HomeMy WebLinkAbout05.d.1) (Handout) Memo from Christopher Ko re: Pension Benefits and Employee Relations Boot Camp •
Central Contra Costa Sanitary District
March 1, 2011
TO: HONORABLE BOARD OF DIRECTORS
VIA: JAMES M. KELLY, GENERAL MANAGER 9
RANDALL MUSGRAVES, DIRECTOR OF,�DMI ISTRATION
FROM: CHRISTOPHER KO, PROVISIONAL HUMAN RESOURCES MANAGER
SUBJECT: PENSION BENEFITS & EMPLOYEE RELATIONS BOOT CAMP
On February 17, 2011, Board President Hockett, Board Member McGill, Board Member Nejedly,
and staff attended the Pension Benefits and Employee Relations Boot Camp for Elected
Officials in Irvine. This event was sponsored by the California Foundation for Fiscal
Responsibility. Approximately 200 public officials were in attendance along with 350 online
participants. This memo will provide the Board with a summary of the discussion sessions.•
Public Employee Pension Transparency Act
This bill is currently being introduced in Congress by Representative Devin Nunes (CA).
Currently, the government accounting standards allow states to use procedures that could
understate their liabilities. California, for example, is expected to exhaust its pension funding by
2026. The bill is aimed to require state and local government pension plans to uniformly
disclose their liabilities with the Secretary of the Treasury, who will then make the information
available to the public through a searchable website. State and local governments that fail to
disclose the requested information would have their tax - exempt bonding authority eliminated.
According to data obtained by Representative Nunes' office, local government pension plans
are underfunded by $574 billion. The bill also expressly states that the state and local pension
obligations are solely the responsibility of those entities and that the federal government will not
provide a bailout.
Chapter 9 Bankruptcy
Lisa Hill Fenning, a partner of Arnold & Porter LLP a former U.S. Bankruptcy Judge for the .
Central District of California, provided information on filing for Chapter 9 bankruptcy as a
municipality. In order to file, a public entity must be insolvent with the intent to confirm a plan to
adjust debts and must have exhausted other alternatives to restructure debts.
According to Ms. Fenning, bankruptcy provides a public entity with three advantages: it provides
the entity with the leverage to negotiate with creditors and labor unions (including the ability to
reject collective bargaining agreements in some cases), it forces all creditors and labor unions
to work collaboratively on a solution, and it requires a neutral decision -maker (bankruptcy judge)
to decide on the fairness of the proposed solutions. Ms. Fenning warned, however, that
bankruptcy should be considered only as a last resort because it is expensive, can damage your
credit rating, is distracting, politically charged, and has an uncertain outcome. Furthermore,
case laws are still undeveloped on a municipality's ability to modify pension plans for existing
employees and retirees.
Honorable Board of Directors
February 24, 2011
Page 2
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Vested Benefit Rights and How to Successfully Negotiate on Those that Aren't
Jeff Chang, a shareholder with the law firm Chang Rutherberg & Long, PC, offered his
interpretation of the pension benefit rights for vested employees, and the common
• understanding that modifying or reducing a public employee benefit plan may constitute a
prohibited impairment of contract under the Constitution. Currently, public employees believe,
based on judicial determinations, that a public employee has a vested right to their pension and
that right cannot be altered unless "comparable new advantages" are exchanged in return.
Mr. Chang, based on his analysis of the case law Kern v. City of Long Beach, offered his
interpretation that public employees immediately obtain a right to participate in whatever public
pension system is made available to them upon employment and that the system and its
formulas can be changed, but not in away that deprives employees of what they have already
earned. In other words, vested monies cannot be taken back. He further believes that
"comparable new benefits" is only necessary where a change takes away already- accrued
benefits. Therefore, he believes pension formulas could be changed going forward for vested
employees.
In conclusion, Mr. Chang suggested several approaches that employers can take to reduce
pension costs, such as switching from a defined benefit plan to a defined contribution plan,
moving to a multi -tier program of benefits, removing "spiking ", raising the normal retirement age
for all plans, and reducing the employer's contribution towards the employee's mandatory
contribution to retirement plans.
Pension Costs and Retiree Medical Benefits
Girard Miller, a Senior Strategist from PFM Asset Management LLC, provided an analysis of
pension and OPEB costs to public agencies. He believes that the pension problem was
exacerbated by benefit increases over the years, aggressive investment assumptions, no
increases in employee contributions, and unfunded liabilities that were doubled in the 2008 bear •
market due to investment losses. It should be noted that Mr. Miller's analysis was focused
primarily on CaIPERS. He also stated that OPEB liabilities are a bigger issue for many
agencies, and suggested that employers should review its actuarial required contribution (ARC)
and unfunded actuarial accrued liabilities (UAAL) with their actuaries for OPEB.
