Four cities tackle growing pension costs

March 09--Following the state's lead in 1999, several cities in Ventura County substantially increased pensions for public safety employees. In many cases, retirement incomes increased by 50 percent with a vote.

The change, known as "3 at 50," meant police would get 3 percent credit for each year they worked and could retire as early as age 50. A 30-year veteran would get 90 percent of their highest-earning year, a figure often boosted with supplements like uniform or housing allowances, vacation and sick payouts. Fire personnel could retire at age 55.

Before that, many contracts offered 2 percent credit per year. The 50 percent increase for many was retroactive, meaning the increased benefits went back to a person's start date. A salary of $150,000 -- roughly the median income for an officer in Port Hueneme -- turned a pension of $90,000 to $135,000.

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The California Public Employees' Pension Reform Act of 2013, PEPRA, sought to control ballooning pension costs and dismal market returns by requiring new hires to eventually contribute half of the normal share. It caps income at $140,424 for those who don't receive Social Security and prohibits increased benefits from being retroactive. The new formula allows a public safety member to retire at age 57 with 81 percent of their income (2.7 percent per year compared to 3 percent).

Those savings could take years to meaningfully materialize. Meanwhile, past decisions are now making their way into pension obligations in a huge way.

The city of Ventura paid the California Public Employees' Retirement System $5.6 million in unfunded liability for fire and police in 2014-15, according to the most recent actuarial report. Using CalPERs' conservative projections, that figure is expected to jump to $14.5 million in 2022-23.

That doesn't include normal, ongoing costs or retirement costs for miscellaneous (non-public safety) employees. A CalPERS annual payment includes normal cost, which is a percentage of total payroll; and unfunded accrued liability, the difference between what the plan owes retirees and the money available to pay them.

The unfunded accrued liability for Simi Valley's police will nearly triple during that same period, from $1.9 million in 2014-15 to $5.8 million in 2022-23, according to CalPERS. Those costs do not include fire because the city gets protection from Ventura County Fire, which is funded by a separate property tax.

Oxnard's financial woes have many sources. One of them is its generous retirement packages, which it extended to non-safety employees. In 2014-15, Oxnard paid CalPERS $9.7 million, a figure that is expected to climb to $30 million by 2022-23, CalPERS projects. That's on top of a property tax that offsets the costs of public pensions by millions of dollars, and it doesn't include what Oxnard pays into a quasi-private provider known as the Public Agency Retirement Services (PARS).

Here's a look at pension costs in four of Ventura County's cities:

VENTURA

In the next budget, which starts July 1, the city is expected to pay CalPERS just under $11 million in unfunded liability. CalPERS projects that to at least double five years later, to over $22 million. That doesn't include normal, ongoing costs.

That increase is just about equal to what a recently passed half-cent sales tax is expected to generate. The City Council supported the tax to pay for infrastructure, public safety, homeless services, water quality and other priorities.

Taxpayer and watchdog groups accuse city leaders of passing the tax knowing it would be needed to offset growing retirement costs.

David Grau, of the Ventura County Taxpayers Association, opposed the sales tax during a failed bid to join the council last year. He said he was well aware of the looming and significant pension increases and if City Council members weren't, they should have been.

Without the new sales tax, pension costs would have crowded out city services, he said.

"What we thought we were going to get in [enhanced] services isn't going to happen because the pension costs are almost dollar per dollar going to eat up the sales tax," Grau said.

City Finance Director Gilbert Garcia said the general fund will be balanced without the sales tax money, which is being accounted for separately and overseen by a soon-to-be created citizen oversight board. "Measure O will not be characterized as used by those groups," he said.

Another watchdog group, Venturans for Responsible and Efficient Government, has made similar claims.

Garcia estimates 20-25 percent of city employees are already covered by PEPRA, which will reduce costs in the long term.

Council member Mike Tracy said the sales tax was needed to enhance the services the city already provides.

"Our intent on how we spend those dollars hasn't changed. We made promises, and to the extent we can, that's how we'll spend it," he said. "There was no behind-the-scenes manipulation, no dishonesty."

