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MINUTES - 03152005 - U.1
»' &2DJ .' CY M TO: BOARD OF SUPERVISORS CONTRA COSTA FROM: John Sweeten,County Administrator COUNTY DATE: March 15,2005 SUBJECT: Public Pension Reform Proposals r SPECIFIC REQUEST(S)OR RECOMMENDATION(S)& BACKGROUND AND JUSTIFICATION RECOMMENDATIONCS�: 1. CONSIDER adopting a position on CSAC's proposed Guiding Principles for 2005-06 Pension Reform. 2. CONSIDER adopting a position on the CSAC drag policy document on Industrial Disability Retirement. 3. PROVIDE direction to the County's representatives to CSAC and the Urban Counties Caucus regarding the County's concerns, issues and positions on pension reform and industrial disability reform when they are discussed at upcoming meetings of the CSAC and Urban Counties Caucus Boards of Directors. BACKGROUND/REASON(S)FOR RECOMMENDATIflNf S): On Friday, March 11, 2005, County staff was alerted to the possibility that action may be considered by the Boards of Directors of CSAC and/or the Urban Counties Caucus on pension reform and industrial disability reform issues, including but not limited to the CSAC draft guiding principles, as well as ACA 5 and ACA 1 X (Richman). Board consideration of these matters would put the County's representatives to CSAC and the Urban Counties Caucus in a position to participate in the discussion of th se very critical issues. CONTINUED ON ATTACHMENT: YES SIGNATURE: RECOMMENDATION OF COUNTY ADMMTRATOR RECOMMENEIATNMOF OMMITTEE APPROVE OTHER SIGNATURE(S): ACTION OF BOARD ON APPROVED AS RECOMMENDED OTHER VOTE OF SUPERVISORS I HEREBY CERTIFY THAT THIS IS A UNANIMOUS(ABSENT �� � ) TRUE AND CORRECT COPY OF AN A ES: NOES: ACTION TAKEN AND ENTERED ABSENT: RBSTAIN: ON MINUTES OF THE BOARD OF SUPERVISORS ON THE DATE SHOWN. Contact: Sara Hoffinan,331-1090 ATTESTED <00 cc: CAON WEETEN,CLERK OF Nielsen Merksamer Evia CAO) THE BOARD OF SUPERVISORS AND COUNTY ADMINISTRATOR BY, DEPUTY BACKGROUND/REASON(S)FOR RECOMMENDATIONS(cont'd): Due to a variety of factors—market performance, benefit enhancements and demographic changes—pension system costs nationwide have increased dramatically in a very short period of time. These cost increases, along with relatively high benefit levels and relatively early retirement ages, have generated a high level of interest on the part of the public. A number of California officials attribute the problem to the dynamics of defined benefit pension systems, and have proposed mandatory conversion to defined contribution plans for new employees hired beginning July 1, 2007. CSAC has taken a di'er+ent approach, seeking instead to identify the specific elements of existing defined benefit plans that have contributed most to recent cost increases, cost volatility and the perception of abuse. Pension system financing is extremely complicated. Initiative measures are particularly ill-suited for dealing well with complicated subjects. A legislative approach to reforming pension systems, for that reason, is likely to _ produce a more well-reasoned result that is less prone to unintended consequences that could be very expensive for the public and have negative consequences for public agencies. Unless the Legislature begins to engage over this topic, the chances of an initiative"solution" increase. It is in the interest of all stakeholders--public agencies, public employees and the public at large—to create a forum in which reasonable proposals and their implications can be considered. CSAC Draft Guiding Principles for 2005-06 Pension Reform The attached Draft Guiding Principles were developed initially by a technical committee comprised of county administrative officers, as well as representatives of the State Association of County Retirement Officers, the State Treasurer's Association and the State Association of Human Resources Administrators. The Committee was assisted by Ira Summer, a pension financing consultant. Guiding principles include: ➢ Protect local control and flexibility ➢ Eliminate abuse Reduce and contain costs ➢ Increase predictability of cost and benefits for employee and employer ➢ Strengthen local controls to develop plans with equitable sharing of costs and risks between employee and employer ➢ Increase pension system accountability In addition, the draft includes specific reform proposals that would promote the principles in the document. Industrial Disability Retirement Industrial disability retirement is considered an adjunct to pension reform under the CSAC guiding principles. The attached document outlines possible reforms consistent with CSAC's traditional position of supporting industrial disability retirement for safety employees who are unable to continue their safety employment due to a bona fide job-connected disabling injury or illness. ACA 5 and ACA 1X ACA 5 and ACA I X are constitutional amendments introduced by Assemblymember Keith Richman that would require all public employees hired after July 1, 2007 be enrolled in defined contribution retirementp lans. According to C SAC, these proposals would lead to initial cost increases and uncertain future cost savings and could negatively impact recruitment, retention and employee-employer relations. Other Pension Reform Legislation In addition to Assemblymember Richman's bills, there are 19 other legislative proposals which address pension issues. An overview of these bills is included in the CSAC materials attached. ADDENDUM TO URGENCY ITEM NO. I March 15, 2005 Supervisor Mary N. Piepho Absent Mr. Sweeten presented staffs report on this item,citing such factors as market losses, benefit increases, and demographic changes,all of which have combined in the last few years to produce dramatic increases in public pension costs all over the United States.He noted that CSAC's approach is to seek to identify the problems within the existing and long-standing defined benefit plan. He expressed that,concurrent with CSAC's position, it is in the interest of all stakeholders to create a forum in which reasonable proposals and their implications can be considered. He said that CSAC has created a set of guidelines aimed at reducing the cost of pension systems,reducing the volatility in the cost, and reducing the perception of abuse,while providing greater accountability for the management of pension funds. He respectfully suggested that the Board consider endorsing the CSAC package in concept recognizing that the purpose of the document is to bring interested parties to the table for discussion. Supervisor Gioia proposed the Board open the door to discussions for meaningful and significant pension reform within the context of the defined benefit plan. Supervisor DeSaulnier suggested the Board be open-minded,and mindful of protecting working people, and said that people in the public sector and their retirement need to be respected. Supervisor Glover said it is important to have all stakeholders at the table for a discussion of these issues, and that support of this item would allow those discussions to happen. The public was invited to address the Board. The following persons provided testimony: 0 Rollie Katz,Public Employees Union Local One. The Board of Supervisors took the following action by a unanimous 4-0 decision: ADOPTED a position of conceptual approval of CSAC's proposed Guiding Principles for 2005-06 Pension Reform,ADOPTED a position of conceptual approval on the CSAC draft policy document on Industrial Disability Retirement,and PROVIDED direction to the County's representatives to CSAC and the Urban Counties Caucus regarding the County's concerns, issues,and positions on pension reform and industrial disability reform for discussion at upcoming meetings of the CSAC and Urban Counties Caucus Board of Directors. March 1,2005 To: Supervisor Kathy Long, Chair, and Members, CSAC Government Finance&Operations Policy Committee From: Steve Keil, CSAC Legislative Coordinator Jean Kinney Hurst, CSAC Legislative Representative Re: Pension Reform Principles and Proposals-ACTION ITEM Pension Reform4ltelated Legislation- INFORMATION ONLY The Government Finance and Operations Policy Committee is requested to approve the draft CSAC Guiding Principles and Proposals., and adopt positions on pension reform-related bills at its March 16,2005 meeting. Following are the recommended actions: Guiding PriWelples, and Proposals on Pension Reform Recommended Actions Recommend Adoption to CSAC Board of Directors Staff recommends that your Committee adopt the attached draft reform principles and proposals and refer them to the Board of Directors for adoption at their March 17 meeting. This document is in response to policy, cost, and public confidence concerns regarding public pensions and is designed to provide CSAC with a flexible platform to seek allies for legislative solutions to issues impacting public pensions. Staff further recommends that the CSAC staff be provided flexibility, under direction of the GF&O Committee,to modify portions of the CSAC reform principles and proposals in an effort to build coalitions to seek legislative reform. The draft document recognizes that public pension plans are in need of reform; however, it recognizes that the complexity of issues impacting public pension plans Will not be well served by"one-size-fits-all" solutions. The draft reform principles and proposals are the product of considerable discussion. Following direction from the November 2004 GF&O meeting and the November 2004 Board of Directors meeting, CSAC staff engaged in four meetings with a technical advisory group to study problems and solutions regarding issues facing public pension plans,to identify Guiding Principles for CSAC reform efforts, and to also develop a flexible menu of reform actions to address problems facing our pension plans. The work of the technical advisory group was reported to the Executive Committee at its January 14, 2005 meeting,and the resulting proposal was reviewed by the GF&O Committee by telephone conference call meeting on January 27,2005, prior to submission to the Board of Directors at its meeting on February 3,2005. At this meeting,the Board also heard presentations from Assembly Member Keith Richman,who has authored constitutional amendment proposals to close existing defined benefit plans and require future employees to enter defined contribution plans,and from Christy Bourna of the California Professional Firefighters Association and representing a coalition in opposition to the Richman proposal. Changes directed by the Board of Directors have been included in the attached draft,in addition to proposed amendments from GF&O