Some cities outsource their highest pension costs

April 2, 2018

Dozens of cities, many of them formed in recent decades, do not directly pay police and firefighter pension rates. They get their safety services though contracts with county sheriff departments and large fire districts.

An example is Lake Forest, a community in Orange County formerly known as El Toro, which incorporated in 1991 and had a population of 77,264 in the last census. It’s one of the 14 cities listed by CalPERS as having a fully funded pension plan.

The CalPERS employer contribution for Lake Forest’s non-safety or “miscellaneous” employees is not a heavy lift — 10.4 percent of pay for most employees next fiscal year and 7 percent of pay for employees hired after a cost-cutting state reform on Jan. 1, 2013.

Cities pay their highest pension rates for police and firefighters, who have a generous pension formula to allow early retirement from dangerous and physically demanding work, usually without Social Security.

For Lake Forest, the police and firefighter pension costs are included in the contract payments to the Orange County Sheriff’s Department and the Orange County Fire Authority, both members of the Orange County Employees Retirement System.

A recent OCERS actuarial valuation shows an employer rate for law enforcement of 62.8 percent of pay and a fire authority rate of 47.8 percent. For employees hired after the reform, the law enforcement rate is 16.4 percent and the fire rate 15.4 percent.

When cities band together, their pooled resources can provide equipment, facilities, training and services that a city can’t afford on its own. Some of the most expensive equipment, helicopters, made news this year because of an Orange County turf war.

“The Sheriff’s Department and the fire authority have regularly clashed, with helicopters from both agencies racing to rescue scenes on dozens of calls, at times arguing over radio and face-to-face after flying in the same airspace,” the Orange County Register reported in January.

The 13 cities that contract with the Sheriff’s Department hired a consultant late last year to study helicopters and other growing costs for police services. Matrix Consulting Group of Mountain View is being paid $269,500 to find possible cost savings for a report expected this summer.

“Over the last ten fiscal years, costs charged by the Sheriff have increased by 33 percent, with approximately 26 percent of the increase occurring in the last five years,” said a memorandum of understanding approved by the cities.

“The parties have concluded, based on facts, that the cost of the Sheriff’s Agreement is becoming a greater percentage of the Parties General Fund budgets and threatens the provision of other vital municipal services,” said the memorandum.

Because they are contract cities, the memorandum said, most cost changes are not under their control. Instead, control lies with the board of supervisors, the sheriff, OCERS, and other county agencies such as the auditor controller and risk management.

The “scope of work” for the study said: “The primary driver of increased costs over time has been increases in salaries and benefits.” Pay and pensions, part of what the contract cities do not control, are not listed in the scope of work, beyond ensuring use of post-reform rates.

Retirement costs, about 25 percent of the total contract cost for the 13 cities, have been increasing at the rate of about 5 to 10 percent a year during the last several years, said Carrie Braun, Sheriff’s Department spokeswoman.

The total retirement cost for all 13 cities is $38.2 million in fiscal 2018-19, up $2.5 million from the previous fiscal year, Braun said. The sheriff and the county executive staff support the study being done for the 13 cities.

The lead city manager for the study, Dennis Wilberg of Mission Viejo, said the contract cities already have the lowest per capita costs for police services in the county, the Register reported last November.

The Orange County Fire Authority, which serves 23 cities, faces the threat that Irvine will withdraw from the authority by a deadline of June 30, leaving a big hole in the authority’s service area and budget.

“Rapidly accelerating property values and major growth in the City of Irvine have resulted in significant inequity between Irvine’s financial contributions to OCFA compared to the value of services received,” an Orange County Grand Jury report said last month.

The fire authority is a joint powers agreement, controlled by its own board, that gets about 60 percent of its funding from the property taxes of 15 cities and the county. More funding comes from eight “cash contract cities” that pay through negotiated contracts.

Irvine has high property values and, unlike some cities, is not “built out” and has more room to grow. If Irvine leaves, said the grand jury, OCFA would lose funding, fire stations, and equipment, while Irvine would assume responsibility for fire services and possibly some of the authority’s pension debt.

The grand jury recommended that “the City of Irvine, OCFA and the County of Orange immediately commence joint discussions to reach an interim agreement addressing Irvine’s inequity issue.”

Meanwhile, the fire authority’s required retirement payments have dropped recently, apparently in part because it was an early adopter of making extra payments to reduce pension debt. (see chart provided by Capt. Marc Stone)

The policy got a boost last year when Gov. Brown made an extra $6 billion to CalPERS to pay down state worker pension debt. Some think the governor’s decision was sparked by a joint presentation to a CalPERS educational forum by a Newport Beach official and a CalPERS actuary.

The fire authority adopted its strategy to speed up pension debt payment in 2013, then revised what became know as the “snowball plan” in 2015, said the fire authority annual financial report for fiscal 2015-16.

The aggressive plan uses leftover funds at the end of the fiscal year averaging $3 million a year, savings from post-reform hires, budgeting $1 million beginning in fiscal 2016-17 that increases $2 million each year until reaching $15 million a year, and $1 million annually for five years from surplus workers’ compensation funds.

“OCFA has been making additional payments toward its UAAL (pension debt) annually since Fiscal Year 2013/14, with additional payments made during Fiscal Year 2015/16 totaling $15.5 milllion,” said the fire authority annual report.

“A recent estimate received from the OCERS actuary indicated that accelerated payments have shortened the timeline to pay down the UAAL from an original twenty-nine years to twelve years.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 2 Apr 18


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