HomeMy WebLinkAboutStaff Report 315-10TO: HONORABLE CITY COUNCIL
FROM:
. DATE:
CITY MANAGER
SERVICES
JULY 19, 2010
REPORT TYPE: Action
.' ,
DEPARTMENT:ADMINISTRATIVE
SERVICES
CMR: 315:10
SUBJECT: Review and Comment on Preliminary Response to the 2009-2010 Santa
Clara County Civil Grand Jury Report "Cities Must Rein In Unsustainable
Employee Costs"
RECOMMENDATION
Staff recommends that Council provide some initial comments and feedback on the Santa Clara
County Grand Jury Repolt "9ities Must Rein In UnsustainableBmployee Costs" and direct staff
to I'etum with the City'S response to the to Grand Jury findings August 2, 20 I O.
BACKGROUND
On May 20, 2010, the Civil Grand Jury of Santa Clara County sent the Honorable Patrick Burt,
Mayor of the City of Palo Alto a report expressing serious concems about rising and
unsustainable employee costs. The report addressed all areas of compensation including wages,
pensions, health care, and vacation, holiday and sick leave. The Grand Jury's chief finding was
that" ... controlling employee costs is imperative for the ongoing financial health of our cities."
DISCUSSION
However, this City Manager Report briefly summarizes the findings and recommendations of the
Grand-Jury (Attachment A contains Grand Jury RepOlt) and to set the stage for further, in-depth
analysis and discussions on how to address the fundamental issues raised by the Grand Jury
report. The Grand Jury requires cities to formally respond to such repolts. During Council
review, staff~'Cquests Council's broad comments and reactions before we formally respond to on
the Grand Jury's findings. In addition, staff recommends retmning to Council on August 2, 20 10
with a final response from the City of Palo Alto regarding the reforms and changes
recommended by the Grand Jury to contain employee costs; which the City must provide to the
grand jury by August 30, 2010.
As stated, the Grand Jury's main determination is that the total compensation paid to city
employees throughout the County is not financially sustainable. This conclusion is based on:
• Wages and benefits increasing at a greater rate than inflation
CMR:315:10 Page 1 00
• Revenue growth or lack thereof that has not kept pace with rising labor costs, particularly
during economic downturns
• Past pension and benefit concessions during "boom" economic periods whose long-term
impacts were not adequately or financially assessed
The Grand Jury report provides a significant amount of data on expense and revenue trends as
well as quotations from officials from various eities on the financial challenges they face in
negotiations with labor organizations. Of special importance are the Jury's recommended
approaches and strategies to controlling employee costs and to maintaining services. Key
recommendations are as follows:
• Introduce lower cost pension and health care plans for new employees known as "two
tier" plans. Extend retirement ages and change salary base formulas for retirement.
• Have employees contribute more to pension and health care costs
• Binding arbitration should be made open to the public for review sinee it limits "the
ability of city leaders to craft solutions that work for the city's budget" (A specific
recommendation is made to San Jose City Council to prepare a ballot measure asking
voters to repeal binding arbitration section in City Charter)
• Renegotiate number of vacation, sick, holiday, and personal days and pace of wage
step increases
• Analyze functions of workforce with eye toward consolidation and elimination of
excess cost
• outsource some activities to private sector
• consolidate or regionalize services to optimize resources and work load e.g. fire,
police, animal, human resources, new informlltion technology systems
• compare wages and benefits to non-local cities and especially to private sector
• solicit community input so that taxpayer monies are spent prudently and fairly
• maintain service obligations 'to community and ensure services and infrastructure are
not neglected
Many of the Grand Jury's recommendations have been pursued by the City of Palo in the past
and during recent negotiations with SEIU employees. In fact, the City was first in the county to
implement a "two tier" retirement system for both SEIU and Management groups. Furthermore,
the City has stressed the need for structural changes in pension and health care benefits in recent
discussions and negotiations with the public safety unions. Considerable work and progress on
the Grand Jury's recommendations still need to be made, however, in order to ensure that the
City maintains a balanced budget and one that reinvests in the future, particularly in the area of
infrastructure.
In cone1usion, staff recommends that the Council provide comments on these recommendations
to incorporate in the City's final response to the Grand Jury,
RESOURCE IMPACT
There is no immediate fiscal impact resulting from this report.
POLICY IMPLICATIONS
This report is consistent with Council policy to maintain a balanced budget and to pursue
structural changes in employee wages and benefits.
CMR:315:10 Page 2 00
ENVIRONMENTAL REVIEW
There is no environmental review required for this report.
ATTACHMENTS
Attachment A: 2009-20 I 0 Santa Clara County Civil Grand Jury Report "Cities Must Rein
In Unsustainable Employee Costs"
PREPARED BY:
APPROVED BY:
CITY MANAGER APPROVAL:
CMR:315:10
~,.. LALO PEREZ
Director, Administrative Services
~M\NL-.-,.J.D * ~ f~JAMES KEENE
City Manager
Page 3 of3
..
Honorable Patrick Burt
Mayor
City of Palo Alto
250 Hamilton Avenue
Palo Alto, CA 94301
ATTACHMENT A
May 26,2010
Dear Mayor Burt and Members of the City Council:
• v "; ,_ ,
CITY OF PALQ ALTO CA
CITY CLERK'S OFFICE
IOJUN-1 AH 7: 33
The 2009·2010 Santa Clara County Civil Grand Jury is transmitting to you its Final Report,
Cities Must Rein In Unsustainable Employee Costs.
California Penal Code § 933(c) requires that a governing body of the particular public agency or
department which has been the subject of a Grand Jury final report shall respond within 90.days to the
Presiding. Judge of the Superior Court on the findings and recommendations pertaining to matters under
the control of the governing body. California Penal Code § 933.05 contains guidelines for responses to
Grand Jury findings and recommendations and is attached to this letter.
PLEASE NOTE:
1. As stated in Penal Code § 933.05(a), attached, you are required to "Agree" or "Disagree" with
each APPLICABLE Finding(s) 1, 2, 3, 4, 5. 6, 7, 8, 9, 11, & 12. If you disagree, in whole or patt,
you must include an explanation of the reasons you disagree,
2. As stated in Penal Code § 933.05(b), attached, you are required to respond to each
APPLICABLE Recommendation(s) 1,2,3. 4A, 4B, 4C, 4D, 4E, 5al, 5a2, 5a3, 5b, 501, 5c2, 5c3,
5c4, 6a, 6b, 7a, 7b, 8a, ab, 9,11, 12a, 12b, 12c, & 12d,withoneoffourjJossibleactions.
Your comments are due in the office of the Honorable Jamie Jacobs-May, Presiding Judge, Santa Clara
County Superior Court, 191 North First Street, San Jose, CA 95113, no later than Monday,
August 30,2010.
Copies of all responses shall be placed on file with the Clerk of the Court.
AMC:dsa
Enclosures (2)
Sincerely,
~~,,; 4: CZ'd.Y'""
ANGIE M. CARDOZA
Foreperson
2009·2010 Civil Grand Jury
cc: MLJames Keene, City Manager, City of Palo Alto
r
_
California Penal Code Section 933.05, in relevant part:
933.05, (a) For purposes of subdivision (b) of Section 933, as to each grand jury finding,
the responding person or entity shall indicate one of the following:
(1) The respondent agrees with the finding,
(2) The respondent disagrees wholly or partially with the finding, in which case the
response shall specify the portion of the finding that is disputed and shall include an
explanation of the reasons therefor.
(b) For purposes of subdivision (b) of Section 933, as to each grand jury
recommendation, the responding person or entity shall report one of the following
actions:
(1) The recommendation has been implemented, with a summary regarding
the implemented action,
(2) The recommendation has not yet been implemented, but will be
implemented in the future, with a time frame for implementation,
(3) The recommendation requires further analysis, with an explanation
and the scope and parameters of an analysis or study, and a time
frame for the matter to be prepared for discussion by the officer or
head of the agency or department being investigated or reviewed,
including the governing body of the public agency when applicable,
This timeframe shall not exceed six months from the date of
publication of the grand jury report,
(4) The recommendation will not be implemented because it is not
warranted or is not reasonable, with an explanation therefor.
