RPVCCA_CC_SR_2011_09_20_06_Pension_RevisionMEMORANDUM
TO:
DATE:
FROM:
HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
CAROLYN LEHR,CITY MANAGER ~
ERIC MAUSSER,HUMAN RESOURCES M~
SEPTEMBER 20,2011
SUaJECT:PENSION REVISION
RECOMMENDATION:
Approve the recommendations made by the City Council Pension Revision Subcommittee
and with concurrence by Management Partners to adopt revisions to the City's pension
plan to attain sustainability and cost control for current employees and new hires,and
further direct Staff as follows:
1)Effective with the pay period beginning September 23 ,2011,discontinue the 6.5%
employer paid member contribution for full-time employees in conjunction with a
one-time salary increase of 5%;
2)Effective with the pay period beginning September 23,2011,discontinue the 1%
employer paid member contribution for part-time employees in conjunction with a
one-time wage increase of 1%;
3)Request CalPERS to prepare a contract amendment to establish a 2
nd Tier benefit
formula for new employees based upon 2%/60 formula with determination of final
compensation based upon the average of the three highest years;and
4)Inquire with ICMA whether or not the City's existing Section 457 defined contribution
plan can be amended to enable matching contributions for new employees or
research and make a recommendation of other plan providers to administrate such
a plan in conjunction with adoption of an amendment to the CalPERS agreement.
DISCUSSION:
At its meeting on November 4,2010,the City Council established a Pension Revision
Subcommittee,Mayor Long and Councilmember Wolowicz,and "directed that the City
select and retain a retirement plan consulting firm to assist in the identification of feasible
and viable alternative pension plans for new employees aimed at achieving cost controls."
Under the direction of the Council Subcommittee,the City engaged Management Partners
to provide an independent look at pension benefits found in the California local government
setting and to identify what options are available to modify the City's current retirement
6-1
PENSION REVISION
September 20,2011
Page 2 of 5
system for greater sustainability,while continuing to meet service demands in the most
efficient and effective manner possible.Working with the Subcommittee to identify
parameters,the consultant reviewed and analyzed City Staffs savings analysis,surveyed
competitor cities'retirement benefit plans,researched pension modifications being
considered by CALPERS,the State Legislature and public agencies throughout the state
and researched applicable retirement laws and regulations.
As the consultant review process proceeded,the HR Manager called several special
informational meetings to keep employees apprised of the Subcommittee's and
consultant's progress.Employees were provided Subcommittee progress reports,an
overview of the current environment in California that gave rise to the issue of public
pension revision in our city;the various State and local initiatives being considered,the
discretion the City has to change basic CalPERS attributes and proposed program
revisions for current employees as well as future hires as recommended by the Council
Subcommittee and in concert with Management Partners'research and findings.
Staff response to the Management Partners solution was generally supportive.Employees
expressed some concern that the proposal does not provide a one-for-one off-set to full-
time employees picking up the Employer Paid Member Contribution (EPMC),as was done
in Rolling Hills Estates.However,it was felt that,in the current environment,the proposed
one-time 5%adjustment for pick up of the 6.5%to EPMC was an acceptable trade-off;
although it includes a significant cost transfer to each current employee.Most employees
seem hopeful that the Council will approve the Subcommittee recommendations and were
appreciative of the Subcommittee's expressed goal to do no harm to current employees
when developing pension alternatives.
Further,all Department Heads agree that the Subcommittee's recommendation is the best
solution to maintain a high degree of organizational productivity,effectiveness and
employee engagement,and demonstrates that employees will partner with the City in
achieving pension stabilization and significant pension cost savings for the City.From a
human resources management perspective,the thoroughness and fact-based
methodology that the Subcommittee relied on in arriving at its recommendations were well
considered.Assuming that in the future,other cities within our area of recruitment move
toward two-tier pension programs,there may not be serious limitations on competitive
recruitment and retention.
Currently,part-time employees pay 7%and the City pays 1%oftheir EPMC.Assuming the
City Council elects to follow the recommendation made by the Subcommittee and
Management Partners,Staff recommends that effective with the pay period beginning
September 23,2011,that the City should discontinue the 1%employer paid member
contribution for part-time employees in conjunction with a one-time wage increase of 1%.
It should be noted that the City's Labor Attorney,Roy Clarke,reviewed Management
Partners'recommendations,along with the legal analysis provided by their legal counsel
Marcus Wu,and concurs that their approach is in keeping with current applicable laws
6-2
PENSION REVISION
September 20,2011
Page 3 of 5
governing pension administration in California.There were several questions frqm Council
pertaining to the powers and latitude of a Charter City versus a General Law City in
shaping pension programs.Mr.Wu will provide his research findings as late
correspondence.The City Attorney will provide any additional information on behalf of Mr.
Clark,if any,after Mr.Clark has reviewed Mr.Wu's research findings.
Councilman Campbell also requested to have several questions answered by Management
Partners as to the financial impact of the one-time salary increase on unfunded liability.It is
understood that Management Partners will reply directly to Councilman Campbell.
FISCAL ANALYSIS:
With a history of stable revenue streams,the City has been governed with a conservative
fiscal philosophy that has!ed to consistently balanced budgets and the accumulation of a
prudent $9 million General fund reserve and a $7.5 million CIP reserve for future projects.
This allows the City to take a measured approach to pension revisions that will provide
long-term sustainability to the program and competitive balance in acquiring quality talent.
This allows the City to tl:ilke a measured approach to pension revision such that will provide
long-term sustainability to the program and a competitive balance in acquiring and retaining
quality employees.
The establishment of a 2
nd Tier for new employees together with an increased cost-sharing .
arrangement with existing employees for member contribution will attain the goal
established by the City Council at its meeting on November 4,2010:"...to achieve cost
control for the City's pension plan."The implementation of the proposed cost-sharing
arrangement with current employees will save the City about $3,000 per pay period;
therefore,Staff encourages its immediate implementation.Staff is presently researching
other comparable Contract Cities used in the 2010 Salary Survey to determine if a 2
nd Tier
pension structure has been implemented,and the nature of any possible changes to
EPMC for current employees.Findings are expected to be submitted as Late
Correspondence
Based on a six-year savings analysis referred to as Assumption A (to be distributed as Late
Correspondence),the City can expect savings ranging between approximately $1.2 million
and $1.6 million,depending on the rate of employee turnover.About $500,000 of the
savings would be derived from shifting the pension cost from the City to existing
employees.The remainder of the savings would result from reducing the retirement benefit
formula to 2%@ 60 for new hires (the lowest possible for CalPERS members who are
outside of Social Security).The savings analysis indicates that the trend of rising pension
costs would flatten-out,and even be reduced,if the recommendation made by the Pension
Subcommittee and Management Partners is followed:
6-3
PENSION REVISION
September 20,2011
Page 4 of 5
FY11-12 $1,031,542 $950,043 $81,499 $933,650 $97,892
FY12-13 $1,091,763 $967,611 $124,152 $932,866 $158,896
FY13-14 $1,212,713 $1,038,164 $174,549 $980,485 $232,228
FY14-15 $1,266,127 $1,038,522 $227,606 $958,253 $307,874
FY15-16 $1,321,655 $1,036,697 $284,958 $931,991 $389,664
FY16-17 $1,379,375 $1,032,521 $346,854 $901,424 $477,952
m "~
Both the cost of the proposed 1.5%defined contribution match for new hires and the
incremental increase of the pension contribution resulting form the one-time salary
incr~ase for existing employees have been included in the savings analysis (Assumption
A).
Based on comments made by Mayor Pro Tem Misetich on September 6th ,Staff prepared a
second savings analysis referred to as Assumption B (to be distributed as Late
Correspondence).This analysis is based on a three-year phase-out of the EPMC that has
been paid for employees the past 20 years,with no salary off-set provided to current
employees.Under this scenario,th~City could experience savings ranging between about
$2.1 million and $2.3 million,depending on the rate of employee turnover.
If Assumption B were adopted,a professional,licensed employee would experience about
a $30,000 reduction of take home pay,based upon the six-year savings analysis.As
described previously,Rolling Hills Estates recently provided a one time 7%salary increase
in exchange for employees assuming the entire 7%EPMC.Of the eight contract cities
included in the comparative analysis presented by Management Partners',only one
required employees to pay a portion of their member contribution.
Clearly,there can be greater cost savings generated beyond the Pension Subcommittees'
and Management Partners'recommendation.But,the savings described in Assumption B
will come with a significant cost to our employees and counter to one of the working
agreements established by the Subcommittee:"The subcommittee is considering changes
in pension formulas,contributions,and benefits only for newly-hired employees.The
subcommittee is not now considering any changes,whether it is in benefits or funding of
contributions,for existing employees and retirees of the City of Rancho Palos Verdes."
Additionally,the direction established by the City Council on November 4,2010 was to:
"find feasible and viable alternative pension plans for new employees aimed at achieving
cost controls".
In the judgment of senior management staff,the City would be better served to maintain a
fUlly motivated and stable workforce.RPV is in the enviable position of employing lowest
number of FTE's (Full-time Employee Equivalents)per population size,together with the
lowest cost of employees per capita,all while supporting a very active Council agenda and
residents'demand for high quality services.
6-4
PENSION REVISION
September 20,2011
Page 5 of 5
At a meeting held with Mayor Pro Tem Misetich prior to the preparation of this staff
report,Staff provided him with draft versions of both Assumptions A and B.As of this
writing,Mayor Pro Tem Misetich has advised Staff that he is still considering the
information and conducting additional research on both scenarios.
Attachments:
Management Partners Pension White Paper
Financial Analysis -Assumptions A & B (Late Correspondence)
Contract Cities 2 nd Tier Survey (Late Correspondence)
6-5
MEMORANDUM
TO:CITY COUNCIL
FROM:MAYOR TOM LONG AND COUNCILMAN STEFAN WOLOWICZ,
PENSION REVISION SUBCOMMITTEE
DATE:
SUBJECT:
SEPTEMBER 6,2011
PENSION REVISION
RECOMMENDATION
Approve the recommendations made by Management Partners,Inc./City Council
Pension Revision Subcommittee regarding revisions to the City's pension program for
current employees and·new hires,and provide further direction to staff.
DISCUSSION
The City engaged Management Partners to provide an objective look at pension
benefits provided in the California local government setting and to Identify what options
are available to modify the City's current retirement system for greater sustainability,
while continuing to meet service demands in the most efficient and effective manner
possible.Working with the City Council Pension Revision Subcommittee to identify
parameters,the consultant reviewed and analyzed City staff's assumptions and
calculations;surveyed competitor cities'retirement benefit plans;researched pensions
modifications being considered by CaIPERS,the State Legislature and public agencies
throughout the state;and researched retirement laws and regulations.The results and
the consultant's/subcommittee's recommendations are presented for the City Council's
consideration in the attached white paper.
Attachment:
Rancho Palos Verdes Pension Revlsion White Paper,Management Partners Inc.,
August 2011
ATTACHMENT 6-1
I.
Rancho Palos Verdes
Pension Revision White Paper
August 2011
MANAGEMENT PARTNERS
INCORI'OIl ...TEO
ATTACHMENT 6-2
MANAGEMENT PARTNERS
INCORPORATED
August 31,2011
Ms.Carolyn Lehr
City Manager
Ci ty of Rancho Palos Verdes
30940 Hawthorne Boulevard
Rancho Palos Verdes,CA 90275
Dear Carolyn:
Management Partners is pleased to transmit a draft of the Pension Reform White Paper for the
City of Rand,o Palos Verdes.In developing this paper we met with the City Council Pension
Revision Subcommittee;reviewed and analyzed Cit)'staff's assumptions and calculations;
surveyed competitor cities'retirement benefit plans;reseurd,ed pension modifications being
considered by CaIPERS,the State Legislature and public agencies throughout the state;and
researched retirement laws and regulations.These efforts were undertaken to determine:
1.What options are available for the City?
2.What options would the City be precluded from pursuing either on legal,tedmical or
practical grounds?
3.What are the grey areas and uncertainties that must be confronted as the public pension
environment shifts?