Committee members and technical advisory committee members. CSAC staff has informed representatives of the Legislature,Administration, and other interest groups of our efforts. Pension-Related Legislation The following list outlines the variety of pension-related legislation introduced as of this date. GF&O Will continue to monitor these measures as they evolve during the legislative process and recommend positions to the CSAC Board of Directors at the appropriate time. + ACA 5(Richman),and ACA 1X(Richman):Each would mandate closure of current public sector defined benefit retirement plans and mandate employees hired after 7-1-07 to be enrolled In defined contribution retirement plans. These proposals would lead to initial cost increases and uncertain future cost savings, and could negatively impact recruitment and retention and employer-employee relations. + AB 214(Richman):Would base all PERS determinations for highest compensation for computing retirement benefits on the highest three year average, rather than the single highest year as utilized in most public agencies. Note: This bill must be amended to apply only to employees first hired after the effective date of the bill. As introduced,this bill would create an unconstitutional contract impairment on rights of current employees. + AB 511 (Richman):Would prescribe ceiling contributions by a public agency to a defined contribution pension plan unless approved by 213 of the electorate. + AB 514(Richman):Would cap for public employees the combined disability benefits from Workers"Compensation and Industrial Disability Retirement(IDR)to 70% of final compensation. Note: seek coordination with SB 916(Speier). + AB 456(Torrico):Would expand criminal penalties for fraud relating to the PERS system. + AB 457(Torrico):A spot bill relating to unfunded liabilities in public pension systems. + AB 458(Torrico):A spot bill regarding PERS rate stabilization. + AB 1568(Torrico):A spot bill stating legislative intent to enact statutory changes necessary to ensure public employee retirement systems operate in a manner that provides state and local government fiscal stability while safeguarding their ability to attract and retain the highest caliber of employee. + SIB 105(Speier):Would amend PERS IDR law to extend authority to conduct medical reviews on disabled employees from up to age 55 to up to age 59 to determine if they remain disabled. + SB$77(Spelier):Would amend the 1937 Act County Retirement Law OR provisions to change the standard for determination of job causation from"substantial"to"clear and convincing evidence that the employment is a substantial cause of the incapacity"and define "permanent incapacity"as"...a mental or physical impairment that permanently prevents the member from the performance of a substantial portion of the job duties required by the member's job classification or those actual duties required of the member on a permanent basis + SB 916(Speier):Would reduce specified Workers'Compensation indemnity benefits to coordinate with IDR pension plan benefits. Note: seek to coordinate with AB 514 (Richman). + SB 880{Ashburn):A spot bill relating to public pension fund reserves and minimum contributions. + SB 882{Ashburn):Would base PERS determination of"final compensation"for purposes of computing pension benefits on the highest three year average, rather than the single highest year as utilized in most public agencies. Note:this bill must be amended to apply only to employees hired after the effective date of the bill. Changes in determination of benefits for existing employees would create an unconstitutional impairment of contract. ♦ SB 883(Ashburn):Would close the PERS miscellaneous employee benefit tiers of 2% at age 55 and 3% at age 60 to employees hired after the effective date of this bill. ♦ SB 884{Ashburn):A spot bill that would prohibit pension benefit increases from being enacted to apply to prior service credit, including specified benefit increases already granted by public agencies. Note:this bill must be amended to apply only to contract amendments that occur after its effective date; otherwise it represents an unconstitutional contract impairment. ♦ SB 885{Ashburn):Would amend 1937 Act County Retirement OR law to permit the retirement board to retire the disabled employee without waiting for expiration of available leave balances. ♦ SB 888(Ashburn):A spot bill regarding creation of"hybrid pension plans' consisting of both defined benefit and defined contribution plans. ♦ SB 889 (Ashburn):A spot bill regarding use of rate stabilization techniques in the PERS system. ♦ SB 891 (Ashburn):A spot bill relating to the 1937 Act Retirement System calling for cost reduction and containment,increased predictability of cost for employee and employer, equitable sharing of cost and risks between employee and employer, greater retirement system accountability, and elimination of abuse. ♦ SB 892(Ashburn):A spot bill relating to Pension Trust law calling for cost reduction and containment, increased predictability of cost for employee and employer,equitable sharing of cost and risks between employee and employer,,greater retirement system accountability, and elimination of abuse. If you have any questions or comments on these measures, please contact Steve Keil at(916) 327-7500, ext. 521. cc: CSAC Board of Directors CSAC Pension Reform Technical Advisory Group James Keene, CSAC Executive Director Attachments DRAFT DRAFT DRAFT Draft Guiding Principles for 2005-06 Pension Reform In response to legislative, administrative,, and initiative proposals early this year, CSAC staff has worked with a technical advisory group to develop proposed principles to guide our participation in discussions about reform of public pension systems. Our efforts have been guided by a firm belief that a legislative solution to pension reform is the best course to ensuring reform with clear cast-benefit outcomes for tocat government retirement systems and for taxpayers. This document has been prepared with the understanding that it remains a work in progress and should be flexible in order to accommodate CSAC"s coalition-buitding efforts. Staff will continue to modify and refine this document as necessary,, under the guidance of our technical advisors and the Government Finance and Operations Policy Committee. ----------------------------------------------------------------------------------------------------------------- Preamble Public pension reform has garnered widespread interest and has generated significant debate among policy leaders about the appropriate remedy for actual and perceived abuse, rising costs, and accountability to taxpayers. CSAC welcomes this discussion and approaches the concept of reform with the overarching goal of ensuring public trust in public pension systems, and empowering Local elected officials to exercise sound fiduciary management of pensions systems, as well as maintaining a retirement benefit sufficient to assure recruitment and retention of a competent local government workforce. Proposed reforms should meet these broad goals, as well as CSAC's guiding principles. The guiding principles and reform proposals are listed below and are intended to apply to new public employees hired after June 30, 2007 in both PERS and 1937 Act retirement systems. Guiding Principles PROTECT LOCAL CONTROL AND FLEXIBILITY Local elected officials should be able to develop pension systems that meet the needs of their workforce, maintain principles of sound fiduciary management, and preserve their ability to recruit and retain quality employees for key positions that frequently pay Less than comparable positions in the private sector. A statewide mandated retirement system is neither appropriate nor practical, given the diversity of California's communities. Further, a mandated defined contribution retirement system could force a reconsideration of the decision of Local governments not to participate in Social Security. ELIMINATE ABUSE Public pension systems provide an important public benefit by assisting public agencies to recruit and retain quality employees. Any fraud or abuse must be eliminated to ensure the public trust and to preserve the overall public value of these system. ❖ REDUCE AND CONTAIN COSTS Public pension reform should provide for cost relief for government, public employees, and taxpayers. ❖ INCREASE PREDICTABILITY OF COSTS AND BENEFITS FOR EMPLOYEE AND EmpLoYER Responsible financial planning requires predictability. Employers must be able to predict their financial obligations in future years. Employees should have the security of an DRAFT DRAFT DRAFT appropriate and predictable level of income for their retirement after a career in public service. ❖ STRENGTHEN LOCAL CONTROL TO DEVELOP PLANS WITH EQUITABLE SHARING OF COSTS AND RISKS BETWEEN EMPLOYEE AND EMPLOYER Equitable sharing of pension costs and risks promotes shared responsibility for the financial health of pension systems and reduces the incentive for either employees or employers to advocate changes that result in disproportionate costs to the other party, white diminishing the exclusive impact on employers for costs resulting from increases in unfunded liability. ❖ INCREASE PENSION SYSTEM ACCOuNTABILrrY Public pension systems boards have a Constitutional duty to (a) protect administration of the system to ensure benefits are available to members and (b) minimize employer costs. The constitutional provisions and state statutes governing such boards should promote responsible financial management and discourage conflicts of interest. Reform Proposals The following proposals represent specific reforms that serve to promote the principles outlined above. Proposals that directly affect employee benefits are intended to apply only to employees hired after.tune 30, 2047. ❖ Restrict public safety retirement eligibility to only those groups of employees who must endanger their own physical safety to protect the public as a major component of their employment. ❖ Establish a formula cap for public safety at 2% at 50 and a formula cap of 2% at 60 for miscellaneous employees. The cost of any defined benefit or defined contribution retirement enhancements beyond the base pension formula must be paid in full by the employee for the duration of his/her employment, unless the employer agrees to share not more than 50%of the cost. ❖ Require that"final compensation"be calculated using highest three-year average, as opposed to a single highest year. ❖ Provide local agencies the option to implement defined contribution retirement plans within both PERS and 1937 Act