Here’s one I know you guys are going to love.
On Tuesday, the Oakland City Council’s Finance and Management Committee will receive an informational report on Oakland’s long term pension and other post-employment liabilities. The report will also list a number of options for reducing future obligations. Although no action will be taken on these options right now, if you feel strongly about pensions (and I know a lot of you do), it would be a good idea to go share your thoughts on this one, or at the very least e-mail or call the Committee members beforehand. The meeting starts at 11 (PDF), although the pension stuff is towards the end of the agenda.
The rest of the post is mostly just a summary of the staff report (PDF), so you guys can get an overview, but again, if this is a subject that interests you, I strongly suggest you read the whole thing (PDF).
What kind of post-employment benefits do we offer?
Well, there are a couple. First, there’s CalPERS. This is how we provide retirement benefits to current employees. CalPERS, or the California Public Employees Retirement System, provides retirement benefits for most (but not all – not everyone uses it) public employees in the State besides teachers. Mostly this blog will talk about CalPERS, but I just want to quickly mention the other ones.
We also have PFRS, the Police and Fire Retirement System (PDF). Before we joined CalPERS, we managed our own system, and it serves sworn employees hired before July 1976. I believe there is only one current employee in PFRS, everyone else is retired already or transferred to CalPERS. I’m sure it will not surprise you that we haven’t managed these obligations well. In 1997, we decided that we didn’t like having to pay every year into PFRS and issued bonds to cover the costs through July of 2011.
At that point, we have to start paying. How much, you ask? The most recent estimate of the unfunded PFRS liability is $435.3 million (PDF). That means that in July of 2011, which, in case you hadn’t noticed, is not very far off at all at this point, we’re going to have to cough up something in the neighborhood of $40 million a year (PDF). Where’s that money going to come from? Well, we’re probably (PDF) going to issue more bonds (PDF).
OMERS, the Oakland Municipal Employees’ Retirement System (PDF), is like PFRS in that it’s from before we joined CalPERS. It covers non-sworn employees we hired before 1970. Employees hired before that date and who kept working for the City had the option of transferring to CalPERS and most of them did. As of July 2009, there were only 50 people in the plan.
OMERS is unlike PFRS in that it’s almost completely funded. The most recent estimate of the OMERS unfunded liability is $518,000 (PDF).
Finally, there are retirement medical benefits. I am not going to get too much into this one right now just due to space concerns and cause it really should have its own post, but basically, Oakland pays for health insurance (up to a certain cost) for retirees. This is a huge unfunded liability, estimated currently to be in the neighborhood of $600 million.
If we were going to put aside money ahead of time to cover the cost of these future benefits, we would have spent $85.7 million last year. Instead we paid $12.5 million to cover the cost for current retirees. You can see the problem here.
The report lists a few options for reducing future liabilities – some sort of prefunding of benefits, instituting medical benefit cost sharing for current employees, and adopting a two tiered system where new employees would not be promised the same level of benefit.
What kind of retirement benefits do people get?
Sworn employees (police and fire) are eligible to retire at age 50, and to receive 3% of their highest annual salary for every year of service. A minimum of five years of service is required to receive this benefit. So, for example, if you retire at age 50 after 20 years of service, you will get 60% of your highest annual salary (PDF) as your pension.
Non-sworn employees have a plan called 2.7 percent at 55. You can probably figure it out yourself, but just in case – that means that if you retire at age 55, you get 2.7% of your highest year’s salary for every year of service. Again, you need to work five years to be eligible. So if you retire at age 55 after 20 years of service, you will get 54% of your highest annual salary (PDF) as your pension.
What does it all cost?
As you can image, providing these benefits is expensive. How expensive, you ask? The City’s CalPERS contribution cost last year was $74.5 million.
That’s based on a contribution rate of 27.877% for public safety employees and 19.588% for other employees. That percentage is set based on a combination of what your pension obligations are going to be and what your unfunded liability is.