This paper answers these questions and should help City decision-makers to approad,the
discussion about what,if any,cl,anges to propose in the current retirement system armed with
full information about the state of the industry with respect to sud,programs..This paper also
provides options and recommendations to allow the decision makers to determine what
direction will best position the City of Rancho Palos Verdes to continue meeting service
demands in the most efficient and effective way possible.
Sincerely,
IIJ~~~
Andrew S.Belknap
Regional Vice President
2107 North First Street Suile 470
San Jose,CA 95131
www.managementpartners.com 4084375400
Fax 4536191
ATTACHMENT 6-3
Pension Revision While Paper
Table of ContenLs
Table of Contents
Management Partners
Introduction ___1
Parameters : 3
Distinction Between Defined Benefit and Defined Contribution .4
Background 6
Retirement Benefits in tl,e Local Government Sector 6
Rancho Palos Verdes'Retirement Plan History 7
Chronology of Rancho Palos Verdes'Pension Revision Subcommittee Activities 7
Revision Efforts 9
City of San Jose Ballot Measure 9
Californians for Fiscal ResponSibility Initiative 1D
State Legislature Bills 11
Initiative process 13
CalPERS Position on Refoml Efforts 13
Rancho Palos Verdes Data and Assumptions 15
Turnover Rate 15
Salary Increases 15
Projected Savings 15
Employee Retention :16
CalPERS Contribution Projections 16
Observations and Options 18
Retirement Formula 18
Final Compensation Calculation Basis 20
Employer-paid Member Contributions 20
Retirement Spiking 20
Current Options Compared witll New Employee Options within Subcommittee
Parameters 21
Options for Consideration 22
Recommendations 24
ATTACHMENT 6-4
Pension Revision White P<lper
Table of Contents M<lnagement Partners
Current Employees ;24
New Hires 25
Current Employees and New Hires 26
Appendix A -First Pension Subcommittee Report..27
Appendix B-Second Pension Subcommittee Report 28
Appendix C-Third Pension Subcommittee Report..29
Appendix D-Vested Rights of CalPERS Members 30
Tables
Table 1.
Table 2.
Table 3.
Figures
CalPERS Rates under Various Scenarios 17
City Discretion with Changes to Basic CalPERS Attributes 22
Pee r Com paris on 23
Figure 1.CalPERS Investment Returns'17
Figure 2.Percentage of Compensation Under Various Plans 19
ii
ATTACHMENT 6-5
Pension Revision White Paper
IntroducLion
Introduction
Management Partners
TI,e City of Rancho Palos Verdes (RPV)engaged Management Partners to
provide an objective look at pension benefits provided in the California
local government setting.TItis was Wldertaken with a focus on how
plans are being modified to be fiscally sustainable over the long term in
the current economic environment while still providing competitive and
reasonable benefits so cities can recruit and retain the experienced staff
they require.Management Partners has reviewed changes being
considered by some jurisdictions such as ti,e San Jose ballot measure.We
have also reviewed and considered ti,e changes proposed by ti,e
Californians for Fiscal Responsibility initiative as well as otiler initiatives
and changes proposed by and being considered by the Legislators.
Management Partners does not consider these potential changes as viable
to Rancho Palos Verdes at this time.These changes are likely to face legal
challenges and lead to prolonged and costly litigation.Additionally,
many of the changes require legislative action and/or changes in the law
or the State constitution.TI,ese changes are not available to Rancho Palos
Verdes at this time and,therefore,are not included in the
recommendations section of this paper.Should any of these changes
survive the legislative process and subsequent litigation and be found
legal,ti,e City retains the option of adopting tl,em at that time while
avoiding the cost of litigation.
Most cities in California contract with ti,e California Public Employee
Retirement System (CaIPERS)for the provision of pension benefits and it
is one of the largest such organizations in the world.Currently CalPERS
serves 284 public agencies and has about 1.6 million members who are
public employees,retirees or beneficiaries.It manages approximately $1.7
billion in assets.
The costs associated with providing pension benefits through CalPERS
have climbed substantially in ti,e last several years.TItis is due to losses
sustained in agency invesln1ents (such as stock market losses)and
enhancements granted in pension programs,primarily in ti,e late 1990s
and tl,e early 2000s.The most often cited enhancement was tl,e creation
of a "3%at 50"program for public safety workers that Can result in a
J
ATTACHMENT 6-6
Pension Revision White Paper
Introduction ManLlBemenL Partners
pension equal to about 90%of final compensation after a ')ormal 3D-year
working career.As a result,CalPERS has had to increase payments
demanded of its contract agenoes,particularly those agenoes that have
adopted enhanced plans.
Increased payments are being demanded just as the resources available to
local governments have suffered severe setbacks.As a result,oties have
had to reduce expenditures and services to fund increasing pension costs.
This takes place against a backdrop of great economic uncertainty and in
an era in which defined benefit plans such as CalPERS have largely .
vanished from the private sector.Instead,defined contribution plans
have become more commonplace.They typically pay a lower benefit and
have much greater uncertainty ti,an defined benefit programs.RandlO
Palos Verdes has not suffered revenue declines,does not have
responsibility for funding public safety pensions,and has not yet had to
reduce services to deliver pension benefits.Nonetheless,the city counol
has sought to modify pensions to assure that Rancho Palos Verdes avoids
finanoal difficulties in the future and to stabilize pension costs as a
percentage of payroll.
As a result of pension cost increases,Rancho Palos Verdes,like many
other cities,is looking at options for changing existing CalPERS pension
benefits.A number of California oties have already introduced lower
benefit plans for new workers and raised contribution levels for existing
employees.
RandlO Palos Verdes is seeking a retirement plan tilat is sustainable in
the long term.In this case,sustainable is defined as a pension structure
with predictable expenditures that are generally a flat percentage of
payroll and that are both economical to ti,e City and beneficial to
employees.TI,e inability to adueve a sustainable pension.structure may
result in the need to divert an increasing amount of general fund dollars
to pay for retirement benefits.This would require a reduction in City
payroll through a reduction in ti,e number of City employees,the
elinUnation of City programs and/or a general reduction in ti,e quality,
frequency and number of services provided to the public.The City is
understandably concerned about costs,while also conscious of ti,e fact
that it needs to remain an employer tilat can recruit and retain employees
in the public employee labor market.
To develop options for the Cily,the Pension Revision Subcommittee
needs a solid analysis of basic fact.regarding pension issues.This while
paper was created to examine the following issues:
2
ATTACHMENT 6-7
Pension Revision White Paper
Introduction Manugement Partners
1.What options are available for tl,e City?.,
2.What options would tl,e City be preeluded from pursuing either
on legal,teelmical or practical grounds?
3.What are tl,e grey areas and uncertainties tllat must be confronted
as the public pension environment shifts?
The paper objectively presents tl,e current public pension environment
and reform efforts,City pension assumptions,infomlation about how
peer organizations structure their plans,and finally,alternatives and
recommendations for RanellO Palos Verdes leaders to consider.
Parameters
At the start of this engagement the City's Pension Revision Subcommittee
established the following parameters to be used when evaluating
alternatives for pension structure changes.
•Long term sustainabilitv.The City is seeking to modify pensions
to assure that Rancho Palos Verdes avoids financial difficulties in
the future by ensuring that pension expenditures become a
predictable and generally flat percentage of payroll and that the
pension system remains economical to the City and beneficial to
the employees.
•Maintain the ability to attract and retain quality emplovees.To
continue to utilize high-quality staff to provide excellent service to
residents,it is important for tl,e City to provide a pension system
that is competitive with other jurisdictions competing for the same
employees.
•Avoid significant litigation risk.Litigation is costly and lengtlly
and ti,e City does not wish to incur unwarranted costs in
reforming its pension plan.Once the courts have made rulings on
litigation over changes made by other jurisdictions,and/or if ti,e
State Legislature enacts ellanges that provide more options for
pension reform,ti,e City has the ability to adopt those changes
determined to be legal and desirable.
•Provide protection against any possible retirement spiking.TIle
City wishes to preclude tl,e actuality of pension spiking but also
any appearance or perception of spiking.
•Maintain the Citv's non-participation status with respect to Social
Security.Social Security is intended to be a safety net by
redistributing wealtll and is neither economical nor cost-effective
as a means of delivering pension benefits to a primarily
professional workforce such as that ti,e City employs.It provides
3
ATTACHMENT 6-8
Pension Revision White Paper
Introduclion Management Partners
far less value for its cost than is provided by pensi~n benefits.
The City wishes to maximize the use of its funds and provide a
superior benefit for employees.
Distinction Between Defined Benefit and Defined Contribution
Two basic categories of retirement plans exist:defined benefit plans and
defined contribution plans.A deftlled belleftl plan is a guaranteed annual
pension (benefit)based on retirement age,years of service and salary.
The employer contribution is a variable amount actuarially determined as
sufficient to provide the guaranteed benefit.A deft lied CDllh'ibllliDII plan is
one in which the employer contribution is a fixed amount.The benefit is
a variable based on investment earnings from the fixed contribution offset
by expenses.If the City wished to move from a defined benefit (DB)plan
to a defined contribution (DC)plan,the following issues would need to
be carefully weighed.
First,a defined contribution plan is not available within CaIPERS;
therefore,the City would have to establish its own defined contribution
plan outside of CaIPERS.Such plans have Uleir own costs,including
administration costs.TI,e City of Irvine had a DC plan several years ago,
but they moved into CalPERS in the early 10005 after determining that it
was less costly and less burdensome.
The City of Rancl10 Palos Verdes originally contracted with CalPERS and
remains with them due,in part,to legislative rules in terms of the State
Constitution and Government Code that make alternatives not feasible.
The cost of leaving CalPERS is substantial.The City would be reqUired to
pay an amount to CaIPERS to fund its liability for retirees.TI,e amount of
this liability dlarge would have to be negotiated wi til CalPERS and
would include possible later increases in liability because of reciprocity
affecting final average compensation of future retirees.AltllOUgh it is not
possible to estimate this cost without a htll actuarial study,ti,e cost
potentially would be large.[n essence,the City would be selling its share
of CalPERS assets at a bad time to do so.OU,er termination costs would
also apply.
A related issue is whether the City could remain in CalPERS for current
employees but exclude future employees and,instead,put them in a
separate,defined contribution plan.We are unaware of any jurisdictions
that have done tllis.Aside from the administrative cost issues related to
offering a defined contribution plan discussed above,CalPERS has stated
informally,U,at its position is U,at agencies cannot keep current
4
ATTACHMENT 6-9
Pension Revision White Paper
Introduction Manl1gement Partners
employees in CalPERS while excluding new hires.Management Partners'
reading of the City's contract witi,CalPERS is that it prohibits any sucl,
exclusion of new employees,
Sections 20502 and 20303 of ti,e Government Code appear to support the
ability of an agency to exclude new employees from CaIPERS.However,
CalPERS would probably challenge sum an exclusion and,given ti,e
City's stated desire to avoid costiy litigation,we do not recommend that
ti,e City take Ulis paUl.
Given Ule current legislation and lack of alternatives,Management
Partners believes Ule costs and risks associated wiUl moving from a
defined benefit to a defined contribution plan far outweigh any potential
benefits,We recommend that the City reform its defined benefit plan at
ti,is time and retain Ule option of moving to a defined contribution plan
in Ule future if economic conditions,Ule job market and legislative
changes provide a more sound basis for such a move.
5
ATTACHMENT 6-10
Pension Revision White Paper
Background
Background
Management Partners
"
Retirement Benefits in the Local Government Sector
11,e California Public Employees Retirement System began operation in
1932 as the retirement system for state employees.In 1941,CalPERS first
began contracting witil public agencies and school districts.CalPERS is
ti,e largest public pension fund in the country with over $217 billion in
assets.As of June 30,2010,1,568 agencies with 1.6 million members
contracted wi til CalPERS.
Public sector agencies in California have historically packaged relatively
modest compensation with more generous benefits,induding a defined
benefit pension program.This was partially in recognition of the fact that
local government employees were not initially covered by Social Security;
many are still not covered -induding those in Randlo Palos Verdes.Since
public sector employees obtained the right to collectively bargain in the
1970s compensation has become more competitive Witil private sector
levels.
