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City of Palo Alto )CA) Staff Report: Response to Colleagues' Memo on Employee Benefits (2013).

City of Palo Alto )CA) Staff Report: Response to Colleagues' Memo on Employee Benefits (2013).

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Published by wmartin46
Background

Council proposed exploring a sustainable model of pension, health and other benefits in its Colleagues’ Memo dated June 15, 2012. Beginning with the Council meeting of October 15, staff created a foundation for this discussion with a review of the components of total compensation (salary, health benefits, retirement savings/pension, paid time off, etc.) and their relationship to recruitment and employee engagement. This report, the second in a series of three reports, seeks to educate the public and City employees about the CalPERS pensions system, explain the Public Employee Retirement Law (PERL) and the Public Employee Pension Reform Act (PEPRA) that became effective January 1, 2013, and provide a foundation for policy discussions and long-term strategies from Council regarding employee pensions. Many of these issues are subject to collective bargaining with the City’s recognized bargaining units and to state law. The primary objective of PEPRA is to ensure that employees share in paying the normal pension cost, introducing a lower-formula second pension tier, and in this regard Palo Alto has been in the forefront of implementing cost-cutting pension practices as permissible under existing law.

Before PEPRA, Palo Alto had already implemented second tier CalPERS plans and negotiated that employees pay their full percentage of pension cost for nearly every employee group. A review of our standard Bay Area survey cities indicates that only 41% of cities have created second pension tiers for miscellaneous employees and 50% for public safety. Additionally, 25% of survey cities continue to provide City-paid employee pension contributions and only one agency pays some portion of the employee pension contribution for safety employees.
Background

Council proposed exploring a sustainable model of pension, health and other benefits in its Colleagues’ Memo dated June 15, 2012. Beginning with the Council meeting of October 15, staff created a foundation for this discussion with a review of the components of total compensation (salary, health benefits, retirement savings/pension, paid time off, etc.) and their relationship to recruitment and employee engagement. This report, the second in a series of three reports, seeks to educate the public and City employees about the CalPERS pensions system, explain the Public Employee Retirement Law (PERL) and the Public Employee Pension Reform Act (PEPRA) that became effective January 1, 2013, and provide a foundation for policy discussions and long-term strategies from Council regarding employee pensions. Many of these issues are subject to collective bargaining with the City’s recognized bargaining units and to state law. The primary objective of PEPRA is to ensure that employees share in paying the normal pension cost, introducing a lower-formula second pension tier, and in this regard Palo Alto has been in the forefront of implementing cost-cutting pension practices as permissible under existing law.

Before PEPRA, Palo Alto had already implemented second tier CalPERS plans and negotiated that employees pay their full percentage of pension cost for nearly every employee group. A review of our standard Bay Area survey cities indicates that only 41% of cities have created second pension tiers for miscellaneous employees and 50% for public safety. Additionally, 25% of survey cities continue to provide City-paid employee pension contributions and only one agency pays some portion of the employee pension contribution for safety employees.

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Published by: wmartin46 on Jan 23, 2013
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01/23/2013

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City of Palo Alto
(ID # 3275)
 
City Council Staff Report
 
Report Type: Action Items Meeting Date: 1/22/2013
City of Palo Alto
Page 1
Council Priority: City FinancesSummary Title: Staff Response to Colleague's Memo Concerning PensionBenefitsTitle: Response to Colleagues' Memo on Employee BenefitsFrom: City ManagerLead Department: Human Resources
Recommendation
Staff recommends that Council receive input and provide guidance, on issues related to the
City’s strategy for reforms and innovations in employee retirement plans and pension. TheCouncil’s direction for this session anticipated the following purposes:
 1. Educate the public and employees about CalPERS pensions and how they work2. Inform the public and employees about the recently enacted pension reform and how itimpacts the City of Palo Alto3.
Enumerate the limitations on the City’s options given our participation in the
CalPERSsystem and the requirements of state law.4. Explore additional pension legislation to close remaining loopholes and to give citiesbroader decision making power in regards to their pension plans.Staff recommends, at a minimum, the following action by the Council:DRAFT MOTION: I move that the staff explore additional pension legislation with our legislatorsand other parties (such as the League of California Cities) to close remaining loopholes and togive cities broader decision making power in regards to their pension plans. (Agenda Item laterthis evening on Legislative Matters anticipates this action).I further move that staff continue to work with our employees and the public to fully
 
 
City of Palo Alto
Page 2
understand the facts about pensions and the status of the
City’s efforts to manage our costs
and provision of benefits while maintaining a talented work force.
Background
Council proposed exploring a sustainable model of pension, health and other benefits in its
Colleagues’ Memo dated June 15, 2012. Beginning
with the Council meeting of October 15,staff created a foundation for this discussion with a review of the components of totalcompensation (salary, health benefits, retirement savings/pension, paid time off, etc.) and theirrelationship to recruitment and employee engagement. This report, the second in a series of three reports, seeks to educate the public and City employees about the CalPERS pensionssystem, explain the Public Employee Retirement Law (PERL) and the Public Employee PensionReform Act (PEPRA) that became effective January 1, 2013, and provide a foundation for policydiscussions and long-term strategies from Council regarding employee pensions. Many of these
issues are subject to collective bargaining with the City’s recognized bargaining u
nits and tostate law.The primary objective of PEPRA is to ensure that employees share in paying the normal pensioncost, introducing a lower-formula second pension tier, and in this regard Palo Alto has been inthe forefront of implementing cost-cutting pension practices as permissible under existing law.Before PEPRA, Palo Alto had already implemented second tier CalPERS plans and negotiatedthat employees pay their full percentage of pension cost for nearly every employee group. Areview of our standard Bay Area survey cities indicates that only 41% of cities have createdsecond pension tiers for miscellaneous employees and 50% for public safety. Additionally, 25%of survey cities continue to provide City-paid employee pension contributions and only oneagency pays some portion of the employee pension contribution for safety employees.Most of the PEPRA changes apply to new, future employees. PEPRA does not do enough,however, to address the hurdle that California agencies still face covering the cost of increasingly expensive employee pensions for current active employees and retirees. Citiesoperating under the CalPERS pension system will experience increasing costs and the lack of flexibility provided to cities will put downward pressure on salaries and health benefits.
 
 
City of Palo Alto
Page 3
PEPRA does level the playing field for competing for talent for the long-term, with all newCalPERS agency non-safety employees earning the same 2% at 62 pension benefit formulaacross CalPERS agencies statewide. It also caps pensionable earnings, imitating social security.There the flexibility ends, leaving CalPERS cities like Palo Alto with few alternatives totraditional defined-benefit pensions short of further legislation. If the City wished to hireemployees with alternate retirement benefits but no defined-benefit CalPERS pension, we
could not legally do so. Attachment A is an analysis of PEPRA’s impact to Palo Alto. At Council
request, staff has sought employee feedback about the desirability and the perceived value of various benefits through two facilitated employee forums. (Attachment B is a summary of theemployee feedback).
Discussion
What is a “defined benefit” pension?
 
A “defined benefit” pension is a retirement plan that
guarantees a fixed monthly retirement allowance, calculated according to the plan formula,
when certain prerequisites are met. CalPERS’ retirement allowances are calculated based on
three factors:

Service Credit - generally, the number of years the employee worked

Benefit Factor - the percentage of Final Compensation an employee is entitled to for
each year of service. For most CalPERS’ plans, the benefit factor increases with the age
of the employee at retirement

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