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HomeMy WebLinkAboutStaff Report 3081 City of Palo Alto (ID # 3081) City Council Staff Report Report Type: Action ItemsMeeting Date: 9/4/2012 Summary Title: Grand Jury Report Title: Approval of Response to Grand Jury Report on Pension and Other Post- Employment Benefits From: City Manager Lead Department: Administrative Services Recommendation Staff recommends that Council review, provide input, and approve the following response to the 2011-2012 Santa Clara County Civil Grand Jury Report “An Analysis of Pension and Other Post Employment Benefits.” Background On June 13, 2012, the Civil Grand Jury of Santa Clara County released a report seeking to answer the question: “Is the cost of providing pension and other post employment benefits interfering with the delivery of essential City services and is the ultimate cost to the taxpayers a bearable burden?” A copy of the Grand Jury report is included as Attachment A. Discussion The Grand Jury’s Report culminates in seven findings and recommendations (see pages 26-28 of the Report). The following discussion responds to the recommendations. Recommendation 1 – Cities should adopt pension plans to extend the retirement age beyond current retirement plan ages. Response: Agree. Palo Alto has already created a second tier for Miscellaneous (non-public safety) employees extending the retirement age for new hires from 55 to 60. In the past year it has also extended the retirement age for new safety employees from 50 to 55. Because the City participates in the CalPERS retirement system, it is limited to the retirement formulas offered by CalPERS. Retirement age is a factor in those retirement formulas and cannot be altered by the City. In addition, although the extended age retirement formulas set the standard retirement age at a higher level, employees may still choose to retire at an earlier age. For example, with respect to the Miscellaneous 2% at 60 tier, retirement at the age of 60 is not required; an employee may retire beginning at age 50 for a lower benefit factor, or after age 60 for a higher benefit factor. In fact, the formula would go as high as 2.418% for an employee who retires at the age of 63 or as low as 1.426% at the age of 50. Lastly, CalPERS offers a 1.25% at 65 formula, but only for state employees who are in the Social Security system; Palo Alto would not qualify because it does not participate in Social Security. Recommendation 2A - Some cities, including Palo Alto, have adopted second tier plans, but further changes are needed. Second tier plans should be implemented for both Miscellaneous and Public Safety. Response: Agree. Since the Grand Jury questionnaire was submitted, Palo Alto has now adopted second tier plans for safety employees as well as miscellaneous. Recommendation 2B – Cities which have not already done so should implement second tier plans for Miscellaneous and public safety employees. Response: Agree. As discussed above, Palo Alto has already implemented this recommendation. Recommendation 2C – All Cities’ new tier of plans should close the unfunded liability burden they have pushed to future generations. The new tier should include raising the retirement age, increasing employee contributions, and adopting pension plan caps that ensure pensions do not exceed salary at retirement. Response: Agree. However, as discussed above, the City’s options are currently limited to the pre-determined formulas and other optional benefits established by CalPERS. The City has taken steps to address issues associated with some of its optional benefits, but also would like to see CalPERS offer more options for additional cost containment. As discussed in the response to Recommendation 1, the City has already raised the retirement age for new employees in the Miscellaneous and Safety groups. In addition, as discussed in Recommendation 4, nearly all employee groups are now paying (or will be paying in the near future) the full amount of the PERS employee share. CalPERS does not offer the option of adopting pension caps within its current formulas. The City has, however, taken steps to minimize increases to final compensation. State law establishes several “optional benefits” that CalPERS offers to employers that may result in increasing an employee’s final compensation beyond the actual final salary amount. In some cases, the application of these benefits may result in an annual pension allowances that exceed the take- home pay the employee received before retiring. The City has taken steps to reduce or eliminate some of these benefits in recent years. For example, the City had an optional benefit that allowed employer-paid member contributions to be converted to pay-rate in the final compensation period. To the extent that employees are now paying all or part of the member contribution, that conversion and the resulting increase has been reduced or eliminated. Similarly, the City had adopted an optional benefit that designated the final year as the final compensation period. The City has now moved back to the three-year averaging for new tier employees, and intends to implement it for all formulas by August 2013 The City believes that these types of reforms are important and appropriate and will continue pursuing them to the extent possible under existing law. Recommendation 3 – The Cities should adopt policies that do not permit benefit enhancements unless sufficient