Archive for December 3rd, 2012

Reform ends market pressure to boost pensions

December 3, 2012

The Antioch city council is scrambling to reverse previous pension cuts before a statewide reform takes effect Jan. 1, an attempt to aid the recruitment of experienced police officers from other cities.

The reform pushed through the Legislature by Gov. Brown imposes a uniform lower pension formula for new hires. Unions no longer will be able to bargain for higher pensions from the current CalPERS menu of a half dozen formulas.

Only about 30 states allow collective bargaining by public employees. And of these only a few have allowed bargaining for retirement benefits, among them Vermont and New Jersey.

The proposal in Antioch last week, a city of 102,000 on the east edge of San Francisco Bay, is one of the last shots in what some call a “bidding war” that raised pensions to meet or exceed benefits offered by other government employers.

Instead of being based on replacement income needed for an adequate retirement, critics say, pension amounts tended to result from a market-like competition with other government employers that “ratcheted up” benefits for no apparent reason.

Agreeing to provide a higher pension is a way for employers to increase worker compensation without immediately straining tight budgets, since most costs are delayed for decades.

Pension increases were aided when CalPERS sponsored a major retroactive pension increase for state workers, SB 400 in 1999. CalPERS erroneously told legislators the increased costs would be covered for a decade by a surplus and investment earnings.

When AB 616 in 2001 broadened the pension menu by adding three more formulas, CalPERS encouraged local governments to raise pensions by offering to actuarially inflate the value of their investment funds to help cover the increased cost.

Much of the criticism of SB 400 has focused on the big pension increase for the California Highway Patrol. The formula jumped from 2 percent of final pay for each year served at age 50 to 3 percent of final pay at age 50.

The “3 at 50” formula set a bargaining benchmark widely adopted for police and firefighters, a big part of local government budgets. The formula is often cited by critics who say “unsustainable” pension costs divert too much money from other programs.

(Although few start work that young, the formula allows those with 30 years of service at age 50 to retire with a pension providing 90 percent of final pay and inflation adjustments. Their life expectancy is a little longer than the 30 years spent on the job.)

The pension formulas set by the reform bill, AB 340, are for new hires. The pensions of current workers are regarded as “vested” rights, protected by contract law under court decisions, that can only be cut if offset by a comparable new benefit.

The top formula for new police and firefighters, “2.7 at 57,” is a significant cut from “3 at 50” and a little less generous than the formula used before SB 400 increased the pension amount, “2 at 50,” which escalated to 2.7 at age 55.

Antioch city council

Antioch city council

Here’s the issue that surfaced in Antioch:

Under the reform bill experienced new hires get the pension formula used on the job prior to the reform instead of “2.7 at 57,” if through a previous employer they already are members of CalPERS or one of the 20 county systems.

Antioch police agreed to a cost-cutting contract change Sept. 1 that gives new hires a pension formula of “3 at 55.” Now the proposal is to return to “3 at 50” before AB 340 takes effect Jan. 1 to give the city an edge in attracting experienced new hires.

Police Chief Allan Cantando is pushing the plan because Antioch, after years of deep staff cuts, is hiring again. He wants experienced “lateral” transfers ready to work the streets immediately and to guide and support new police academy graduates.

A survey of 15 area cities given to the city council last week showed five with “3 at 50” (Concord, El Cerrito, Richmond, San Pablo and Vallejo), eight with “3 at 55” (including Antioch neighbors Pittsburg and Brentwood) and two with “2 at 50.”

The Antioch proposal also would return the pension formula for non-safety or miscellaneous employees to “2.7 at 55,” up from a cut to “2 at 55” in 2007. A report to the council said this pension increase is needed to be “equitable and competitive.”

A motion of intent to raise the two pension formulas was approved last week on a 5-to-0 vote. The council expects a cost estimate from CalPERS tomorrow (Dec. 4) and, procedurally, would need a special meeting Dec. 26 or 27 to meet the Jan. 1 deadline.

Cantando said the police department may, with expected vacancies, hire 15 to 25 officers during the next 18 months. He said one officer has been hired since the lower “3 at 55” formula began Sept. 1.

The city reportedly has hired about eight miscellaneous employees since that formula was lowered five years ago. They would be retroactively vested in the higher “2.7 at 55” formula if it is adopted by the council later this month.

The argument for the pension increase is that it’s a “tool,” like a signing bonus or other incentives, that can be used in recruitment. Some council members suggested the increase may not be approved if the CalPERS cost estimate is too high.

A San Francisco television station said Antioch was going against the tide of cost-cutting reform on a “hot button” issue. A Contra Costa Times columnist, Daniel Borenstein, said the proposal is “wrongheaded” in a city with a large pension debt.

In an apparent reference to the columnist, outgoing councilman Brian Kalinowski said “unlike one of my good Sunday morning reads,” he thinks the “3 at 50” formula resulted from study showing officers working the street at age 57 is not good policy.

“I actually think when cooler heads prevail the state will come back and have something more reasonable in the arena for public safety,” said Kalinowski.

Borenstein’s report in 2009 that two Contra Costa fire chiefs retired at ages 50 and 51 with pensions far above their salaries (in one case $185,000 salary and $240,000 pension) sparked legislation to curb the improper boosting or “spiking” of pensions.

The spiking struggle continued last week when a superior court judge approved a stay sought by unions of a Contra Costa County Employees Retirement Association decision to comply with anti-spiking provisions in the new pension reform legislation.

On retirement, cash payments for unused vacation, holiday, administrative and sick time that can be added to the final salary used to calculate pensions are limited to the amount normally earned in a single year.

The unions contend that the single-year limit on “terminal pay” in AB 197, a companion to the main reform bill, AB 340, violates their vested rights and would reduce the pensions expected by members of the county system.

The stay means hundreds of Contra Costa County workers considering early retirement to avoid a pension cut may stay on the job after the new law takes effect Jan. 1, the Contra Costa Times reported.

The two other 1937 act county retirement systems with similar terminal pay policies, Alameda and Merced, are said to be complying with the new anti-spiking legislation.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 3 Dec 12


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