-
... ~ 2009·2010 SANTA CLARA COUNTY
CIVIL GRAND JURY REPORT
Issue
CITIES MUST REIN IN UNSUSTAINABLE
EMPLOYEE COSTS
Employee costs are escalating in the cities of Santa Clara County (County), revenues
are not keeping pace with these increases and cities are cutting services. How do
cities contain these escalating employee costs?
Summary
In this report, the 2009·2010 Santa Clara County Civil Grand Jury (Grand Jury) takes a
broad look at employee costs in the County's fifteen cities and recommends solutions to
control costs so that cities over time can achieve fiscal and organizational stability and
eliminate budget deficits.
There is widespread concern that the cost of employee total compensation continues to
increase while revenues and services decrease. Wages and salaries climb, even as the
economy struggles. Pension and health Care benefits have risen substantially since
2000. Vacation, holiday and sick leave policies are overly generous and exceed those
of private industry. The overall costs to cities are not sustainable. Cities need to
negotiate, approve and i implement considerable cost containment measures so that
employee financial obligations do not continue to escalate.
Cities should expand the comparison of salaries and benefits beyond other nearby cities
to include the private sector. Options for additional cost savings include: outsourcing
some activities to private industry; consolidating services with other cities or the County;
optimizing job functions; and introducing lower cost pension and health care plans for
new employees. .
It is important for the cities to solicit community input so that taxpayer money is spent
prudently and fairly, while maintaining the obligations of local government to its Citizens,
and ensuring that services and infrastructure improvements are not neglected.
Background
During the last decade, cities Significantly increased the total compensation that
employees receive, but city leaders did not adequately forecast and plan, nor allocate
enough money to pay for these long-term obligations. In order to attract qualified
workers during the dot-com boom, the cities, flush with revenue, increased wages and
benefits, especially pension benefits, with unrealistic expectations that the economy and
1
the stock market would continue to expand. These increases are largely guaranteed by
union collective bargaining agreements. Binding arbitration in public safety has
compounded the situation in the City of San Jose,
Two recessions later, most cities are experiencing chrc;mic budget deficits. The
economic downturn that started in December 2007 is exace[bating the cities' poor
financial health, The following major factors are contributing to the cities' problems:
• Increased wage and salary costs
• Increased retirement and health care costs
• Reduced property tax revenues
, • Reduced sales tax, occupancy tax, and construction tax revenues
• Reduced revenue from the state
In order to balance budgets, cities are dipping into "rainy day" funds and reserve funds,
shifting funds, and reassigning redevelopment money, Many of the cities are facing
looming general fund deficits ranging from $3 million to more than $100 million, Overall,
the cities are taking a multi-pronged approach in tackling these projected deficits by
generating new revenue, reducing operating expenses, and curbing employee
compensation costs,
The opportunity for generating revenue is primarily limited to increasing taxes and fees,
or in some cities, selling surplus property, Voter approval of a ballot measure is
necessary to increase taxes and few cities are considering this option. To achieve cost
recovery for all programs, cities have raised or are raising fees-business license fees,
parking lot and meter fees, parks and recreation fees, building fees, sewer connection
fees, etc.
Cities are reducing operating expenses by streamlining operations, implementing
technology improvements, delaying infrastructure projects, cutting support to nonprofits,
and reducing or eliminating services. Service reductions are across all departments,
such as code enforcement, arson inVestigation, customer service, tree trimming,
landscape maintenance, graffiti abatement, canine units, street repairs, fleet services,
and hours of operation in parks, libraries and community centers,
Long-term, cities have few options to control employee costs, Among these are:
• Renegotiate contracts for existing employees with the unions.
• Change pension and retiree health benefrts for new hires,
• Alter personnel policies and workplace practices.
• Recommend ballot measures that could mandate changes,
2
Short-term, cities can control employee costs by:
• Ordering furloughs
• Imposing temporary wage freezes
• Enforcing a hiring freeze
• Eliminating vacant positions
• Laying-off staff
Methodology
The Grand Jury took the following actions:
Reviewed the 2008-2009 San Mateo County Civil Grand Jury report "Reversing the
Upward Trajectory of Employee Costs in the Cities of San Mateo County".
Requested from each city in the County:
• 2009-2010 City Budget
• Latest Certified Annual Financial Report
• Any amended agreements or Memoranda of Understanding (MOUs) of union
contracts that were negotiated, imposed and/or implemented in 2009
Surveyed the cities for information on number of employees, employee benefits,
employee salary/wages, total revenues, retirement formulas, and contributions to
pension plans and other post-employment benefits (OPES). (Survey Forms; Appendix
A-C)
Interviewed the city manager or financelbudget director in each city and gathered
information on the city's financial health, deficits, labor negotiation practices, strategies
to balance the budget, and specific actions to increase revenue and reduce employee
costs.
Interviewed the president of Santa Clara County/Cities Managers' Association and the
former president of the Santa Clara County Cities Association (comprised of elected
officials) and discussed pension reform and how the cities can work together on issues
of mutual concern.
Interviewed the president of the San Jose Police Officers' Association and talked about
the contract negotiation process and the role of labor in a city's financial health.
Discussion
Without deliberate, collaborative action, employee wages and benefits will continue to
increase substantially year-over-year. The percentage of general fund money spent on
employee costs is escalating. During Grand Jury interviews, most of the city managers
and finance directors indicated that their current percentages are unsustainable and
additional increases would lead to drastic changes to city services. San Jose Mayor
Chuck Reed in his State of the City Address on Feb.18, 2010 stated that employee
costs shot up 64% in the last nine years while revenues climbed just 18%.
3
Table 1 : Comparison of Overall Employee Costs in Selected FuU-Service Cities' (With Police and
Fire Departments) as Percentage of General Fund.
I
~~ .. ~ t,:1buoiiiiin-Gilroy. Los Ga:tos .... M~pjtas View
001 61% 61% 73% 71%
010 172% 79% 83% 78%
[2000-2
2009-2
· 1 These cllles provided data for both fiscal years.
... .. c~~····
Santa . Sunnyvale 'Clara Average
64% 76% 61.6%
77% 77% 77.6% -----.... -~ ... -----~--....
As this table shows, controlling employee costs is imperative for the ongoing financial
health of our cities. For aI/ cities, the Grand Jury investigated the main components of
total compensation, work force practices, labor negotiations, and public involvement.
TOTAL COMPENSATION
The cities' median total compensation cost per full-time equivalent (FTE) for:
• Regular employees (non-safely) increased 37% from an average median of
$71,379 in fiscal year 2000-2001 to an average median of $113.104 for fiscal
year 2009-2010.
• Safely employees (police and fire) increased 41% from an average median of
$102,646 to $173,714.
Table 2: Changes in Median Total Compensation, includes Wages and Benefits
Note: ContraClldistrict means that seNices are provided via a contract with the County or via a special district
The cumulative increase in the total compensation is the result of increases to base
payroll, health/dental benefits, retirement benefits, and other benefits. The rate of
increase in total compensation for city employees has been higher than growth in the
local economy, and employee costs are escalating at a higher rate than the growth in
the cities' general fund revenues. For the 10 years from 2000-2009" the Consumer
Price Index for the Bay Area increased by a total of 26.8%, or an average of 2.7% a
year.
4
Graph 1: Average San Jose FTE Costs versus CPI Changes over Time
$130,000
$120,000 .
$110,000
$100,000
$90,000
sso,ooo
$70,000
$60,000
2000· 2001· 2002· 2003· 2004, 2005-2006-2007, 2008· 200S·
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1. Salary/Wages
At present, the cities utilize a traditional public sector salary schedule with five 5%
salary steps for most job classifications, Step increases occur automatically unless
action is taken to withhold the 5% increase based on poor performance, The typical
time it takes an employee to reach the top step of the salary range is three. and a half
years.
