City pension second tiers taking affect

Officials say changes in benefits are a good start, still may look to do more
The city of Healdsburg is in the midst of its pension reform plans, with second tiers of retirement benefits taking effect for new employees.
Under new agreements effective Oct. 1 for public safety employees and Nov. 5 for all other city employees, anyone hired to work for the city will sign on with a reduced benefit package.
The changes come after the city negotiated with employee groups this summer, which aside from the second tier, also resulted in current employees paying more for their plans.
City officials say they have made great strides by adding the second tier, even though the gains made from the new tiered plans won’t be realized until new employees are hired on.
“Both of the second tiers are the lowest pension formulas that PERS currently offers,” said City Manager Marjie Pettus.
Under CalPERS, the California Public Employees’ Retirement System, employees are split into two groups — public safety and miscellaneous. The retirement formulas offered to the two groups are different, and under state law, cities can only lower retirement benefits to the lowest rates CalPERS offers.
In the second tier of benefits that Healdsburg is implementing for new hires, public safety employees receive 2 percent at 55 and miscellaneous employees will receive 2 percent at 60. In comparison, current public safety employees receive 3 percent at 50 and miscellaneous employees receive 2.5 percent at 55.
The percentages refer to the amount of salary per year the employee will receive if he or she retires at the specified age.
For example, under the new second tier, if a firefighter works for 30 years and retires at the age of 55, he will receive 2 percent of his salary (averaged over the last three years of service) for every year, which would be 60 percent.
Under the formula used for current employees, that same firefighter could retire at the age of 50, and if he had worked 30 years, would earn 90 percent of his single highest salary year in retirement.
Those differences, some say, could lead to discord among employees doing the same job, but receiving very different benefits.
“The concern we heard was that we’re not going to be able to get good recruits — that other jurisdictions that have gone with the second tier, kept the 3 percent (formula),” Pettus said. “Time will tell. We may get young officers right out of the police academy who use Healdsburg as a stepping stone to get their years and move onto other jurisdictions.”
Under the second tier, all employees’ formulas are based on an average of the last three years of service, rather than their highest year. This also helps prevent what is known as “spiking,” where individuals cash out vacation, sick leave and other non-salary payments during their final year of work to increase the pay that the retirement formula is based on.
In Healdsburg, spiking was already precluded by city ordinance, but state law now requires the three year average formula as well.
Healdsburg city councilmember Jim Wood said the changes the city has made for future employee pensions is more than what many jurisdictions have done.
“We went as low as we were legally allowed to go for the second tier,” Wood said. “We can’t do anything with existing pensions. That’s what we are getting criticized for and I don’t think that’s justified. Until there’s a change in Sacramento that allows us to change existing pension benefits, we can’t do anything. Once an employee is given a specific pension level, you can’t take it away, you can’t go backwards.”
Pettus said in the future, there may be other changes the city can make for future employees that excludes salary enhancements from being considered in the pension formula, but something like that would have to be negotiated with the four bargaining units. Other options could include requiring employees to pay their share and part of the employers (city’s) share.
Healdsburg employees agreed to concessions that included paying the employee share of the retirement package. Up until recently, the city was paying both the employer and employee share for some employee groups.
Now, Pettus said, “100 percent of employees are paying their share.”
The city’s total PERS budget for fiscal year 2013 is $1,643,487. Of that, $610,412 is for safety and  $1,033,075 for miscellaneous employees.
Included in the payments to CalPERS was a side fund of unfunded liability that the city owed to CalPERS when the system changed the way it formulated rates for cities based on regions. Last month, Healdsburg refinanced that side fund and will save over $980,000 by paying a smaller interest rate over the last 10 years of debt.
“We’re saving on two fronts going forward,” Pettus said. She said though it may seem hard to understand, the city did not issue bonds on future unfunded liability, but instead on money already owed to CalPERS that was being rolled into the PERS rates.
Pettus said the strides the city has been able to make is a testament to the willingness of employees to make significant changes.
“They didn’t have to come and talk to us, and they did, and they’re giving up a lot,” Pettus said. “We’re a small city and our employees are committed to the work they do and are willing to work with the city to manage personnel costs