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Home My WebLink AboutStaff Report 182-06City of Palo Alto City Manager’s Report 3 TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: HUMAN RESOURCES DATE:MARCH 20, 2006 CMR: 182:06 SUBJECT:APPROVAL OF REVISED RESOLUTION TO IMPLEMENT SECTION 414(h) OF THE INTERNAL REVENUE CODE TO DESIGNATE THE CALIFOR~qA PUBLIC EMPLOYEE RETIREMENT SYSTEM 9% RETIREMENT CONTRIBUTIONS AS EMPLOYEE CONTRIBUTIONS ANI) 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 1, 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 tem~nate 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 1, 2006 and will save the City significant dollars in long-term retiree medical costs. CMR: 182:06 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 (employee) contributions until retirement benefits are received. RESOI~CE IMPACT The immediate cost to the city will be approximately $250,000 in 2005-06 and $300,000 in 2006-07. The reversal will result in an increase to base salaries for PAPOA members, as well as increased overtime costs. A portion of the anticipated cost, approximately $115,000 per year at the current salary levels, represents the increase in overtime costs, which will be an ongoing cost. The remaining portion of the immediate cost is due to the fact that the higher salaries will cause an increase in the employer contribution rate. Both of these cost increases will be covered from existing funds in the 2005-06 budget and will be factored into the 2006-07 proposed budget. The cost of the increase to the employer contribution rate is expected to decrease in 2008 after CalPERS factors in the contribution change resulting from PAPOA employees paying their own contributions. Those employee contributions will operate to pre~fund a portion of PAPOA pension costs and reduce the City’s long-term pension costs. Over time it is anticipated that the immediate cost attributed to the City’s employer contribution rate will be largely offset by the reduction in the City’s pension costs for PAPOA members. POLICY IMPLICATIONS This request does not represent any change to existing City policy. CMR: 182:06 Page 2 of 3 ENVIRONMENTAL REVIEW This is not a project under the California Environmental Quality Act (CEQA). 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 C-ARLSEN / Director of Human Reso~tr.c~ CITY MANAGER APPROVALi E~’f~’--~-’~K~’-’’~M]LY HARRISON"’’~ Assistant City Manager CMR: 182:06 Page 3 of 3 ATTACHMENT 1 (c)The City will increase the pick-up of employee PERS contribution from 7% to 9% effective with the pay period including September 1, 1984, which benefit will continue through the life of this Agreement through June 30, 1988, and its continuance or a modification of the existing provision may be subject to negotiation at the request of either party. (d)For purposes of negotiation and arbitration proceedings hereafter, the payment by the City of the employee’s contribution shall be deemed a 7% adjustment in salary for the year July 1, 1983 through June 30, 1984, and a 2% adjustment in salary for the ten months, September 1, 1984 through June 30, 1985. (e)Notwithstanding subsections (b) through (d) above, upon filing a notice of retirement, the 9% City-paid PERS contribution will be converted to a salary adjustment of equal amount. (f)In order to continue after June 30, 1994, the provisions of Section 19(e) of this Article, as soon as possible following ratification of this agreement, the City will contract with PERS to provide "Reporting the Value of Employer-Paid Member Contributions as Compensation in Employees’ Final Compensation Period by Contract Amendment (Government Code Section 20615.5). (g)Effective upon termination of PERS contract amendment "Reporting the Value of Employer-Paid Member Contributions as Compensation in Employees’ Final Compensation Period" (Government Code Section 20615.5): (1)The City will discontinue payment of PERS Employee Contributions (EPMC) and discontinue all provisions of Section 19 (e). (2)The City will increase the base pay of all represented classes by 9%. (3)Employees in all represented classes will make PERS member contributions by payroll deduction. (4)The City will provide for member contributions to be made as allowed under provisions of IRS Code Section 414(h) 2. (h)Military Service Credit. Effective as soon as possible, the City will amend its contract with the Public Employees’ Retirement System to provide for Section 20930.3, Military Service Credit as Public Service. Section 20. Retirement Medical Plan 11 ATTACHMENT 2 Palo Alto Peace Officers’ Association and City of Pa!o Alto Side Letter to Memorandum of Agreement Effective immediately through June 30, 2005, the Palo Alto Peace Officers’ Association agrees to not initiate termination of the PERS contract a~endment "Reporting the Value of Employer-Paid Member Contribution as Compensation in Employees’ Fina! Compensation Period" (Government Code Section 