Private industry has the moice of multiple pension administrators and
investment advisors to provide pension and investment services.These
alternatives are not financially feasible for California municipalities ti,e
size of Ranmo Palos Verdes.
General law cities and counties almost universally contract with CalPERS
for their retirement system.Based on CalPERS'statistics it appears that
approximately 85%of California cities are covered by this system.Some
charter cities and counties maintain their own retirement systems but tilis
is practical only for large cities and counties.To maintain its own
retirement system,an agency must establish a treasurer function and
must have ti,e staffing and ability to invest funds to maximize returns.
Setting up and establishing investment systems is cost-prohibitive and
inefficient for small agencies.Agencies whidl elect to leave CaIPERS are
required to pay significant termination costs to cover future retirement
cost liabilities.
6
ATTACHMENT 6-11
Pension Revision While Paper
Background Management Partners
Most local government executives serve with multiple agencies during,
their careers.It is,therefore,important to have the availability of
reciprocity (portability),provided by CalPERS for members who move
from one agency to another.
Rancho Palos Verdes'Retirement Plan History
TI,e retirement plan provided to employees of Rancho Palos Verdes has
changed twice since the City first incorporated in 1974.TI,e chronology of
the plan changes follows:
o On December 1,1974,the City of RandlDs Palos Verdes
established a 2%@ 60 retirement formula based on three-year
average final compensation
o On April 21,2001,the City changed to the 2%@55 formula
and went to U,e single highest year final compensation.
o On September 29,2007,U,e City changed to the 2.5%@ 55
formula while maintaining single highest year final
compensation.
The decisions to enhance U,e retirement formula in 2001 and 2007 were
based on surveys of cities'benefits with whom Rancho PaJos Verdes
competed for talent.The d,.nges were made to ensure U,at RandlD Palos
Verdes was able to attract and retain high-quality staff.Due to the
downturn in the economy as well as pension reductions made by
competitor cities,it is not currently necessary to offer the existing
retirement formula to attract and retain high-quality staff.
Chronology of Rancho Palos Verdes'Pension Revision
Subcommittee Activities
On November 4,2010,Council member Steven Wolowicz presented a
memorandum on Pension Revision to U,e City Council,recommending
that U,e Council appoint a two-member subcommittee to work wiU,City
staff to select a consulting firm to analyze and make recommendations for
a new retirement plan.Councilman Steven Wolowicz and Mayor Tom
Long were appointed to the subcommittee.
On November 30,2010,the Mayor and City Council members
participated in a Pension Workshop facilitated by CalPERS Senior
Actuary Kung-Pei Hwang and retirement plan consultant John Bartel.
On December 7,2010,the subcommittee presented its first report to tI,e
City Council (see AppendiX A).
7
ATTACHMENT 6-12
Pension Revision White Paper
Background Managemenl Partners
..
On January 18,2011,Bartel Associates,LLC submitted a r~port on the
City's CalPERS Unfunded Actuarial Accrued Liability (UAAL).
On June 7,2011,U,e subcommittee presented its second report (see
Appendix Bl.
On June 17,2011,Finance &IT Director Dennis McLean and Human
Resources Manager Eric Mausser presented a memorandum to U,e
subcommittee providing an update on the request for qualifications
(RFQ)and propDsals for an independent retirement plan consultant to
analyze possible alternatives Df the City's existing pensiDn plan.
On July 1,2011,the subcommittee presented its third report to the City
CDuncil (see Appendix C).
Management Partners has reviewed and researched the preliminary
findings of U,e subcDmmittee and have had UlDse findings reviewed by
an attDrney experienced in public pensiDn law.We have determined U,at
these preliminary findings are valid and realistic.TI,e California
Constitution and U,e regulatiDns of CalPERS greatly limit the alternatives
available tD public sectDr agencies in tern1S of pension benefit options.
TI,e optiDns U,at are available as well as various effDrts by public agencies
and U,e legislature to increase UlDse options through legislative
propDsals,initiatives and ballDt measures are discussed in detail in below.
B
ATTACHMENT 6-13
Pension Revision White Paper
Revision Efforts
Revision Efforts
Management Pl1rlners
Some local agencies have established a second tier of benefits for new
employees and greater cost-sharing by current employees.Both
approaches are possible through CaIPERS.There is some movement in
Charter cities to amend basic parameters in pension plans even for
existing employees,but U,ere is great uncertainty about the question of
vested rights.
The City of San Jose is currently considering a Charter change that would
overhaul pensions for future as well as current employees.However,for
local agency members of CaJPERS,reform options are limited absent state
legislation.Any more significant dlange must,therefore occur at the
state level through ti,e legislature or tllTough the initiative process in
order to allow greater flexibility to those agencies contracting WiUl
CaIPERS.
The following sections present current efforts to affect dlange for public
sector pension options.
City of San Jose Ballot Measure
On May 13,1011,Mayor Chuck Reed,Vice Mayor Madison Nguyen and
Councilmembers Rose Herrera and Sam Licardo placed presented an
agenda item to U,e City Council recommending that the City:1)declare a
fiscal and public safety emergency,and 1)amend the City Charter to limit
retirement benefits and require voter approval of increases in retirement
benefits.The specific recommendations were as follows:
•For new employees,absent voter approval for enhancements or
increases,limit retirement benefits to a hybrid plan tllat may
consist of social security,defined benefits or defined contributions
with maximum City contributions in total being not less than 6.1%
or greater than 9%of base salary or 50%of the costs of U,e benefits
whichever is less.
•For existing employees,without voter approval of enhancements
or increases,limit retirement benefits as follows:
9
ATTACHMENT 6-14
Pension Revision White Pilper
Revision Efforts Milnilgemenl Partners
o Benefits earned and accrued to date would not be reduced.,
but additional pension benefits shall accrue at a maximum
rate of 1.5%per year of service.
o The age of eligibility for service retirement would be
increased by six months annually on July 1 until the
retirement age reaches the age of 60 for police officers and
65 for all other employees.
o For existing and future retirees,,,~thout voter approval of
enhancements or increases,institute the following d,anges:
o Limit increases in pension payments to retirees to the .
increase in the Bay Area CPI,not to exceed 1%per year.
o Allow bonuses or other supplemental payments only to
long term service retirees or disability retirees whose
household income falls below the poverty level.
o Place additional limitations on growth in retirement benefits if the
fiscal and public safety emergency gets worse.
Four legislators asked the Office of State Attorney General to review the
San jose emergency proposal.The response was that "unilateral
impairment"of any contract "causes us deep concern."111is phrase
indicates that legal action would be taken against the City of San jose in
response to this proposal.Rancho Palos Verdes and similar cities cannot
ignore SUdl expected litigation costs.
Californians for Fiscal Responsibility Initiative
111e Pension Re\~sion Subcommittee requested that Management
Partners identify the provisions of the Fair and Sensible Public Employee
Retirement Plan Reform Act.111is initiative is sponsored by the nonprofit
organization Californians for Fiscal Responsibility.111e stated provisions
of the Fair and Sensible Public Employee Retirement Plan 'Reform Act are
as follows:
o Aligns state and local government retirement benefits with those
offered by the federal government and large private employers.
a Employees hired after july1,2013 are eligible for a defined
contribution (DC)plan.
a Defined benefit (DB)pension for new employees will not
exceed the plan offered to federal workers on July1,2011
(1.1%of highest three-year average at age 62 multiplied by
years of service).
a Qualifying compensation will not exceed 75%of taxable
social security wages.
10
ATTACHMENT 6-15
Pension Revision White Paper
Revision Efforts Management Parlllers
o Defined benefits are payable when employ~es reach the
retirement age established by Social Security (currently age
62).
o Employees not covered by Social Security shall be
provided witl,a supplemental defined benefit equivalent
of social security.
•Public employees and taxpayers share costs.
o Current and future employees pay half tI,e cost of pension
and retiree health benefits.
o Defined benefits shall be based on an average of tluee'
years of qualifying compensation which excludes
overtime,sick,vacation,bonuses and severance.
o Retroactive benefit increases are prohibited.
o New employees may not receive lifetime medical benefits
prior to age 65.
•Improves efficiencies in benefit delivery.
o DisabilIty benefits are provided by a joint powers
autl1ority,self-insurance or private companies.
o Public employers shail provide competitive life insurance
and disability benefits integrated witl,retirement benefits
and other insurance.
o Public employees may optout of their retiree healtl1 plan.
•Improves governance and accountabilIty of public pension plans.
o Two-tl,irds of a public pension plan's governing trustees
shail be independent of tI1e retire men t system and two-
thirds of independent trustees shail be certified or licensed
financial,actuarial,accounting,legal,benefits or
investment professionals.
State Legislature Bills
The unsustainable reality of current pension systems and associated
liability has resulted in numerous efforts by tI,e legislature at reform.In
2010,two bills,AB 194 and AB 827 were passed by the Legislature but
tI,en vetoed by tI,e Governor.
AB ]94 would have limited tI,e maximum salary upon whicl,retirement
benefits are based to no more tI1an 125%of tI,e salary recommended by
the California Citizens Compensation Committee for tI,e position of
Governor.AB 827 would have prohibited an employment contract for a
local excluded employee from including any clause that provides for an
automatic renewal,an automatic compensation increase,or an automatic
compensation increase in excess of a cost-of-living adjustment.11,e bilI
11
ATTACHMENT 6-16
Pension Revision White Paper
Revision Efforts Management Partners
..
would also have required local agencies to complete a perfonnance
review for any excluded employee before an increase in compensation in
excess of a cost-of-living adjustment may be implemented for that
individual.
So far in 2011,a number of Assembly Bills and Senate Bills have been
proposed that would make significant c1langes to pension structures.The
fate of these bills remains to be seen.Among these bills are:
•AB 344,which would place limits on final compensation and on
post-retirement employment.
•AB 646 which would prohibit a public agency from implementing
its last,best and final offer in bargaining until at least 10 days after
a fact finders'written findings of fact and recommended terms of
settlement have been submitted to the parties and the agency has
held a public hearing regarding the impasse.
•AB 875,which would prohibit public employees first hired on 01'
after January 1,2012 from using credit for accrued leave or
overtime for purposes of determining final compensation.
•AB 961,which would exclude matters relating to pension benefits
from ti,e scope of representation of public employees,thereby
prohibiting employee organizations from negotiating pension
benefits wi til public employers.
•AB 1184,whicll would require the contracting agency from which
a non-represented CalPERS member retires to pay that portion of
the liability for creditable service perfonned for a prior
contracting agency tllat exceeds 115%of the last salary paid by
that agency.It would also prohibit contracting agencies from
establishing their own plans for individuals that first become
CalPERS members on or after January 1,2013.
•AB 1248,which would require a local public employer to prOVide
coverage under ti,e federal Social Security system to all employees
who are not covered by a defined benefit plan.
•AB 1320,which would establish a Taxpayer Adverse Risk
Prevention Account for eacll CalPERS employer whose assets
would be invested with otller CalPERS assets and be available to
pay employer retirement contributions that exceed the normal
cost of benefits.
•SB 27,which would provide tI,at any change in salary,
compensation or remuneration principally for the purpose of
enhancing the benefits of a member (known as spiking)would not
be included in ti,e calculation of the member's final compensation.
It would also prohibit any member who retires on or after January
12
ATTACHMENT 6-17
Pension Revision White Paper
Revision Efforts Management Partners
1,2013 from performing services for any employer covered by
their retirement system for 180 days..
o 58520,which would require CalPERS to establish a hybrid
retirement plan for public employees who become members on or
after January 1,2013 and would prohibit those plans from creating
a vested property right for members with respect to any employer
contributions before retirement.
o 58526,which would specify for employees hired on or after
January 1,2013 that final compensation means the highest annual
average compensation earnable during a consecutive 36-montil
period of membership.11,e bill would also prohibit the addition
of compensation for accrued leave or overtime work in ti,e
calculation of final compensation.