The city has been working on pension costs, Tracy said, noting that the city offers no retirement health benefits. That can add significantly to a city's retirement burden.

There have also been trade-offs, with the city offering cash payouts for health insurance instead of income that counts toward pensions. For example, the most recent fire contract raised health contributions from $191 for a family to $1,006 per month. On top of that, fire personnel get an "optional benefit" of $513. None of that income counts toward their pension, city officials said then.

In recent years, the city increased the amount employees pay toward their retirements, but at the same time gave a pay raise to cover those initial costs. Several cities did the same.

Tracy said that's because, in years past, employee groups negotiated a lower pay increase in exchange for the city picking up pension costs.

Tracy retired as police chief in 2004 after 30 years in the city's police department. His final year, he earned a base salary of $147,000, according to the Los Angeles Times. The addition of non-salaried benefits such as car allowance boosted his pensionable income significantly, and he now collects the city's highest pension. Currently, he gets roughly $18,000 per month, or just over $216,000 per year.

Tracy said he received no special arrangement.

"I had a contract with the city. I served as a police office for 30 years, retired and got a pension at the terms that were dictated," he said.

PEPRA, applied to those hired after Jan. 1, 2013, sought to address what's known as pension "spiking" and began requiring an average of the three highest-earning years be used to calculate a final pension, rather than the highest single earning year.

CalPERS' board interpreted PEPRA to mean around 100 extra items can continue to be tacked on to boost base pay, and many cities have adopted similar terms into their contracts with employee groups. Those include extra pay for language skills, educational incentives, working weekend and night shifts and working directly with the public at libraries and jails.

PORT HUENEME

In recent years, the small city by the sea has seen significant turnover in all of its top positions, including six city managers in four years. The cash-strapped city ran a deficit in seven of the 10 budget cycles from 2006 to 2015, using $5.7 million in reserves to make up the difference, according to city documents from a recent budget workshop.

Port Hueneme also offers generous retirement benefits and the city's highest police officer pay on average, according to the state controller's office.

Non-public safety employees pay nothing toward their retirement, according to city officials. Public safety employees contribute 6 percent to the employer portion of the equation. That matters because that's added to what is considered pensionable income. Employee side contributions, conversely, are not.

Meanwhile, Port Hueneme's pension costs are exploding. Its unfunded accrued liability payment of $1.3 million to CalPERS in 2017-18 will be $3.2 million in 2022-23. It was $774,000 in fiscal year 2014-15, according to CalPERS actuarial reports.

To reduce the burden, officials have worked to reduce health costs for retirees, said City Manager Rod Butler, who joined the city in November.

Also, the city recently stopped offering Social Security benefits and for years employees haven't received a pay raise outside of increases called for in contracts tied to years of service (step increases), Deputy City Manager Carmen Nichols said.

In December 2015, the city voted to stop paying the management group's Social Security taxes and eliminated a $1,200 annual "management benefit" but it added a half-day paid holiday. In all, the changes saved the city $40,000.

Butler said that in the spring or summer, the city plans to hire an actuarial to analyze the current and future PERS picture.

"Every dollar that we have to spend on PERS employer contributions is a dollar less than we can spend on police service, fire service, parks, street maintenance, some of those bread and butter services that are paid from our general fund," Butler said.

To help the city's overall financial health, Butler said the city will explore three options: reducing costs, including retirement-related costs; a voter-approved revenue measure; and working to generate economic development that includes drawing in new business.

SANTA PAULA

In November, voters approved a 1-cent sales tax touted by the council as a way to fund police and fire services, along with street repairs, youth services and "other city services."

The city will spend just under $1.4 million to pay down pension debt in 2017-18, which will rise to $2.5 million by 2022-23, actuarial reports show.

Santa Paula has been relatively conservative with its benefits, implementing a lower formula for those hired after 2006 and requiring non-public safety employees to contribute the bulk of the employee side of their payment.

But the police union pays nothing, while fire picks up 2 percent of the employer side.

City Finance Director Sandra Easley said the city is aware of the growing costs. The city is looking to cut costs by disbanding its fire department and joining the Ventura County Fire Protection District.

