Why Redlands is preparing for an increase in pension contributions

June 24--REDLANDS -- Even as it's bracing for pension increases that will challenge the budget, the city expects to add to its payroll in the coming fiscal year.

When it approved the budget earlier this month, the Redlands City Council OK'd hiring eight additional full-time employees in 2017-18, though officials say all of the positions may not be filled. This is happening one year before increases in public employee pension contributions kick in for cities across the state.

It is still unknown how much more the city will have to pay, however. So, according to Mayor Paul Foster, officials are being cautious when it comes to bringing on new employees.

"It's a very complex issue for the city," he said. "People are saying, 'Why aren't you adding more police, fire and all these people now?' This is why. It adds to the liability and we're kind of wanting to wait and see where we're at before we get any deeper."

The California Public Employees Retirement System is lowering its expectations on investment returns, which means public agencies like Redlands will be faced with higher contribution costs in the near future.

In December, the CalPERS Board of Administration voted to lower its assumed rate of return from 7.5 percent to 7 percent over the next three years. For public agencies and schools, this begins July 1, 2018.

The reason for the change is to ensure the long-term sustainability of the fund, according to PERS officials.

"Unfortunately the state PERS board has always, historically, overestimated what their returns are going to be and it always falls upon the cities to make up a big portion of that gap," said Councilman Jon Harrison.

The rate reduction will result in an average employer rate increase of about 1 to 3 percent in annual costs for active members in miscellaneous retirement plans, and 2 to 5 percent increase for most safety plans, according to CalPERS.

Employers will also see a 30 to 40 percent increase in their current unfunded accrued liability payments, which is meant to help pay down unfunded liabilities over 20 years and bring the fund to fully funded status over the long term, according to CalPERS.

In response to a request for comment, Redlands city spokesman Carl Baker said in an email that city staff will not be prepared to discuss future CalPERS contribution rates for at least several weeks until they meet with CalPERS and have a chance to brief the City Council.

"My understanding is staff will be meeting with PERS representatives sometime during the course of this year and to go over exactly what these increases in PERS for our city mean," Foster said. "We don't know what the percentage will be at this juncture. We do know that there will be one coming and a couple of years of these higher rates ... and they will plateau and come down again."

Lowering expectations

CalPERS sent a letter to cities in January to inform them of the pending increases and laid out general guidelines for calculating broad estimates.

Earlier, CalPERS had surveyed agencies and determined lowering the rate incrementally over three years would allow agencies more time to plan.

"We've done a lot of outreach and communicated to them so it's not a surprise," said Amy Morgan, information officer with CalPERS.

Every year, CalPERS releases public agency actuarial valuation reports, which calculate the following year's contributions and forecast contributions several years out.

According to the latest reports, from August 2016, Redlands' total contribution is estimated to be $10.48 million in 2017-18.

The next report, due out this summer, will implement the new rate into projected contributions, which will give cities a better idea of how much they can expect to pay in 2018-19 and beyond.

Bracing for impact

Officials with the League of California Cities have been working to inform cities across the state of the impending increases, said Dane Hutchings, a lobbyist with the league.

The new rates will not begin to affect cities until fiscal year 2018-19, Hutchings said, with the full impact of the 7 percent rate hitting in fiscal year 2024-25.

"Between the years 2023 and 2025, that's when you're going to see rates quadruple and budgets are going to be completely strained," he said.

Because the contribution rates depend on CalPERS' investment returns, Foster said, a really good year could yield a lower contribution rate and a really bad year could cost the city more.

"It's not one of those things where the city has an option or the citizens have an option to not pay these pension costs," Foster said. "We have no choice. We have to, so we have to find a way to fund them."

So if pension costs are on the rise, why continue hiring more full-time employees?

The city's mission is to provide services for residents and businesses, Baker said, and those needs must be addressed through appropriate staffing levels.

"The priority in staffing changes over the past 10 years have been those that improve efficiencies, address safety of residents and staff, and those positions that generate revenue for the city," Baker said. "Personnel costs, including pension costs, are part of the budget process and we have consistently operated with a budget that is balanced on recurring revenues since 2007."

New hires

The addition of eight full-time employees would still leave the city below pre-recession staffing levels, Redlands officials say. Those workers would be hired to fill positions across the organization, Baker said, meaning their compensation would be funded by the city's general fund and enterprise funds.

The cost to bring on a new employee depends on several factors, said Human Resources Director Amy Martin, such as whether the employee is new and on the lower end of the salary or experienced and on the higher end.

Pension obligations have also changed since the implementation of the Public Employees' Pension Reform Act of 2013, which requires employees hired after Jan. 1, 2013 to pay at least half of their pension contribution rate. These employees are also on more modest benefit plans.

"It's actually a really great plan," said Hutchings, with the League of California Cities. "There's 50/50 cost sharing of contribution rates and the promised benefit is a little bit more realistic. Really, the faster we can get more (of these types of) employees hired the better."

Included in the eight positions in Redlands are two police officers who will be hired at midyear. Terms of their employment and benefits likely will be governed by the pension reform act, Martin said.

"We're being very cautious about how many full-time employees we do have," Foster added. "We have added police, because we felt that was very important."

Sharing costs

Currently, all full-time Redlands employees pay the full employee share of their pension costs.

Harrison said hiring part-time employees where it makes sense minimizes the city's obligation, but some positions require the continuity and skill set that only a full-time employee can offer.

"The good thing," Harrison said, "is new employees are under the revised pension structure. I think a big part of the problem is the number of employees, not only in Redlands, under the prior, very generous program put in place back around 1999 or so."

The city also continues to have unfilled positions on the books.

Whether positions are filled depends on the city departments' budgets, Martin said.

"Some of the positions that they have will not be able to be recruited right away if they don't have the budget to support it," she added. "At such point they believe they can support the salary, they can recruit for it."

When a position opens up, Martin said, city officials determine whether it needs to be filled.

"The direction given by the city manager for myself and the department directors, is to analyze every position that comes open and determine is this really one we need? Can we downgrade it? Does it need to change?" Martin said. "We are very cautious when we have turnover to make sure that positions needs to be filled."

Weighing options

As the city gains more information on its future pension obligations, officials will have to consider their options, Foster said.

"I don't want to talk about those until I know what the percentages are really looking like," Foster said. "I don't want to cry Chicken Little that the sky is falling, because I don't think it is. The city is in financially very sound shape."

The city is continuing to pay down a $25.8 million bond issued in 2007 to refund the city's obligation to PERS.

The bonds paid the unfunded liability at the time and lowered interest rates.

As of June 30, 2016, the city owed $17.29 million on the bond, according to the city's 2016 consolidated annual financial report. The estimated principal and interest on the bond is nearly $3 million for next fiscal year.

Harrison said another bond would not be an option for the city this time around.

"We don't want to take on that debt," Harrison said. "We need to figure out how to reduce expenses or find additional revenue streams."

Harrison said the city needs to be open to all possibilities and run them by the citizens for feedback.

Under a worst-case scenario, Harrison said, the city would have to cut city services to meet the pension obligation, "which would certainly be unfortunate and something the city would not want to do if any other options are available to us."

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