Initiative process
In addition to the bills moving tilfough ti,e Assembly and State Senate,
there is a state initiative called the "Public Employee Pension Reform Act"'
(Initiative 11-0007)tilat would change ti,e State Constitution and:
o Set ti,e retirement age at 62 for current and new employees.
o Limit pensions to 60%of a three-year average salary.
o Require employees to match public agency retirement
contributions.
o Allow public agencies to modify pensions.
o Prevent pension changes through collective bargaining.
CalPERS Position on Reform Efforts
In July 2011,CalPERS issued a paper titled Vested Rights of CalPERS
Members (included as Appendix Dj.The document states:.
o A public employee's right to the retirement benefits earned during
employment is generally a vested right.
o Public employee retirement benefits are contractual obligations
entitled to ti,e protection of the "Contract Clause"of the State
Constitution as well as provisions of the Federal Constitution
forbidding ti,e impairmentof contracts.
o Promised benefits may be increased during employment but not
decreased,absent the employees consent.
o The courts have established tilat this rule prevents not only a
reduction in the benefits that have already been earned,but also a
reduction in ti,e benefits tilat a member is eligible to earn during
13
ATTACHMENT 6-18
Pension Revision White Paper
Revision Efforts Manaaement Partners
future service.This statement is particularly pertinent to the San
Jose ballot measure.'
•Employees to be hired in the future do not have vested rights to
any particular retirement benefits and there is no constitutional
impediment to unilaterally reducing (or even eliminating)
retirement benefits for new hires.
•Some employers may choose to pay a portion or all of the
retirement contributions otherwise required of their employees.
These payments typically are negotiated during collective
bargaining and the law provides that the employer may
"periodically increase,reduce,or eliminate"such payments.
This paper suggests that CalPERS would go to court to protect the rights
of its members as outlined above.
ATTACHMENT 6-19
Pension Revision White Paper
R'Jncho Pillos Verdes Data ilnd Assumptions
Rancho Palos Verdes Data and Assumptions
Management Partners
'.
The following section of this white paper presents key data elements and
assumptions that contribute to retirement cost projections.
Turnover Rate
Rancho Palos Verdes staff assumes a turnover of two employees per year.
For the period of January 1,2005 through April 30,2011,turnover
averaged 2.6 employees per year.This equates to an average annual
turnover rate of 5%.11,is calculation does not include two employees
who were laid off during that period.
A 5%turnover rate projection is conservative as turnover will probably
increase when the economy improves.Additionally,a number of City
staff members are approaching retirement age which could also
accelerate the rate of turnover.As of ti,is writing,City staff are re-
calculating a range of projected saVings,using a low of two employees
leaving per year and a high of five leaVing per year.Higher turnover will
result in additional savings for the City as cLlrrent employees under ti,e
2.5%@55 fOm1ula are replaced by new employees witi'a different
retirement tier (witi,a 10IVer formula).
Salary Increases
RancllO Palos Verdes staff assumed annual salary rate increases of 3%
based on historical data (2.6%annual cost of living adjLlstment [COLA]
increases and 2.2%merit increases).Even though salary increases may
average less than 3%over the next six years,we are using ti,.t projection
as Management Parlners does not want to overstate the savings which
will be higher if salary increases average less than 3%.
Projected Savings
If ti,e City were to grant a one-time 5%pay increase in excl,ange for
employees paying ti,e fuJI 6%employer retirement contribution (instead
of paying 1.5%as they currentiy do),and establish a 2nd tier witi,a
15
ATTACHMENT 6-20
Pension Revision White Paper
Rancho Palos Verdes Oat-a and Assumplions Management Partners
'.
2%®60 formula and three year average compensation basis for new
employees,projected savings from current pension costs would range
belween approximately $81,000 and $98,000 in year one based upon a
turnover rate of 5%and 7%,with increased savings eadl subsequent year
rising to approximately $347,000 to $478,000 in year six.TIlerefore,the
total pension savings over the initial six years would range between $1.2
million and $1.6 million.Savings calculations based on lower average
salary increases and/or higher turnover will increase these projected
savings.
Employee Retention
An unintended consequence of the 2.5%@55 plan is that by having the
retirement formula top out at age 55,employees do not have an incentive
to remain employed beyond age 55 even though they may still have
much to contribute.In fact,many public employees,after reaching age 55
and retiring from a public agency,continue to work for another employer
or become self-employed.
The 2%@55 and 2%@ 60 fommlas botll reach tlleir maximum percentage
(2.418%)at age 63.Under both of these formulas,employees have an
incentive to remain witll the public agency beyond age 55 and up to tlle
more realistic retirement age of 63.
CalPERS Contribution Projections
Under tl,e current 2.5%@55 formula Witll single highest year
compensation basis}and assuming an ongoing investment returns of
7.75%,CalPERS projects the following employer contribution rates for the
next five years:
•2012/13 -13.8%
•2013/14 -15.5%
•2014/15 -15.8%
•2015/16 -16.1%
•2016/17 -16.4%
TI,ese increases are not sustainable as defined by the subcommittee.The
rate increases can be mitigated by moving to a second tier for new hires,
as illustrated in Table 1.CalPERS provided the follOWing rates for new
hires under tllree retirement plan scenarios.
16
ATTACHMENT 6-21
Pension Revision While Paper
Rancho Palos Verdes Data and Assumptions Managemenl Partners
Table 1.CalPERS Rales IIIlder Variolls Scellarios
Figure 1 shows CalPERS'historical investment returns.
Figure 1.CalPERS 11lveshllelll Retul1Is'
I
\ I
2S~·1
20~.·-------=:....,.;=--:=-:-:--------:;"-"""i;l---:====----:=~---==---D--=-:--=---=-,
IS~.+---i'-~----"""""":,.--__;;f;;.,...:::"-----::-----===--=t"""'--___:~+_-=_---
~~:::J1r----=--=-------=..=...:==--------===--==--=----=-=-------T+\1----:
XI
-25~.
·2':0"
·30~;
S"o.
E
E 0".-a:
'0s
&
·IO~.
F~e~IY.~r
-AetU<ln.:lllnteresl Rale -<t-Annual R<l15 01 Return -m-I5-Ye.:lr Rolling Geomelnc Aver<Jg
I SOl/rcl!:Actuarial Presentatioll for lilt!City of RflIld,o Palos Vcrdes by KlIflg-pei Hwang,CnIPERS Swior Pension
ACluunj.11120110
17
ATTACHMENT 6-22
Pension Revision White Paper
Observations and Options
Observations and Options
Mana~ement Partners
It is neither practical nor feasible for the City to move out of the CalPERS
retirement system and into another system.Rancho Palos Verdes is a
General Law City rather than a Charter City.This alone severely limits
retirement system options.Even if the City could move out of CalPERS,
there are no practical alternatives for a small dty such as RPV.
Additionally,in order to move out of CaIPERS,the City would have to
pay a large "termination fee"to cover liability for future retirees,
pursuant to the existing agreement with CalPERS.TNs is something the
City cannot unilaterally dlange.Given the realities of remaining within
the CalPERS system we looked at the options U,at are available to the
City within CalPERS.
1l,ere are U,ree primary factors that determine the City's retirement cosls:
•Type of retirement formula ofiered to employees,
•Final compensation basis that is used for benefit caleulations,and
•Any portion of the employer retirement contribution that is paid
by the City (referred to as employer-paid member contributions
[EPMCJ).
An additional factor that may impact costs is whether employees have
the ability to increase the compensation basis during Uleir final year(s)
of service ("retirement spiking"),
Retirement Formula
City employees are currently under the 2.5%@55 formula,With U,is
formula,at age 55 an employee's retirement benefit is calculated by
multiplying the years of qualified service by 2.5%and U,en multiplying
final compensation by thai percentage.For example,an employee 55 or
older with 25 years of qualified service would receive 62.5%of U,eir final
compensation (2.5%x 25 years),Under this formula,the multiplier (25%)
does not increase after age 55.
AnoU,er formula commonly used by public agencies is the 2'10@55
formula,Under this formula,at age 55 an employee's retirement benefit
18
ATTACHMENT 6-23
Pension Revision While Paper
Observalions and Options ManaBemenl Parlners
is calculated by multiplying the years of qualified service by 2%and then
multiplying final compensation by that percentage.For example,an
employee aged 55 with 25 years of qualified service would receive 50%of
their final compensation (2%x 25 years).With this formula,the
multiplier (2%)increases up to 2.418%at age 63 or older.So,an
employee who is 63 years old and has 25 years of qualified service would
receive 60.45%of their final compensation.
A third possibility that some agencies are beginning to implement for
new employees is the 2%@ 60 formula.With this formula,at age 60 an
employee's retirement benefit is calculated by multiplying the years of
qualified service by 2%and then multiplying final compensation by that
percentage.For example,an employee who is 60 and has 25 years of
qualified service would receive 50%of their final compensation (2%x 25
years).Under this formula,the multiplier (2%)also increases up to
2.418%at age 63 or older.So,an employee who is 63 with 25 years of
qualified service would receive 60.45%of their final compensation.Figure
2 below illustrates the different levels of final compensation under these
three plans at various ages.
Figure 2.Percelltage of Compel1satioll UlUfer Various Plalls
--2%@55
-e-2'l'.@60
-_-2-5%@55
2.500
2-418
25002-5002500/1
/2250
_<:---------,r"":-=----..!J'-----
2.000
25
1.0
~20
E
&
~
:icci 15
Additional years of service
50 525 55 575 60 63
I
RetJrementAlle
19
ATTACHMENT 6-24
Pension Revision While Paper
Observations and Options
Final Compensation Calculation Basis
Management Partners
..
For current City employees.the final compensation basis is known as
single highest year.l1,e employee's single highest year compensation
(based on 12 consecutive months)is used in the benefit calculation.
Normally,but not always,the highest compensation occurs in the
employee's final year of service.
An alternate final compensation is known as three-year average.In tilis
case,ti,e employee's highest average compensation over 36 consecutive
months is to calculate ti,e benefit.Normally,but not always,ti,e higliest
average annual compensation occurs in the employee's final three years
of service.
Employer-paid Member Contributions
CalPERS has set the employee contribution for the 2.5%@55 plan at 8%
of salary.Of tilis 8%,the City currently pays 6.5%and employees pay
1.5%.l1,e current employer contribution rate for both ti,e 2%@55 and
2%@60 plans is 7%rather than ti,e 8%contribution rate for the 2.5%@5 5
plan.
For bOUl current and future employees,the City could decide to pay all,
part,or none of ti,e employee contribution.So,for employees under ti,e
2.5%@55 plan,U,e Oty could reduce its EPMC to 0%or any oU,er
percentage wiU,employees paying the remainder of the 8%employee
contribution.
The City also has the latitude to establish different EPMC percentages for
different plans.For example,the City could set a 0%EPMC for
employees under ti,e 2.5%@55 plan with employees paying the full 8%
while setting a different EPMC percentage (e.g.,3%)for employees under
a 2%@550r2%@60plan.
Retirement Spiking
As noted above,the retirement benefit is calculated by multiplying final
compensation by a percentage factor based on the employee's age and
years of service.Also,final compensation is based on either the
employee's highest 12 consecutive months of compensation or the
employee's highest average compensation over 36 consecutive months.It
is in the City's interest,and in ti,e interest of taxpayers,to ensure that
employees do not manipulate their final compensation for ti,e purpose of
increasing their retirement benefit.
20
ATTACHMENT 6-25
Pension Revision White Paper
Observations and Options Management Partners
One way in which spiking can occur is to promote an employee at the
end of their career or explicitly to increase their final compensation.
Otl,er forms of increasing salary include special assignments that pay a
differential or acting pay.The City should be diligent in reviewing any
such late career salary increases to ensure they are based on need and are
in ti,e best interests of the City and tllat tI,ey are not being implemented
to increase final compensation for retirement purposes.