It's not clear that move will save the city any money -- it will cost nearly 80 percent of all current and future property taxes.

The city also recently approved new citywide fees on residents and businesses to better reflect the cost of service, Easley said. The last fee study was done in 1999, she said.

The fees include the increased costs of salaries and benefits.

Additionally, Easley pointed to the just-approved sales tax, which is expected to generate $2.2 million per year. She also noted that 30 of the city's employees are now covered under PEPRA.

Last year, a consultant cautioned that the city has low reserves and is ill-prepared for future recessions. Nonetheless, the city is currently engaged in a survey to see if it needs to substantially raise salaries.

OXNARD

In 2003, Oxnard added a "3 at 60" plan for non-public safety employees and management, which retroactively boosted their pensions by 33 percent.

Then-City Manager Ed Sotelo, who implemented various retirement perks throughout his tenure, recommended approval of the benefit for himself and around 450 others.

"We are in good, sound financial health. In no way does this create a financial impact that will hurt services to our residents," Sotelo said at the time, according to the Times.

The council approved it knowing the state faced a $35 billion budget shortfall. Sotelo and others could now get up to 90 percent of their income after working 30 years, compared to 68 percent.

The city has been using a private system, Public Agency Retirement Services (PARS), to manage the extra benefit. According to the 2015-16 Comprehensive Annual Financial Report, that account today is 61 percent funded, or $34 million short of what it owes.

The PARS plan paid roughly $2.6 million out in benefits during 2014-15 and $2.9 million in 2015-16. It paid PARS roughly $72,000 in fees, Assistant City Manager Jesus Nava said.

According to the report, the figures assumes an increase in investment assumptions from 6.5 percent to 6.75 percent. That's despite its investments taking a nosedive from $6.8 million in 2014-15 to $2.1 million in 2015-16 -- a 69 percent drop.

Nava wrote in an email that the discount rate was increased "to reflect the cost of managing the PARS plan investments which are paid from the plan's investment earnings."

Since Oxnard opened its plan with PARS, the fund has averaged a return of 6.71 percent. In the last year, it was 3.09 percent, Nava said.

Taxpayers pay for public safety pensions through property taxes too, through what's known as the Carman Override. But the city was violating state law by using too much of it, which meant Oxnard had to come up with $5.5 million more in fiscal year 2014-15, according to city budget documents.

"CalPERS costs were already the fastest growing item in our budget, so this radical reduction in Carman Tax revenue only compounds the problem," City Manager Greg Nyhoff wrote in the following year's budget letter.

That's one reason Oxnard borrowed $16 million from a 2008 sales tax designed to enhance public safety. Without that, Mayor Tim Flynn said, the city would likely have faced massive layoffs. The city paid part of that back last year.

On the CalPERS side of things, the city's debt is expected to climb from $14.5 million in 2017-18 to $31.2 million in five years.

All of that is on top of normal, ongoing costs to both systems.

To Flynn, the unfunded liability "really does present in fact the most pressing fiscal challenge for every municipality, not just Oxnard. This looming issue of unfunded liability is the most serious and long-term fiscal problem."

Oxnard's financial challenges related to pensions aren't unique, he said, and neither is the resistance to talking about the issue. Flynn said the council needed to set policy on pensions, and not during contract negotiations with employee groups.

"The thing that's particularly disturbing is being branded as either anti-worker or anti-public safety...No public official wants to be labeled as against fire or police," he said.

Glossary

Unfunded accrued liability: What a city owes in already-promised retirement benefits.

Funded ratio: How much a plan has versus what it owes. A plan that's 80 percent funded, for example, could pay 80 cents on the $1 of a retirement benefit of all plan members.

Pensionable income: The number used to determine income. It includes around 100 items including extra pay for language, working the overnight shift, travel pay and overtime pay.

Normal employer costs: Ongoing pension costs, determined as a percentage of an entity's total payroll.

CalPERS: The California Public Employees' Retirement System.

PARS: Public Agency Retirement Services, a privately run company that manages supplemental retirement benefits.

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