Okay, I’ve rewritten that last sentence about a dozen times, and still don’t think I’m doing a very good job explaining it. I’m just going to let the report (PDF) explain it to you:
The contribution rates are comprised of the normal cost (i.e., the future annual premiums) and the amortization base cost which is determine by CalPERS to bring the system to 100% funded over 30 years. The amortization base cost is dependent on the unfunded liability of the City. The higher the unfunded liability the higher this rate will be to make the plan whole. For example, since the City has an unfunded liability of $254.7 million for the safety plan as of June 30, 2008, the City pays a contribution rate of 28.092% for fiscal year 2010-11. If the City pays that unfunded liability ($254.7M), then the contribution rate would only be 17.689% for fiscal year 2010-11. Beause the City has an unfunded liability of $254.7M, CalPERS charges 10.403% (amortization cost) in addition to the normal cost to bring the plan funding status to 100% over time.
So, the way we’re going, we can expect those contribution rates to keep rising – up to 33.7% for safety employees in 2016 and 26.5% for non-safety employees in 2016. And of course, payroll costs will rise during that same period.
How do we pay for it?
Well, the City’s CalPERS contributions are just part of the salary costs. So they come from whatever source of money is also funding the payroll.
Oakland workers also contribute to their pensions. The rate varies depending on what they do. This is called the “employee share.” The idea behind the employee share is not, as some people seem to think, that the employee necessarily pays it. The employee can, and there’s nothing wrong with that at all, but I just wanted to make it clear that it isn’t done that way everywhere. All it means is that the money paid into the employee share belongs to that specific employee rather than the City’s whole pension fund in general. So if you quit the City, you can decide you don’t want whatever pension you may have been eligible for, and take the money that was paid as employee share out of your account and roll it into your IRA or whatever.
CalPERS sets the employee share for civilian employees at 8% of pay, and for public safety employees at 9% of pay. In Oakland, civilian employees pay the full 8% employee share into their pension out of their paychecks. Police Officers contribute nothing, although they will start giving 2% in 2013. Firemen contribute the full 9% employee share, and then on top of that, also give another 4% of their paycheck to help cover the City’s portion of the costs.
What can we do about it?
The report includes a couple of options for reducing the cost of pension obligations.
Introduce a two-tiered retirement system: This would allow us to continue the current benefits for existing employees, but give a smaller benefit to new hires. That way, costs would decrease over time.
Change calculation of final compensation: Retirement benefits through CalPERS are based on the employee’s “final compensation.” Although this sounds like an obvious thing, it’s not. There is more than one way we can calculate final compensation. In Oakland, we calculate it as the total of your highest paid consecutive 12 months of work. You could make that number based on the average of the employee’s three highest years pay, and it would end up being a little lower in many cases.
Increase employer paid member contribution: Another option would be to just make employees pay more. The more workers give out of their paycheck, the less the City has to pay.
Pay all or part of unfunded liability: If we paid our whole unfunded liability of $537.3 million, then our annual percentage that we have to pay to CalPERS would be way lower. I don’t even know why this one was mentioned at all, since where would that money come from?
Discussion on Tuesday
Okay, so like I said before, this is an informational report. Nothing is going to happen at Tuesday’s meeting. But if you are concerned about the City’s refusal to deal with ever increasing post-employment liabilities, this is an excellent opportunity to voice those concerns.
Like I said before, the meeting starts at 11 on Tuesday (PDF). You can also contact the members of the Committee beforehand. Their contact information is as follows:
District 2 Councilmember Pat Kernighan:
E-mail: firstname.lastname@example.org, Phone: (510) 238-7002
District 3 Councilmember Nancy Nadel:
E-mail: email@example.com, Phone: (510) 238-7003
District 4 Councilmember Jean Quan:
E-mail: firstname.lastname@example.org, Phone: (510) 238-7004
District 5 Councilmember Ignacio De La Fuente:
E-mail: email@example.com, Phone: (510) 238-7005
If you do elect to go speak, or send your comments in advance, here are a few words of advice. Try to be reasonable. Read the report, make sure you understand the issues and the options, and try to ask for something that might actually happen. For example, there is no point to calling and saying the City should no longer use a defined benefit plan. You might think that, and it might be a reasonable position, but there is just no way that it’s going to happen. So don’t bother. Don’t go and say that all employees should take a 50% pay cut. That’s not going to happen either. And if you demand things that are completely outside the realm of possibility, you will just be dismissed as crazy and your effort will have been a waste of time. So try to keep it reasonable.
And if you can’t make it in person, you can always catch the action streaming online on KTOP.