To reduce OPEB liabilities, Mr. Miller suggested reducing benefits for new hires, eliminating
spousal and survivor benefits, increasing retiree co- payments on medical plans, and offering
pro -rated benefits based on years of service (ex: employee earns $15 per month of retiree
•
medical stipend for each year worked).
For more immediate results, Mr. Miller suggested that employers should eliminate Employer
Paid Member Contribution (EPMC), require employees to contribute to OPEB, freeze OPEB
with a CPI cap, raise retirement ages, and install anew retirement multiplier for new hires. He
also suggested setting up an OPEB trust fund to reduce GASB ARC.
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Honorable Board of Directors
February 24, 2011
Page 3
Negotiating Reductions in Employee Benefits
Eddie Kreisberg, a Principal and a labor negotiator with Myers Nave, offered negotiation
strategies on reducing employee benefits. He outlined the legal constraints under labor law
(namely the Meyers- Milias -Brown Act, or MMBA), challenges elected officials can expect,
unions' usual arguments against reductions, and potential benefit changes.
Among his suggested benefit changes, Mr. Kreisberg included options such as adding a second
tier for new hires with a lesser retirement formula and using the final three year average rather
than the highest year, requiring employee contributions to pension, cost sharing on future rate
increases, moving to ' a deferred compensation or other defined contribution options, requiring
more years of service to qualify for retiree health benefits, fixing a flat dollar capon the
employer's contribution towards health benefits, reducing health plan options, paying overtime
based on statutory standard, and lowering the maximum accruals on leaves that would be
eligible for cash -out upon separation.
Mr. Kreisberg also cited the City of Stockton's Action Plan for Fiscal Sustainability, which was
adopted by its City Council and served as a blueprint for labor negotiations. A copy is attached
for your review.
Conclusion
The Boot camp provided a history of both retirement plans and OPEB, presented the magnitude
of statewide and nationwide liabilities, and described some approaches to manage the liabilities.
Many of the speakers had PowerPoint or additional written information which was part of the
Bootcamp handout material. Copies are available, so please let staff know if you would like to
have the information.
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attachments
cc: Department Directors
K. Alm
D. Clinton
D. Ratcliffe
• M. Scahill
C. Ko
•
Resolution No. 10-0199
STOCKTON CITY COUNCIL
• RESOLUTION BY THE CITY COUNCIL OF THE CITY OF STOCKTON ADOPTING AN
ACTION PLAN FOR FISCAL SUSTAINABILITY
By City Council Resolution No. 10 -0166, adopted on May 26, 2010, the City
declared a state of emergency based on fiscal circumstances; and
The City is committed to implementing a plan that will restore long term fiscal
integrity for the benefit of the City's citizens; and
The City desires that its Action Plan be transparent and understandable
throughout the community; and
The City values its employees and wants to compensate them fairly and
appropriately; and
The City's labor contracts include a host of costs and features that create
inappropriate escalating and unfunded liabilities; and
The City desires to clearly articulate a plan that will serve as the blueprint for
future egotiations now, therefore .-. �-
aril, 1 } 1, 11 L" it (rod i`1' I H''1 ft t f` `J
BE 11 12ESOLVVED BY --THE. COUNCIL OF THE CITY , : AS
,
FOLLO `*, . t . 4 s 7
1. The City Council of the City_Stockton hereby_ adopts the attached Action
Plan for Fiscal Sustainability 1 r
2. The City Manager is authorized to take such actions as are appropriate to
carry out the intent of this Resolution.
PASSED, APPROVED and ADOPTED JUN 2 2 2010
•
, ` N JOHN 1 ayor
it i, o , the City of 5 0• ton
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wirstwirstAt...aw qt/
'THER1T1 gr :iSSNt n/
ty Clerk 0 41el l r it of Stockton
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Review
Date June 19 2010
ACTION PLAN FOR FISCAL SUSTAINABILITY .
AS ADOPTED BY THE CITY COUNCIL OF THE CITY OF
STOCKTON
JUNE 22, 2010
Introduction
The City of Stockton ( "the City ") faces immediate and long term challenges
caused in part by escalating and unfunded costs in its labor agreements. The City
greatly values its employees and the services they provide to the community. However,
labor costs have escalated exponentially and unfairly, particularly when compared to the
more modest wage and benefit programs covering the majority of the City's citizens. It
is unacceptable that some of the City's labor unions ( have insisted on higher wages and
benefits at a time of recession - when the City's unemployment rate is approximately
22°/ ;and the median household mcome'forsa family "of fouNis lust over $63 000
• T hy s en 1point A 1 oh PIa intended to serve as a Y oli'cyi t i cir the Qity's
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labor relations program,' The City is committed to abiding by the Meyers - Milian -Brown
Act ( "MMBA "), and will co to_ a my :Gip: ithi p artnerships
whenever reasonably possible with labor. This Action Plan shall serve as the
benchmark for future objectives with labor.
