City employees of today will be sitting comfortably come
retirement, with retirement benefits from the state pension
fund.
City employees of today will be sitting comfortably come retirement, with retirement benefits from the state pension fund.
Not so for future generations of police officers and city workers as municipalities across the state including Morgan Hill and Gilroy move toward lower retirement benefits.
The Santa Clara County Cities Association Board of Directors, working in tandem with the San Mateo association and at the behest of both counties’ city managers groups, were scheduled to meet Thursday night to consider a two-tiered retirement system. The first tier would be for current employees and the second tier would be for employees hired from here on out. The idea is to reduce the amount the city spends on retirement benefits to CalPERS, or the California Public Employees Retirement System, the largest pension system in the nation.
“It’s important that we do it jointly because we’re all in the same labor market, we’re all responding to our obligations to reduce costs while being mindful of our obligation to be able to recruit,” Morgan Hill City Manager Ed Tewes said.
Like many cities in the Bay Area, Morgan Hill’s police officers will receive a retirement benefit equal to 3 percent of their final year’s wages for every year of service when they retire at age 50 or older. In other words, a 30-year Morgan Hill officer who retires with a salary of $200,000 will receive $180,000 each year in retirement.
Switching to a retirement benefit equal to, say, 2 percent of a final year’s wages for every year of service at age 50 means that same officer would receive $120,000 each year in retirement. And that’s big savings for the city.
Finance Director Kevin Riper estimated the savings 10 years from now, if such a benefit package were accepted by the police union, would be several hundred thousand dollars annually, and probably at least half a million dollars annually 10 years after that – just for police officers switching to something like this second-tier benefit level.
“If you want to add miscellaneous employees into that mix, then you can safely double those figures for 2019-20 and 2029-30,” Riper said.
It’s hard to know exactly, Riper said, because officials don’t know how many employees will work for the city in the future or how much those employees will earn.
Until these changes take place, cities like Morgan Hill have a tough road ahead. With the economic downturn, the city’s liability with CalPERS, which was overfunded by almost $10 million in investment earnings in 2000, is now underfunded by $10.8 million this year. That’s a $21 million drop in seven years. That amount will continue to increase, too, during the financial market fallout, Riper said.
As the economy nosedives, so goes CalPERS’ investment portfolio. As that goes down, employer contributions necessarily move up to make up the difference since California’s government workers enjoy a defined benefit package; that is, their pensions are guaranteed. And that means a lot of General Fund shuffling in Morgan Hill’s near future.
This year alone, city taxpayers will pay $2.78 million toward city employees’ retirements. About $1.68 million of it will come from the beleaguered general fund.
And that’s chump change compared with the forecast for 2014. If nothing changes by then, the city will pay about $3.98 million that year to CalPERS.
These amounts go towards employees’ future retirements and retired former city employees’ pensions as well as unfunded liability, which is the amount CalPERS officials had calculated it would receive in investment earnings, but then didn’t.
And it will continue to increase in the foreseeable future as CalPERS economists factor in the credit crunch’s effects and employees’ payrolls continue to increase with, for example, cost-of-living increases written into union contracts.
All these contributions go toward state government workers’ pension funds. While Morgan Hill police officers get 3 at 50, all other city employees can earn up to 95 percent of their salary, if they work for the city for 38 years or more. If an average city employee made $100,000 during their thirtieth year of employment, that employee would receive $75,000 a year in their retirement, according to CalPERS data.
Two former city employees make more than $100,000 off their CalPERS pension, according to www.californiapensionreform.com. Former Police Chief Jerry Galvin, who retired in December 2003, brings in more than $120,000 each year. The police chief before that, Steve Schwab, receives more than $109,000 each year.
Data for Morgan Hill’s retired safety personnel is not available because the pool of employees is so small, Riper said. But statewide, CalPERS pays 12,000 such retired safety workers an average annual pension of almost $28,000. Thirty-six of these 12,000 are retired Morgan Hill officers.
The 70 miscellaneous retirees whose last employer was Morgan Hill receive an average annual pension of about $11,000 per year, as of 2007.
When times were good, the city’s general fund was unfazed by these numbers. In fact, from 2000 to 2003, CalPERS was bursting at the seams with investment earnings and employers like Morgan Hill didn’t pay a penny toward their employees’ retirements.
Now, though, the financial crisis struck and employer contributions are skyrocketing, going from zero contributions in 2003 to $2.8 million today and they will continue to rise for the foreseeable future, according to city officials.
Current employee benefits are constitutionally protected so there is little the city can do about current employee pension costs but prepare and plan for the long-term future for a lower level of benefit for new hires, said Brian Stott, the city’s human resources director. In the next several years, the baby boom generation of city employees will retire with their locked-in contributions. This will result in a hiring spree, and cities across the state will have to have “an appropriate system in place” for these new employees, Stott said.
Mayor Steve Tate, who represents Morgan Hill in the cities association, was optimistic that all the counties’ city representatives would be on board with moving towards lower benefits.
“I hope it goes forward quickly,” Mayor Steve Tate said of the proposal. Tate said he hopes to see a formal agenda item for the council to adopt in an October meeting.
The board, made up of a representative from each of the county’s 15 city councils, were scheduled to meet at Sunnyvale City Hall Thursday night. Tate plans to report on their decision or action, which will influence the city’s course of action, at the Sept. 23 meeting of the Morgan Hill City Council.