During the time employees are moving from the first to the top step, they also receive
any general salary increases negotiated by bargaining units, After they reach the top
step, they continue to receive annual negotiated cost,of-living adjustment (COLA)
increases, In the three years starting July 1,2008, and ending June 30,2011, the
COLA increase in typical contracts is scheduled to rise by 6% to 9.5%. In this scenario,
an employee in step progression could receive a salary increase of 26% to 29.5% in
those three years, During Grand Jury interviews, city managers indicated that
automatic step increases cause undue hardship on the cities' finances,
2. Health Benefits
Employees in each city receive a generous contribution from the city toward numerous
heaHh care benefits: medical insurance, vision insurance, dental insurance, employee
assistance programs, and cash-in-lieu of medical coverage, Medical expenses
continue to rise, and the cities have been pressured into identifying new strategies to
minimize the impact of rising medical insurance costs, Medical insurance expenses
are increasing at rates that exceed public employers' revenue growth,
5
Table 3: Cities' Monthly Contributions to Health Care Benefits
. . ~1,l!l.O, -2~O1 2Q~9 -2010 . i
Indiv.idiial .. ' Family Indiilidu.<il . . Family I
Campbell $295 $493 $668 $1,224 i
Cupe,rtino $634 $634 $792 $869 •
Gilroy Average was $453 Average was $1024
Los Altos $569 $569 $550 $1400
Los Altos Hills $228 $594 $592 $1540 i
Los Gatos $262 $586 $629 $1,442 .
Milpitas . $318 $621 $780 $1,622 i
Monte Sereno $490 $800 $600 $1300 .
Morgan Hill $475 $475 $600 $1260
Mountain View $303 $739 $777 $1,824
Palo Alto $296 NA NA NA
San Jose $289 $545 $540 $1,139
Santa Clara Average was $498 $720 $720
Saratoga $201 $523 $611 $1,609
Sunnyvale Average was $534 $635 $1666
In the table above, the monthly premiums increased Significantly from 2000 to the
present. To reduce costs while preserving essential medical benefits, the cities have
implemented or are considering various cost-sharing initiatives. Among these are:
• Cost sharing of monthly premiums; some cities set a certain dollar amount that
employees contribute, others set a percent, e.g. San Jose has a 90/10% split
(employee share is 10)
• Co-pays for doctor visits, hospital stays and prescription drugs; co-pays currently
are relatively low, usually $5.00
• High deductible plans
• Health savings plans for new employees
3. Retirement Pension Benefits
Defined-Benefit Plan
Employees in. a defined-benefit retirement system are guaranteed a specific, annual
pension at retirement. The annual benefit is distributed in monthly payments. Monthly
benefits are calculated using a formula based on the employees' years of service and
the salary they received at the time of retirement. In addition, after retirement, retirees
are eligible for cost-of-Ilving increases. Most pension plans also provide benefits for
disability and death, and in some cases, provide benefits to survivors or beneficiaries.
In the cities of Santa Clara County, similar to most public sector organizations, full-time
and many part-time employees are enrolled in a defined-benefit retirement system.
6
a. CalPERS
California Public Employees' Retirement System (CaIPERS) is the defined-benefit plan
in which employees in the majority of the cities of the County are enrolled. The cities
and employees make contributions for retirement benefits to CaIPERS. CalPERS
invests, manages, and distributes money to employees when they retire. Cities are
required to increase their contributions when the costs of benefits increase andlor when
investment retums decline.
Exampl()s of How the CalPERS Formula Works for Regular Employees
Each city chooses among legislatively-approved formulas that determine the amount of
lifelong penSions. The most common formula for regular employees is 2.7% at age 55.
To apply this formula: 1) take 2.7% of the employee's last year's salary; and 2) multiply
it by the number of years of service to determine the amount received upon retiring at
55.
• Regular city employees with 30 years of service will receive 81% of their last
. year's salary for life.
• Regular city employees with 20 years of service will receive 54% of their last
year's salary for life.
• Regular retirees will receive an annual COLA of up to 2% a year.
Examples of How the CalPERS Formula Works for Safety Employees
The typical formula for safety employees is 3% at age 50. Upon retirement, an
employee will annually receive 3% of their last year's salary, multiplied by the number of
years of service.
• Safety employees with 30 years will receiVe 90% of their last year's salary.
• Safety employees with 20 years will receive 60% of their last year's salary.'
• Safety retirees will receive an annual COLA of up to 2% a year.
b. San Jose Pension Plan
San Jose does not participate in CaIPERS, but instead has two retirement plans: the
Police and Fire Department Retirement Plan and the Federated City Employees'
Retirement System. Both the City and its employees make contributions for retirement
benefits. The fonmulas used to calculate pensions for San Jose employees are similar
to those used for CaIPERS.
• Regular employee formula: 2.5% at 55; maximum base benefit of 75% of final
average salary
• Police formula: 2.5% for first 20 years; 4% starting at 21 st year; maximum base
benefit of 90% of final average salary
• Fire formula: 2.5% for first 20 years; 3% starting 21st year; maximum base
benefit of 90% of final average salary
• All retirees receive annual COLA increases of 3%.
7
Calculating Pension Benefits
Employee pensions are based on general formulas that are agreed on between the City
and the labor unions. A typical pension formula takes into account salary, number of
years served, age eligibility for retirement, and a percentage rate of an employee's
recent salary level. Table 4 provides some examples.
Table 4: Examples of Lifetime Retirement Pensions
(Does Not Include Health Care Benefits or Annual COLAs)
'I··~. ~~ .... -~~~-""---:-:-1:r.~Ex~··-a-m-p-le~" ~o-.-y-ea-~-~:.~c-e-qJa~~e···~o-~-. "'-A-n-nu-a-' -,
. Employee an!! Formula Salary"' Workeli .. Firi~lor Retirement i
~"" ...... \Y." PoM'" I ----'___f~--.~-___f---_+--:. ~SlljarY .'
! 30 years, 75% $55,504
age 55 Regular employee 2.5%@55 $74,005 (1)
$103,093 (4) 25 years,
age 55 75% $77,320
~~--------t---.... -.. -+---
·Safety employee 25% plus
(police get 4% after 20 years) $116,210 (5) 25 years,
age 50 70% $81,347
r--------... -.---___f-----+-----+---
Safety employee 2.5% plus
(fire get 3% after 20 years) $120,206 (6) 25 years,
age 50 65%
* Depending on the afy. employee retirement pension is based 00 final or highest years' salary.
(1) This example salary is the median 2010 salary for regular employees in San Jose
(2) This example salary is the median 2010 salary for regular employees in Saratoga
(3) This example salary is the median 2010 salary for pOlice officers in Los Gatos
. (4) This example salary is the median 2Q10 salary for firefighters in Gilroy
(5) This example salary is the median 2010 salary for police officers in San Jose
(6) This example salary is the median 2010 salary for firefighters in San Jose
$78,134
The cities use retirement formulas that vary somewhat from one city to another. The
table below shows the retirement formulas used by the cities for the 2009 -2010 fiscal
year. In the past decade, these pension formulas have been modified substantially.
Most cities increased their formulas from 2% at age 55 to the current 2.7% at age 55 for
regular employees, and changed their formulas for safety employees to the more
generous 3% at age 50. The cities also vary on the base salary on which retirement
benefits are calculated. The highest or final year of salary is now most commonly used
as the base salary; earlier, more cities calculated employee penSion amounts based on
an average of the last three years' salary.
8
Table 5: Retirement Formulas for Cities
....••. .-..... --~-
Retirement Formula -Percentage Gained for I Pension Based on Last
City Year's Salary or the Each Year Worked & Age Needed to Retire : Average of Three Years
Safllty I Regular All Employees
: 3 Year AV!9rage(Regular} Campbell 3%@50 2.5%@55 Highe~tYear (PoliceL
Cupertino None; contracted out 2.7%@55 Final Year . 3·~@50 (Police)
.. ... --------~--.. ------~--~.
Gilroy 3%@55(Fire) 2.5%@55 Highest Year
........ -. ------
Los Altos 3%@50 2.7%@55 Final Year ...... -~ ..... M __ _ ... _ .. -
Los Altos Hills None; contracted out 2%@55 3 Year Average
.. -
Los Gatos 3%@50 25%@55 Highest Year ,...-
Milpitas 3%@50 2.7'10@55 High!9st Year
..... _.