Issues and Action Plan Principles
Issue No. 1 — Transparency/ Hidden Costs:
The City's labor agreements contain embedded costs and obligations that are
often difficult for citizens to identify or understand. For example, the City's payroll
system carries over 100 different "additional pay" codes ranging from "assignment pay"
to "longevity pay" and others. In many instances, these are simply disguised forms of
Page 1
regular salary. These additional pays make it difficult for the public to evaluate and
understand the overall compensation of City employees.
Action Plan Principle No. 1: The City shall reduce or eliminate "additional pay"
categories. "Additional pays" will be authorized only when the additional pay is
absolutely essential to the performance of special job tasks that are not encompassed
within the job description. The City shall ensure that all compensation packages are
fully, accurately and simply costed out, with total costs displayed to the public so that
city residents can understand and evaluate the pay at issue. Unless there are exigent
circumstances as determined by the City Council, labor agreements containing cost
increases shall be publicized and made available at l least two weeks prior to adoption.
Issue No. 2 — Transparency / Side Letters: The City is aware of certain "side
agreements," other informal memoranda memorializing understandings between
p ; si l {9 I " pra es" llege o tii t y S O de
de adme s and labor I . r 1 and
a re a e ( .past a st " , are .mn o a t e j b j e j caus the
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increase costs, and detract from two critical principles: (1) the public has a right to know
the contractual arrangem t ifin a � t g� ` ! p loy e s; and (2)
pursuant to state law, labor commitments by a public agency must be approved by the
City Council.
Action Plan Principle No. 2: No side agreements or past practices shall be
binding on the City unless the agreement or practice is approved in public by the City
Council. New labor agreements shall supersede all previous agreements and practices,
and shall not contain language preserving previous agreements or practices.
Page 2
Issue No. 3 — Salary Formulae: Various City labor agreements contain wage and
salary formulae that mandate automatic wage increases regardless of economic reality
based upon compensation paid in other cities and /or changes in the cost of living. For
example, the Police Officers Association ( "POA ") recently filed a grievance to enforce a
wage formula that the POA contended required the City to give a 23% wage increase as
of July 2008. The salary formula itself required the City to compare salaries from
communities that have little or marginal relevance to Stockton, including Irvine,
Glendale, Anaheim, Chula Vista and Bakersfield. The City eventually settled, resulting
in a retroactive wage increase of 15% at a time when the City was in the midst of a
financial crisis, and many of the City's citizens wer rsuffering from layoffs and reduced
pay.
The Fire Union is currently asserting the right to an 8.5% raise based on a similar
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sale formula, which conf auto alit adjust base, irrat` ional t ...r..1
comp to
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communities including tel
Garden Grove, kluntrngtowBeach,i Pasa
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San Bernardino, Santa Ana and Torrance. In ad�di th contract would provide
for a liVing 3.6% increase based u pon a t of i rrr ul `tr ! � . '��
Action Principle No. 3: The City's labor agreements shall not provide for
automatic wage adjustments that are premised on formulae or automatic cost of living
inflators.
Issue No. 4 — Fairness and Parity: The City's labor agreements have staggered
terms, meaning that they expire at different times. This results in a "ratcheting effect" —
i.e., the next union to negotiate looks to the last agreement and attempts to negotiate a
better agreement. It also results in differing benefit structures and work rules. And, it
Page 3
makes it difficult to ensure across - the -board fairness in City -wide programs that should
be given uniform treatment.
Action Principle No. 4:' The City shall strive to have its labor agreements
expire at the same time — particularly with public safety unions.
Issue No. 5 — Contribution to Health and Welfare Benefits: Many of the City's
employees make no contribution toward health benefits. For example, City firefighters
pay nothing for health coverage, regardless of whether they are single, married or in a
family plan costing over $1000 per month. This situation is in stark contrast to the vast
majority of the City's residents, many of whom must contribute toward their health care,
and some of whom have no health care coverage at all, The situation is not only costly
and out -of -step with other jurisdictions, it is unfair.