systems, as stand-alone benefits or hybrid systems. Remove barriers to providing defined contribution plans to individual emptovee units within retirement membership categories. ❖ Amend the County Employees Retirement Act to eliminate the cost of the Ventura court decision by removing factors outside direct salary in determining"final compensation." Note: awaiting definition of"direct salary." ❖ Limit application of pension formula increases to prospective service in order to avoid unfunded liability resulting from extension Of benefits retroactively. All costs for the extension of retroactive benefits are the sole responsibility of the employee. ❖ Limit pension benefits to career employees by excluding from eligibility temporary employees and contract employees. Within the PERS system, seek a definition Of "employee"that restricts the effect of the Careiff v. Metropolitan 1+Vater District case. ♦•.. rd to tha DRAFT DRAFT DRAFT Utilization of rate stabilization "bestpractices"including: 5-year direct rate smoothing; establish a rate funding corridor of 85%-115%of assets after system is 100%funded; if funding level is outside of the corridor, de a 5-15 year time frame for adjustment of rates to get back into the funding corridor; rate funding corridor should not be utilized to Pav for new benefits; rate stabittzation surchaM mff be utilized. ❖ Pension Oblieation Bond debt service should be disclosed in both employer and pension system actuarial reports. ❖ Upon agreement,, permit employers and employees to share responsibility for all retirement system costs, including unfunded liabilities. ❖ Retirement boards and arbiters should not have the authority to grant pension formula increases nor should they act as advocates for pension formula increases. Note the PERS mission statement: "Our mission is to advance the financial and health security for all who participate in the System." v*• Clarify the two-fold responsibility of retirement boards to (a) protect retirement system assets for the benefit of participants and (b) minimize employer contributions. ❖ Reform Industrial Disability Retirement (IDR) (see attachment). Note: These items continue to be reviewed and will be further clarified by additional discussion with our technical advisors under the direction of the GFO policy committee. Attachment DRAFT DRAFT DRAFT Pension Reform Issues: Industrial Disability Retirement (IDR) In response to IDR reform discussions., CSAC traditionally has supported the principle of provision of[DR to safety employees who are unable to continue their safety employment due to a bona fide job-connected disabling injury or Illness. CSAC also has traditionally recognized that IDR can be extremely expensive, and that responsible reforms are warranted to limit the cost to truly legitimate claims. Possible reforms include, but are not limited to: 1. IDR should be discontinued for any period of time the disabled employee participates in similar work with another public agency, even if that agency participates in a different pension system. The definition of"similar"work would be based upgn the criteria used b the agent pursuant to the Nolan vs. City of Anaheim case for original anal 1DR determination. 2. Raise the age limit for the employer to reevaluate disability status of the [DR recipient from 55 to 59. (See SB 105 (Spgier).) 3. Employees who qualify for both an[DR and a regular service retirement should be required to choose one or the other option, and the current practice of providing both benefits by tax sheltering 50%of the service retirement for such employees should be discontinued. This would not apply to other Workers' Compensation benefits for which the employee may be qualified. ir."Amfinjt* 13 "C;Ifiabg pMAICUMap"faF ME 11= es 4. A Rew a.R.do amp a oF B..r 10 %M�a ff 9 5 9 11.30 C. of of salifirmation for 9- r%+ 1%^1 aid t%,m AmrJanad ta dirzcas mr-amm C_gRt na aina k—aafit r-mewi ch dafinition chal old nr%+ 1-6,M cr% pftq+r&-+:h* as to t3=ra tQ VJQr.it'2*1%Mr. i M t ke% a of 6511.0%ra 0 ftra 5 E%W%. Mar%O %W%W a%Oftff%.v G�Ifts age Apss% PINK sla WWWrONMI1610 Rat seFles. 5• 1MR kimnaf*r.cholold k,- FeA-B*,*ad to kr%+b and z ar i . l I Marma laachl oftwol% %MV1%**s1%Osa1%~ aw� 91%0*0� V_1ftP` 1%..90'.1we"W.Y��00' �Nzl%a ff %We %�%0%V`b.Y inkad ta aath dties rel ated to viratectina t ke r.afe+4 x of tha no ah,ic a a fiald ar clictodial 1611%.41 651%on"k.6 %WX IDR rhavald rwit km garmxiAmd ta cafimbx amplahnaa -c dkahlekd diva t GOMMOR tO RGR5aP.!!kb.A amOlcuraeSr 6. The determination of IDR should be based upon"predominant cause,"i.e. a job-connected illness or iniury is the principaI causation of the disability. 4 "Rebuttable presumptions"shall,not constitute causation for IDR. Some disabling injuries and illnesses for safety employees are deemed to be rebuttable presumptions (including heart, cancer, pneumonia, meningitis, hernia, blood-borne pathogen, biochemical substances, and lower back). This is true for causation standards for PERS IDR, which is linked to workers' compensation causation,, and is true for 1937 Act Retirement systems for "blood-borne pathogens." This generally means that they are deemed job connected, unless the employer can prove otherwise,se., unlike other injuries for which the employee must demonstrate at least a de minimus job nexus. in a k^1 lid kft1ft MWaWad 293d alimiRMd if tkm'&g UIRRat meet a gtaadard of caarzanablanarc. 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Pliblic amalcauam dw%lold bft--4 acad madir-al maRageMeRt Of S-Elf"49,9MMIMA-BaS C1 tammranx diruabil;W tariar.+r%claimiaa IORI imisidina- emnimear.riaht to *aJtJ;dm an IOR mmid ana uaar of I aker GaA Aar%n ammem+c. and avre- aaan aw iac %O%V�N`fta �ffs� jv�ftfts %We t - - wrffr�*AaWEN pp�sftoftff fGF ,mmolnuam to affmr_altarmatbla a1FRn1mAR:*Rt tiq 'nil smd umr"= Mzirl M_LON'Pw AAfr%l lid arinly Iftftff -M.ard'ft�Y...1W I.A., Tw%PGOW...�M; agoaftr 8%**�Vsga VV%ffWM1%%0 %ftrffr%JV I gal Art amnlauam and MRS aMQ1CM1P=UlfhImCa tha 1!%1M931QUP Janmd ta a rahabilitatian %Ww ps—_ a 00M.'e— 1was1w %.V Oramr W Was a a The date of application by an employer for a successful IDR is the effective start date of the IDR. This date is established regardless of any existing leave balances available to the employee or the employee's participation in a rehabilitation program. Employees will qualify for advance IDR payments while awaiting resolution of the application pursuant to Labor Code Section 4850.3. 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Eliminate overlappine IN benefits and workers' compensation benefits when payable for the same injurer by establishing an offset between the two systems. (See SB 916 (Spgier), AB 514 {Richman 13. If some or all of the above cost saving reforms can be achieved, support for increased IDR benefits for employees who are totally disabled from any work(as opposed to occupationally disabled) as part of a package of reforms. ACAXl 1 Assembly Constitutional Amendment, 1 st Ext. Session-Ill-IMODUCED Page 1 of 3 BILL NUMBER: ACAX1 1 INTRODUCED BILL TEXT INTRODUCED BY Assembly Member Richman JANUARY 6, 2005 A resolution to propose to the people of the State of California an amendment to the Constitution of the State, by adding Section 8 to Article XX thereof, relating to public pension or retirement benefits. LEGISLATIVE COUNSEL'S DIGEST ACA 1, as introduced, Richman. Public employee defined contribution plan. The California Constitution reserves a role for the elected officials of this state in the governance of public pension systems through several means, including the power to determine the appropriateness of retirement benefits for public employees. This measure would establish the California Public Employee Defined Contribution Plan. The measure would provide that on and after July 1, 2007, any person hired by a public agency may enroll only in a defined contribution plan of a public pension or retirement system, and is prohibited from enrolling in a defined benefit plan, as defined. The measure would permit an active member of a defined benefit plan, during a specified period, to transfer a sum equal to the member's interest in the defined benefit plan to a defined contribution plan. Vote: 2/3. Appropriation: no. Fiscal committee: yes. State-mandated local program: no. WHEREAS, California's state and local governments face severe budget crisis because elected officials spend more than they receive in taxes. A fair and balanced approach to restoring long-term fiscal responsibility must include limiting the cost of government employee pensions which have grown dramatically in recent years, threatening the long-term investments California needs in education, infrastructure, health care, and public safety; and WHEREAS, California has among the nation's most generous public pension plans, providing some employees with more than 100 percent of their final years' salary at age 50. During the past 20 years, most private employers have moved to defined contribution plans such as 401 (k) plans to limit costs, promote responsible budgeting, and improve fiscal accountability; and WHEREAS, The struggle to meet the demands of generous pension plans negotiated by elected officials has increased state and local government debt by more than $12 billion, leaving more than $30 billion in additional unfunded costs for future retirees. Creating defined contribution plans for all state and local government employees will eliminate new unfunded liabilities; and WHEREAS, Under current law, existing state and local government employees cannot have their retirement plans changed by this measure. http://www.leginfo.ca.gov/pub/bill/asm/ab 0001-0050/acaxl 1 bill 20050106 introduce... 3/11/2005 ACAXI I Assembly Constitutional Amendment, I st Ext. Session -INTRODUCED Page 2 of 3 Promises made to all current public employee retirement system members will be kept under this measure. A switch from defined benefits to defined contributions plans will only affect employees hired by public agencies on or after July 1. 2007.- and WHEREAS, Unlike current government pension plans, defined contribution plans allow employees to enhance their credit standing, control their assets, move pension assets from one job to another, and pass along remaining funds to their heirs; and WHEREAS, Defined contribution plans will make government officials more accountable for spending public money, reduce the long-term cost of retirement plans, provide greater budget predictability, and help restore fiscal responsibility to state and local budgets; now, therefore, be it Resolved by the Assembly, the Senate concurring, That the Legislature of the State of California at its 2005-06 First Extraordinary Session commencing on the sixth day of January 2005, two-thirds of the membership of each house concurring, hereby proposes to the people of the State of California, that the Constitution of the State be amended as follows: First--That Section 8 is added to Article XX thereof, to read: SEC. 8. (a) The California Public Employee Defined Contribution Plan is hereby established. (b) Notwithstanding any other provision of law or this Constitution, on and after July 1. 