Monte Sereno None; contracted out 2%@55 Highest Year .. -
Morgan Hill 3%@50 2.5%@55 Highest Year
Mountain View 3%@50 2.7'10@55 Highest Year
PatoAlto 3%@50 2.7'10@55 Final Year
-~--..
. 2.5% 1st 20 yrs;:!%
........ __ ...... _.--
I San Jose . __ ..
starting 21 st yr (Fire) Final Year;
2.5% 1st 20 yrs; 4% 2.5'10@55 75% maximum regular;
starting 21" \,i(Pollce) 90% maximum safety
....... ----~
, Saratoga None; contracted out 2'10@55 Highest Year ........ __ .-
Santa Clara 3%@50 2.75%@55 Final Year _ .....
Sunnyvale 3%@50 2.7'10@55 Highest Year
...... --.. -~
In Grand Jury interviews, some city managers reported that these formula changes are
causing a systemic problem for their cities. The changes. in the formulas provide for a
generous but costly increase to the monthly benefits. Estimates project that annual
pension benefits will increase approximately 25% to 50% from the previous formulas.
4. Other Post-Employment Benefits (OPEB)
Most of the cities in the County provide OPEBs in addition to pension benefits to their
retirees. OPEBs typically include health, dental, vision, or prescription drug care to
eligible retirees, their families, and in some cases, their beneficiaries. However, benefits
vary widely from no additional contributions after retirement, to full retiree and
dependent coverage for life, after a vesting period. These benefits are tax free.
Retiree health insurance premiums have been escalating. The increased number of
baby boomers reaching retirement age and employees retiring at a younger age are
affecting this cost.
Cities are required by the federal Governmental Accounting Standards Board (GAS B) to
calculate their long-term retiree health obligations by June 2010, depending upon the
annual amount of city revenue. Therefore, complete information is not yet available.
However, the magnitude of the obligations reported to the Grand Jury for the next
several years shows a dramatic increase in projected yearly expenditures and future
liabilities.
9
Funding Pensions and OPEBs
To cover pension obligations city employees pay fixed rates into CaIPERS, while the
rate the cities pay is adjusted every three years. Rates are determined by the
performance of CalPERS investments and the anticipated pension obligations for each
city. The payment is made as a percentage of employee salaries.
Similarly, in San Jose, city employees contribute a fixed rate as a percentage of salary
into the applicable pension plan. The City's contributions are established by its
retirement boards and are based on many factors, including the cost-sharing
arrangement with the employees and the level of benefits provided. Rates can increase
if there is a decline in the assets of the retirement fund, which has occurred recently
with the steep decline in the stock market.
The cities are responsible for the mounting unfunded pension liability. Unfunded
pension liability is an estimate of the cost of future retirement payments for which the
city does not have funds already set aside. This is one of the reasons that the cities'
contribution rates are notably higher than employees' contribution rates, as set forth in
the table below.
Table 6: Employer Contributions as a Percentage of Salary to Pension Plans and OPEB
P--~Iifploy:~~ <>o!'itributioll.as a
.... -. ..
I Employer Contributiona!>_a • perC'~ritaue of Salary to Pensl"n. Percentage .ofSala.y''j.oOPEB -'. Phm . .'. ' --."" --' -'.
~
Cjty' j)olii:~ ", . . Regu,'l"r . P.o)i ce ,·. Fire. . Re9ular .• " fire . Em,plQyees . ,-Employee£J S~~pbe~ ~-1' 3~?o/. None' 10,7% 5,0% None' 4.0% •
'M'_'' .
~pertino-. None> None' 21.56%' None' None 13,9%
' __ m~
Gilroy : 35,25%' 35.25%' 12,64% 0,02% 0,02% 0,02% -~~--~ , "
•
.
Los Altos • 28.99%' None' 22.69%' CAlPERS Minimum Health Berl~ --
i Los Altos Hills None' • None' 21.69%' None' None' 14.2% !
CL:~Gato~ 33.84% None' i 14,58% 2.21% None' 5,19% :
~Mileitas 21,68% 21,68% I 14,58% 7,9% 7,9% 7,9%
I-tlI1onte Sereno None' None' . 19.66%' N/A None' None' .
/v'Iorgan Hill 28.05% None' 19,69' 0.00% None' O.Q~
~untajn View 25.56% 25,56% 15.59% 7,34% 7,34% 7.34%
9,9% 9.9% 9,9%
! Palo Alto ,..... ... 33,7%' 33,7%' 23,55%' ~8/0~1 (08/09) (08/09)
San Jose 21,61% 24,12% 18,31% 5.28% 4,19% •
Santa Clara 26.12% 26.12% 17,02% 2.29% 2.24%
Saratoga None' None' 18,65%' : None' None'
~ SunnY\faJe 41.09%' 41.09%' 22.25%' 8.0% 8,0%
Source: Data from Fiscal Year 2009-2010, except as otherwise noted
Notes:
1 Includes percentage of employee contribution that the city pays
2 Service provided by County or special district
10
5.7%
2,31%
N/A
8.0%
Employee Contributions to Pensions and OPEB
Employee contribution rates as a percentage of salaries are as follows:
• Regular employees: 8% to CalPERS when the formula is 2.7% at 55; and 7% if
the formula is less
• Safety employees: 9% to CalPERS when the formula is 3% at 50, and 8% if the
formula is less
• San Jose Regular employees: 4.28% to The Federated City Employees'
Retirement System
• San Jose Police employees: 8.18%, Fire employees 8.62% to Police and Fire
Department Retirement Plan
• Cupertino Regular employees: 2.4% for OPEB
• San Jose Regular employees: 5.7% for OPEB
• San Jose Police employees 5.28%, Fire emploYees 4.19% for OPEB
• Employees in the other cities contribute nothing for OPEB
Nine of the 15 cRies -Cupertino, Gilroy, Los Altos, Los Altos Hills, Monte Sereno,
Morgan Hill, Palo Alto, Saratoga, and Sunnyvale -pay all or a portion of the employees'
pension contributions. For example, Gilroy pays 100% of safety employees'
contributions; Morgan Hills pays 100% of regular employees' contributions. This means
those employees do not make any contributions to their own pensions.
Social Securitv Contributions
Of the 15 cities, only Monte Sereno and Santa Clara contribute to Social Security for
regular employees. Such participation requires both the city and the employee to
contribute 6.2% of the employee's salary to the Social Security system. The
employees of most cities will not be able to receive Social Security unless they have
worked and contributed for 40 quarters at another employer.
Pension Reform; Two·Tier System
The pension benefit is the most expensive benefit provided to employees and has
significant cost implications, which is why cities must ensure that the costs of pension
benefits are sustainable in the long term. During Grand Jury interviews, many city
managers and finance directors stated that pension costs are skyrocketing and diverting
limited resources from community services. For example, in Mountain View, CalPERS
costs have increased over the past decade from $2.8 million to $7.7 million. San Jose
will contribute approximately $138 million into its two retirement plans for 2009 -2010;
more than double that of Just 10 years ago. Pension costs are increasing due to benefit
enhancements and losses in investment returns.
11
City managers recognize the challenge they are facing and are working together
through the Santa Clara County/Cities Managers' Association to investigate ways to
reduce pension costs. Since pension benefits are considered vested, there are
limitations on what can be changed. Recently the city managers of Santa Clara County
and San Mateo County agreed on a jOint policy statement that recommends that all
cities adopt a two-tier pension system. (Appendix 0) In the two-tier system, cities would
implement a reduced level of retirement benefits for all new employees in all agencies in
the region. This solution would take detailed planning and communication to
implement. The Santa Clara County Cities Association has asked the city managers to
present the proposal to their respective city councils and start preliminary discussions
with the unions.
Among other cities statewide, San Carlos and Brisbane have already initiated a lower,
second tier for new hires. Palo Alto is in the process of implementing a second tier for
new Service Employees International Union workers. Sunnyvale completed a
preliminary analysis of a second tier and estimated it could save approximately $45 .
million over 20 years. The goal of two-tier system would be to provide a competltive
pension at a more sustainable long-term cost by increasing the age of retirement and
lowering the retirement payout.
Other suggested options to reduce penSion costs are 1) convert to defined contribution
plans for new hires, which are common in private industry and 2) eliminate "double
dipping", which occurs when a public employee retires and subsequently enrolls in a
new public retirement fund while continuing to collect from the earlier one.