CalPERS has instituled a number of regulations 10 limit opportunities for
retirement spiking.For example,EPMCs are not counled in final
compensation by CalPERS unless an agency specifically elects to do so
through a memorandum of agreement or ordinance.Employer cash-outs
of accrued but unused vacation and sick leave are also now excluded
from final compensation by CaIPERS.CalPERS does allow unused sick
leave to count toward additional service credit (but not toward final
compensation).For every 250 days (2,000 hours)of unused sick leave,the
employee is credited with one additional year of service.This credil is
mandated for pooled agencies SUcll as Rancho Palos Verdes.CalPERS
estimates the cost tllis benefit as 0.2%10 0.7%of payroll depending on ti,e
amount of unused sick leave accrued by employees upon retirement.
Current Options Compared with New Employee Options within
Subcommittee Parameters
The following applies to current employees:
•Cannot change formula
•Cannot change compensation calculation basis
•Can change EPMC
Additionally,the City could provide a volunlary deferredcompensation
plan Witll or without the City making a contribution to assist in retaining
employees who reacll ti,e current retirement age of 55.TIlis option has
not been fully studied by Management Partners or by the subcommittee
and is not part of our recommendation.However,we do recommend
that it be studied further in the future.
The following applies to new employees:
a Can change formula
a Can change compensation calculation basis
a Can change EPMC
Additionally,the City can provide a voluntary deferred compensation
plan with or without the City making a contribution.
21
ATTACHMENT 6-26
Pension Revision White Paper
Observalions and Options Management Partners
Table 2 below summarizes the City's ability to change basic attributes
assodated with the CalPERS plan based on current legal understandings
and CalPERS positions.
Table 1.Cih)Discrelioll with Cballges 10 Basic CafPERS Alh'ibllfes
Current New
Retirement Component Employees Employees
Change to pension formula Can nor change Can change
Change to compensation cah::ulation basis Cannot change Can change
Change to employer paid member contribution Can change can change
Options for Consideration
The following options could be considered by City Council.
•Adopt alternative CalPERS formulas for new hires
o 1%@55
o 2%@60
•Institute a three-year salary basis for new hires
•Modify EPMC for new hires and/or current employees
•Offer a deferred compensation plan supplement for 1%@55 or 1%
@60plans
Approaches utilized by benchmark cities are presented in Table 3.
22
ATTACHMENT 6-27
Pcnsion Revision White Paper
Observations nnd Options
Table 3.Peer Compmi,oll
Manilgcment Pnrtncrs
Employer Employee Employer Paid Total
RetJrement (ontnbutlon Contribution Member Employer
Peer City formula Salary Basis to PERS [0 PfRS Contribuflon Contnbution
65%-employee
RPV 2.5%@55 Single highest year 15.1%8.0~~pays I5'}'21.6%
0%-employee
pays m but Cicy
RPV contributes B~·
Proposed Average of three 1.5%to Deferred 7.755'~to
Tier 2 m@60 highest years'salary 6.755%7.0%Camp Plan 8.255'~
SIngle highest year
21I@55 July 1,2011 Averace
Rolling Hills July 1,2011 of three highest o,~.employee
Estates1 2%@60 years 20.5%7.0~'pays 7%:20.5%
Average of three 7%-employee
Calabasas 2%@55 highest years'salary 10.9%7.0%pays 0%17.9%
laguna Average of three 7%-employee
Nicuel m@55 highest years'salary 10.539%7.0%pays 0%17.539%
Classified:less
than two years
of service
4.47%
contribution;Classified staff for
after two first nvo years:
years of 3.6'"-employee Classijied:
Classified:service 6.26%pays 0.87%33.37%
27.11%contribution.
Classified after
Management:Management:two years,Management:
27.11%5.01"Management,32.1Zl:
Executive:City
Sanjuan Average of three Executives:Executives:pays 100%oj Executive:
Capistrano 2.7%@55 highest years'salary 27.11%7.74'~employee's share.34.85%
S.25S~-employee
Goleta 2'~@5S Single highest year 10.338%7.0%pay 1.75%15.588';
La Canada 75i.-employee
Flintridge m@55 Single highest year 12.73'~7.0%pays 0%19.73%
Data not Data not Data not
Malibu 2%@55 Data not available available available Data not available available
no·employee
Walnut 2%@S5 Single highest year 11.751%7.0'0 pays O~1B.75m
I City implemcllted Tit:r 2.(2%@ 60 with tllreL-yenr ni/erngt)in/11.
~t\otlc-tilJfJ:i%snlary iuO"(nse wns provided as all offset.
ATTACHMENT 6-28
Pension Revision White Paper
Recommendations
Recommendations
Management Partners
Based on the parameters identified by the Pension Revision
Subcommittee,analysis of available options,and review of peer
jurisdiction systems,Management Partners offers the following
recommendations.
Current Employees
The City should retain i1,e 2.5%@55 formula and retain the single-
highest year basis.In addition,Management Partners recommends i11at
the City:
•Decrease EPMC from 6.5%to 0%.
•Grant a one-time 5%salary increase in conjunction with
increasing i1,e employees'portion of retirement contribution from
1.5%to S%.TIus results in a net savings to i1,e City of 1.5%of
payroll in year one and in each subsequent year.
Note:Prior to 2007,the City paid the entire employee retirement
contribution and employees paid no portion of i1,e contribution.In 2007,
City employees were asked to vote on whether to increase their
contribution from 0%to 1.5%in conjunction with improving the
retirement formula from 2%@55 to 2.5%@55.TI,e employees voted to
doso.
Although we believe the City has a good legal basis to reduce the EPMC
for current employees,City employees might take the position that since
they voted on setting the EPMC at 6.5%,tl,e 6.5%EPMC is a vested right.
TIlis specific issue is untested in litigation.To minimize the costs of
potential litigation,we recommend that the one-time 5%salary increase
be implemented to partially offset the 6.5%EPMC reduction.This offset
will greatly reduce the potential of litigation alleging lhat the 6.5%EPMC
is a vested right.
24
ATTACHMENT 6-29
Pension Revision White Paper
Recommendations
New Hires
Milnagement Partners
Management Partners recommends that the City change to 2%@60
formula.In addition,we recommend that the City:
•Change to three-year average basis.
•Institute EPMC of 0%with employees paying the full 7%
employee contribution.
•Offer an optional deferred compensation plan [401(a)or 457(b)
plan]""th the City contributing up to 1%or 1.5%10 new
employees who elect to participate in and make contributions to
the plan.In the interest of fairness and practicality,once
established,the 1%to 1.5%City contribution amount should
remain at that level unless it is necessary to change it due to
severe and unanticipated financial circumstances.
Note:11,e cost to the City for the 2%@60 plan with a matd,ing 1.5%
contribution to a 457(b)plan is slightly less than the cost of tl,e 2%@55
without any matching.Since bOtll plans "top out"at 2.418%at age 63,tl,e
benefit to employees who work until age 63 is significantly greater under
the 2%@60 plan Witll the 1.5%match than under tl,e 2%@55 plan
without the maId,.
Moving the age at which the retirement formula "tops out"to 63 has
benefits for both tl,e City and its employees.The City will retain
experienced employees beyond the current retirement age of 55 while
also reducing recruitmenl and training costs for senior level positions.
Employees who retire at age 63 rather tl,an the current age of 55 while
enjoying a City contribution into a deferred compensation ploy will enjoy
a more secure retirement in several ways:
By working for tl,e City to age 63 rather than age 55,employees
will retire witl,more years of sernce whidl is a major factor in the
retirement benefit.Since employees who relire from ti,e City at
age 55 often continue in employment elsewhere,tile employee's
work years will,in many cases,remain the same.
The 2.5%@55 tier has a maximum benefit of 2.5%while the 2%@60
tier has a maximum benefit of 2.418%(less U,ill,0.1 %difference).
11,e cumulative effect of the City's deferred compensation
contribution of 1%-1.5%over the course of employees'careers
more tI,m makes up for tl,e minor difference in the maximum
formulas in the two tiers.
25
ATTACHMENT 6-30
Pension Revision White Paper
Recommendations
Current Employees and New Hires
Management Partners
Management Partners recommends that the City closely review and limit
any final year compensation increases to preclude spiking.
Under these recommended reforms,the Oty will achieve immediate first
year savings of 1.5%of payroll.Absent any current staff leaVing the City,
ongoing annual savings of 1.5%will be realized.Significantly higher
savings will be achieved as current employees who are under the 2.5%@
55 formula are replaced by new employees under tl,e 2%@60 formula.
26
ATTACHMENT 6-31
Pension Revision White Paper
Appendix A-First Pension Subcommittee Report
Appendix A -First Pension Subcommittee Report
27
Management Partners
ATTACHMENT 6-32
First Report of the Pension Subcommittee of the City Council for the City of
Rancho Palos Verdes
Members:Steian Wolowicz and Thomas Long
Initial Meeting:December 7,2010
Although the subcommittee anticipates conducting additional meetings and working with
an independent consultant to attempt to formulate one or more proposals for possible
pension revision to be considered by the city council as a whole,the subcommittee felt it
would be useful to issue a set of preliminary observations and common agreements
under which the subcommittee is working for the purpose of providing Information to
those interested in the subcommittee's work.These observations and common
agreements are SUbject to revision If the independent consultant presents information
not currently known or considered by the subcommittee.
Observations:
A.The average benefit collected from the City of Rancho Palos Verdes pension
plan by retirees Is approximately $1,000 per month.Rancho Palos Verdes
employees do not earn Social Security benefits based on their time with the City.
According to the speakers at the December 7,2010 meeting the City's pension
benefits are about average when compared to those offered by other comparable
cities.
8.Funding the City's pension benefits,even after significant investment losses have
requIred large increases in contributions,consumes about 3%of the City's
general revenue budget.Protective service employee pension costs are not
under the control of.the city council.Fire Department pensions are under the fire
department's budget within the County of Los Angeles.Sheriff Departmenfs
pensions are under the control of the Sheriff.Although the City contracts with the
Sheriff to provide police servIces,the City has no control over the Sheriff's
pension policies.
C.Prior to 1he initial subcommittee meeting the City Manager relayed a concern
expressed by Staff that included in the concept of "vested benefitsn Is the
percentage of employees'portion of contribution.While the core elements of the
existing employees plan shOUld not change,the dIscretionary latitude of this
percentage needs to be clarified and understood.Moreover the independent
con.s ultants may identify other factors that are not now known for consideration.
D.The subcommittee was established by the Council to address concerns
expressed by council members about the City's rising pension costs both in
terms of absolute dollars and as a percentage of covered payroll.The
subcommittee was also tasked to consider the potential impact,if any,of
underfunding of vested benefits.
1
ATTACHMENT 6-33
E.Various factors contribute to the complexity of the subcommittee's tasl<s and may
be beyond the control of the council and the City.These include:.
(1)Unpredictable and uncontrollable impacts on investments from market
performance and changes in actuarial factors that affect the costs of
benefits.
(2)CaiPERS offers only a limited set of options.Based on comments from the
speakers during the December 7,2010 it is our understanding that
CaJPERS does not provide service for Defined Contribution retirement
plans.CaiPERS would require cities offering a second tier defined
contribution plan to place the defined benefit plan with another plan
administrator.
.(3)Adopting changes to the City's pension plan that would reinstitute Social
Security benefits or adopt currently unavailable formats may require
agency rulings,judicial interpretations.and/or legislative action.
Common Agreements:
1.The subcommittee is considering changes in pension formulas,
contributions,and benefits only for neWly-hired employees.The subcommittee is
not now considering any changes,whether it is In benefits or funding of contributions,
for existing employees and retirees of the City of Rancho Palos Verdes.
2.The subcommittee is not considering options which involve the City
departing from the California Public Employees Retirement System ("CaJPERS").
Given the preliminary comments received,the subcommittee has found that departing
from CalPERS Is not now practical or cost-effective.
3.Any revisions made to the City's pension benefits should not
degrade the City's ability to recruit and retain high quality professional
employees.The City has a long established policy of attempting to provide
compensation at the 75th percentile when compared to other comparable California
cities as a way of recruiting and retaining skilled employees.
4.The primary purpose of pension revisions is to control cosis and to
provide a sustainable pension plan.It may be found that given viable alternatives
now available retirement costs cannot be significantly reduced but only limited in the
increases.The purpose of pension revisions is not to cut pension benefits to existing
employees or otherwise disrupt the City's relationships with its employees or with
potential recruits.Instead,the purpose is to assure that pension contributions both
appropriately fund promised benefits but also are within the C~s abilities to support.
