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Pension Reform: Avoiding the Perfect Storm

Mayor Doug Tessitor discusses pension reform and negotiations with the city’s employee unions.

"Over the past few years the city has been on the forefront of pension reform, but that came with challenges from city employees and their bargaining unit.  What are your thoughts and perspectives of the city's current pension reforms and negotiations with the different city union groups?"

No one should be surprised that the changes that are occurring in public employee pension plans are creating consternation and push back from public employee unions. Change never comes easily and when benefits that have come to be considered sacrosanct are put on the table, City Councils and City Managements become fair targets for complaints.

One needs to look at history to try to understand how we got here and why we need to make significant changes now and in the future. 

Over many decades, city administrations around the state have dealt with employee salary negotiations in ways that, in my opinion, were not very transparent and certainly were not prudent. Frequently, when budgets did not allow for salary increases to meet the needs and demands of employees, benefits were enhanced instead. Techniques such as basing retirement benefits on the single highest salary year, as opposed to a three-year average, was a convenient method to provide more potential retirement income to retirees without forcing cities to provide immediate funding. 

Another technique, used almost universally, was the payment by cities of 100% of the employee’s contribution to their retirement plans. This was the equivalent of a private sector employer paying the employee’s portion of the Social Security contribution.

While these changes were occurring, employee groups were negotiating higher percentage retirement benefits for each year worked. Over the years, earned benefits went from 1% per year, to 2%, to 2.5%, to 2.75% and in some cases to 3% per year. At the same time retirement ages went from 65, to 62, to 60, to 55, to 50, etc. For example, under these formulas, an employee under a 2.75% benefit at age 55 could retire on 82.5% of his final year salary after 30 years on the job; a 3.0% at 50 with 30 years of service could retire on 90%.

Because the cost of the benefit plans, regardless of the plan design, is dependent on investment results, cities now find themselves in a perfect storm. Generous benefits, rising incomes, stagnant sales and property taxes, and poor investment performance have all combined to make it impossible for cities to continue business as usual.

Now we are forced to start dialing back retirement ages, reduce the percentages credited, etc. Because we have a contractual and moral obligation to fulfill our promises to existing employees we are limited to asking them to contribute their employee share to the system. This makes the largest financial difference to the city immediately, and is the subject of current labor negotiations.

At the same time we must negotiate changes in our future retirement benefits for newly hired employees. This is the so-called two-tier retirement system. By introducing new rules, for new hires, we can begin to manage future costs. These changes must also be negotiated with the various bargaining units.

All Glendora citizens can be very proud of the way our city’s employees have risen to the economic realities we face. They recognize that they are very fortunate to have good jobs with excellent benefits. They also recognize that by each one making a relatively small sacrifice, the chances that we will have to have large staff reductions is minimized.  Each member of the City Council and the administration has expressed our deep appreciation for their willingness to help.

We appreciate that these sacrifices are not easy. Each of us, individually and corporately, are dealing with the same problems. None of us caused the problems, but each of us is called on to help solve them.

* The views and opinions expressed in these articles are those of Doug Tessitor alone.  They are not to be construed to represent official positions of the city or the opinions of any other council member.

Glendora Mayor Doug Tessitor fields your community questions and answers them in a weekly column. In Glendora Patch’s Mayor’s Roundtable, you are invited in an ongoing dialogue about issues and concerns you have regarding your city. Share your ideas and voice your opinion.

Have a question you'd like Mayor Tessitor to answer? E-mail hazel.lodevicotoo@patch.com

Doug Tessitor September 06, 2011 at 05:31 AM
Bill, Books could be written - probably have been - about the pension issues and what should have been done. I appreciate that you are not putting this on my "plate." Thank you. However, I doubt that there has ever been a time when money was so plentiful in the city that a council could have sold the idea of putting aside extra money for pensions. Ever since Prop 13 in the 70's (?) local governments have been scratching for every penny. By the way, pensions started to change in the early 80's. A result, I believe, of Prop 13 restrictions on salary increases - and creative negotiations as I said in my original article.
Doug Tessitor September 06, 2011 at 05:38 AM
Before you think otherwise, I am in favor of Prop 13. Before that law, there was no restriction on local government spending. If something needed to be done - easy- just raise property taxes. Many people were priced out of their homes as a result. Today we are paying the piper. OPM - Other people's Money - has been about used up. So, local government - and hopefully, State and Federal governments - are having to get serious about eliminating unrestrained spending.
Regulate September 06, 2011 at 07:49 AM
For the record, CALPERS investment return in the fiscal year 2010-2011 was 20.7%. “This is our best annual performance in 14 years,” said Rob Feckner, CalPERS Board President. “For the second straight fiscal year, the Pension Fund exceeded its long-term annualized earnings target of 7.75 percent.” http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2011/july/fy-2010-11-returns.xml
Doug Tessitor September 06, 2011 at 01:02 PM
Notice that Mr. Feckner said "best performance in 14 years." One year of excellent performance does not make up for several years of horrible performance. Or haven't you looked at your own investments in awhile? Also Mr. Feckner was not including the drop in the last two weeks, where a few days of panic wiped out all the gains of the last 18 months. Markets go up; markets go down. CALPERS is supposed to invest in low risk, hence low return, securities. It is awfully difficult to AVERAGE 7.75% return in an agressive portfolio, let alone a conservative one. Not to mention also making up for past losses.
Patchy September 06, 2011 at 10:43 PM
Interesting subject......It would seem the city council is really concerned with spending and wants to make cuts in benefits to it's employees. Funny how the cuts don't apply to them. Our council enjoys fully paid medical insurance paid at tax payer expense. Why all are either retired or otherwise employed? So shouldn't they already be covered? Not publicized, but all the Glendora Department heads also received a 2% raise July first... Funny at the same time they are asking..... no telling their employees that they are going to face large benefit cuts. They were giving raises to the department heads... Same with the city attorney. No cuts to his contract. Regarding pensions and costs. Before the downturn in the economy there were a number of years where Glendora's pension costs were ZERO. Glendora should have been proactive and set aside funds save during those years to help pat for years when pension costs grew. Mr Tessitor was on the council during these years.

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