Retiree Health Care Reform
Retiree health care costs continue to increase and cites are facing significant unfunded
liability for their retirees' health care benefits. San Jose is working on a plan that
provides for the costs of retirees' medical benefits to be split 50/50 by the city and the
employees, which over time would reduce the city's unfunded liability.
Other cities are looking at modified health care plans for their new employees. In some
of these plans, the obligations of the city end when the employee retires. One example
is establishing a health savings account for each employee hired after a certain date;
the city contributes to the account each month, which after vesting the employee can
take into retirement. Health savings plans are tax sheltered and the employee can
contribute to them.
5. Days Off
Employees receive paid time off for holidays, vacations, personal leave days and sick
days; the number of days granted each employee vary by city and by union.
The number of vacation days increase based on length of employment with an allotted
number of hours or days granted each year. In some cities vacation days can be
accumulated year after year and converted to cash at termination or retirement, or
added to the number of years of service and calculated into the retirement benefit.
Other cities have imposed limits on accrual time, and require cash out at that time.
12
Employees receive approximately 12 days of sick leave each year. Disability insurance
is available for extended sick leaves. Depending on union affiliation, employees are
eligible to receive accrued sick leave as a cash payment or added into their number of
years of service and calculated into their retirement benefit. Some are eligible to receiVe
up to 100% of their sick leave paid out at retirement, with no cap on the number of
hours. Other employees are eligible to receive up to 75% of their sick leave paid out to
a maximum of 1200 hours at retirement.
Although payouts of accrued sick leave are common in govemment agencies, these
benefits are not common in the private sector and could be reduced and capped to save
costs.
Table 7: Days Off Per Year by City
exempt) 22 to 44
Gilroy 1020 9 4.5 20 to 40 12
Los Alios 10 to 20 10. 2 (5 for mgml.) NIA 12
Los Altos Hills 12 to 20 12 12 30 12
Gatos 10 to 25 10 to 12 3 (6 12
111031 12 12
10 20 1 12
2 20 to 40 12
30 to 75 12
San Jose 10 to 25 14 20 to 50 12
Santa Ctara 13 to 14 3 50 (lire 84) 12
Saratoga 22 to 32 13 0
Sunnyvale 11 11 2.5-3.5 62 0
Notes:
1 Number of days varies by length of service.
2 In most cities vacation and sick leave days above the allowed retainable number can be cashed
out annually; the retainable amounts can be cashed out al retirement or reSignation.
3 Mountain View fire and police receive 5.55 days in lieu of holidays; San Jose fire and police
receive 5.6 days in lieu of h()lidays.
4 Employees may annually cash out up to 50% of their balance of sick days and 60 hours of vacation;
the rest is retainable.
In the past year, a few cities have imposed furlough days; although this reduces costs, it
also impacts services provided to the community. Some cities are considering
substiluting certain paid days off for unpaid days, instead of imposing furloughs to
reduce the impact on services.
13
WORK FORCE PRACTICES
1. Determining Wage and Benefits Packages
The Grand Jury learned from interviews that most cities set their compensation
packages by surveying the wages paid to public employees in a handful of like cities in
the general area, rather than wages for the employment market at large. In union
negotiations, cities will often negotiate to a place on the comparable wage index rather
than negotiating what they think are reasonable salaries by job classification, If the
wages in a salary range increase due to negotiations, all negotiated salaries increase.
Limiting comparisons to other cities in the same geographic area results in "a follow the
leader" or "keeping up with the Jones" mentality in the cities, rather than real market
based compensation. Neither cities nor the labor unions appear to see a value in
comparing private and public sector wages and benefits, or in tracking compensation
trends in general. Recently, the Bureau of Labor Statistics reported that high-tech
wages in the Bay Area (54% were in Santa Clara County) dropped 12% in the past nine
years following the collapse of the dot-com bubble. During this time period, wages in
city government increased substantially.
Private industry has wrestled with the same benefit issues as the public sector. and has
been quicker to implement solutions that have reduced or contained employer-paid
costs, especially pension and health care costs. A report published by the Employee
Benefit Research Institute (EBRI) noted that, "State and local governments have sharply
higher costs for health and retirement benefits than private-sector employers, since their
workers participate in these benefits at far higher rates and public-sector workers are far
more likely to have defined benefit retirement benefits than are private-sector workers."
The EBRI stated that government employers' overall total compensation costs were
51.4% higher than private-sector employers' costs; the costs were 42.6% higher for
wages and salaries and 72.8% higher for benefits.
2. Consolidating Services with Other Cities or the County
All cities provide core services for their residents and perform operational activities to
keep the city running properly. With 15 cities performing similar functions, there are
opportunities to reduce duplication, decrease costs and improve efficiency by sharing or
consolidating services among cities or the County.
Currently, four cities obtain police services from the County Office of the. Sheriff; others
utilize the County's fire services or have special fire districts. Several cities have
consolidated their animal control functions. The Grand Jury learned through interviews
that these arrangements are successful and provide a sizeable cost savings. Additional
merging of services, such as trash collecting. library functions. payroll activities, and
parks and recreation work, could be pursued to reduce employee costs while providing
effective and efficient services to the community.
14
3. Outsourcing to Private Industry
Outsourcing to private industry is another avenue for cities to pursue to decrease
employee costs while maintaining services. Through interviews, the Grand Jury learned
that Saratoga and Monte Sereno utilize this service delivery model extensively.
Saratoga identifies itself as a "contract city." Several cities have limited contracts with
private firms and other cities are beginning to examine the option.
Functions currently being contracted out include landscaping, street sweeping, tree
trimming, recreation services, road surfacing, janitorial services, fleet maintenance,
trash collection, and traffic engineering. Santa Clara has outsourced the bulk of its
information technology functions.
Outsourcing services traditionally performed by employees requires proper planning,
effective communication, reliable cost comparisons, and performance-based contracts.
And for many cities, it means negotiating with and working with their unions to
accomplish this transition.
4. Optimizing Staff
Organizationally, the cities should ensure that their staffing models are efficient,
. effective and are operating at the optimum level to decrease employee costs. It is
important to analyze the functions performed by all. job classificati9ns and make
adjustments in the workforce. As appropriate, cities should reassign functions to lower
paid job titles, consolidate functions with similar jobs in the same or similar work group,
and trim unnecessary functions.
In 2009, Sunnyvale retained a consulting group to conduct an optimal staffing study of
seven departments. Many of the staffing and operational improvements recommended
by the group have been adopted and other changes will be implemented in the future.
The Office of the City Auditor in San Jose recently completed a study that identified 88
positions being performed by public safety employees that could be performed by
civilian employees at a lower cost. These positions are in Administration,
Investigations, Technical Services, and the Office of the Police Chief. Some examples
of the positions that could be switched to civilians are: Public Information Officer, Police
Artist, Watch Bulletin Police Officer and Main Lobby Police Officers. The estimated
annual savings would.be $5,077,500.
LABOR NEGOTIATIONS
1. Collec1ive Bargaining Agreements
In the cities. with the exception of Los Altos Hills and Monte Sereno, the majority ofthe
work force is represented by labor unions and operates under collective bargaining
agreements. Salaries, health care benefits. retirement pension plans, other post
employment benefits plans, and workplace rules are negotiated by the unions on behalf
of their members.
15
Each city negotiates with from three to 11 unions. For instance, Los Gatos has three
unions; San Jose has 11 bargaining units, representing approximately 96% of the work
force. The cities and each bargaining unit negotiate legally-binding contracts, which are
known as either a Memorandum of Agreement (MOA) or a Memorandum of
Understanding (MOU), and they are effective for a deSignated period of time, usually
two or three years.
Pursuant to the Meyers-Milias-Brown Act (MMBA), the cities have a right to insist that
contract negotiations take place at the bargaining table between the designated
representatives of each city and the designated representatives of the various
bargaining unit employees. Both the cities and the unions have an obligation under
applicable law to negotiate in good faith. It is the goal of both parties to reach a
negotiated collective bargaining agreement.