2007, any person hired as a new employee by a public agency may enroll only in a defined contribution plan of a public pension or retirement system, and shall not enroll. in a defined benefit plan. (c) On and after July 1, 2007, and before January 1. 2008, any active member of a defined benefit plan offered by any public agency may transfer a sum equal to the net present value of that member's interest in the defined benefit plan to a defined contribution plan as defined in this section. (d) As used in this section, the following terms apply: (1) "Defined benefit plan" means a system providing a pension benefit determined by a formula based on age, service credit, and salary. (2) "Defined contribution plan" means a system providing a pension benefit that is equal to the combined employer and employee contributions plus interest and net investment earnings, less administrative expenses. A public agency may use one or more private sector third-party administrators to manage a defined contribution plan, provide investment vehicles, and educate members and retirees on appropriate investment strategies. (3) "Public agency" includes, but is not limited to, the State of California, and any city, city and county, or county, including a charter city or charter county, district, school district, University of California, California State University or other political subdivision or public entity of, or organized under the laws of, this State, or any department, instrumentality, or agency thereof. Second--That in the event that this measure and any other measure relating to retirement plans of public employees appear on the same statewide election ballot, the provisions of that other measure shall be deemed to be in conflict with this measure. In the event that this measure shall receive a greater number of affirmative votes than that other measure, the provisions of this measure shall prevail in their entirety, and the provisions of the other measure shall be null and void. Third-- That the provisions of this act are severable. If any provision of this act or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect http://www.leginfo.ca.gov/pub/bill/asmlab 0001-0050/acaxl—1 bill 20050106 introduce... 3/11/2005 ACAXI I Assembly Constitutional Amendment, I st Ext. Session-INTRODUCED Page 3 of 3 without the invalid provision or application. hftp://www.leginfo.ca.gov/pub/bill/asm/ab-0001-0050/acaxl—1 bill 20050206 introduce... 3/11/2005 ACA 5 Assembly Constitutional Amendment-INTRODUCED Page I of 2 BILL NUMBER: ACA 5 INTRODUCED BILL TEXT INTRODUCED BY Assembly Member Richman DECEMBER 6, 2004 A resolution to propose to the people of the State of California an amendment to the Constitution of the State, by adding Section 8 to Article XX thereof, relating to public pension or retirement benefits. LEGISLATIVE COUNSEL'S DIGEST ACA 5, as introduced, Richman. Public retirement systems. The California Constitution reserves a role for the elected officials of this state in the governance of public pension systems through several means, including the power to determine the appropriateness of retirement benefits for public employees. This measure would establish the California Public Employee Defined Contribution Plan. The measure would provide that on and after July 1, 2007, any person hired as a new employee by a public agency may enroll only in a defined contribution plan of a public pension or retirement system, and is prohibited from enrolling in a defined benefit plan, as defined. The measure would limit employer contributions to a defined contribution plan to an unspecified percentage of employer payroll, establish other parameters for defined contribution plans, and also set forth related findings of the Legislature. The measure would permit an active member of a defined benefit plan, during a specified timeframe, to transfer a sum equal to the member's interest in the defined benefit plan to a defined contribution plan. The measure would also allow a local jurisdiction to exceed limits imposed by the measure upon a vote of 2/3 of the electorate. The measure would authorize the Legislature to amend the provisions by a vote of 3/4 of the membership in each house by concurrent resolution in each of 2 consecutive sessions. Vote: 2/3. Appropriation: no. Fiscal committee: yes. State-mandated local program: no. WHEREAS, The California Constitution reserves a role for the elected officials of this state in the governance of public pension systems through several means, including the power to determine the appropriateness of retirement benefits for public employees; and WHEREAS, It is the intent of this measure to prohibit, on and after July 1, 2007, defined benefit plans for all public agencies and to only authorize all new employees of public agencies to enroll in a defined contribution plan; and WHEREAS, It is the intent of this measure to establish the California Public Employee Defined Contribution Plan, to provide for fiscally responsible defined contribution plans- and WHEREAS, The Constitution is amended from time to time in furtherance of the wishes of the people and the people may set new http-://www.leginfo.ca.gov/pub/bill/asm/ab-0001-0050/aca-5 bill 20041206 introduced.h... 3/11/2005 ACA 5 Assembly Constitutional Amendment-INTRODUCED Page 2 of 2 standards and provide for additional oversight and review of public pension systems; now, therefore, be it Resolved by the Assembly, the Senate concurring, That the Legislature of the State of California at its 2005-06 Regular Session commencing on the sixth day of December 2004, two-thirds of the membership of each house concurring, hereby proposes to the people of the State of California, that the Constitution of the State be amended as follows: That Section 8 is added to Article XX thereof, to read: SEC. 8. (a) The California Public Employee Defined Contribution Plan is hereby established. (b) Notwithstanding any other provision, on and after July 1, 2007, any person hired as a new employee by a public agency may enroll only in a defined contribution plan of a public pension or retirement system, and shall not enroll in a defined benefit plan. (c) On and after July 1, 2007, and before January 1, 2008, any active member of a defined benefit plan offered by any public agency may transfer a sum equal to the set present value of that member's interest in the defined benefit plan to a defined contribution plan established in accordance with this section. (d) On and after July I, 2007, employer contributions to a defined contribution plan established pursuant to this section shall not exceed percent of employer payroll, except that employer contributions up to percent of employer payroll may be made for sworn police officers and full-time firefighters. (e) As used in this section, the following terms apply: (1) "Defined benefit plan' means a system providing a pension benefit determined by a formula based on age, service credit, and final salary. (2) "Defined contribution plan" means a system providing a pension benefit that is equal to the combined employer and employee contributions plus interest, less administrative expenses. A "public agency may use one or more third-party administrators to manage a defined contribution plan and educate members and retirees on appropriate investment strategies. (3) "Public agency" includes, but is not limited to, the State of California, and any city, city and county, or county, including a charter city or charter county, district or other political subdivision or public entity of, or organized under the laws of, this State, or any department, instrumentality, or agency thereof. (f) With respect to any local jurisdiction, the limits imposed by subdivision (d) may be exceeded upon a vote of two-thirds of the electorate of that jurisdiction. (g) Notwithstanding any other provision to the contrary, without approval by the people, the Legislature may, by a vote of three-quarters of the membership in each house by concurrent resolution enacted in each of two consecutive two-year sessions, amend any part of this section relating to public pension or retirement systems. http://www.leginfo.ca.gov/pub/bill/asm/ab-0001-0050/aca-5 bill 20041206 introduced.h... 3/11/2005 AS A-98042aHEH CT ! M . Richman ACA Would Start Fiscally Responsible Pensions FOR IMMEDIATE RELEASE Contact; Daniel Pellissier December 6, 2004 Patrick Sullivan 916-319-2038 SACRAMENTO --In order to restore some fiscal responsibility to the pension costs that are ravaging government agency budgets throughout California,Assemblyman Keith Richman today introduced Assembly Constitutional Amendment 5 that will put new public employees in the same type of 401(k)pension system offered to most private sector employees. "Every week we read more stories about state, local and school budgets being decimated by defined benefit pension costs. The City of San Diego, Orange and Contra Costa Counties all have pension deficits of more than $1 billion. CalPERS owes more than $1.9 billion than it has on hand and just last week state teacher pension fund officials said they may cut benefits for future retirees by $500 a month to eliminate their$23 billion deficit. ACA 5 will stop state government and local public agencies from making expensive promises they can't keep and will restore accountability to-public pensions,"Assemblyman Richman said. During the last 20 years,most private sector companies have moved their retirement programs from defined benefit plans that provide retirement benefits based upon a formula of years employed and final salary to the 401(k)-type plans that match employee contributions to their own accounts. For employers,these defined contribution plans eliminate the volatility in contribution rates and prohibit passing along the cost of current benefits to future fiscal years. For employees,defined contribution plans allow workers to take their money with them when they change jobs and create individual assets they own and can be passed along to heirs. By adopting ACA 5, California would follow a number of states that have shifted to some form of defined contribution plan during the last decade, including Colorado,Florida,Michigan, Montana and South Carolina. "Retirement costs for state employees alone have grown from$200 million in 2000 to $2.6 billion this year, heading to $3.5 billion in 2009. ACA 5 will begin to stabilize and reduce these retirement costs as the Legislature and Governor Schwarzenegger struggle to eliminate California's$10 billion structural budget deficit. While current employees and retirees will see no change.in their retirement plans,new public employees will be offered the same type of plan offered to most private sector employees and currently offered to state workers without an employer match,"Richman said. 1 Securing California's Fiscal Future 1 Assemblyman Keith Richman,M.D. ; t P 7.1 California's Fiscal Outlook 9*4" Legislative Analyst's Office Projected General Fund Spending 2003-04 Through 2008-09 RETIREMENT-RELATED PAYMENTS (Dollars in millions).