HomeMy WebLinkAboutStaff Report 126-06TO:
FROM:
DATE:
SUBJECT:
HONORABLE CITY COUNCIL
CITY MANAGER DEPARTMENT: HUMAN RESOURCES
JANUARY 30, 2006 CMR: 126:06
APPROVAL OF RESOLUTION TO IMPLEMENT SECTION 414(h) OF THE
INTERNAL REVENUE CODE TO DESIGNATE THE CALIFORNIA
PUBLIC EMPLOYEE RETIREMENT SYSTEM 9% RETIREMENT
CONTRIBUTIONS AS EMPLOYEE CONTRIBUTIONS AND DEDUCT
FROM THE SALARIES OF PALO ALTO PEACE OFFICER ASSOCIATION
(PAPOA) MEMBERS
RECOMMENDATION
Staff recommends that Council approve the attached resolution to implement the following
provisions outlined in the Palo Alto Peace Officer Association (PAPOA) Memorandum of
Agreement, for the period of July l, 2001 - June 30, 2007, Section 19, Retirement Benefits,
subsection (g):
1)
2)
3)
Discontinue the 9% Employer-Paid Member Contributions (EPMC) to the California
Public Employees Retirement System (CalPERS);
Increase the base pay of all represented classes by 9%; and
Enact provisions of Section 414(h) of the Internal Revenue Code (IRC).
BACKGROUND
In the PAPOA Memorandum of Agreement for the period of July 1,2001 -June 30, 2007, Section
19, Retirement Benefits, subsection (g), (Attachment A), the City negotiated and agreed to terminate
reporting of the value of Employer-Paid Member Contributions (EPMC); however, an
implementation date was never agreed to. PAPOA did not request execution of this agreement for
several years as it recognized that there would be a financial impact to the City. In 2003, PAPOA
requested the implementation of this provision and the City agreed, with the stipulation that the
effective date be deferred to July 1, 2005 or no later than September 1, 2005. In the course of the
discussions with PAPOA, the bargaining group acknowledged the City’s right to implement a 20-
year vesting requirement for PAPOA’s future retirees under the Public Employee’s Medical and
Hospital Care Act (PEMHCA). This vesting requirement went into effect on January !, 2006 and
will save the City significant dollars in long-term retiree medical costs.
CMR: 126:06 Page 1 of 3
DISCUSSION
When an employer pays the employee’s retirement contribution to CalPERS, the manner in which it
is paid is subject to negotiations with the City’s bargaining units. The City currently pays the EPMC
for the City’s various bargaining units in two ways. The first option is to pay the EPMC in the
salary of employees and then report the contribution to CalPERS as special compensation. The
second option for accomplishing the same result is for the City to pay the EPMC for an employee
group, as the City currently does for PAPOA employees and then to implement a "final year
reversal." The "final year reversal" required a PERS contract amendment, and functions to convert
the EPMC to salary in an employee’s final (or highest salary) year thereby increasing the salary rate
on which the employee’s retirement amount will be based. This option involves more staff time
when processing retirements due to the need to adjust records when reporting final compensation to
CalPERS as well as trying to resolve retirement issues for employees. With either option, the City
pays CalPERS approximately the same amount of money to fund retirement benefits; it is just paid
in different manners.
As discussed above, the City and PAPOA agreed to discontinue the EPMC for the members of its
bargaining unit. PAPOA members would prefer to have the 9% employee contribution included in
their members’ salary and represented as special compensation as described in the first option above.
The International Association of Fire Fighters, Local 1319 (IAFF) also negotiated this option for its
members in 1995. (Although IAFF is currently using the EPMC option as a cost-savings measure, it
negotiated and the City agreed to revert back to the special compensation option in June 2006.)
In order to make this change, CalPERS requires the City to adopt a resolution to discontinue the
reporting of the value of EPMC and to enact the provisions of Section 414(h) of the Internal
Revenue Code (IRC). Section 414(h) of the IRC allows for the CalPERS contributions to be
designated as employee contributions and deducted from employee salaries, and to be treated for tax
purposes as employer contributions. This provision has the effect of deferring taxation of member
(emp!oyee) contributions until retirement benefits are received.
RESOURCE IMPACT
The annual cost to the City will be approximately $300,000. This cost will be covered from existing
funds in the 2005-06 budget. This cost is due to the increase in overtime costs as a result of the raise
in base salaries for PAPOA members in addition to an increase to the employer contribution rate.
Due to the uncertainty and fluctuation of future employer contribution rates, it is difficult to
determine the full cost to implement this agreement at this time. Staff is working with CalPERS to
finalize cost estimates for the 2006-2007 proposed budget. Ongoing adjustments to overtime
expense will also be evaluated as part of the 2006-07 proposed budget.
POLICY IMPLICATIONS
This request does not represent any change to existing City policy.
ENVIRONMENTAL REVIEW
This is not a project under the California Environmental Quality Act (CEQA).
CMR: 126:06 Page 2 of 3
ATTACHMENTS
PAPOA Memorandum of Agreement for the period of July 1,2001 - June 30, 2007,
Section 19, Retirement Benefits, subsection (g)
PAPOA side letter agreement
Resolution implementing the provisions of Section 414(h) (2) of the Internal
Revenue Code on behalf of safety members represented by the Palo Alto Peace
Officer Association
PREPARED BY Sandra T.R. Blanch, Risk and Benefits Manager
DEPARTMENT HEAD:
RUSS CARLSEN
Director of Human Resources
CITY MANAGER APPROVAL:
EMILY HARRISON
Assistant City Manager
CMR: 126:06 Page 3 of 3