HomeMy WebLinkAbout0213.094ij-' 9 " '" , ~
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March :n, 1994
HONORABLE CITY COUNCIL
Palo ~lto, California
Members of the Council:
Report in Briaf
This is an informational report, and no council action is reqlJiJ,"ed
at this time. Since 19B7, City labor agreeFlents have allowed
employees to elect, in the final year before reth'.e11ent, to Convert
their retirement contributions to a salary adjustttDllt. This
conv~rsion incroases the amount ~f co::t.pensation reported to tho
Public Employee Retirement system (PRRS), increasinq the calculated
retil.'sment benefits fot" the rotires ..... ho choOS6S this election.
PERS has recently enacted new requlations as. to what may be
included in "report,able" compensation, and has be9ur, to bill
agencies _directly for any I.mfunded liabilities which result fron
thia type of agreoment. Unfunded liabilities occur whan funding
levels (Le., employer rates) are not updated to JI.'~t_ch increases in
employee benefit obligations. The city has bean bib.':0 $54.000 tor
ene retiree, and awaits the determination of the total liability
incurred from conversions elected in the last eight 'months,. staff
will re.turn to Council with a funding 'l"ecoml'!lendation 'When the total
amount of liability is known.
Bao1tgroun4
In April 1992, PERS notified contracting agencieo that certain
labor agreements, negotiated bat~t.fl;en employers and labor 9roups,
had been resulting in inflated pension benefits. In particular I
arrangeIllents whiCh provided for 'an increase .to ,an employee's
compensation reported to PERS in the final year before retire~ent
re.sulted in a significant increase in retirement benefLts. Such
agreements were widespread. .
CMR:213:94
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In ~ost instances, the increas~d compensation reported to'PERS was
not in 'compliance with the ,Pliblic Employees' Retil"ement Law, and
provided bena:flts in excess of the actuarial assumptions 'Which PERS
us/ad to determine funding rates. Unless PERS' actuaries deter-mine
the cost of each employer co~pensation agreement. employer rates
ca~not be 'adjusted to match future pension obli9ations of an
entity. 'Hhen thf!: present value of an employer's pension benefit
obligations exceeds the value of the accu]:!Iulated assets in the
employer's account with ?ERS, an unfunded liability results.
PERS determined that in some cases r agreeMents which inflat.ad
employees I fthal benefits had occurred because of a
misunderstanding of law; in ,other cases, th.ere was evidence of
possible crilllinal fraud and collusion. On Decembp.r 18, 1992, in an
effort to curb what it considered to be pension abus~ and ensure
pension accountability, the PERS Board adopted a short-term policy
regarding the reportability of co:rtpensation. This policy disallows
the l"eporting of certedn payme.nts and conversions as "compe.nsation"
for the purpose of calculating monthly retirement benefits as of
De:cember 18, 1992. Provisions were made for certain types of
compensation which were provided as t.he result of labor agreell1cnts
in effect on or b~fore Dec~mber 18, 1992. Contract agencies were
notified that any unfunded liability resulting from benefit
conversions to salary would be charged directly to the agencies.
Palo Alto, in its three labor agreements and management
compensation plan, allows employees to convert the City-paid
employee PERS contributions to a salary adjustment for the final
twelve months immediately prior to retirement. This conversion
will sunset 011 June 30, 1994. PERS will bill the City for the
unfunded liability resulting from these final year conversions to
salary. For conversions completed prior to Decernher 18, 1992 (the
adoption of the new regulationa) through June 30, 1993, the City's
employer contribution rate will be adjusted. For'conversions which
comlJienced during the period of July 1, 1993 through June 30, 1994,
pa~ent may be made by either:
o Lump-sum payment
o Amortizat.ion of paY!L,ent (up to 60 months with interest
accruing)
o Adjustment of employer rate, or
o A combination of payment methods.
CMR:213:94 2
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l!rst Billing statement
On February l6, 1994, 'the City received its first 'billing statement
from PERS for the unfunded liability r~sulting from a final year
conversion. The billing statement, for $54,000, relates to only
one retiree, who retired on December 1" 1993. After contacting
PBRS, staff was told to anticipate seven 'Clore, similar bills from
PERS for retirees 'Who l'etired prior to March 1, 1994. PERS
required that the City elect a payment for payments on these bills
prior to March 15. However l staff requcGted an extension, pending
receipt of .:\11 the outstanding retirement billings, so that the
full cost of tha: conversions through December 31, 1993 could be
ascertained. When the amount of the unfunded liability for the
eight retirees is known, staff will be in a position to develop a
r6co~rnendation for payment of these assessments.
Further extensions of the deadline to choose a payment fuothod may
be necessary~ If the election is not made by the City a~ required,
the Cit.y's employer contribution rate will be automatically
adjusted.
Upon r~ceipt of the new PERS enployer contribution rates for 1994-
95, the City will be able to evaluate the cost of past salary
conversions allowed employees in their tinal year prior to
retirement. In addition, the City will need to choose a payment
~ethod for the liability incurred from such conversions which have
occurred since July 1993. When the amounts of these charges are
fully known, staff will begin to analyze 'the impact of these
retireMent liabilities to the City's financial standing, and the
options available in future labor agraements. staff wi 11 return to
emmcil at that time with a recommendation for funding.
Respectfully submitted~
{I~/'{P;t4JJ1
CAROl. FkELI.
Accou ting Manager
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• Y IIARR I .»
"O'rector ~nance , r .-:. ~"~ i
J ~E FLEMING •
C· ty Manager ,I
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CHR:213:94 3
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