap is 15 percent, Goldman told the council at a recent budget hearing.

All of the city’s other bargaining units have agreed to pay 8.868 percent of their salaries toward their pension benefits, the maximum amount allowed by CalPERS, staff reports attached to the contracts when they were sent for the council’s approval showed. The city will have to petition CalPERS for permission to make the change, though city staff has said they don’t think CalPERS will say no.

Goldman stressed that Alameda’s city employees have long contributed to their own retirement plans, a cost many neighboring cities covered in part or completely until recently.

“A lot of cities pay part of their employees’ share; Alameda always has had employees pay full freight,” Goldman said.

The city boosted public safety retirement benefits to 3 percent of their police and firefighters’ top salary per year of work at a retirement age of 50, a move different cities made when competing for workers during flush financial times. But Goldman and Jeff DelBono, political director for the firefighters’ union, said those benefits can’t be rolled back, and DelBono said employees’ existing retirement plans can’t be moved from CalPERS even if the employees wanted the move.

The biggest changes cities can make are to benefits for future employees, though those changes can’t happen unless whole classes of affected workers – essentially, all safety workers or all non-safety workers – agree, and they won’t produce savings for cities for another two to three decades, DelBono and Goldman said.

Still, cities are asking their employee unions for what’s called a “second tier” of benefits for new hires. A recent survey conducted by the League of California Cities showed 11 East Bay cities that had changed or were in the process of changing retirement benefit formulas for workers over the past five years.

Alameda’s city leaders are asking their non-safety workers to consider boosting their retirement age to 60 from 55 for new employees, and for them to take 2 percent of the average of their top three years’ pay instead of their highest year’s pay – something all of those unions would have to agree to in order for the change to go into effect, Goldman confirmed. And City Manager John Russo said Tuesday that he wants to sit down with the city’s public safety unions to discuss additional, unannounced pension changes.

The ballot measures in both San Jose and San Diego would apply reduced benefit plans to new employees only, with new hires in San Diego being placed in 401(k)-style plans if the measure there passes court tests.

The impacts of the changes vary, though in Alameda rising employee pension contributions may already be having an impact: Goldman said the city expects to pay $9.92 million into CalPERS for employee pensions, down from $10.18 million in 2011, a chart from the city showed. Goldman said the reductions could also be the product of earlier layoffs and a “smoothing formula” CalPERS applies to rate increases to prevent massive spikes that could cripple municipal budgets.

Additional contract talks with the city’s public safety unions are slated to take place this summer, while discussions with non-safety workers about raising the age they’ll be eligible for benefits are to occur in 2013. Meanwhile, the city has set up a pension task force to explore its pension issues; their report is due out in the fall.

EXTRA: I’ve posted my 2011 series on pensions from The Island on our Data page.


Submitted by Michele Ellson on Mon, Jun 25, 2012

Hey folks:

Last week I touched base with CalPERS regarding some questions their 2011 report left in my mind (and some others who contacted me after the piece ran). Specifically, it wasn't clear to me whether CalPERS was saying existing pension plans could be reduced, and also not clear whether they believed cities could unilaterally change pension benefits for future hires. I just received their responses, so I'm posting my questions (in italics) and their responses (in bold) below.

-Can a city unilaterally change pension benefits for new hires (eg, change benefit formulas or put new hires into a completely different plan) or must they negotiate? It appeared the document was saying this but I wanted to make sure.

This really depends on the relationship the City has with employee groups and the structure they have in place. Most would use collective bargaining to come to an agreement.

-Also, I wasn't clear about whether benefit changes could be negotiated with existing employees - eg, if the city could negotiate with its public safety unions to change the benefit formula for currently employed police and firefighters from 3% at 50 to, say, 3% at 55 - or if those benefits can never be reduced once offered.

Our view is that benefits currently offered are a vested right and can’t be reduced.

-One other question: Could the city seek to negotiate with one employee group to leave CalPERS for another plan (eg Social Security) but leave other groups in CalPERS, or would they be required to negotiate with everyone to exit CalPERS at the same time? I wanted to make sure I was clear on this.

Ye(s), our contracting agencies can amend their contracts to exclude certain groups of employees from membership while keeping others in.