Future pension cost increases should be controlled such that the City's overaU pension
costs remain a relatively low share of the City's budget and do not grow
disproportionately compared to other of the City's costs.A sustainable pension plan
providing good value benefrts Is in the common interest of both the City's employees
and its residents.
j.
I
2
ATTACHMENT 6-34
5.Broader pension revisions are likely to be effective,if at alt.only at a
higher government level.Members of the sUbcommittee and/or members of the
public may support different and more considerable revisions to pension benefits for
pUblic employees.However,a broader scope of revision may not be possible at the
level of a City the Consultants will be asked to identify viable (practical and cost-
effective)alternatives.Signfficant alternatives may be made available to municipalities
through action by the governor,regislature,ballot initiative,or new models developed for
municipalities.The current or future Councils should be free to consider those
alternatives as they arise.
As the subcommittee proceeds forward,it hopes to develop a consensus as to
whether or not a viable revision to the City's existing pension program is necessary and
possible.If such a consensus in favor of a revision emerges,the subcommittee will
either reach a consensus on a single proposed option for a revision or perhaps two or
more options for the entire Council to choose among.We anticIpate at least one
additional reportsummarizing the results of recommendations from the retained
Independent consultant and our additionaJ work.
Dated January 4.2011
Sincerely.
401458_1.00C 3
ATTACHMENT 6-35
Pension Revision While Paper
Appendix B-Second Pension Subcommittee Report Management Parlners
Appendix B-Second Pension Subc::ommittee Report
28
ATTACHMENT 6-36
Second Report of the Pension Subcommittee of the City Council for the City of
Rancho Palos Verdes "
Members:Stefan Wolowicz and Thomas Long
Date 7 June 2011
This report supplements the Subcommittee's earlier report of December 7,2010,a copy
of which is attached for your reference.T-he Subcommittee reaffirms the observations
and common agreements announced in its first report of December 7,2010.The
purpose of this report is to advise the Councn,the City employees and the public of
further efforts by the Subcommittee since the time of our last report.
The Subcommittee is continuing to study options designed to assure that the City's
pension plan remains sustainable and practical.Based on informalion gathered 'and ','.",
pending meeting with an advisory consultant the Subcommittee has tentatively,';:,::;,'!
concluded that the present range of options available to it is fairly limited.The :'"'.,,'.',':;..,
Subcommittee tentatively does not expect to recommend that Rancho PalosVerdes ..':',.
leave CaIPERS.These tentative conclusions have been reached due to two primary:',.'
reasons.First,the City Is too small to bear the costs of maintainIng Its own pension plan :,
and presently securing an alternative plan and sponsor does not appear viable,'
accordingly leaving CalPERS is not a viable option at this time.It is expected that .
ullimately major reform by the state legislature will be necessary to provide the1evels of.'
changes now requIred by CALPERS.Second,the Subcommittee hopes to avoid,'
recommending changes to the City's pension that could pose a significant risk to the '
City in'litigation.
With the above restrictions in mind,the Subcommittee is continuing to work to develop a
consensus proposal to the Council for changes in the City's pension plan that will '
bolster Its sUs1alnabllity by s1abilizing the City's pension costs as a percentage of
payroll.The Subcommittee is exploring creating a second tier pension plan for new
employees.The Subcommittee is also exploring adjusting the contributions of current
employees toward the pension plan coupled with an equitable adjustment in the salaries
of current employees.Staff has presented the Subcommittee with a number of options
and predicted savings from each of the options.The Subcommittee needs additional
time to study these options and needs to confer with an independent pension
consultant.We hope to select and begin conferring with the independent consultant
within the following month.
In its first report,the Subcommittee indicated that it was planning to work with an
independent consultant Staff promptly prepared a request for proposal but received
only one bid in response to that initial proposal.The Subcommittee felt it was
necessary to circulate a new proposal and to solicit additional bids.Through no fault of
the staff.the process of obtaining an independent consultant has,unfortunately,been
delayed.Nonetheless,the SubcommIttee anticipates conferring with an independent
1
ATTACHMENT 6-37
/'
consultant to confinn its own assumptions and the information that staff has provided to
it and developing a final report to the Council with either a consensus recommendation
or viable alternative proposals for the Council to consider within the next three months.
The Subcommittee attended a recent presentation of the Los Angeles Division of the
League of CaUfomia Cities on Pension Reform.A handout containing some .
background information discussed at that meeting Is also attached to this report The
Subcommittee is providing this report and the attached infonnation and wOl be prepared
at our meeting on June 7,2011 to respond to q.uestlons by the Council.
Dated ..&7 ,2011
Sincerely,
.....
ATTACHMENT 6-38
Pension Revision White Pilper
Appendix C-Third Pension Subcommillee Report Management Partners
'.
Appendix C-Third Pension Subcommittee Report
29
ATTACHMENT 6-39
Third Report ofthe Pension Subcommittee ofthe City Council
for the City of Rancho Palos Verdes
Summary of Meeting of July 1,2011
Members:Councilmember Steve Wolowicz and Mayor Tom Long
Consultants:Andy Belknap and Tim Sullivan,Management Partners,Inc.
The Subcommittee reaffirms its observations from its initial two reports.For ease of reference
those two reports are attached.
Goals of the project
o Consider recommendations to the Council for possible changes in RPV's pension
structure to assure long term sustainability that does not expose the City to risk of
litigation or deteriorated employee relationships.
o Provide the Subcommittee with advice and confirmation of issues that the
Subcommittee has encountered during the preliminary gathering of information.Also
include comments and advice as to the potential implementation or probable
roadblocks of the adoption of a defined contribution-type plan.
o Sustainability generally means ensuring that pension expenditures become a predictable
and generally flat percentage of payroll.
o Management Partners will assist the Council Subcommittee in reaching a
recommendation and will prepare further interim reports after each meeting with the
sub-committee.
o Present a final report to the City Council in September,ideally at the first meeting of
that month.
Areas to consider in formulating recommendations:
Given the preliminary information obtained by the Subcommittee,the Consultants are to
provide advice as to the expected viability of adopting an expected "second tier"defined
benefit plan for new employees.
o Whether to move from a singie highest year salary basis to a three year average salary
basis.
o How to provide protection against any possible retirement spiking,by for example
converting vacation or sick leave into compensable pay for purposes of retirement
calculation
o Whether to offer a one-time S%salary increase in exchange for increasing employee
contribution from 1.S%currently as follows:
o Current employees pay 8%retirement contribution and stay in 2.5%@ SS plan
o Future employees pay 8%retirement contribution and move to 2%@ SS plan or
2%@60plan.
ATTACHMENT 6-40
o Whether to offer a Second TIer Plan to current employees on a voluntary basis with
some incentive such as lower contribution rate or employer matching in a Deferred
Compensation plan.Also consider employer matching in a Deferred Compensation plan
generally for the possible Second Tier Plan.
o Determine how to ensure that any new pension plan does not require Social Security
coverage
Desired action items:
o Examine and comment on assumptions in the Subcommitee's two prior reports.
o Confirm staff's data as submitted to the Subcommittee and the Consultant.
o Determine the City's actual turnover rate for the past 10 years.
o Determine if the annuity percentage for 2.S%@ 55 and 2%@ 55 even out at any age.
o Cite potential pension reform ballot issues (David Crane and Marcia Fritz or other
credible expected sponsors of pension reform initiatives likely to be proposed to
California voters)in the report.
o Explore the assumption and explain why it is not feasible or practical to move beyond
the concept of sustainability (i.e.,a defined contribution play).
o Establish the credibility of the data and numbers.
o Determine which cities to include in comparisons:
o Coastal contract cities without public safety employees
o Those with similar demographics
o General Law
o High cost of living
o Show the experience agencies with their own pension plans (e.g.,Orange County)have
had.
o Gather historical records of CalPERS contributions for unfunded future liability.
o Address the issue which some raise that pension reform must come from the State
level.
•Be able to say to staff."Yes,these changes will cost you more but it will assure plan
sustainable.You don't want to be a member of a retirement plan that is not
sustainable.II
•Also be able to explain the reasons that now exist which are likely and valid reasons
which now prevent discontinuation of defined benefit plans in favor of defined
contribution plans.
Questions to answer by the Consulting Advisors:
•If the City moves to a two tier plan (2.S%@ 55 for current employees and 2%@ 55 for
new employees with all employees paying 8%retirement contribution)will they reach a
level percentage of payroll within 3-5 years?If not what would be a reasonable period
of time within which to reach a level percentage of payroll?
•Assess the uncertainties associated with CalPers including:
ATTACHMENT 6-41
a Variability /volatility of contribution rates?
a Unfunded future liability?Note:It is expected that the Advisors must be
prepared to fully explain the importance or lack of importance as'to this issue,
•What is the status of the IRS ruling on Orange County?
•For the possible new Second Tier Plan,is it possible to include a voluntary DC Plan (4S7
Plan)?
•Can a 2%@ 60 Plan be enriched by adding a deferred compensation component?
•Is it legal and otherwise advisable for the City to make contributions to a deferred
compensation plan based on age or years of service (as an incentive for staff to work
beyond age SS)?
• A critical and important part of the consultants'advice includes a full description of.all
viable,legal and practical alternative retirement plans which reasonably considered for
adoption by the City.
Timeline:
Develop a draft report for review by the Council Subcommittee,in advance of a final report
presentation for the September 6,2011 Council meeting.
ATTACHMENT 6-42
Pension Revision White Paper
Appendix D -Vested Rights of CaJPERS Members
Appendix D -Vested Rights of CalPERS Members
3D
Management PtJrlners
ATTACHMENT 6-43
r ,
Vested Rights of CalPERS Members
Protecting the pension promises made
to public employees
July 2011
ATTACHMENT 6-44
l
CalPERS Profile
The C,liforni.Public Employees'Rcciremenr System (C:l1PERS)is <he
";Irion's largcst public pension fund with ilSsers of :approximately 5240 billion.
Ht::tdquartcrcd in S3cramcnro,CaJPERS provides retirement and hl.-:llr!t
benefit services to more th.m 1.6 million members and 3.033 school and public
employers.The System also opcr.m:s eight Regional Offices located in Fresno.
Glcndi1Je,Onngc,Sacramcnco,San Diego,SilO Bernardino,5an Jose,and
\~lnUI Creek.Lcd by a 13-mcmbcr Board of Adminis[~rion,consisting of
mcmbc:r-c1c:c[(~d.:J.ppoimc:d,and cox officio members,CalPERS membership
consisrs of approxim;ucly 1.1 miJlion acrive 'lOd in::lcevc members and morc
rha.n 500,000 retirees,beneficiarics,and survivors from St:1re.school and
public :lgcncies.
EstJblishcd by legislation in 1931,the Sysrem became opcr.arion:U in
1932 for cilc purpose of providing a secure retirement ro Srare employees
who dedicue meir ClfCCrs ro public service.]n 1939.new legislaoon allowed
public O1gency and classified school employees ro join cilc System for rerirement
benefits.C.,IPERS began administering health benefits ror Sute employees
in 1962.and five years I~ter.public otgencic:s joined dlt:Healrh Program on
a contract basis.
Adefined benefit "rirement pl.n,C:l1PERS provides benefirs bilSed
on a member's years of service.age,and highesr compensarion.In addition.
benefits arc provided for disability and deam.
Tod,y C>IPERS offers .ddirionaJ progr:lms.including,deferred
compensation retirement SJvings plan.member education services,and
an employer rrust for posr~retirement benefits.Learn more at our website
at \V\V\v.caJpers.C1.goV.
I
.I
ATTACHMENT 6-45
'.
Contents
I.Introduction
II.Overview:Member Benefits And Contributions.
III.Overview:Employer Funding Obligations.. .
IV.California Contract Clause as Applied to Public
Employees'Retirement Benefit Rights . . . .
V.Federal Contract Clause as Applied to Public
Employees'Rights in California.