2. Mediation and Arbitration
Under the MMBA, if negotiations do not result in a tentative agreement, impasse
procedures allow either party to invoke mediation, If there is still no agreement after
impasse procedures are exhausted, the MMBA states that the public agency may
implement its last, best and final offer. Additionally, after mediation the bargaining units
have the right to strike, except for police officers or firefighters who do not have the right
to strike,
F or San Jose police and firefighters, if parties fail to reach agreement after mediation,
City Charter Section 1111, approved by voters in 1980, allows the parties \0 submit the
dispute to binding arbitration, A three-member panel comprised of a city representative,
a union representative, and a neutral arbitrator selected by the city representative and
the union representative, decides each issue by majority vote, The arbitration is not
open to the public.
3. Negotiating Team
Each city delegates the authority to negotiate labor contracts on behalf of the city to the
city manager or the city manager's designee. The city manager generally delegates
the lead negotiating responsibility to one of these job titles: assistant city manager,
human resources director, employee relations director, or administrative services
director. Other key members of the city negotiating team may include the city attorney
or an outside labor attorney, the department head or a high-level manager of the
applicable work group, the finance director, and occasionally an outside consultant.
The negotiating team members do not belong to unions, and they do not operate under
a financial incentive, But as employees of the city, their compensation is proportional
with union employees; when salaries and benefits increase for union members, they are
generally awarded similar increases. In some cities, members of negotiating teams
have worked for the cities for a number of years, and many have come ·up through the
ranks" and have strong connections to the union employees. Some of the city
managers told the Grand Jury that this can be problematic, as these negotiators may
experience peer pressure and concede to the unions. For this reason, among others, a
few cities are considering adding outside conSUltants to their teams.
16
4. Role of the City Manager
Prior to labor negotiations, the city manager provides to the mayor and city council a
detailed fiscal analysis of current and projected economic conditions, and the current
and projected budget. The city manager also meets with the mayor and council in
closed session to recommend the city's position on contract renewal, itemize issues,
and receive direction about the intended outcome of negotiations. In upcoming
negotiations, it is anticipated that cities will ask for concessions for both current wages
and current and future benefits. Prior to negotiations, some of the city managers
conduct informal meetings with union leadership, as well as the rank and file members,
to provide data on the city's financial health and employee costs.
The city manager is integral to negotiations and is responsible for setting strategy,
direction, and parameters for the negotiating team. The city manager is closely engaged
with the team prior to negotiations to determine the areas the city would like to negotiate
and those it would not like to negotiate: The MMBA, however, defines and controls the
areas that are subject to negotiation. Throughout negotiations, the city manager is
briefed regularly on progress and issues. The negotiating team will consider the union
proposals during the length of the negotiations, and discuss and counter the proposals
within the confines of the council's guidance.
S. Role of the City Council and Mayor
The mayor and council are responsible for setting policy direction and guidelines for
labor negotiations, overseeing the city manager, and approving labor contracts. The
mayor is the public spokesperson.
Although the mayor and council are supposed to represent the best interests of the city
and ultimately the taxpayers during negotiations, it is difficult to separate politics from
bargaining sessions. If the council approves a package that is favorable to labor, some
council members could benefit if they keep or earn union support. Throughout the
County, many city councils are dominated by labor-endorsed candidates, and unions
play an active role in elections. Unions often support their candidates' campaigns with
endorsements and contributions. They print and distribute literature, manage phone
banks, make personal appearances at campaign events, and canvass neighborhoods.
Conversely, unions will sometimes negatively campaign against a candidate they
oppose.
During its investigation, the Grand Jury learned that labor representatives sometimes go
directly to council members while negotiations are occurring to solicit their support for
various proposals. For this reason, the Santa Clara City Council and the city manager
developed and approved "Employer Notification Principles" for the negotiating team and
the council to observe during negotiations. These principles govern the commitment,
responsibility and behavior of the city manager and the council and have improved the
city's negotiations. These principles discourage council and labor discussions during
the negotiation process. San Jose has a similar policy that sets guidelines for the
council to ensure labor negotiations are conducted in good faith and to avoid actions
that would circumvent the city's designated bargaining team.
17
PUBLIC INVOLVEMENT
In the past year, many articles have appeared in newspapers and other publications
about the dire fiscal straits of our cities. The public is becoming aware of the growing
cost of employee obligations. Until recenlly most residents were relatively uninformed
about long-term financial costs and how they came about.
During Grand Jury interviews, four of the cities indicated that they did not hold public
discussions before the start of their last contract negotiations; other cities stated that
they did encourage public comment in regard to the salaries or benefits being
negotiated, but that these sessions did not garner a lot of public attention. Some of the
city managers acknowledged that the taxpayer is often unaware of the long-term
financial impact of negotiations, especially concerning pensions.
The negotiated MOAs and MOUs are either on a council's consent calendar for
approval or appear as a separate agenda item. In either case, there is seldom lengthy
discussion around this approval. Approved contracts are posted to a city's web site.
Many city leaders are currently engaged in a variety of activities to better inform the
public about the cities' financial health and to solicit input. These activities include
publishing quarterly newsletters, posting reports on city web sites, conducting budget
sessions, sending out surveys, and creating task forces.
Ballot Measures
Escalating public employee costs .are a problem occurring throughout California. In
some cities and counties, recent ballot initiatives have given citizens an opportunity to
vote on retirement and health care benefits.
Orange County, San Francisco, and San Diego voters passed ballot measures as
follows:
• In November 2008, Orange County voters decided that future retirement
increases must be voter approved.
• In June 2008, San Francisco approved two measures increasing pension
benefits for existing employees, but limiting the future costs of retiree health care
benefits:
o New employees will contribute 2% of salary and the employing agency will
contribute 1% to a new retiree health care fund,
o New employees must work ten years to receive half of their health care
costs upon retirement and 20 years for full coverage; previously
employees were 100% vested after five years.
• In November 2006, San Diego required voter approval of any increase in retiree
benefits,
18
Conclusion
. In the past decade, reasonable, intelligent people -city and labor representatives -
negotiated generous employee wage and benefit packages through collective
bargaining agreements under which the cities are currently operating. As these expire,
both groups must recognize the financial impact of these agreements, coupled with the
economic downturn, and negotiate contracts that will:
• Assist the cities in returning to fiscal health.
• Preserve the services the taxpayers deserve and expect.
• Provide competitive and affordable compensation for employees.
For many years, there was a common belief that public sector employees earned lower
wages than the private sector, but this was balanced by more generous public benefits.
Current data shows wages have increased in the cities and are at least on par with
private sector jobs, while benefits in the cities have escalated dramatically, thus
increasing total compensation to a point that it is out of sync with private industry and is
unsustainable for the cities. Unfortunately the taxpayers, who come from both public
and priVate sectors, are funding this inequity.
The cities' leadership must look beyond political barriers and focus on total
compensation and on workplace practices to contain escalating employee costs. All
parties -city administrators and labor unions -need to negotiate in good faith to
implement lasting, vigorous, sustainable change for our cities:
Findings and Recommendations
Finding 1
The costs of total compensation for employees have grown substantially in the past
decade and now threaten the cities' fiscal stability.
Recommendation 1
All of the cities in the County need to implement measures that will control employee
costs. As a starting point, each city should determine the percentage.· of savings
required from the total compensation package to reach budget stability, and provide
choices of wages and benefits in collective bargaining sessions for the unions to choose
to achieve that percentage goat
19
Finding 2
Salary and wage increases do not reflect changes in economic conditions; e.g. even
with minimal inflation, yearly COLAs are granted with little bearing on the actual
increase in cost of living or market conditions.
Recommendation 2
Cities should not increase salaries and wages that are not supported by planned
revenue increases. Cities should tie COLA increases to clear indicators and retain the
ability to adjust or withhold based on current economic data.
Finding 3
Step increases are arbitrary and do hot adequately represent an employee's added
value to a city. Combined with COLAs, new employees' wages increase quickly and
are not necessarily reflective of improved knowledge and skills.
Recommendation 3
Cities should negotiate step progressions from the current three and a half years to
seven years. Employees should not receive COLA increases while in step progression.
Finding 4
Medical insurance costs for active employees are growing year after year at rates that
exceed most cities' revenue growth, while the employee contribution to medical care is
minimal.