monies are deposited, such as in an irrevocable trust, concurrent with enacting the enhancement, to prevent an increase in unfunded liability. Response: Agree. This recommendation is addressed by the Labor Guiding Principles adopted by City Council on April 9, 2012. The Principles include #2, which provides that “The City should be able to meet the cost of any compensation commitment from current and projected on- going City revenues,” and principle #8 which provides that “The City should pursue short term and long term strategies to curtail increasing employee benefit costs. It should move away from providing benefits that place the burden on the City to pay the cost of automatic increases and toward benefit structures that require negotiations to determine how much and who will pay for such costs.” Therefore the Council has in effect already implemented this recommendation. Recommendation 4A – The Cities should require all employees to pay the maximum employee contribution rate of a given plan. Response: Agree. This recommendation has been a key goal of the City in recent negotiations and has now been implemented across all employee groups with the exception of the Fire Chiefs Association (FCA), Police Managers Association (PMA), and the Utility Managers Association. These groups comprise 55 positions out of a total of 1,016 citywide. The City has proposed this contribution level for FCA and for the Utility Managers Association and expects to bring PMA in line with the other groups in the next round of negotiations. Recommendation 4B – Cities should require employees to pay some portion of the Past Service Cost associated with the unfunded liability in proportion to the Benefits being offered. Response: Agree. The first step in this direction was to bring employees up to paying their entire employee share of pension costs. In future labor contract negotiations, the City may explore with employee groups additional measures to ensure that past service costs are distributed in an equitable and sustainable manner. Moreover, the City would welcome legislative change that would prohibit retroactive improvements. Recommendation 5 – Cities should immediately work toward implementing policy changes and adopting measures aimed at making full OPEB ARC payments as soon as possible. Response: Agreed. Palo Alto approved a policy to make full OPEB ARC payments in 2007 (CMR:438:07) when the City established the trust with CalPERS for retiree medical. Recommendation 6 – This recommendation pertains to the City of San Jose and is not applicable to Palo Alto. Recommendation 7 – Cities should transition from defined benefit plans to defined contribution plans as the new tier plans are implemented. Response: Agree in principle. The Council has recognized the importance of new and more creative options for post-employment benefits going forward and views defined contribution plans as an important option. The City already offers all employees, in addition to their CalPERS pension, the option of participating in a IRC 457 retirement plan and contributing a portion of their pre-tax earnings for retirement. However, this is another area where CalPERS currently limits the City’s ability to make changes. As a CalPERS participant, the City cannot opt out of the defined benefit plans offered by CalPERS without a prohibited exit cost, or otherwise reduce the proportion of retirement needs to be met through the defined benefit program. As a result, changes in state law would be necessary before the City could fully implement this recommendation. A July 2, 2012 Colleagues Memo to Council raised this and many of the other issues contained in the Grand Jury Report. Council requested a series of community discussions about pensions, health care and other employee benefits to take place in September and October, 2012. This Grand Jury response is a prelude to a broader discussion in the commfunity of these very same issues. Additional Information and Clarification Unfunded Liability On page 10 of the Report, Table 3 shows unfunded liability for pension and OPEB for 8 cities in Santa Clara County, as well as the County itself, in total and on a per-resident basis. Staff has reproduced that table below: FY 2010 Unfunded Liabilities (Not in Risk Pool) City Pension OPEB Total Liability per Resident Santa Clara County 1,455,835,322 1,300,000,000 2,755,835,322 $ 1,547.00 Cupertino 18,581,728 18,069,366 36,651,094 $ 629.00 Gilroy 35,100,000 4,900,000 40,000,000 $ 819.00 Milpitas 70,166,975 31,230,798 101,397,773 $ 1,518.00 MV 104,121,296 29,396,467 133,517,763 $ 1,803.00 Palo Alto 153,941,000 105,045,000 258,986,000 $ 4,021.00 San Jose 1,434,696,471 1,706,081,881 3,140,778,352 $ 3,320.00 Santa Clara 223,667,947 23,855,000 247,522,947 $ 2,125.00 Sunnyvale 149,300,000 92,800,000 242,100,000 $ 1,728.00 Total 3,645,410,739 3,311,378,512 6,956,789,251 It appears from the above Table that Palo Alto has a high ratio of unfunded liability per resident; however several factors must be considered to place this ratio in perspective. The table does not appear to take into account the level of service and the unique services that Palo Alto provides in comparison to other cities in the County. First, Palo Alto is the only of the above cities operating its own utilities: gas, electric, water, waste water collection, refuse, storm drain, waste water treatment and fiber optic. Utility operations account for 40% of the Palo Alto