VI.CalPERS Members'Rights .
VII.The Role oi CalPERS in Protecting Members'
Vested Rights .
VIII.Conclusion
.3
.4
.7
..8
·12
.13
·16
·17
ATTACHMENT 6-46
'.
2 I Vested Rights of CalPERS Members
ATTACHMENT 6-47
'.
I.Introduction
Rccem economic crises affecting the world's governments and markers have:brought fiscal
pressures on state:and local budgcts in California.Budgetary consrraincs have focused anen-
cion on rhe:cost of providing public services,and no cast has received more attemion than rhe
compensation and benc:fics earned by our public employees.Commissions,poliricalleadefs
and private citizens all have wdghed in on rhe subject,e:J.ch proposing wide-ranging "reforms"
aimed ;l[reducing rhe rerirc:mcnr bendics earned by public servants.Proposals have:included.
for example::moving to Jess advantageous benefit formulas,imposing caps on pensionable::
compcnsadon.changing the definicion of pensionable compensation [0 exclude items that arc
currently includtd,It:ngrhening the ufinal compensation"period on which bendi.u Jre calcu-
lared,restricting emplDyees'tighrs to pucehase additiDnal service credit,lengthening eligibiliry
periods.increasing employee conrributions and dimin:!ting employer paid member conrribu-
tions.Many of these prDpDsals seek to apply these "reforms"to currently active employees as
well as those who may be hired in the future.
UndersrandJbly.chis ;:mcmion on the compcnsadon and benefits of members of d,c
CalifDrnia Public Employees'Retirement Sysrem ("CalPERS")has raised concerns as to the
Ieye!of assurance rhe law provides char promised pensions will be available upon rcrirc:menr.
CalPERS has prepared this paper for two purposes:
•To articulate the current state oi California law regarding the nature of its
members'pension rights and the extent to which such rights have become
··vested"and may not be impaired;and
To explain the role of CalPERS in ensuring that its members'vested rights
are honored.
This paper is nor intended co respond CO any p;:micu1:u proposed legislarion or iniciatiYe.
R..1rher,it is inrended co presenr CaJPERS'insritutional views in rhe broader comexc of its
primary gDverning laws:the California Public Employees'Retirement Law (GOV't Code
§§20000,et seq.)(the "PERL")and the California and United States Consricurions.The
merils Jnd enforceability of any new proposal mwc be anaJyzed on irs own unique terms
and conditions.
Finally,althDugh some of the general principles and authoriries discussed in this paper
may be rdevant to plans CalPERS adminisrers other than rhe Public Employee Retirement
Fund defined benefir plan,this paper is nDt intended to address any issues relared to the
CalPERS'healrh benefirs plans,defined cDntriburion plans,rhe Legislaror's Recirement
Sysrem Dr the Judicial Retirement Systems (l and II).
Vested Rights oi CaJPERS Members I 3
ATTACHMENT 6-48
II.Overview:Member Benefits And Contributions
California law clearly establishes [hac public emplay<c reciremem benefics are a form of
deferred compcnsarion and parr of rhe employmem comracr.Rights [0 [his deferrc:d compcn-
sation arc earned when [he employee provides service to the public employer.
By scacu[e and camrac[,public employees,na[CalPERS,decide how much of an
employee's campensaeian will be paid currendy and how much will be deferred and paid in
d,e fucure.Simply puc,employees gram [he benefits owed [0 CalPERS'membees.CalPERS
in [urn saves as the:truStee of (he trust crcilred [0 fund these benefits.through rhe prudent
adminisrration and invesonenr of the rcri~mem fund.
The righes of all CalPERS membees are escablished by sraru[e.In me case a£lacal agencies,
membees'righcs are also governed by [he comcac[bmv<cn [he agency and C.'l!PERS.\'(Ihen
conrracring wirh CaJPERS.local agencies may choose from;}menu of options.Benefies for
CalPERS membees are afren [he produc[of calleceive bargaining.
This sec[ian provides a general overview of [he core benefits earned by CaJPERS
members.It is not imc:ndc:d [0 be :J comprehensive description of:111 benefits and rights
of all CalPERS members.
A.Service Retirement Allowance
Each CalPERS member carns service credit [Qwards a Iifedme rerirement aHowancc a.fr:cr
employmenc,calculaced under a fo[mula which accounts for [he members years of crediced
service,the m~mber's "final compensation"and the member's age:at retirement.E:J.ch b::ndi.t
formula is commonly referred to as a specified percentage of a member's Mfinal compensation"
for each year of service,based on OJ.particular age at retirement.For example,uncler a "2%
at 55"benefit formul:I,a member receives 2%of his or her "final compensation"per year of
crediced service.if mar member retires at age 55.If dte member rerires earlier or latcr than age
55,[he:member receives a lower or higher percentage cr"final compensation,"according to
a Statumr)'rable.For example,under me "State 2%at 55"rabie,a member retiring at age 50
receives 1.1 qh of "final compensation"per year of credited service.A member ~eriring ar age 63
or older receives 2.5~b of"nn:tl compensation"per year of credited service.
As nored,each formula applies a mulriplier ro a member's "final compensation."For some
members,"hnaJ compensation"means rhe highest one-year average pensionable "compensation
earnable"dla[[hey earn dueing [heir careers.For a[her members,me highcs[annualized mree-
year average "compensation earnable"[hat they ea.rn during their careers is used.In general
«rms,"campemacian earnable"includes [he member's "payca[e"(essentially base salary)and
cercain icems af"special compensacion,"which ace escablished as pensionable by law or regula-
tion."Compensation earnable"ge::nerally do~noc include::i[(~ms such as ove::nimc pay and
amounts [hac are noc available to employees in rhe:same group or class of public c::mploymenr.
4 I Vested Rights of CalPERS Members
ATTACHMENT 6-49
B.Disability Retirement Allowance
If a member has an injury or illness rhar prevenrs rhe member from performing rhe cuscomary
duries of his or her regular posirion,rhe member may be eligible for a disabiliry miremenr.If
a member's disabiliry is the result of a job-relared illness or injury,and ,he member is a school,
loc.,1 or State safecy,Stare peace officerlfirdiglucf.State industrial.or State parrol mcmbc:r.rhe
member may be entieled co an industrial disabiliry rerirement.Local miscellaneous members
also may be eligible if their employer contractS wiell CalPERS co provide for an industrial
disabiliry retirement.
A member who is gr:uucd a disability retirement rcccivt:S rhe greater of the service retire-
ment allowance (if eligible)or an allowance based on a specified formula applicable co rhat
member.A member who is granted an indu5uiaJ disabiliry retirement allowance:receives me
greater of his or her service rcrin:mcnr allowance (if digiblc)or a specified percentage of rhe
memb<r's "final compensation"(usual I)'50%,bur 60%for some members),plus an annuiry
purchased with his or hcr accumu!med addirional conrribudons.
"California law clearly establishes that public employee
retirement beneiits are a iorm of deierred compensation and
part of the employment contract."
C.Purchase oi Service Credit
If they mect e1igibiliry requirements.3crivc members arc cmicled [0 purchase addirionaJ
rcrircmc:nr service credic,which increases their re[jrcmenr allowance.AddicionaJlYI where
eligible.members can purchase service credir for prior public service,milirary service and
certain other cypes of service.The member's cosc co purchase addirional service credic is
sec by scarucc and is based on 3cruariaJ assumptions and mechodologies dctermined by che
Board of Adminisrrarion ("Board").
D.Death and Survivor Benefits
CalPERS provides benefirs [0 rhe beneficiaries of acri"e and mired members upon el,e
mt:mbt:r's deach.Bc:ndics and eligible r~cipit:nrs vary bas.:d on whc:cher the:mt:mber was scilJ
working ar rhe rime of dearh or was rerired,and by [he member's employer,occuparion and
rhe specific provisions in the conrracr berween CaJPERS and the employer.Addirionally,a
member may ope co have his or her reriremem allowance reduced in ordcr ro increase the
benefits that will become payable [Q che member's beneficiaries ilfcer che member's death.
Vested Rights of CalPERS Members I 5
ATTACHMENT 6-50
E.Cost of Living Adjustments
A member's (or beneficiary's)inirial allowance:is subject (0 annual cosc-oF-living adjustments
("COLAs)cl'a<account for changes in the applicable cOSt ofliving index each year.Members
ilnd beneficiaries also may receive additional "Purchasing Power Proteccion"when annual
COLAs have been substantially eroded by inRation over [ime.
F.Member Contribution Rates
Members generally contribute porrions of their paychecks rowards the coS[of their furnre
recir~mcnr benefits,These:member comriburions ace:established in various ways,including
among other by SClturC,ordinance and memorandum of understanding,and rhey vary widely
based on such things as the member's employer,occuparion and bargaining unit,if any.In
gc:ncr.1l.member contribution r.!te5 are established as J.percentage of che member's monthly
compensation.\'Qirh respcct to member contributions escablishc:d by stature under rhe PERl:
"The Lc:gislarure reserves me right [0 incn.:ase or orhcnvise adjust the rates of [member}comri-
bmion ...in amounts and in a manner ir may from time to rime find appropriate."Some
member comribution rares also are expressly subjecr to collective bargaining.
Some employers may choose to pay a pOlTion or all of the retirement contributions other-
wise required of rheir employees.These paymenrs rypicaJly are negoriared during collecrive
bargaining and the law providcs Ulat rhe employer may "pcriodica.lly increase,reduce,or
diminarc"such payments.
G.Reciprocity
The "reciprocity"provisions of thc PERL (and reb.red provisions in dlC retiremenr laws govern-
ing orher Cillifornia public rerirement systcm)provide:for cerrain reciprocal rcrin:mcm benefits
for a person who works for [\vo or morc public employers during his or her career,with
membership in [\vo or more CaJifornia public retiremenr sysrems.
The primary purpose of reciprocity is to "eliminateD rhe adverse consequenceS:1 member
mighr mherwise suffer when moving from one retiremenr systcm [Q aflmher."-Reciprociry
provisions accomplish chis in a number a ways,including.for example.allowing a member [Q
usc his or her highesc compensation in any rc:ciprocaJ system [Q determine rhe compensarion
used ro calculate benefits from all such systems.
6 I Vl2sled Rights of CalPERS Members
ATTACHMENT 6-51
III.Overview:Employer Funding Obligations
The California Supreme Court long ago eseablished mae a promise of a pension madi:by
a public employer co ies employees is a promise rhe employer muse keep.In ocher words,
public employers in California arc legally required co honor promises co currene and former
employees regardless of how much money they have set aside for mae purpose.
In order (0 ensure mar their promises J.r~kepr,me law requires California's public
employers eo pre-fund ehe benenrs ehey owe by making contributions eo CalPERS along
\Vim the contributions of [heir employees.By investing [he combined contributions of
members and employm,CalPERS is able co pay all of ehe benenes as mcy come due.
To successfully fund all promised benenes,ehe law requires ehe Board co maiorain an
accuarially sound retiremenc fund.As one COUrt explained:"Acruarial soundness of [CaJPERS]
is necessarily implied in [he (ora!conrracrua!commitment,because a comrary conclusion
would lead CO "-'press impairmenc of employees'pension tighes."Further,employees have a
vested right [0 Sriltll[QriJy required employer contributions.even where:chose:conrribudons
are not linked [0 providing an "acruaria1ly sound"rctirement system.
"...a promise of a pension made by a public employer...is a promise the
employer must keep.In other words,public employers in California are legally
required to honor promises to current and former employees ..."
The California Conseicution provides ehae ehe Board "shall 0 have sole and exclusive
responsibility [0 :ldminisrcr rhe:system in it manner char will assure prompt delivc:r)'of benefits
and rdatc:d sc:rvicc:s to the:participants and rhc:ir bc:nc:ficiaric:s"and "consiste:nc with the exclu-
sive fiduciary responsibilities vc:srcd in ir,shall have:rhe soh:and exclusive:power to provide
for acruarial services in order to assure the competency of me assers of rhe public pension or
retiremenc sysrem."The Board h:ls authoriry ro derermine an acruarially sound rare of conrri-
bucions thac.together with invcstment earnings,will "assure rhe compercnc}'of rhe ~ets"
of CalPERS such ,hae all promised benenes are paid now and in ehe future.It is me Board's
exclusive responsibility co determine ehe coneributions ehat will be required of the participating
employers and ehe pareicipating employers ehen have a mandacory "minisrerial"duty co pay ehe
contributions cllae ,he Board determines are necessary.This obligation will be quickly enforced
by rhe couns,by writ of mandilrc,if an employer fails ro mect ir.