Recommendation 4
Cities should negotiate that employees assume some of these increased costs for their
medical benefits. To contain medical costs cities should consider the following:
A. Split monthly premiums between the city and the employee and increase the
employee's share, jf already cost splitting, and remove any employee caps.
B. Establish reasonable co-pays for doctors' visits, prescription drugs, and in
patient and out-patient hospital care.
C. Prohibit an employee from being covered by both city-provided medical benefits
and as a dependent of another city employee.
D. Reduce cash-In-lieu payments.
E. Introduce f! new lower premium, high-deductible medical plan.
20
Finding 5
Pension formula changes instituted in the past decade, stock market losses, the aging
"baby boomer" work force, and the growing unfunded pension and OPES liability all
contribute to making retiree pension and health care costs the most problematic and
unsustainable expense the cities are facing. The city contribution to pension plans and
OPESs far exceeds the employee contribution.
Recommendation 5a
Cities should:
1) Renegotiate and make provisions for increasing the employees' contributiOn for
current pension plans.
2) Renegotiate to stop paying the employees' contribution amount to pension plans.
3) Renegotiate to implement a contribution amount for employees to OPES; this
contribution should provide for a reasonable split of costs between a city and the
employee for retiree medical and dental benefits.
Recommendation 5b
Cities should thoroughly investigate reverting to prior pension formulas that were less
costly.
Recommendation 5c
To provide a meaningful, long-term solution, the cities should negotiate agreements to:
1) Institute a two-tier system for pension and retiree health care for new hires.
2) I ncrease the retirement age from 50 or 55 to 60 or 65.
3) Calculate pensions on the last three to five years of salary.
4) Replace current post-employment health care plans with health savings plans.
Finding 6
Public sector employees are granted a generous number of holidays, personal days,
vacation days and sick leave annually. Rules and limits on accrual vary by city and
union, but vacation days and sick leave can be accumulated and converted to cash or
calculated into the pension benefit within those limits.
21
Recommendation 6a
Cities should renegotiate with the bargaining units to 1) reduce vacation time; 2) reduce
the number of holidays and/or personal days; 3} cap sick leave and eliminate the
practice of converting accumulated sick leave to cash or adding into their years of
service for inclusion in their retirement benefit.
Recommendation 6b
Cities should negotiate to substitute paid days off for unpaid days instead of imposing
furloughs. For example, reduce paid holidays to major holidays only, consistent with
private ihdustry; and convert minor holidays to unpaid. Therefore, the public is not
impacted by fewer services caused by furloughs, and the city saves the employee cost.
Finding 7
Cities traditionally determine their compensation packages by surveying the wages and
benefits of other public sector employees in the same geographi~ area. There is major
resistance to comparing themselves or mirroring trends with the private sector. This
has allowed wages and benefits to become artificially high and out of sync with market
trends.
Recommendation 7a
Cities should research competitive hiring practices and alter the approach to determine
fair wages and benefits for each city by using public and private sector data.
Recommendation 7b
Cities should renegotiate salaries and wages using valid market comparisons and not
only the current wage index. Cities should utilize more market-oriented compensation
practices so that salaries can adjust as competition for labor changes. Cities should
reduce entry-level compensation for positions for which there are many qualified
applicants.
Finding 8
All cities perform certain core functions to run smoothly and provide services to their
residents. To reduce employee costs and streamline. operations, the cities are in
various stages of contracting services to private industry or partnering with other cities,
special districts or the County to deliver services.
22
Recommendation 8a
Cities should explore outsourcing some functions and services to private industry.
Cities should discuss the prospect with cities that are successfully doing this to
determine best practices and areas for success. Cities should develop contracts with
measurable objectives, performance goals, and timelines.
Recommendation 8b
Cities should create partnerships with other cities. special districts and/or the County for
services, such as payroll, human resources, animal control, police and fire. Cities
should investigate sharing the cost of new information technology systems.
Finding 9
Cities can gain operational efficiencies and effectiveness with lower employee costs by
. making sure they are staffed with the correct numbers of people in the appropriate job
classification in all departments and work groups.
Recommendation 9
Cities should analyze the functions performed by all job classifications and make
adjustments in the work force. Consolidate functions within the same group or a similar
group. Reassign appropriate work to lower paid job classifications. Eliminate
unnecessary functions.
Finding 10
The San Jose City Auditor identified 88 pOSitions currently being performed by public
safety employees that can be performed by civilian employees at tower costs. The
safety 'employees could be moved to positions that require their expertise and training.
The auditor estimated this could be accomplished in less than 90 days and save
approximately $5 million annually.
Recommendation 10
San Jose should negotiate this suggested transfer with the San Jose Police Officers'
Association and set realistic timeframes to move these safety positions to civilian
positions.
23
Finding 11
In many cities, the contract negotiation process is completed by placing the negotiated
collective bargaining agreements on the consent calendar for approval, which is acted
on quickly at the start of council meetings by a single motion and vote of the council. .
Recommendation 11
Cities should consider holding well-publicized public hearings about the cities' goals of
negotiations before negotiations begin, and again at the end of negotiations to report to
citizens clearly what changes have been made in contracts. .
Finding 12
Current contracts were negotiated in good faith by representatives of the cities and the
bargaining units: they were approved by the city councils. Promises made to employees
were made by elected officials, past and present. Responsibility for formulating and
approving solutions to restore the cities' financial stability resides squarely with our
elected officials. The economic downturn has placed additional pressure on the
situation.
Recommendation 12a
City council members and mayors should become better informed about the fiscal
realities in their cities, long-term costs and commitments, and be cognizant of potential
issues in labor agreements .
. Recommendation 12b
City councils and mayors should direct city administrators to (re)negotiate collective
bargaining agreements th~t reverse the escalation of employee costs through
concessions, cost sharing, and a second tier for new employees.
Recommendation 12c
City councils and mayors should meet with the bargaining units to clearly outline the
cities' financial health and show how employee costs are impacting the budget.
Recommendation 12d
City councils and mayors should inform citizens of their plans for controlling
unsustainable employee costs and remove politics from the equation.
24
Finding 13
Binding arbitration is not open to the public and results in an adversarial process
between the city and employee groups. Binding arbitration limits the ability of city
leaders to craft solutions that work for the city's budget. The process has resulted in
wage and benefit decisions that have been greater than the growth in basic revenue
sources.
Recommendation 13a
. San Jose City Council should make binding arbitration open to the public.
Recommendation 13b
San Jose City Council should prepare a ballot measure asking voters to repeal Section
1111 of the City Charter that addresses binding arbitration.
25
Appendix A
Retirement Information Form Sent to Cities
~C~ity!.:.: ____ .. ___ _
rU.nion NameT tJnion Name
----.. _--
Union Name Union Name Union Na~ _LJllion tta~
i
~--... -~
Current I
Pension Plan
WtQfmul,,) .
Future
Pension Plan
based on
MOU ... _-
Year Future
Plan is
effective ... -f-----~
Current COLA
Future COLA
-----. . ... -
based on
! : MOU ... _---... -____ M __________ . __ ._--
Current
Pension
calculated
based on final
year salary, 3 : ,
year average, ,
or other
Future ,
Pension
calculated
based on final
year salary, 3
year average,
or other ~~.-.... .._---_ ...
26
Appendix B
City Contribution Form Sent to Cities
A B C D E F G H r ._--
%of I Current Current
Employee's Amount Amount
City Employee Pension City Employee of of
Contribution Contribution· Contribution Contribution Contribution Pension Pension
to Pension to Pension paid by to OPEB as to OPEB·as that is that is
as'(.of pay as % of pay City' % of pay % of pay Funded Unfunded
Non-Public
... ~' ........
:
Safety
~ployees __
2009
2010 : c--...... .. -
2011 I
2012 I f---------.....
2013 --_. -.. -~--.
2014 .... -~. ........ --~---·-··m-
Police ~-......
2009 I
2010 .... -.. _ ...
2011 --. __ .-
2012 .
-_ .. . .. -
2013
2014 .. -~-----.. -.. ··· __ m_
Fire .