- 2003-04 illions):2003-04 Estimated $1,083 2004-05 Estimated $1,901 2005-06 Forecast $2,360 2006-07 Forecast $2,574 2007-08 Forecast $2,869 2008-09 Forecast $3,157 .2009-10 Forecast $3,424 Average Annual Growth From 2005-06: 9.8% 3 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. n.. t .Y. -.k -. .. ,.::•;....::,....:... :.c:'ua,:^....:a':.:. ...:.:,x.::,{tom.. ,k^.. '.. t` 5 { { 2. T f : 4 i 5 {,v 2, 4• .. ......�.. ! .+fin.+.T.,..T..� ,�1I��I��•�i ka... :. r,..........•... ?-. "}k ti<. Y ,.,✓,.,:,... ..,,.h...;a..s-vX., moi.. ,� ....... .v.... ..w...... .....:. .. .., .. ... .. .:n. :'%}X..a` \ .fie {.' :ik Source: PERS and other data collected independently by the Legislative Analyst's.Office. 10 PERS Counties 10 Independent Counties with Greatest Unfunded Liabilities with Greatest Unfunded Liabilities (Valuations as of June 30, 2002) (Valuations as of June 30, 2003) County, 'Unfunded Liao lily Funded County _Unfunded Liability Funded Riverside $215,976,588 92% Los Angeles $3,910,000,000 87% Solano 66,467,679 89% San Diego 19435,000,000 76% Santa Clara 34,537,990 99% Orange 978,079,531 83% Butte 19,9849007 93% San Bernardino 552,838,000 87% El Dorado 1610619500 95% Alameda 508,2861000 87% Colusa 81,220,051 87°x'0 Fresno 419,50030000 79% Santa Cruz 6,016,465 99% Contra Costa 380,888,000 90% Glenn 61016,434 91% Kern 328005000 83% Trinity 4,686,574 90% Sacramento 243,8945000 94% Humboldt 4926511841 98% Ventura 14550003,000 93% Independent Counties Below 90 Percent Funded Status PERS Counties (Valuations as of June 30, 2003) Below 90 Percent Funded Status County Unfunded Liability Funded (Valuations as of June 30, 2002) San.Diego $13435,0001000 76% Coum Unfunded Liability Funded San Luis Obispo 125,970,000 77% Colusa $8,2209051 87% Fresno 419,5003,000 79% Orange 978,079,531 83% ,All Other.PERS counties at least 90%funded. Kern 3281800,000 83% Los Angeles 35910,0009000 87% San Bernardino 552,8389000 87% Alameda 5081286,000 87% Sonoma 113,2253,000 89% All other non-PERS counties at least 90% funded. 4 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. f . F P.. x s. 4£: u,y.. $' P r; :9. S 3 h d' ✓ QTS; ..h N vv• .> § Jv Source: PERS and other data collected independently by the Legislative Anal'yst's Office. 25 CITIES WITH 15 CITIES WITH LOWEST PERCENT FUNDED GREATEST UNFUNDED LIABILITIES SAFETY PLANS (Valuations as of June 30, 2002) Over$1 pillion in Unfunded Liability (Valuations as of June 30, 2002) Unfunded Percent City Liability Funded Unfunded Fervent Ojai 11138,690 22% City Liability Funded Pittsburg 91271,646 53% Corning 1,715,925 59% San Diego $ 720,713,000 77% Seal Beach 3,216,173 60% Oakland 414,679,366 83% Pasadena 69,1231,151 65% Stockton 731603,590 90% Oakland-PERS 1893,9353,709 66% Torrance 66,0159998 84% Brentwood 3,8051,629 67% Santa Rosa 47,6901632 88% Calistoga 12356,698 68% Santa Clara 479473,702 91% Hercules 1,658,424 69% Sacramento 45,3663,361 95% Orland 1,04011388 69% Richmond 453,260,454 90% Oakland-No,PERs 275,6631000 69% Fremont 43 475 077 90% Santa Cruz 9,82%886 71% ' ' 95% Huntington Park 15,700,667 71% Riverside 4 3,363,2 34 Murrieta 2,009,041 71 Pasadena 40,353,874 95% Alameda 369270,882 88% port Hueneme 3,6191,320 72% 190 Safety plans are below 90%funded status Berkeley 35,9921,298 94% Vallejo 343,055,329 89% 15 CITIES WITH LOWEST PERCENT FUNDED Santa Barbara 33,948,717 91% NON-SAFETY PLANS Roseville 322307,066 83% Over$1 nillion in Unfunded Liability San Jose 27,8851,000 99% (Valuations as of June 30, 2002) 93% Unfunded Percent Hayward 2798569133 City Liability Funded Bakersfield 27,738,146 94% Pittsburg 1093519613 27% Santa Cruz 273,251,564 87% Brentwood 43,973,961 70% Costa Mesa 261662,532 90% Shaffer 13,836,873 74% San Mateo 261433,611 90% Folsom 8,082,442 80% Santa Monica 2597531,288 85% Rosemead 11,261,264 81% South SF 23,975,610 89% Roseville 22,2579548 82% SLO 21,328,874 84% Mission Viejo 23,2443,830 83% Wasco 13,221,697 84% Susanville 1,119,444 84% San Fernando 2,980,775 85% Cerritos 10,564,588 85% Capitola 1,3351502 86% San Luis Obispo 8,154,576 87% Piedmont 11,1233,307 87% Palmdale 42961,403 87% 38 cities are below 90%funded status 5 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. t _ Y r.: } t• `h. J T a. 4 r: }} 3 3. r s. I :Z { E 't N, O. T N� # Source: PERS and other data collected independently by the Legislative Analyst's Office. 15 CITIES WITH HIGHEST CONTRIBUTION RATE 15 COUNTIES WITH HIGHEST CONTRIBUTION RATE SAFETY PLANS SAFETY PLANS (Valuations as of June 30, 2002) (Valuations as of June 30, 2002) City Contribution Rate PERS-Counties Contribution Rate Huntington Beach 49.767% Glenn 33.239% , Fillmore 46.875% Monterey 33.029% Compton 45.989% Modoc 30.837% Santa.Cruz 44.014% Tuolumne 30.707% Pomona 43.705% Siskiyou 30.561% Torrance 43.338% Calaveras 30.430% San Diego 43.070% El Dorado 28.965% - Seal Beach 42.445% Colusa 28.663% El Centro 41.028% Placer 28.001% South Gate 40.076% Mono 27.989% Berkeley 39.971% Stockton 39.512% Independent Counties Valuations from June 30,2003 Maywood 39.115% Orange 39.39% Alameda 38.916% San Diego 34.99% Redondo Beach 38.807% Contra Costa 32.67% Mendocino 32.23% Sacramento 31.40% 15 CITIES WITH HIGHEST CONTRIBUTION RATE NON-SAFETY PLANS 15 COUNTIES WITH HIGHEST CONTRIBUTION RATE (Valuations as of June 30, 2002) NON-SAFETY PLANS (Valuations as of June 30, 2002) City Contribution Rate Canyon Lake 22.389% City Contribution Rate San Diego 22.070% Sierra 18.617% Chico 19.992% Colusa 17.546% Susanville 19.027% Solano 16.442% Cerritos 18.719% Riverside 15.354% San Fernando 18.572% Mariposa 13.332% Sutter Creek 18.434% Trinity 12.450% Pittsburg 18.188% Glenn 12.267% DalyCity 17.828% Alpine 10.133% Industry 17.776% El Dorado 10.071% Chula Vista 17:428010 Butte 9.904% Parlier 17.414% Westlake Village 17.313% Independent Counties Valuations front June 30,2003 Palm Springs 17.193% San Diego 25.59% Ukiah 16.342% Alameda 22.25% Mendocino 20.11% Los Angeles 20.02% Contra Costa 18.35% 6 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. t: x• t. k: 3 •S 'i`. souk" 'k :iY r y M .k: Y .L d :r+ !�IA. r..•a T ,��1!��,� ,. '..�. Epi OiC t'`y^ n Source: California State Treasurer's office. PENSION OBLIGATION BONDS ISSUED SINCE 1994, t : Y a. ti r r _ ds.Iss ►e Prinll Anoua R inanc ::Am n 994 3 $2285,270,233 $21,2853270233 1995 9 $2,143,353,621 $532785,000 199f. 4 $786,663,512 $469,480,326 1997 5 $680,012,740 $136,923,081 1998 3 $206,465,000 $2061081 087 199.9.. 3 $201,290,000 $163,070,000 2a0 1 $211,350,000 $211,350,000 21 3 $377,641,449 $202.9625,591 .0 10 $1,279,185,000 $597,7153,360 2G3 9 $1,295,077,111 $920085253 OQ4*. 22 $2,280,542,928 $644,03 89'75 T�'I 0 72 $11,746,851,594 $633693424,906 *Through October 13,2004 -N0TE: Annual payments on a $1 billion 20-year bond at 4% is $,/.i million. 7 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. O O N N O O O O O k O O 646 6 L O O t!! cl N N N co cr) O ti C6 _O L6 &a O_ 00 00 to N N r N M O COO tM bg b!). 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CL cr> >c m m u) w 0 o OO O O O O O O O O O O o O 0 p� O O O O O O O O O O O O O O O O O N N N N N N N N N N N N N N N N N I'll- Q. tom- T ` ` Q Q ,� , C� M M M d• �1" O d? r N N O N N N N N N N N N N �l O r- e- CO c0 c0 c0 c0 c0 0 c0 c0 CD CO ' c0 c0 CO I` O O o O O O O O O O O O O O O O O424 V � 00 � 00 � O � 'Cr CO M O 'er r � N �' Q) �' O � 1` � O �' 00 �' O 'Ct M �' CO •� Oo Lo M 0 0 0 o OHO OHO ONONOMOOOOOOOOOOrONOf` Oo00000MOC� Of` V Na N O N N r N r N O N O N O N O N r N r N O N O N O N r N r N r G3 C � k > CO •; � ?.. .:, ��r .«.- �.... .f, _ rr��.:. �..+:}.<...�.z.....�,...'a,x§��,.,.< - ,. us CONTRA COSTA: PENSION IMPACT ON GENERAL FUND Fiscal Year Retirement Expense Asa % of General Fund (millions) General Fund 1994-95 $ 2994 5.78 1998-99 41.6 7.39 2001-02 53.8 6o73 % 2003-04 80.6 9.32 2004-OS 103.9 12926 % 2005-06 ??? ??? ■ With an additional Unfunded Liability of$1.2 Billion ■ Not including Unfunded Retiree Health Costs 13 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. .... ...... ...:....:........::.... a .. .... ..+:4. K^ F k. 3 3. 