workforce. The General Fund administration provides services (HR, finance, etc.) to the Utilities which they reimburse annually. The other cities would not have the same staffing levels as a result of Palo Alto having more utilities. Furthermore, the compensation offered to Utilities employees must be competitive with equivalent private-sector utilities; salaries in the Enterprise Funds tend to be higher, and they participate in the CalPERS pension based upon their salaries. Second, Palo Alto services include five libraries, theatres, and extensive arts and children’s programs – far more than comparable cities. These community services, valued by residents as a part of the lifestyle in Palo Alto, require more employees than the average Parks and Recreation department. Also to be noted is that Cupertino, with the highest number of residents per active employee, outsources its public safety services and the figures above apply to its miscellaneous employees only. Third, Palo Alto offers regional services, such as our Water Quality Control Plant, our Animal Services, and our Fire Services provided to Stanford, for which we receive offsetting revenue. However the full liability is captured in the table. Fourth, the Cities have unique attributes that make up the OPEB liability, which should be considered in detail. For instance, comparing Palo Alto to Mountain View’s OPEB liability, Palo Alto’s is higher due, in part, to covering the cost of dependent healthcare coverage for retirees while Mountain View does not. Palo Alto also has a greater number of retirees, 860 compared to Mountain View’s 304. The actuarial calculation of OPEB liability for the two cities differs in a key assumption related to assumed annual increase in healthcare expense, which increases the cost of future year liability. Palo Alto’s OPEB actuarial report assumes that healthcare will increase 9.4% in 2013 and then at least 7.8% per year through 2020. Mountain View’s, on the other hand, assumes healthcare will increase 7.6% in 2012 down to 5.5% through 2019 and beyond. Palo Alto’s healthcare cost estimates are very likely to materialize given the recent trend in healthcare increases. These important differences are a significant factor in while Palo Alto’s valuation is higher than Mountain View’s. If we next compare the unfunded liability per employee or per retiree, Palo Alto does not stand out as much. City Unfunded liability per active employee Unfunded liability per retiree Unfunded liability/active employee or retiree (combined) Cupertino $ 226,241 $ 172,883 $ 97,998 Gilroy $ 173,913 $ 156,863 $ 82,474 Milpitas $ 272,575 $ 492,222 $ 175,429 Mountain View $ 256,272 $ 463,603 $ 265,040 PA $ 264,002 $ 202,649 $ 125,615 Santa Clara $ 261,376 $ 398,588 $ 157,859 Sunnyvale $ 270,201 $ 239,941 $ 127,087 AVERAGE $ 191,620 $ 236,305 $ 102,281 Sick Leave Payout A recent article in the press described the option in some local governments for employees to get cash for unused sick leave at the time of retirement. Palo Alto made changes to this practice in the 1980s. Presently there are only 9 long-term employees eligible to receive sick leave payout. Eventually, all employees eligible will have left the city. Additional Clarifications 1. On page 15 of the Grand Jury Report (Attachment A), Table 5: Pension Benefit Plan Changes does not capture Palo Alto’s second tier and employee contribution changes. The Palo Alto line items should read as follows: 1st Tier Plan 2nd Tier Plan City year of increase Original Plan Benefit Increase Employee- Paid contrib. Plan Name Year Adopted Employee- Paid contrib. Palo Alto 2007 Misc. 2% at 50 Misc. 2.7% at 55 2% - 5.75% 2% at 60 2010 2% to 7% Palo Alto 2002 Public Safety 2% at 50 Public Safety 3% at 50 0%-9% 3% at 55 2011- 2012 6.25% to 9% 2. On page 17 of the report, it mentions “Mountain View, Sunnyvale and Cupertino are commended for having begun to implement a “pay forward” strategy [for Retiree Medical], which demonstrates fiscal responsibility.” Staff wishes to point out that Palo Alto has executed a “pay forward” strategy since 2007. 3. On page 20 of the report, it mentions that “all Cities surveyed [with a few exceptions]...either reimburse for accrued unused sick time or permit it to be converted into service time for purposes of determining pension. Staff wishes to point out that in Palo Alto, sick leave payouts do not count towards pension credit. In conclusion, staff requests Council input and final approval of responses to the Grand Jury report. A final response from the City of Palo Alto regarding the recommendations by the Grand Jury must be delivered by September 15, 2012. Staff prepared this report before the Governor's proposal on pension reform was approved. Staff will update the Council on the Governor's proposal during upcoming discussions on pension and healthcare. It is likely that elements of the proposal will address the recommendations contained in the Grand Jury report, but staff will need time to evaluate the proposal before making a final determination. 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 benefits. Environmental Review There is no environmental review required for this report. Attachments: Attachment A: 2011-2012 Santa Clara County Civil Grand Jury report (PDF) Prepared By: David Ramberg, Assistant Director Department Head: Lalo Perez, Chief Financial Officer City Manager Approval: ____________________________________ James Keene, City Manager