Action Principle No. 5: The City shall require its employees to make
reasonable contributioEs.toward cost of +health care coverage provide'dithrough the
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Issue No. 6 - Health Plan: The City currently offers only one health p an, a self- insured
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plan, with the plan design itse embedded into various la contracta' Because the
plan elements are embedded into labor contracts, it is cumbersome for the City to make
changes that provide efficiencies and savings, even when those changes have little
fiscal impact on employees and retirees. In addition, because the City only offers one
plan — a quality plan that has a relatively high cost — City employees have no health
care choices.
Page 4
Action Principle No. 6: The City shall offer one or more additional health care
insurance plans. The City's contributions shall be negotiated based on the lowest cost
plan made available by the City.
Issue No. 7 — Retirement: City employees are guaranteed a specific, annual pension
at retirement. The City currently pays 100% of the retirement contribution to the
California Public Employee's Retirement System (CaIPERS) for all employees. The
City contribution is expected to exceed 20% of the City's payroll costs over the next few
years for non - safety employees and 40% for safety employees. In addition, current
retirement is based on the highest year of salary earned. This practice is inconsistent
with both public and private sector employers.
Regular, non - safety employees receive lifellong pensions calculated using a
formula of "2% at age 55."
�""'r".I r j'1 T cal ''1 9'+ tit -.~'t
•} RegulacOity en-iployees withr30 7 years of services receive 60% of their highest
1 � ::� 1� I
q U ye�er's'salary for life.' - .■ G+'I i .
• Regular City employees with 20 .years of service receive 40 % _of their highest
year's salary for life.
• Retirees receive an annual COLA of up to 5% a year.
Safety employees receive "3% at age 50." Upon retirement, an employee will
annually receive 3% of their highest year's salary, multiplied by the number of years of
service.
• Safety employees with 30 years receive 90% of their highest year's salary for
life.
Page 5
• Safety employees with 20 years of service receive 60% of their highest year's
salary for life.
• Safety retirees receive an annual COLA of up to 2% a year.
Action Principle No. 7: The City will require its employees to contribute a fair
share of their pension costs. CaIPERS sets a required "employee" contribution:
currently 7% for non -sworn employees, and 9% for sworn employees. City employees
shall pay the entire employee contribution. In addition, the City shall negotiate "cost
share" agreements with employees to share the total burden of city pension costs, as
provided under PERS rules. Further, the City shall negotiate to establish a "second tier"
pension benefit for new employees entering the workforce, costing less than the current
plans and reducing overall City costs over the long run.
Issue No. 8 — Time 00 Benefits: Currently, City �mployees receive paid time off for ii,
holidays, :vacation da and sipk days Employees can ,accumulate pp tto i.8 weekCs of
vacationannuallS& Vacation
- - -time is converted t cash rough "sell back, -=or at
termination or retirement. Employees can accumulate an unlimited amount of sick
leave; half of an employee's sick leave is converted to cash at retirement and the other
half can be added to years of service for the calculation of the retirement benefit.
Staffing shortages, furloughs and closed Fridays create larger banks of accumulated
vacation time that must be paid out when not used. The budget impact is often
unpredictable and unmanageable, which reduces the City's ability to deliver services to
the public.
Action Principle No. 8: The City will establish vacation use work rules that limit
the accumulation of vacation time and provide for use with management approval to
•
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ensure that the needs of the public take priority and overtime is minimized. The rules
shall also limit the practice of converting vacation and sick leave to cash to situations
when such cash -out is legally required. The City shall evaluate the current leave
programs and implement reasonable reforms consistent with programs in the public and
private sectors.
Issue No. 9 - Work Rules: The labor contracts, and informal department policies,
contain staffing work rules that limit management discretion and are highly inefficient.
The Fire Union contract, for example, contains a variety of staffing mandates that
purport to remove any discretion on the part of the City to adapt to the needs of the .
service and modernize. For example, the labor contract provides that fire trucks must
be staffed by five firefighters, when the vast majority of jurisdictions safely operate fire
trucks with four persons, and the contract contains n€merous other dictates that hamper
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the re Chief s ability to manage t e workforce°efficii ntly f DI u;
Action Principle tNo. '9 The C ity. -shall uregairil itsi management rights' to
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supervise, manage and direct its workforce. The City shall.not enter into labor contracts
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that contain inflexible staffing requirements or unreasonable restrictions on the City's
management rights.
Issue No. 10 — Overtime: The City's overtime practices are out -of -step with the federal
Fair Labor Standards Act ( "FLSA "). In some highly publicized cases, employee
overtime has exceeded employee base pay. There are opportunities for abuse when
employees take sick or other leave that require the callback of another employee at
overtime rates.
Page 7
Action Principle No. 10: The City shall restructure its labor agreements to
bring overtime obligations in line with the minimums required by the •Fair Labor
• Standards Act. The City shall minimize the use of unnecessary overtime.
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