2 ..i 1' 7 2 2: iht S i. LOCAL GOVERNMENTS IN CRISIS Contra Costa Countv: Source: Contra Costa County Grand Jury Report No.0409 entitled"Budget Woes and Layoffs:The Contributions of Pension Improvements," and the Contra Costa County Supervisors response to the report. ■ Significant cost increase to County: In fiscal year 2003-2004 retirement expenses to the General Fund were $80.6 million dollars or 9.32%of the General Fund and in fiscal year 2004-2005 costs jumped to $103.9 million or 12.26%of their General Fund. ■ Over$1 billion in outstanding liability for past pension costs: As of 12/31/03 the County's total outstanding liability for past pension costs was $1.06 billion. This included$587 million in outstanding pension obligation bonds. ■ Pension costs more than 12 % of General Fund: In fiscal year 1994-1995 retirement expenses consumed 5.78%of the General Fund or$29.4 million. The 2004-2005 costs ballooned to 12.26%of the General Fund or$103 million. City of San Diewo: Source: Final Report of the City of San Diego Pension Reform Committee. ■ Unfunded liability exceeds$1 billion: By January 1, 2004,the City's pension Unfunded Actuarial Accrued Liability(URAL)had increased to $1.167 billion. In comparison San Diego's 2002-2003 General fund including Special fund dollars was $1.951 billion. Employment Costs were nearly$850 million. ■ Funding status is below 70%: On January 1, 2004 the system was only 68.7%funded. ■ Benefit improvements identified as main reason for under-funded problem: Committee identifies Investment Performance as 6%of the problem,Under-funding by the city as 10%, Use of Plan earnings for contingent benefits as 12%of the problem, and Net Actuarial Losses as 31%of the problem, and Benefit Improvements as 41%of the problem. Orange County: ■ Unfunded liability exceeds$1 billion: The County's unfunded accrued pension liability is now about$1.3 billion for the cost of covering benefits for retired and current county employees.Source:LA Times November 13,2004 article"O.C.Looks to Fill Pension Gaps" ■ Recent August 2004 benefit increase raise liability by $300 million: Because the contract is retroactive to cover all existing employees, it will add nearly$300 million in liabilities to a 14 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. system that already is about$1 billion forecasted retirement demands. source:OC Register August 15, 2004 arficle"Bankruptcy,Part IV" Benefit increases approved as services are cut: In December 2002, supervisors approved a $75-million package of employee perks and bonuses at the same time layoffs and service cutbacks were being considered,triggering criticism by an Orange County Grand Jury.Source: LA Times November 13,2004 article"0.C.Looks to Fill Pension Gaps" .Kiverside Coun Source:Report of the Pension Advisory Review Committee • Board o Supervisors seeks bonds to reduce$470 million pension deficit: On November 5, f 2004 the Board of Supervisors approved in concept the issuance of Pension Obligation Bonds to deal with the projected June 2005 unfunded actuarial liability of $470 million. • Pension fund level plummeted over past 6 years: "The projected June 30, 2005 unfunded actuarial liability is $96.6 million for the Safety Plan and$374.4 million for the Miscellaneous. This is a dramatic swing from June 30,2000 when the,County's Miscellaneous Plan was"super-funded"by $439.9 million and the Safety Plan was super- funded by $90.7 million." Increased benefit level again impactfunding status: "The decline in ftinding status for both plans is attributable to market losses, a new benefit structure for Safety employees(3%@ 50) and Miscellaneous employees(3% @ 60), as well as payroll growth and other actuarial factors." Santa Clara Coun Source:Santa Clara County Civil Grand Jwy Report—May 2004 • Benefit costs rise at alarming rates: "As a percent of salaries paid,the contributions have increased from 8%to 9.'3%from fiscal year 2001-2002 to the present.The County's cost for funding retirement plans has increased almost 50%, from $66 million to a projected$95 million over the same period." • Budget shortfall made worse by increased contributions:"Current County and San Jose budget shortfalls are made worse by required increases in contributions to the retirement systems,but potentially more serious problems loom in the future that may burden local government with very high fixed costs,requiring increased revenue or reduced services." • Employees continue to seek-higher benefits which could cost an additional$235 million: Mercer Human Resource Consulting prepared an actuarial valuation for San Jose should they choose to enhance the public safety personnel pensions-to mirror the CalPERS 3%-per-year- at-age-50 model.Enhancing the pension benefit from an 85%maximum to 90%would cost $235 million for vested liabilities. Amortized over the next 14 years,this would add$24 million to a current budget line of$50 million. 15 Securing California's Fiscal Future Assemblyman Keith Richman, M.D. y ..y. 3 7 ,2.• t '.., J..•• is Y j.. ..,. ... ... .. ..•. :. .. Y.G.. ...v.. ...,.-. S',>• .Sv. £. i oR. L. u 4 3:3 4 2 4 ^e• xi .:�... :.D-C NK .0 ... ':, .c. .. C•... .,`ffTRN ...a�. .. .. .... 6 -: �`��� �R.�R.^.Y�1. }ItTr 2: SERVICES SQUEEZED AS PENSION COSTS SWELL ■ Contra Costa County: Retirement costs will supplant other city services such as "infrastructure repair, law enforcement,social welfare and health:""Retirement costs continue to increase as a percentage of the General Fund,critical services such as infrastructure repair, law enforcement, social welfare and health will be reduced. Many of these recommendations will fall upon those that can least afford to lose these services." Contra Costa Grand Jury Report-June 2004. ■ San Joaquin County:Pension cost increases are S times more than the budget for parks and recreation. The County will spend$17.8 million more annually to pay a record increase in pension costs. County administrators were uncertain how the county would pay for the increase, an amount which exceeds the county's entire budget for contingencies and is more than five times what is to be spent on parks and recreation for this fiscal year. Stockton Record-December 1, 2004 ■ City of Salinas: Closing Library to deal with additional costs: Administrative manager Jan Neal,blamed the closing on a combination of state raids on local budgets; a poor economy; dramatic increases in contractual benefits and payments to the state public employee retirement system; and a county government.San Jose Mercury News—November 21, 2004 ■ City of Oakland:Retirement Costs will impact services `from filling potholes to recreational programs:"Oakland is estimating a budget shortfall of$27.7 million and $15.5 million in additional retirement costs over the next two years is largely to blame. City Administrator Deborah Edgerly has proposed a range of ways to close the deficit, including a 3 percent across-the-board cut,which would include police'and fire departments. That would mean lessened services to residents, from filling potholes to recreational programs, according to an article in the Oakland Tribune. Oakland Tribune—November 21, 2004. ■ LA County Fire Overworks Firefighters because New Hire Benefits Are So Excessive: Benefits for L.A. County firefighters are such that it is now cheaper to pay massive amounts of overtime than to hire more firefighters. Fire Chief P.Michael Freeman: "As ridiculous as it sounds, it's more cost-effective to bring in a firefighter from home and pay them time and a half because we don't have to pay more benefits for them."Los Angeles Daily News—July 4, 2004 ■ City of Richmond: Firefighters losing jobs: The city has laid off 18 firefighters since January,bringing the department down to 60. USA Today—November 29, 2004 ■ Riverside County: "We should not be priding ourselves on avoiding service cuts. We ought to be expanding services:" Riverside County Supervisor Bob Buster said the problem is not only that there is not enough money to pay benefits, it is that the additional obligation 16 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. '. 1 71 ;� 4 R IPT THE CALIFORNIA PUBLIC EMPLOYEE DEFINED CONTRIBUTION PLAN, Plan Structure: ■ Prohibit defined benefit plans for state, local government and special districts and establishes a framework for new fiscally responsible defined contribution plans. Eligibility: ■ After July 1, 2007, all new state, local government and school employees may only enroll in a defined contribution pension plan. ■ Current employees may voluntarily convert their existing Defined Benefit pension plan to the new defined contribution program during aone-time open enrollment period. Design ■ Establish a maximum employer contribution. ■ Provide for enhanced public safety classifications. ■ Allow the use of private fund administrators. ■ Establish a vesting period. ■ Provide retirement education to employees ■ Encourage employee enrollment. 18 Securing California's Fiscal Future Assemblyman Keith Richman, M.D. BENEFITS OF A DEFINED CONTRIBUTION RETIREMENT PLAN Eliminates Risk of Unfunded Liability: ■ Defined contribution plans are fully funded. ■ In contrast, defined benefit plans expose taxpayers to future liabilities. Retirement Benefits are Portable: ■ Most employees have multiple jobs in his/her lifetime. ■ Benefits from a defined contribution plan can be consolidated into an IRA or other qualified plan. ■ Benefits can easily be passed on to heirs. Quicker Vesting Period: ■ Defined benefit plans.generally require more than five years of service before an employee is vested. ■ Alternatively, defined contribution plans vest in employer contributions more quickly and immediate vesting is possible. Control Over Retirement Earning Options: ■ There are no limits to the benefits an employee may earn in a defined contribution plan. ■ Short-term employees benefit from investment based plans. These workers typically get substantially reduced benefits because defined benefit formulas reward greater tenure. ■ Encourages workers to actively participate in their retirement planning. Improved Employee Recruiting: ■ Short vesting schedules and portable retirement benefits make defined contribution plans attractive to younger, well-qualified employees. ■ Puts government sector on equal footing with private sector competitors. Greater Flexibility for Women: ■ Women are more likely to have interrupted work schedules because of family responsibilities. ■ Quicker vesting and portable benefits give women greater options. 19 Securing California's Fiscal Future Assemblyman Keith Richman, M.D. aE- BASIC PLAN DEFINITIONS DEFINED CONTRIBUTION PLANS A Defined Contribution (DC) plan is a retirement savings plan where employers and employees make tax-deferred contributions to individually-owned accounts. These contributions are invested and the employees get the investment earnings and principle when they retire or leave the system. A DC does not specify the retirement benefit to be received by the employee. Rather, it specifies a contribution, typically expressed as a percentage of compensation, which is deposited into an individual account for each participant. The actual benefit for the participant is based solely on the amount contributed to the account by the employer and participant, and the investment earnings attributable to that account. DEFINED BENEFIT PLANS With the notable exception of the 20 county systems organized under the 1937 County.Employees Retirement Act, PERS and SIRS provide retirement benefits to most of California's public employees. The plans offered by these systems are Defined Benefit(DB) plans, where employees receive a predetermined benefit upon retirement. In a DB plan, the benefit is determined by a formula that includes the number of years of service, the employee's "final compensation," and a factor to be applied to equation based on the employees age at retirement. While the benefit is specified in advance for the employee, the actual cost to the employer is based on actuarial analyses of accrued assets as they are applied to accrued liabilities, incorporating projections for future earnings, wage inflation and other factors outside of the employer's control. 