...... --.. -'--.-.. -----+------f -----+~--
2009 f-----"2""01C'::0+----I--_m ---+---. ----1-----\------11------+ ..... -.. ---
1------::
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"-1:.::1-+----.-.. -----f--.. --
---;g1} --.. ---i----+----I----+ ____ ·+ ____ 1-______ 1
2014 ---t------j------+----j----........ -_ ....... _=c.:..L ___ --'-___ -'--___ '--_
Question; Does City/Employee contribute to Social Security? Yes/No ___ _
'Does the city pay a portiol) of the employee's required share of retirement contribution? If so what is that
percent? ___ _
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Appendix C
City Information Form Sent to Cities
City of ____ ~ ______ _
CITY INFORMATION
1. What is the population of your city based on the 2000 census? ___ _
2. What is lheestimated current population? ____ _
3. How many total FTE's (Full Time Equivalents) did your city have in 2000/01? ___ _
4. How many total FTE's does your city have now (2009/10)? ___ _
5. How many FTE were in the Police department in 2oo0/01.? Now __ _
6. How many FTE were in the Fire department in 2000/01? ____ Now __ _
7. What was your Total Revenue in fiscal year 2000/01 ___ _
8. What is yourTotal Budgeted Revenue for 2009/10? ___ _
9. What per cent of the General Fund were employee costs with benefits in 2000/01? ___ _
10. What per cent are employee costs of the 2009/10 budget? ..,-...,.-,.,..-_
Employee costs include payroll, retirement benefits, health/dental benefits and other benefits.
11. How much did the city contribute to non-safety Retirements benefits in 2000/01? ___ _
How much did the city contribute to Police/Fire in 2000/01? __ _
12. What is the non-safety Retirement cost for 2009/10? _____ _
What is the Police/Fire Retirement cost for 2009/1 O? -'--____ _
13. How much did the City pay for Health/Dental Benefits in 2000/01? ___ _
14. What is the 2009/10 City cost for Health/Dental Benefits? _____ _
15 .. What was the average monthly premium the City paid for employee Health/Dental Care in 2000?
Individual Family.......,_-;--;-;_
16. What are the current average 'premiums for Health/Dental Care?
Individual Family ____ _
17. What was the median salary for non-safety employees without benefits in 2000? ___ _
With benefits -::_--:
18. 2009/2010 median salary without benefits With benefits ____ _
19. What was the median salary for police employees without benefits in 2000/01? ___ _
With benefits .
20. Current median salary withOut benefits _. With benefits ____ _
21. What was the median salary for fire employees without benefits in 2000? ___ _
With benefits _--;_
22. Current median salary without benefits With benefits ____ _
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Appendix C -continued
City Information -continued
23. What is the average number of years for your non-safety employees? __ _
What is the average number of years for police?
What is the average number of years for fire emp-,-Io-y-ee-s";:?-_-___ _
24. How many. vacation days, floating' days, holidays, personnel leave days and sick days are
employees entitled to annually?
25. What are the vacation and sick leave accrual and buyout policies?
26. Did you impose any furlough days this year? Y N If yes, which work groups? How many
. people are affected? How often?
27. Prior to entering into each of your current agreements with organized labor, did your city Council,
as part of regular business, encourage public comment in regard to the salaries or benefits being
negotiated? Y N
28. Are the MOU's resulting from contract negotiations typically on the consent calendar when
coming to the City Council for approval? Y N .
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Appendix 0
Santa Clara' County/Cities Managers' Association Policy Statement on Retirement
Benefits
SCI).\. Mateo Gcn.tv"ttj
c.fttJ M.(;IVI,,&\0tYS AS~()f'..,iutlDv~
PoUcy Statement on LocaJ Government Retirement Benefits
Background
For more than 70 years, the State of California and local governments have offered '.
"defined bemwf' retlremen1 plan to employees. This system provides a guaranteed
annual pension based upon retirement age, salary, and years of servtce. Most, but nat
all, municipalities In California are part 01 !he Public Employees' Retirement System
(PERS).
Over the years, local government retirement costs have risen and fallen based on two
key laClors: Investment returns and the tevel of benefit payments provided to
employees. tn the late 1990's the California legislature enacted significant benefit
enhancements for public employees In the PERS system that were optional for
panicipating loeaf governments. At that time, some ret1rement plans were deemed to be
'super funded" and many local governments edopted benefit enhancement plans. For
example, most public safety personnel are on Ihe "3% @ 50' plan, which provides a
penSion benefit of up to 90% of salary afler 30 years of service as early as age 50.
When 1he retirement system suffered serious investment losses in the ea(ly part of this
decade, Ihese losses, combined with newly approved benefit enhancements, caused
dramatic increases in employer contribution rates. Cities in our two counties have seen
the percentage of their General Fund budget dedicated to PERS costs increase while
Iheir (etilemen1 liability funding had decreased from over the pas1 decade. For
example, in Mountain View, General Fund PERS cOsts have gone from $2.8 million in
FYOO to $7.7 million in FY10; in San Bruno, it has 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 FYOO and FY10; in Betmont, it has gone from
.5% to 11.4%. And Campbell has seen its public safety relire,!,enl system fall from
122% funded to 70% funded over ten years.
In the past five years, a number of proposals have been introduced to reform Of
dramatically revise the pubtic 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 specifIC
refoml recommendations. To date, no concrete action· has been 1aken by the
legislature"
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Appendix D -continued
Recently, the city managers of San Diego County have prepared a whITe paper on Ihis
issue calling for a new and lower 'second tier retirement benefit 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. AdditlonaHy, Governor
Schwarzenegger has proposed retuming p~nsion formulas to 1999 leve!s for new hires
-a move he says will save Ihe state $74 billion through 2040. The City of Sunnyvale
has done a preliminary analysis of a lower tier and has estimated it could save a total of
$44 million over 20 years. The cities of San Cartos and Brisbane have already initiated
a lower, second tier for new hires (among otoor cities stateWide},
While the debate is ong9in9, no dear consensus has [jeen achi~ved on addressing the
high cost of pension benefits and no action appears imminent The city managers of
.Sanla Clara and San Mateo counties believe it is Important to take a proactive stance
on Ihis issue which has long-term implications for Ihe fiscal slabilily of our cities. This
issue is even more important now, given the tremendous losses suffered in the stock
market in Ihe pasl year. AI 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 mainlain its pension obligations. pul cleal1y
there is no guar.antee this rate can be achieved. Based on lhls year's negative returns,
employer rates are expected 10 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 fmcsl pOlicies that preserve !oca! government's ability to meet
community needs, while atlracling competent and molivaled employees to public
service.
> Providing adequate retiremenl benefrts is an imporl2nt part of attrncting and
retaining public employees; this continues, to be an issue as, demographically, there
are fewer young people to' enter lhe public sector. .
};> Current retlrement benefit formulas are not fiscafly sustainable. The costs are
escalating beyond our ability to fund them and diverting limited resources from direel
service delivery to Our commu(lities. In addition, current pension benefits exceed
what private sector employees receive and what is reasonably needed to attract
public employees.
~ Ideally. Ihis situation would be addressed at a statewide level and there would be
consistenl slandards for aiL We cannot, however, afford to wait for a statewide
solution, Therefore, the cities of Santa Clara and San Mateo counties support
2
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APPENDIX D -continued
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 condmons; a "one size fits
all" approach may not be realistic, but all cities in the region compete for the same
empjoyees'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
» Every city is committed 10 moving toward a two lIer syslem for all new contracls.
» Any new system or tier should be fair to employees, sustainable for taxpayers and
employers, and based on objeclive acluarial dala.
Acllon Steps
The city manager associations of Sarna ctara County and San Mateo County support
the slatements in this documenl and their members pledge to work with their elected
officials and labor groups to implemenl ils principles: We fudher pledge to work with
other city managers across Ihe slale and Ihe League of Califomia Cities 10 advocale for
changes consislent with Ihis document.
Dave Anderson, SCCCMA Connie Jackson, SMCCMA
Adopted July, 2009
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This report was PASSED and ADOPTED with a concurrence of at least 12 grand jurors
on this 13th day of May, 2010.
~A dL c;:,;cdr Angie M. Cardoza
Foreperson
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