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City of Palo Alto (ID # 3205)
City Council Staff Report
Report Type: Consent Calendar Meeting Date: 10/15/2012
Summary Title: PAPOA Second Pension Tier
Title: Adoption of (1) Resolution of Intent and (2) Ordinance to Amend the
Contract Between the Board of Administration of the California Public
Employees’ Retirement System (CalPERS) and the City of Palo Alto to
Implement California Government Code Section 20475: Different level of
benefits provided for new employees, Section 21363.1: 3.0% @ 55 Full
Formula, and Section 20037: Three Year Final Compensation for Safety Police
Employees
From: City Manager
Lead Department: Human Resources
Recommendation
Staff recommends Council adopt: (1) the attached Resolution of Intention of the Council of the
City of Palo Alto stating its intent to amend the contract between the California Public
Employees’ Retirement System (CalPERS) and the City of Palo Alto to implement Section 20475:
Different level of benefits provided for new employees, Section 21363.1: 3.0%@55 Full
Formula, and Section 20037: Three Year Final Compensation for Safety Police Employees; and
(2) an ordinance to authorize the Amendment.
Background
The City has been negotiating with all labor units to establish a new second pension tier with
reduced benefits for new hires to curtail the City’s growing pension costs. The City and Palo
Alto Police Officers’ Association (PAPOA) reached agreement on terms for a successor
Memorandum of Agreement (MOA), including a second tier pension with reduced benefits in
May 2012. The City also discussed its intent to move to a second tier pension plan for future
new hires with the Police Managers’ Association (PMA); however the parties were not able to
reach agreement on terms for a Memorandum of Agreement. The City implemented terms and
conditions of employment for PMA members on July 23, 2012 which included a new second tier
pension plan generally consistent with the terms in the PAPOA MOA. Now the City can proceed
to adopt a second tier reduced pension benefit for all safety police employees. The terms of
the second tier pension benefit include the formula of 3%@55 and final year salary calculation
based on the average highest three (3) consecutive years.
The first step in the process is for the Council to adopt a Resolution of Intent and conduct a first
reading of the ordinance amending the CalPERS contract. Once the final ordinance is adopted
and becomes effective, the contract amendment will go into effect the following payroll date.
Based on the current schedule, the effective date of the contract amendment will be December
7, 2012.
This benefit change will only affect new safety police personnel who are hired after the
effective date of this amendment, and not current, active employees in the Police Officers’ and
Police Managers’ Associations.
Discussion
This change in pension formula for newly hired police safety employees is expected to gradually
decrease the City’s retirement benefit expense. Currently under the 3%@50 formula, an
employee retiring at age 50 with 25 years of service can, for example, retire with a pension
equal to 75% of final salary. The 3% is a multiplier applied to the number of years of service,
then multiplied by the final salary to determine the pension amount. Upon implementation of
this amendment, under the new formula, an employee does not reach the full 3% factor until
age 55. The maximum for either plan is 90% of salary with 30 years of service.
Another change in the new tier will be the calculation methodology for final salary. CalPERS
provides the option to employers to use the average highest salary in a 1- or 3-year period. The
current benefit provides for the average highest salary in a 1-year period. This benefit will
continue for all current sworn police employees. The new reduced pension tier will use an
average of three (3) consecutive highest years of salary to calculate the final salary for purposes
of the pension calculation.
The cost analysis provided by CalPERS states that while there will be no immediate rate impact
for the City due to this amendment, ultimately, the City’s normal cost will decrease as new hires
in the lower formula begin to replace existing employees in the higher formula who retire or
otherwise terminate. The approximate difference in normal cost is expected to be 1.4%.
Resource Impact
With the implementation of the new reduced pension tier and the average of the final three (3)
consecutive years of salary to determine pensions, the City will gradually realize contribution
savings or avoided costs as new PAPOA and PMA employees replace those now employed
under the current formulas. With these two changes, the City is expected to save $11,000 in FY
2015 with annual savings rising to $120,000 in FY 2022. Total estimated savings or avoided
costs for these two changes and for the two units are $0.5 million for the period of FY 2015
through FY 2022.
Policy Implications
This recommendation supports the City Council’s goal of reducing pension costs to the City and
is consistent with existing City policies.
Environmental Review
This action does not require an environmental review.
Attachments:
Exhibit A - RESO CalPERS Police 2nd Tier (PDF)
Exhibit B - ORD Amend CalPers Contract Police (PDF)
Exhibit C - Amendment to Contract (PDF)
Exhibit D - PERS 3-55 Actuary 9-17-12 (PDF)
Prepared By: Elizabeth Egli, Administrative Assistant
Department Head: Kathryn Shen, Director, Human Resources
City Manager Approval: ____________________________________
James Keene, City Manager
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Exhibit A
Resolution No.____
Resolution of Intention of the Council of the City of Palo
Alto to Approve an Amendment to Contract between the
Board of Administration California Public Employees’
Retirement System and the City Council of Palo Alto to
Implement a Second Tier of Retirement Benefits for New
Police Employees
WHEREAS, the Public Employees’ Retirement Law permits the participation of
public agencies and their employees in the Public Employees’ Retirement System by the
execution of a contract, and sets forth the procedure by which said public agencies may elect to
subject themselves and their employees to amendments to said Law; and
WHEREAS, one of the steps in the procedures to amend this contract is the adoption
by the governing body of the public agency of a resolution giving notice of its intention to
approve an amendment to said contract, which resolution shall contain a summary of the change
proposed in said contract; and
WHEREAS, the following is a statement of the proposed change:
To provide Section 20475 (Different Level of Benefits). Section 21363.1
(3% @ 55 Full formula) and Section 20037 (Three-Year Final Compensation)
are applicable to local police members entering membership for the
first time in the police classification after the effective date of this amendment to
contract.
NOW, THEREFORE, the Council of the City of Palo Alto does RESOLVE as
follows:
SECTION 1. That the Council of the City of Palo Alto does hereby give notice of
intention to approve an amendment to the contract between said public agency and the Board of
Administration of the Public Employees’ Retirement System, a copy of said amendment being
attached hereto, as “Exhibit A” and by this reference made a part hereof.
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SECTION 2. The Council finds that this is not a project under the California
Environmental Quality Act and, therefore, no environmental impact assessment is necessary.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
__________________________ _____________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
__________________________ _____________________________
Sr. Deputy City Attorney City Manager
_____________________________
Director of Human Resources
_____________________________
Director of Administrative Services
120228 sh 8261831 1
Exhibit B
Ordinance No. _____
Ordinance of the Council of the City of Palo Alto
Authorizing an Amendment to the Contract between the
Board of Administration of the California Public Employees’
Retirement System to Implement a Second Tier of
Retirement Benefits for New Police Employees
The Council of the City of Palo Alto does ORDAIN as follows:
SECTION 1. Findings and Declarations. The City Council finds and declares as
follows:
That an amendment to the contract between the City Council of the City of Palo Alto
and the Board of Administration, California Public Employees’ Retirement System is hereby
authorized, a copy of said amendment being attached hereto, marked Exhibit “B,” and by such
reference made a part hereof as though herein set out in full.
SECTION 2. The Mayor of the City Council, City of Palo Alto, is hereby
authorized, empowered, and directed to execute said amendment for and on behalf of the City of
Palo Alto.
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SECTION 3. This ordinance shall take effect on the 31st day after the date of its
adoption.
INTRODUCED:
PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
____________________________ ____________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
____________________________ ____________________________
Sr. Deputy City Attorney City Manager
____________________________
Director of Human Resources
____________________________
Director of Administrative
Services