Should Rocklin buy out of CalPERS?
It’s a hard pill to swallow – $75 million. But if the city of Rocklin wants to buy its way out of the California Public Employees’ Retirement System, that’s what it would have to come up with, according to City Manager Rick Horst.
It’s what’s called “termination liability,” or what it would cost the city to stop issuing defined benefit pensions to its employees and move to a 403(b) or some other defined contribution retirement program like the city of Los Angeles, Orange County and the corporate world.
The CalPERS estimate was released to City Council at the Jan. 8 meeting. The nearly $75 million breakdown includes a $16 million pension obligation for the Fire Department, $24 million for police and $34 million for the rest of city staff. That cost estimate includes pension obligations for employees currently working and those already retired. During fiscal year 2012-2013, the city of Rocklin will pay CalPERS $4.2 million for its share of pension contributions. The city’s total operating budget is $41.8 million.
In the past, the city was criticized for alleged pension spiking, allowing service credits for early retirement and allowing retired annuitant double dipping, where an employee retires and then returns to the same job as a contracted employee. A state reform law passed last year not only restricts the alleged past abusive practices, but also gives the city more tools to reduce costs by allowing reduced benefits for new employees, among other things.
New City Council member Greg Janda listened closely to the retirement figures and looks forward to helping the city with further pension reform.
“I am glad to see this report released – it will definitely raise awareness to residents that this is a very serious issue,” Janda said.
Janda said he’s open to considering the $75 million pension buyout or other solutions going forward.
“Yes, it is an ominous figure,” he said. “I am open to exploring all possible options and weighing the advantages/disadvantages of each to come up with the best possible solution for our city.”
Horst told the council terminating the city’s obligation to CalPERS is unlikely.
“Those numbers are very high and it’s not probable (it) would ever be a solution for us,” he said.
The city would likely have to take out a municipal bond to cover the cost and that is not acceptable for some council members.
Vice Mayor Scott Yuill, who’s been very outspoken in favor of pension reform for years, said he sees no justifiable financial reason to pull out of CalPERS.
“Such a move could not be accomplished without a collective bargaining process that, no doubt, would lead to lawsuits of insurmountable proportions, and such a process couldn’t practicably commence until all current labor contracts reach their conclusion several years from now,” he warned.
Most city union contracts end in 2015, with the Rocklin Police Officers Association contract expiring in 2017.
In Yuill’s opinion, the practice of selling municipal bonds to cover a buyout would be “irresponsibly risky.”
“Especially when we know that there is a possibility that Congress will likely push to eliminate the tax-deductible status of such bonds, making the cost of borrowing cost-prohibitive,” Yuill said.
Yuill suggests financial stability can more readily be achieved by keeping staff to an appropriate level and incorporating pension reform measures already set in motion.
“The financial challenge before us was created over several decades, and will take some time to rectify,” he said. “Cool heads, transparency, accurate information and cooperation will surely stabilize the problem.”
Rocklin Mayor Diana Ruslin agrees and commends the city’s employee unions for helping reduce costs.
“Rocklin employees are ex-tremely dedicated and accomplished and have worked hard during this recession and have agreed to concessions to help the city’s finances,” Ruslin said.
Longtime City Councilmember George Magnuson is confident the city will see pension reform continue in some form.
“There is no way that reform is over,” Magnuson said. “The recent (state law) reforms are still being digested.”
Even so, industry experts like Mike Gaskins, a labor relations representative for City Employee Associates who negotiates such contracts with cities in Southern California, said in the long run the strategy could hurt the city.
“Before too long, public employers are going to have a real difficult time attracting anybody to come at the new retirement formula,” he said. “It’s probably still a little better than Social Security, but not by much.”
CalPERS told the city of Rocklin this year’s expected investment returns are estimated at 0 percent, according to Horst.
Horst said his 401(k) from a previous employer performs better than the CalPERS returns.
“My rate of return, from this novice, is much higher than all those experts,” Horst said.
Gaskin pointed out hiring lower-level workers is easier for cities now, but acquiring skilled workers will be challenging.
“Engineers, planners and water treatment plant people are still premium high-skill-level jobs that you’re going to have to compete against other employers,” he said. “And if you can’t offer a decent total package on both salary and benefits, then you’re not going to get the best.”
Horst admits the new reforms, including pushing more of the benefit costs to workers, could inflate salaries over time.
“That sounds positive because future employees are going to have to pay more,” he said. “But you know what’s going to happen? There is going to be demand on the salary side and there is going to be problems between parity and a lot of issues.”
Current pensions are based on the number of years of service, the age at retirement and the highest year salary. The city has gotten a lot of attention for the number of retired staff who make over $100,000 pensions. However, of the seven Rocklin employees who have retired since the reforms have been enacted last summer, none have pensions over $100,000.
Next month, Rocklin’s chief financial officer is expected to present a two-year actuarial study on other post employee benefits – retiree health care costs, which city officials admit is a bigger financial strain on the city than pensions.