20 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. i t .... ..... ........... .!....... ... ,;. .. .. .. ,.^,..v.. .. .:..... .,:_:... y' '•kms ..x,'.. d: x ti< l x ky 3. 4. .in• .L", K�"S" .T- •f Y } A .. Jm x, NOTABLE ADVANTAGES To EACH 1D%.ETIREMENT PLAN ........ :..:..........:.........., .+.....> '... a... .. ..+. : a .. ... ... Y. .v ),. -r'� 23ef%:{. •>� ..?.�`$4 z'aN,c:d+ :7f' s:• ♦.k .Y+.a.S4'M. .A{ +i:d ,C ..aa .L� .R'" '~ •k.' �'St.. .}:.. >.•,..: .,:-.. .... ,r-...x: :..a .•.: .. .. t+.. -:.G. DU .: ...�.r.+••{f.+ ..:i.} '..d n> u.,...!sa,:. ,•N,k.. i�h•` '.i3:•.���.•.t.. •:,6 irax [ 4: 3: t.' b � : 4 t•' '. f. a-fl' X' 'k'•t- ,a�—+ >, .ion";'" 'e.:,�•. w >' .;'Sir... '�. a�.� r tom,,. � �? r'a: .�.. :s'i:` •,',`:z�:�'s�#a:;:..a... ms.., ..�,. e •'�.. •s ,� �. •�: ,,.,,..tom•�' .,x ':�... :� ':y. .��" "5��,�{' 'YCa• `v3:. <. ,.... ...., ,., -fi ..,. ..?>c'�'.4:.:f .... .. -rS<. ...... }yam.{..._ .,'r.. ,...t �e ''L':. •:?,•y,� k,...a...'d £;X ...f:....v t.....:.,-•..,s:.�chr.+..s`rs... fes- .2Y.i.d•.....�..w , ,o<- .,..:•t $�"<.. ,"w.-c :+... ....:�.•r>}= ..,3�'`1. �".+2:•>t, i�:• fi.. __��44 �za"sis �''>�'•'�+' .,,,x.. :"£...,.,•?.-, .ar.. �• ,s,a -.S?t3> ti'•x ..3..k..C:.;FiSw+''"�.ism. f7ai •.. , .,.--t•a:•.:a .:.,aa .. 3.<.. +.+. #..c. ..,<> Ks. to ....+ v- ..::. .4. .,,.�.�. ......x.... ..'' .. n. , .%.�.� :4 a.+a< .v.. .:...,•.'�>.a}.... ^.-.:3 'x:.: •a. ssa<..:..2:«f.4.:'zst.::<+�..:�:�-9A'£+ >✓ .4. ...;.<.:. ..a. .. :: ...... :`. ..:. .,... 4.u,.,..5.,r.>} ,,,,aa g •�•..•n'ri;�•+£Y v4::.X.,.x...t >3...'f.. .�:..:.':.. . i .....>«..:e..3.. :2.....•,'x . .. <k :.r.:., .. f x..........Ar...,-+5.,�� .::�-Y ..,,s`.< S>, ::...:,. ....,. .:..:.,+., fi":p'.:. .rs.3: h-. , :.. r`kr. ��.e. .-+.e- ::#• *a. .'t 3sr. ..-u. �::c":,..x f, .':Z;'.. ..�s".�`a..}"�' .. ..4. ..,.....,.:..,.......E..,6., ,.:x. ......�''....s.ra<.:�a4•S:ir�.':•s�.. s....rS..R;: ..,c::K:. v<>.sa:?:✓�.:.;a3{:...•t�'b''^:F;eC...ra^x... ".<:� ' :.:. .,.,�.t.!z..:t.:w3.."&>:'>.^s:.....•::Y:esJ}tY.+�����wrt1^h� ..t...r.,<.J,-E..a...4..n •..`k"i..aiK' ..:. ■ Employer bears investment risk. Employees choose and self direct their ■ The retirement benefit is predictable investments from professionally managed and known, based on the various investment products and have access to benefit formula of retirement plans. investment information. ■ For employees with many years of Employees have an opportunity to for service,the defined benefit formula- increased retirement income based on may provide a larger benefit. their investment decisions. ■ An employee cannot outlive his or Shorter vesting periods. her benefits Younger employees have many years to ■ Benefit increase with each year invest their account balances. worked. Employees can transfer balances to other ■ A disability annuity is generally qualified plans or and Individual provided. Retirement Account(IRA)upon ■ If an employee has five years of distribution. earned service,the employee may Portability features provide a potential for augment its service years and more retirement income for employees purchase up to five years of non- who have several changes during their qualified service to enhance future careers. benefits. ■ Flexible benefit options may include ■ Cost-of-living adjustments are lump-sum distribution,partial generally guaranteed and designed to distributions, or withdraws. mitigate impact of inflation on retiree. ■ Immediate survivor benefit based on an ■ Survivor annuity protects significant employee's account balance (including others. employer contributions and earnings). 21 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. ... ... >:....:.,.. .. .. ... :.... .... ..:.. .... .. .......,...... a......a ..: .:,.>:: moi: 'C: :`Fi i r. .... ..:... ...... .- .. .. .., ,<•..?a,_.'...,..:........r.... L tiff T c:l F: 3•S S 4 n.. �s 1. f ? ..T, ......., ............. a ..r... .. :.. �;: ..... ........fR- .5[': Sawa:.5s> NOTABLE DISADVANTAGES TO EACH RETIREMENT PLAN xa. �.:e.......'.. .,. �...:ec:,.•,. :r....... .. .....� ...N.,2--2�..<>•:• .;:•''y.S ,3' .sq$r^ y� s<,i:...2..:T-+l''Y >T"'.: .> ... r.>..ti..x...�.. .,..,.,. ,..:,... .......... .. ...'�e,�::.....�.. :,x.. :.. .,a�"'��:,.K i. ..c:.. i' �,�• :>«sa Yom;' >.as•.k. +n'.a.,�3,',yy��,, •;'�t�+.c.—s�fi'F�'s:t :r> y •ii�k. ..T.G. \>Z•- Y. ,.k:.. < r 2. .tj t r•: p k. �SCi �: •s� S3. a� '::'r:. xsxL3sii. fiic'. Sy f, .. „r' ...,.. r.t s., h' ... . ,..xx.,.,.,. '....:- •:� i s'�e.rt:,2< `�:}.i:u:3 xx�� }q� f. �. n2 .oyw,..L::. :3A4: �F+� :5>RK'ir N"'h�" •')i .� � y C :GCf� ...:.,..::t.,'}..as >:.sfr w....a::. , ,S.a. -..,.i§'a4:h..n...yam.. SE. '�+. •.�S-.. .$�. t>. '� S he•it6 ? ,'C'?7 0: 5:r. :'eiE. .�'+. s�:•C T'S: .. x..-.,..r...4.fa.. .<.<...�... r•,. ., [, , .. ,>,n...`�' .e. a tx.t'.. .3, ::, k�:..8 ?'a'.. .Y''<u .:.,•. r.y. ... ) ... ...F. 2.. :...... .::[.Y"^..s...S.E...+.�./...<a,. ....,.... :•v*?.:.�•. nt'. s: ?Y.k .s .. ...}i': .?:�2 S,.�+3 r:+`�i.,M,.�S�Y'"'% ■ Employees with shorter service or who Employees bear investment risk; leave their job before retirement might therefore they must actively monitor not earn a large benefit or even qualify their investments. Poor investment for a benefit. decisions may result in lower benefits. ■ Employees have no say in plan Older employees may have too few investment decisions. years before retirement to accumulate a large account balance. ■ Benefits are reduced if an employee chooses an early retirement option. Employees assume responsibility for retirement income cash flow and ■ If an employee terminates employment inflation protection. and gets a refund,the employee receives his or her contributions and Death and disability benefits include interest, but not the employer members account balance. Unless contribution. additional death or disability benefits are provided by group term life or disability plans,the members account balance may be insufficient for members with shorter service. 22 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. t F ar (; •x .c .S' yr .E.: PE ERS NOTABLE CONSIDERATIONS OF EACHIRIETEREMENT PLANT r• rx L:. h b f' ,Y 4. 'Y .3• ';-'"3>4:a':': :-:....:�.':.- .� � ..... ..:...� -:6.Y:r, rev: 3 YC Y^ .;,3•i 4. qe 'Tv'•<< Oji• { � -.y:. :::xv1. r."kY �'•Y..sk•<'a. .....:r•.:` ':�f� •v'r,..v ..<�:+A. �.. ..Y.. :F� � .,>r+'%.,...Y""''r....'<,. <. s.. .. ......r. n+ ':f•;Y:. 4X•.;.�.n.N3".:.^' .'hZ:.NT't.S.+k.."'�.^ Gi�.i".!i- > <5,:. ■ ADB pian resembles an insurance A DC plan is a 401k style investment plan, in that it provides a guaranteed, plan resembling a saving accumulation predicable retirement benefit based on program allowing for greater individual specific formula and participation in the control of the plan choices, program. ■ Defined Contribution plans attract ■ Defined Benefit plans attract employees employees that: that: Want investment control and are ✓ Want a guaranteed benefit for life willing to assume the related risk for that is not affected by fluctuations the opportunity for potential growth in the financial markets. of their retirement money, ✓ Plan to stay with a covered ✓r Do not-pian to spend their entire employer for many years. career with a covered PERS employer and benefit from the ✓ Prefer the state to make investment portable plans. decisions. ✓ May leave and reenter the workforce at various times for family or other personal reasons. 23 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. Y- J a• ^` S: T, a. 1i .7 PSA F SR s 3 Ya r� i; # RK- : wY n` , Y S :� A•x �;. 4 4.. 1. ... ... .x...... ........ ............... .: ,YA...Y X;^ :t4:-`.aea, id' KEY OBJECTIVES COMPARED ....tf :... >. ... ....t.. .. .. .:....' .. .,...y: .. .....x:: .. a s}' .. 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''�. ...Lb'\•aa-.%..:tvn r 4 Ry: S 4 t.�.'•'.. >.st<. t: 1. S ,f is S n3ta.. sR ff•• '4. ,•� ,x Rau h +;w c •xa 'Y�1.,'. s.. �<�• ,t:[ .-k:t �''`i.. ',i�f< F ..{t.. ..K;.:.� � SvS:x:'° v.5'ji•< ::;,;. •, Vit. :.,t. :S.^>.. a.t ir',•>•. .::s:Fa..:v, .k.�a±z. ':{, it: ).�>. .,"4<'S?S�t'ir' v`. .\ ^' :•:1•. uR,v S ,r..• .vis ^:`::,v,:.. ,..v.. .x Y•Sa : 4'ti> .. .,i .:.5:. .. '33f w... - )L•,. YtA t. x:- �t.... ..,.,. a .r, ... ...h.a.s .E,e :��t .. .x.. .y.>t.. .t. 4. :... :,: .. a.K .. .,..... '�Sa:7. R,. .,:. .� .:: :£....., ,., ........ y w .�;. .,'aR. <• -:Y. r'^:. :.s. T•)C' .... .. ... FY .,:-.., 3••a. ..X....v ........7 „ , % .. : :y. -... .S':,: .:`R<. a:Yi w ^f:y,,,,;,; .. y't`E:<-•>;A SFiccQ'. c .ayt. x'c �y.azE!$ >�>�.,4,���•,�e,t 3.�x.t x.r. ar£€ayPtr FY�s Account accumulations are fully Benefits are not portable outside of > I y p� x r y portable the sponsor s •uri diction t 4 Short vesting schedule Typically longer vesting period �sr } _ _ 2 �,•,.•y t �,b t n SrR x as d 7 Employer contributions are statutorily Variable employer contributions f Cocn Ons defined defned and predictable subject to the political roc ess � fY Y ="OA � • i � ~` 4 Benefit formulas determine Benefit payments made from accrued e�n+efit retirement benefits to be paid by ix � y/� Y d ` investment earnings and principle IF aymnts: plan sponsor 2"'< r \. Y k Benefits directly related to investment Benefits have no direct relationship << 2 t FT 3 xH; y p El- Vc I t ".x:, `.: performance to investment performance i 3 •. � �'� �,.it •� T 4+FtX ,1 ?) J.. a r k 1 ........... Y Employer er makes investment T�Y-��.•;F L�� �k x 4 x p r z:: 5 Employee makes investment decisions � fiw�=Yne: decisions Y v Employee assumes the risk for Employer funds guaranteed benefits i investment performance and assumes investment risk w' '< 5..ra• t i ' 3 ?wr x k Strong possibility of future unfunded > i + V No unfunded liability roblem . . :K ,}x ,- W �'p llablllty W r 24 Securing California's Fiscal Future Assemblyman Keith Richman, M.D. act •.:'q.: E •t' f: t 'S Y .r }: t y. / s y k: .tF. wt x. l� S iN r 5�• A9 fi } : SAG .... . . AVERAGE WEE'xv%.Ijl-JY WAGE DIFFERENCES Source:EDD-Employment data from Current Employment Statistics Program;and wage data from the Quarterly Census of Employment and Wages Program N• V.i 1) : v. 4 !. •'E .<,.r r z "'.03 y mdras w z t : ::.. w {, z- }� �0i 77i, 3 nna 4 _N 011 JALJRK .4" j- -77 1. n •- 'rvat+� ct $805 11,983,7+ 0 A $850 1696200 L Mate dove .1600 rnment 966 471 `ecieral I $1,043 258,700 overnment T otal.:G. .-..-overnm� . t - $893 2.%426.1500 25 Securing California's Fiscal Future Assemblyman Keith Richman, M.D. .. .:....:.:.,.....: : t x t.. ••5 3 sr r } :...,:. .. .. ,, .. .. s. ... .. ....E... . . :. , . .,.. .. .....:..:. .....:..>...... .:.: is r.L....... .. ........ }^'n '", y PUBLIC VS. PRIVATE SALARY COMPARISON, Source:Department of Personnel Administration's December 2003 Report on Salaries for Occupations Comparable to Selected State Civil Services Classifications Office and Administration Average State Average Private Government Salary Salary Salary Range Accountant-Journey 42750 4,928 3,110-61220 Accountant-Entry/Sub-Journey 39305 3,802 2,743-53,592 Administrative Analyst-Journey 4,780 53,274 3,759-6,995 Administrative Analyst-Entry/Sub-Journey 32720 49240 2,471-59592 Attorney-Senior Journey 9,328 1031417 5,643-15,205 Attorney-Journey 79696 7,665 4,742-10,879 Attorney-Entry/Sub-Journey 59126 69079 3,3 82-7,788 Clerk/Clerk Typist-Senior Journey 21945 22503 1,831-4,258 Clerk/Clerk Typist-Journey 29506 29330 11646-3,564 Clerk/Clerk Typist-Entry/Sub-Journey 21181 21042 1,466-3,194 Data Processing Analyst-Journey 5,009 59394 3,480-89192 Data Processing Analyst-Entry/Sub-Journey 39927 49545 2,320-6,767 Librarian-Journey 4,594 33,922 3,092-9,062 Eneineerine and Allied Civil Engineer/Civil Engineer Registered- 6,457 79342 419458-99687 Supervisory Level Civil Engineer/Civil Engineer Registered- 52710 63,116 3,692-71633 Registered Journey Civil Engineer/Civil Engineer Registered- 4,660 5,149 3,042-69367 Registered Journey Drafter 3,769 3,691 2,389-49942 Engineering Technician-Journey 43,239 3,704 2,604-5,472 Crafts and Trades Electrician-Journey 3,902 4,298 2,756-6,608 Janitor/Custodian 23,315 23,093 11156-3,629 Stationary Engineer-Journey 4,606 41727 3,259-52352 Medicine and Rehabilitation Licensed Vocational Nurse-Journey 21862 3,862 2,053-49844 Registered Nurse-Journey 49443 59599 33,303-6,637 Pharmacist-Journey 53,748 79760 5,008-9,363 Staff Psychologist(PhD) 59570 6,605 39768-9,062 Social Worker(MSW) 31,839 59361 21657-5,592 26 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. z: tt $. AT 4 fi k X S[" N" . S Scathing Report Cites San Diego's Poor Management: An investigation by lawyers hired by the city produced a scathing report citing dysfunctional management of the city of San Diego over generous pension deals with public employee unions and in financial dealings with Wall Street. As reported September 17 in the San Diego Union-Tribune and Los Angeles Times,the report found no evidence of criminal activity, although it and related documents have been turned over to federal investigators looking into possible violations of securities laws. The city understated its fiscal problems, stemming from enormous pension debt, in sewage treatment bond papers filed with the Securities and Exchange Commission. The report was released by Vinson&Elkins, a Washington,D.C. law firm,and it opened by saying San Diego's "image as a model of fiscal responsibility has been seriously tarnished." Failure to disclose to investors the city's retirement deficit($1.17 billion,plus$1 billion in unfunded health costs)was noted in the report. It also included a handwritten memo from the city"s treasurer, Mary Vattimo,of March.13,2003 saying that unfunded liability was projected to soar to $5 billion by 2021. The Times reported that top officials were`willfully ignorant of key financial details and elected officials lacked the background or inclination to understand the city's complex pension plan, considered one of the most generous in the country."The Times noted that, according to the report,the City Council,to placate"politically powerful"labor unions, increased pension benefits and planned to pay for them with future stock market earnings, not the city general fund. But the stock market declined,and the-council compounded its mistake by refusing to increase general fund contributions to the system, allowing the deficit to grow. As scathing as the report is, it was described as a"whitewash"by Diann Shipione, a pension trustee who has been sounding alarms about the pension mess for two years. "As damning as this report is, it's an expensive and successful whitewash,"the whistleblower told the Union-Tribune. "It assumes that everybody getting in line for millions of dollars of unfunded benefits was just too stupid to notice that something might be wrong. That is a real stretch. There is a premise that people in city government did not know the consequences of their actions,which they clearly did." The Wall Street Journal, in a September 16 column,cited untenable pension obligations as it compared San Diego to the beleaguered United Airlines and US Airways. Pensions Blamed in Berkeley: The city is falling further into debt,reported the Berkeley Daily Planet(September 14), and Budget Director Tracy Vesely blamed higher pension and health care costs. She said higher-than-expected employer contribution rates,required by the California .Public Employees' Retirement System,will cost the city an extra$1 million next year. 27 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. Employees would forego pay raises for three years as part of the deal,but, said Mr.Moorlach, "It's always an up escalator;there's no down escalator.After three years,employees will come and complain that they haven't had a raise for three years." Reed Royalty,president of the Orange County Taxpayers Association, said in a letter to supervisors: "Taxpayers in the private sector are'deferring retirement—sometimes into their 70s —to support themselves and to pay the taxes that enable government employees to retire at age 5 0 or 5 5 with inflation-adjusted pensions that approach 100 percent of salary in the highest-paid year of service." LA Media Exposes Excessive Public Pensions: Two major newspapers covering the Los Angeles metropolitan area had major features 7 days exposing excessive public pension benefits. The Los Angeles Daily News reported on July 10 that 1,198 retired Los Angeles County government employees receive pensions of more than$100,000 a year,with the top ten ranging from $210,434 to $316,047. According to the Los Angeles Times(July 12),the pension crisis was precipitated,beginning in 1999,when former governor Gray Davis signed a bevy of union-backed bills that allowed state and local governments to sweeten retirement packages. "Improvements varied-at the state and local level,but increases of 33 percent to 50 percent have been common. In most cases,the increased benefits were made retroactive with employees paying little or none of the extra costs," the paper said. For the state,the pension cost increased from$611 million in 2001 to $2.5 billion this year,the paper said.And eight local governments so far have been granted a deferral of their contributions to the Public Employee Retirement System this year,but will have to pay back the deferred amount,beginning July 2007,plus 7.75 percent 'Interest.The irresponsible eight: Santa Clara County, Long Beach,Lemon Grove, Paradise,Pacific Grove,Richmond, South Gate and the Sacramento Metropolitan Fire District. Other government jurisdictions, including the state,are borrowing to pay forpension costs. According to the San Diego Union-Tribune (July 8), San Diego Mayor Dick Murphy is proposing to borrow$200 million to pay for pension benefits.The city's fiscally-challenged pension fund has a$1.15 billion deficit and unfunded retiree health costs estimated to be between $600 million and$938 million. Carl DeMaio,president of the Performance Institute in San Diego, said, "Submitting an IOU is not a payment. It is not actuarially sound.All you're doing is pushing back a crisis for two or three years." The Daily News obtained the data on Los Angeles County retiree benefits through a Public Records Act request,but the county refused to provide the name or former position of the person getting$316,047.What was done to cause what the Daily News calls"sugar-coating"of the retirement benefits?The list is long and varied: First and foremost, basic retirements were increased to allow government employees to retire earlier at a larger percentage of their salary per year(times number of years worked).For some,this allows an employee to get 90 percent of salary at age 50. 29 Securing California's Fiscal Future Assemblyman Keith Richman,M.D. provide data. t ne highest pension is being collected by the widow of former Los Angeles County Sheriff(up to $270,000 a year),the paper reported. In an April 7 editorial,the Daily News called for a change. "No one denies that public employees should be paid fairly for their service, but the current pension system affords them benefits unheard of to most of the hard-working Californians who pay the bills.And the purpose of government shouldn't be to enrich a lucky few, but to benefit all." Soaring Public Pay and Benefits Fuel Fiscal Crisis: Public payrolls have grown far more than inflation in the last five years, reported the Los Angeles Daily News(March 13). In fact,the newspaper's analysis found that costs of salaries and benefits for the financially troubled Los Angeles Unified School District grew three times the 17 percent rate of inflation. Steven Frates, senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College,told the Daily News: "At all levels of government,the rate of compensation has gone up much more rapidly than it has in the private sector and,most importantly, faster than the personal income of the people who pay for this."Personal income per capita in California increased 24 percent over the five years through 2002-03. "There has been a wealth transfer.It has gone from the citizens to the people in government." The newspaper reported these statistics for the state, city of Los Angeles,Los Angeles County, and the LAUSD (stats are over the past five years through 2002-03): State of California—Costs of salaries and benefits,including pensions, soared 41 percent, from $13.3 billion to $18.7 billion. The number of full-time employees increased 10.5 percent,to 212,563. City of Los Angeles—Pay and benefits, including pensions, increased 26 percent,from $1.8 billion to $2.2 billion.The paper said average pay for police officers grew 28 percent, compared to 23 percent for civilian workers. Overtime costs increased by 61 percent,and workers' compensation costs were up 81 percent. Los Angeles County—Salaries and benefits jumped 39 percent, from$5 billion to$6.9 billion,while average county employee's pay increased 31 percent,to$49,343. LAUSD -- Salaries and benefits grew 51 percent, from$3.6 billion to $5.4 billion,as the average compensation package grew 27 percent,to $65,526. On March 10,the board approved $427 million in budget reductions and gave the superintendent until April 9 to find$61 million more to cut. The board eliminated 480 positions, mostly nurses, clerks and administrators. 32 Securing California's Fiscal Future Assemblyman Keith Richman,M.D.