The city might need to shell out nearly $30 million during the
next 30 years to make up for losses to its employee retirement
accounts because of the stock market meltdown, according to a San
Mateo actuary.
The city might need to shell out nearly $30 million during the next 30 years to make up for losses to its employee retirement accounts because of the stock market meltdown, according to a San Mateo actuary.
Each year, the City of Gilroy makes contributions for its employees to the California Public Employees’ Retirement System, which holds and invests the money. However, CalPERS’ investment portfolio took a massive dive in 2008, dropping from $253 billion at the end of 2007 to $183.3 billion one year later. While it climbed back to $203.3 billion by the end of 2009, many cities, including Gilroy, were left facing a gap between the amount of money the city promised it would pay its employees in retirement benefits and the amount the city actually had in its CalPERS account.
It is unclear how much money the city will have to pay and how long it will take to pay off the debt, as much depends on future investment returns. However, one thing is clear, most City Council members want to tackle the matter sooner rather than later.
“We’re lying to ourselves, if we think, ‘oh well, we don’t have any cost right now,'” Councilman Craig Gartman said this week.
The city eventually will have to make up the $30-million gap through increased contribution rates from either employees or the city, according to the report by actuary John Bartel.
Close to 16 percent of the base salary of most city staff members will likely go toward retirement by 2015, according to Bartel’s report. Meanwhile, the City of Gilroy will likely pay close to 30 percent of police and firefighters’ salaries for their retirement, the report estimated.
Under the current system, non-emergency personnel pay their own contributions to their retirement accounts out of their salaries. By contrast, the city pays contributions for public safety employees.
The council considered a policy statement Monday night by the Santa Clara and San Mateo county/cities managers’ associations that advocated moving toward a two-tiered system, in which current employees retain their negotiated level of retirement benefits, but new employees get a lower retirement package.
During a regular meeting Jan. 25, the council discussed the problem and heard from Bartel. Bartel’s report indicated that CalPERS does not plan to boost rates substantially until 2013-14. Even then, they will not be as high as they would be if CalPERS had not smoothed them over. Still, council members wanted to begin taking care of the debt sooner rather than later.
“I think that we need to deal with it right away,” Councilman Perry Woodward said. “It’s time to start.”
Bartel said Gilroy is actually doing better than other cities and counties he serves because of a 2007 reamortization agreement with CalPERS.
“If you only look at their pension plan, they’re certainly in better shape than my other clients,” he said.
The City of Gilroy paid about $5.6 million in CalPERS retirement costs in 2008-09, according to City Finance Director Christina Turner. Total retirement contribution costs in 2009-10 are expected to be $5.1 million, she said.
That figure has dropped because of the layoffs that occurred this past year, City Administrator Tom Haglund said.
Bartel’s actuarial report assumes that the pension plan will have an investment return of 7.75 percent for the next 15 years. However, not everyone is convinced that will be the case.
“It sounds like the kind of deal conceived on LSD,” Councilman Bob Dillon said.
City Administrator Tom Haglund and Bartel both noted that investment returns for CalPERS vary.
“One of the things that you have to recognize is that these actuarial reports are a point in time,” Haglund said. “There aren’t absolutes that can be drawn from this.”
At the same time, Bartel noted that the losses that CalPERS suffered in 2008 are striking.
Like many cities throughout the state during the past decade, the City of Gilroy passed contracts with its workers during CalPERS’ boom years, allowing employees to receive as much as 90 percent of their income per year upon retirement.
The 3-at-50 plan approved for police officers allows them to retire at age 50 and guarantees that they will receive an annual amount equal to 3 percent of their highest salary multiplied by the number of years they worked, up to 30 years. For instance, an officer who retired after 30 years on the job with a top salary of $100,000 would receive $90,000 per year.
Similar to police officers, firefighters have a 3-at-55 plan and other city employees have a 2.5-at-55 plan.
Previous city councils approved such plans with promises from CalPERS that the city would not have to pay more than it is paying now, Gartman said. However, that was in the days when CalPERS investment returns were far better shape.
Given the current situation, Gartman advocated that city workers have the same benefits as most taxpayers.
“The days of golden parachutes for city employees, I think, should be over,” he said.
The report estimated that about 15.5 percent of non-public safety workers’ salaries most likely would go toward their pensions in fiscal year 2013-14, up from 14 percent in 2012-13. That figure would be 14.3 percent in a best-case scenario and 17.3 percent in a worst-case scenario.
The city’s financial load is also burgeoning because the ratio of retirees to active employees is increasing. In 2008, 130 non-public safety employees were receiving retirement benefits compared with 178 active employees. By contrast, only 94 people received benefits in 1998 while the city had 141 active employees. Like the national social security plan, the city’s retirement plan relies on active employees to help fund retired employee’s benefits.
As a result of these challenges, city leaders are considering implementing a “two-tiered” system. Such an agreement is important because the city needs to offer benefits that are competitive but still affordable, Woodward said Monday.
“We’ve got to find a way to provide police and fire service in addition to the other services without going broke,” he said.
Haglund envisioned a two-tier system that still would use CalPERS but just would have decreased retirement plans. However, both Dillon and Gartman said before Monday’s meeting that the city should stop using CalPERS for the city’s pension plans.
Gartman advocated providing 401K plan options for city employees, while Dillon said he thought that city employees should be allowed to choose a retirement plan.
Not everyone is a fan of making such changes.
Gary Muraoka, president of the American Federation of State, County and Municipal Employees for the City of Gilroy, noted during Monday’s council meeting that retirement plans for public safety employees cost far more than they do for other city employees, which his union represents. He also cited informational material from CalPERS that states that CalPERS investment losses have created bigger financial problems for cities than increased pension formulas. Muraoka told the council that he did not want AFSCME members to have to face pension cuts when the union’s retirees already receive less than half the amount of Gilroy’s firefighters and police officers.
“If you need to fix something, do what you have to do,” Muraoka said. “We’re not the problem.”
While several council members noted this week that a two-tiered plan would not have an immediate impact because all current employees would retire with CalPERS pensions, they said it would benefit the city in the long run. The council needs to start solving the problem now, council members said.
“When you’re traveling 100 mph down the road, you’re not going to stop automatically by putting the foot on the brake,” Gartman said.