20615.5) as listed under the Memorandum of Agreement, July 1, 2001 -June 30, 2007, Section 19. Retirement Benefits, subsection (g): Effective upon termination of PERS contract amendment °’Reporting the Value of Employer-Paid Member Contributions as Compensation in Employees’ Final Compensation Period" (Government Code Section 20615.5): (1) (2) (3) The City will discontinue payment of PERS Emp.oloyee Contributions (EPMC) and discontinue all provisions of Section 19(e). The City will increase the base pay ofa!l represented classes by 9%. Employees in all represented classes w~ll make PERS member contributions by payroll deduction. (4)The City will provide for member contributions to be made as allowed under provisions of IRS Code Section 414(h) 2. The City agrees to terminate the PERS contract amendment "Reporting the Value of Employer-Paid Member Contribution as Compensation in Employees’ Final Compeiasation Period" (Government Code Section 20615.5) as listed under the Memorandum of Agreement, July 1, 2001 - June 30, 2007, Section 19. Retirement Benefits~ subsection (g), sections (1) through (4), effective as close to July 1., 2005, as possible, but no later than September, 1, 2005. RECEIVED JUL 0 7 2003 HU~AN RESOURCES¯ OEPARTMENT ** NOT YET APPROVED ** RESOLUTION NO. RESOLUTION OF THE COUNCIL OF THE CITY OFPALO ALTO IMPLEMENTING THE PROVISIONS OF SECTION414(h) (2)OF THE INTERNAL REVENUE CODE ON BEHALFOF LOCALSAFETY AND MISCELLANEOUS MEMBERS REPRESENTED BY PALO ALTO PEACE OFFICERS’ ASSOCIATION (PAPOA) WHEREAS, the City of Palo Alto has the authority to implement the provisions of Section 414(h) (2) of the Internal Revenue Code (IRC); and WHEREAS, the Board of Administration of the Public Employees’ Retirement System adopted its resolution regarding Section 414(h) (2) on September 18, 1985; and WHEREAS, the Internal Revenue Service has stated on December 6, 1985, that the implementation of the provisions of Section 414(h) (2) of the IRC pursuant to the resolution of the Board of Administration would satisfy the legal requirements of Section 414(h) (2) of the IRC; and WHEREAS, the City of Palo Alto has determined that even though the implementation of the provisions of Section 414(h) (2) of the IRC is not required by law, the tax benefit offered by Section 414(h) (2) of the IRC should be provided to its employee members of Palo Alto Peace Officers’ Association (PAPOA), who are local safety and miscellaneous members of the Public Employees’ Retirement System. NOW, THEREFORE the Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION i. The City of Palo Alto will implement the provisions of Section 414(h) (2) of the Internal Revenue Code by making employee contributions pursuant to California Government Code section 20691 to the Public Employees’ Retirement System on behalf of its employee members of Palo Alto Peace Officers’ Association (PAPOA), who are local safety and miscellaneous members of the Public Employees’ Retirement System (the ~designated employees"). "Employee contributions" shall mean those contributions to the Public Employees’ Retirement System which are deducted from the salary of employees and are credited to individual employees’ accounts pursuant to California Government Code section 20691. SECTION 2. The contributions made by the City of Palo Alto to the Public Employees’ Retirement System, although designated as employee contributions, are being paid by the City of Palo Alto in lieu of contributions by the designated employees, who are members of the Public Employees’ Retirement System. SECTION 3. The designated employees shall not have the option of choosing to receive the contributed amounts directly instead of having them paid by the City of Palo Alto to the Public Employees’ Retirement System. 060123 sm 8260204 1 ** NOT YET APPROVED ** SECTION 4. The City of Palo Alto shall pay to the Public Employees’ Retirement System the contributions designated as employee contributions from the same source of funds as used in paying salary. SECTION 5. The amount of the contributions designated as employee contributions and paid by the City of Palo Alto to the Public Employees’ Retirement System on behalf of a designated employee shall be the entire contribution required of the employee by the Public Employees’ Retirement Law (California Government Code section 20000, et seq.). SECTION 6. The contributions designated as employee contributions made by the City of Palo Alto to the Public Employees’ Retirement System shall be treated for all purposes, other than taxation, in the same way that member contributions are treated by the Public Employees’ Retirement System. SECTION 7. This is not a project for purposes of the California Environmenta! Quality Act ("CEQA"). INTRODUCED AND PASSED: AYES: NOES: ABSENT : ABSTENTIONS: ATTEST:APPROVED: City Clerk Mayor APPROVED AS TO FORM: Deputy City Attorney City Manager Director of Administrative Services Director of Human Resources 2 060315 sm 8260204