As scared by ehe United States Supreme COUrt,a den ned benefie plan "i.,one where ,he
employee,upon rctiremenr,is enrirled co a fixed periodic pa)rmenr.The:asscr pool [av:lilablc:
co pay benefies]may be funded by employer or employee concribu'ions,or a combinaeion
ofborh.Bur dlC employer rypica.lly bC:lfS [hc entire investment risk and ...must cover any
underfunding as the result of a shorcfull cllOe may occur from ,he plan's investmencs."
Vested RIghts of CalPERS Members 1 7
ATTACHMENT 6-52
IV.California Contract Clause as Applied to Public
Employees'Retirement Benefit Rights
A "vested"benefit is one th:u has matured inca an irrevocable contractual right;which cannot
be [alien away or otherwise impaired without the member's consent,except in extremely limit·
ed circumstances.A "non-vested"benefit,on Ule:othcr hand,is one thilt has been promised
condi'ionally.I,is generally alrerable or complerely revocable by rhe appropriate aumoriry
(usually me Legislarure or rhe employer)wirhout me member's consent.A public employee's
right to rhe retirement benefits earned during employment is gcncr.J.lly a vcsted right.
California has a strong public policy,enunciated rhrough published legal decisions over
rhe past half century,establishing rhar public employee retirement bene firs are contracrual
obligarions entitled to rhe prorecrion of me 'Conmcr Clause of rhe Stare Constirution.
Thar clause,found ar Article I,sccrion 9 of rhe California Constirution provides:"A ...law
impairing me obligation of Contraas may nor be passed."(Article I.section loaf me Unired
Stares Constirurion similarly prohibirs a stare ITom impairing [he obliga'ion of contractS.)
This means that an employee's ve.5[ed pension righu may nor be impaired e.xccpr under
excremdy limited circumstances.
The fundamental doctrine procecring California public employee pension rights is
succincrly stared:"A public employee's pension conscicutes an e1cmc:m of compensation,
and a vesred contracrual right ro pension benefirs accrues upon acceptance of employmcnL
Such a pension right may not be destroyed,once vesred,withour impairing a contractual
obligation of me employing public entiry."
This doctrine has been applied and refined by dozens of Californi.appellate cases since
rhe 1940s.Several general rules have emerged mrough rhis jurisprudence:
RULE 1:
Employees Are Entitled To Benefits In Place During Their Employment
Public employees obroin a ves,ed righr ro me provisions of rhe applicable re,irement law
rhar exist during the course of their public employment.Promised benefits may be increased
during employment.but not decreased.absent the employees'consent.
These rules apply to all active CalPERS members,wherher or nor rhey have yer performed
rhe requirements necessary ro qualify for cenain benefirs mat arc parr of the appJic.lble rctire-
ment law.For example.even if a member has not yct satisfied rhe five year minimum service
prerequisite to receiving mOSt service and disability benefits,rhe member's right to qualify for
those benefits upon completion of five years of service vesrs as soon as the member starts work.
The couru have established that this rule prcvcnu not only.a reduction in rhe benefits [hat
have already been earned.bur aJSO::1 reducrion in the bendits that a membc:r is eligible ro e:lCn
during future service.For example,a bailor proposition that purported to eliminate future
benefir accruals for legislarors was held unconsrirudonal because legislators were entitled to
continue:earning benefitS under the law in place when they were first e1ecred.
8 I Vested Rights of CalPERS Members
ATTACHMENT 6-53
'.
RULE 2:
Employees Are Entitled Only to Amounts Reasonably Expected irom the Contract
Vested rights protection docs nor extend [Q unreasonable or unanricipated windfaJls.In other
words,rhe Comr:lcr Clause only prorects [he bcndits d13r arc reasonably expected from rhe
contract,and does nO[prarect l'unforeseen advantages."
RULE3:
Only Lawiul Contracts with Mutual Consideration Are Protected by the Contract Clause -
"The conrrilcr clause does nor protect expectations char are based upon contracts chin are
invaJid,unenforceable,or which arise without rhe giving of consideration.Nor does the
comracr clause pcmece expectations which are based upon legaJ meories ocher chan contrJC[,
such as quasi·con£r.lcr or estoppel."
For chis rC:lSon,it is noc an "impairment of contract"for CalPERS [0 correct an error by
a member,rhe member's employer or CaJPERS'sraff rhar may have resulred in more fuvorable
rrearmem ro rhe l11ember rhan rhe low allows.The PERL specifically aurhoriles C:t1PERS ro
correce such errors.
RULE4:
Future Employees Have No Vested Rights to the Current Statutory Scheme
Employees ro be hired in rhe:furure do nor have vesred rights co any panicular n:tin:menr
benefirs because rhey have not yer entered into public employment.Thus.chere is no consti-
turional impediment to unilaterally reducing (or even cIimin:1ting)n:tirc:mcnt benefits for new
hires of public employ<rs,<ven if rhe public <mplayas hisrorically h.v<provid<d such benefirs
to [heir employees as parr of pasr employment contracts.
RULES:
Retired and Inactive Members Have Vested Rights to the Beneiits Promised to
Them When They Worked
Like active employees.retirees and inactive members have:a vested right co me benefirs that
were in place when they were employed.However.n:rirees and inactive members generally
do not have vested rights to bcneficial changes crcawd after [heir employment tc:rminatcs.
This is because a "member whose c:mploymcnr Terminated before enacrmenr of a stam[c offer-
ing addirionOlI benefits docs not cxchOlnge services for the righr to the benefits."An exceprion
to the generaJ rule rhar benefits granrc:d afrer rerin:menr arc nor vesred arises when rhe rcrirce
Vested Righls of CalPERS Members I 9
ATTACHMENT 6-54
'.
or inactive member gives up anQ[her righe acquired during employmenc in excHange for [he
rigbt [0 receive posr~employment improvemencs,In that casc,the right to a post~employmenr
improvement is generally:t vested righe.
RULE 6:
Active Employees'Vested Righis May Be Unilaterally Modified Only
Under Exiremely limited Circumstances
Active public employees have il vested right to a substantia.!pension.but,under limired
circumstances,the terms of their retirement righrs may be modified before chey retire.The
California Supreme Cou"has explained:"[Vjesrcd comracrual pension rights may be modified
prior to retirement for [he purpose oflu~eping:1 pension system Aexible to permir adjusrments
in accord wich changing conditions and.:u me same time maintain me integriry of the S)'srcm.
Nonc::dldess,such modifications must be r~sonable.and to be sustained as such.alterations of
employees'pension righes musr bear some macerial rdarion ro dIe theory of a pension systcm
and its successfUl operarion,and changes in a pension plan which resulr in disadvantage to
employees should be accomp'lOied by comparable new advantages.Further.i,is advantage or
disadvantage ro the particular employees whose own concracruaJ pension righrs.already earned,
are involved which an::the criteria by which modifications to pension plans muse be:measured."
There J.r~numerous California published decisions mat discuss rhe circumstances under
which modificarions ro ,he vesred rights of active employees may be permirred.There arc four
primary steps for determining whether a modification is permissibl~:
(3)The first step in determining wherher a modification is permissible is to derermine if
rhe unmodified right is in fact vested,mcaning neither the employer nor me Legislarure
reserved ,he right ro dtange ,he benefic.This is because rhe applicable reriremenr laws often
concemplate changes.Indeed,the laws sometimes expressly reserve to rhe employer or [he
Legislature the right to modify or eliminate ccrrain bcnefits.A member's vdted right is
only ro the law as it is wrirtcn at the::rime of employmenr.including all of irs conditions.
(b)If a ves(Cd righr exisrs,,he next step is ro derermine whc<her ,hac vesred righr has been
changed in a \Yay [hilr is disadvancageous to the member.
(c)If i,is determined d,a,a vesred righr has been changed in a way ,hal is disadvantageous
to a member,the next step is to dClermine whecher [he change has a "material relation
ro ,he theory of a pension sysrem and irs successful operation."Ifir does nor,men me
modification is nor permissible.Case law is c1e:u thar "changes madc to effect economies
and save rhe employer money do bear some matcrial rdation (a [he theory of a pension
system and its successfUl operation,"bur,as discussed immediately below,this finding alone
is nO[sufficient to justify 3 disadvantageous change to a member's vested rights.
10 I Vesled Rights of CalPERS Members
ATTACHMENT 6-55
..
(d)If the change bears a "material relorion ro the theory of a pension sysrem and iis
successful opcr.1tion,"[he final secp is co determine whcchcr [he disadvantaged employees
will receive a "comparable:new advanrage."\,(,hen a courr conduces this analysis,it looks
specifically at whar may be raken from and provided to rhe individually impacred employ-
ees.This mcmber-by.member analysis.however,does nor necessarily rake into account each
member's unique personal circumstances.Thus,a member does nor gee {Q pick and dloose
which advantages or disadvantages will apply co him,and rhen argue that his vesced righrs
howe been unconstitutionally impaired.
RUlE7:
The State's "Emergency"Powers Are Extremely Limited and Cannot Be Used
to Reduce the Benefits that Have Been Promised
The courts have carved our one narrow exception ro rhe conscirucionaJ prohibition against
rhe impairment of conrrac[S.although [here is no case where a coun has acruaJly applied
char exception in a way char has reduced (he long cc:rm coses of public rcdremcnr benefits in
California.Both rhe California and Unired States Supreme Coum have held that "a substan-
rial impairment may be consrirurionaJ if it is "re.uonable and necessary [0 serve an important
public interest"during an emergency.The courts pay little heed,however,[0 [he "legislative
assessment of n:asonable and nccess.try,"because "the Sr:uc's sdf-inreresr is ar stake land aj
governmental enriry can always nnd a use for exrra money.especially when raxes do nor hi!ve:to
be raised."Thus,the coum apply a rigorous four-prong resr when derermining if rhis limited
exception applies:(a)the legislative enactment must serve to protect "basic interests of sociery;"
(b)there must be an "emergency jusrificadon for rhe enactment,"(c)the enactment must be
"appcopriate for the emergency;"and (d)the enacrment must be "designed as a rcmporary
measure.during which rime the vested conttact righrs are not lost but merely deferred for a
brief period.interest running during the temporary deferment."
Thus,even if vesred pension rights may be temporarily impaired in a [fue emergency
siruation,it is clear that the:Statc's emergency powcrs do not enable it [Q solve irs budgerary
problems by diminacing or reducing the:long [crm benefic promises it has made.
Vested Rights of CalPERS Members I 11
ATTACHMENT 6-56
V.Federal Contract Clause as Applied to Public Employees'
Rights in California
As srared above,it is clear rh:H the "Contract CI:J.use"of rhe Californi3.Conscirudon provides
broad protections of me vosted pension righrs of California's public employees.Some current
'"'reform"proposals suggest changing the Stare Constiturion [Q reduce or dirnin:nc public
employee rcrircmenr bcncnrs,in some insr3l1cc:.s even amending [he Contract Clawe judf.
Presumably.proponents of these measures assume that by amending rhe Scne Consticurion.
they can avoid il conscitucional challenge [Q their proposed impairment of vcs[(~d retirement
benefits.The assumption is misplaced,for tWO reasons:
First,if a proposed pension reform were to be enacted in the form of;}consticucionaJ
amendment,it would still have to pass muster under the Contract Clause of me State
Consrirucion.In other words.any new provision of rhe Stare Constimrion would still be
subjecr ro rhe requiremc=nr that it nor impair the oblig;Hion of contracts.Absenr actually
dimin.uing [he enrire Comr2ct CIOlus~,the f.Icr thar i:l pension reform measure may be
adopted by way of a constitutional amendment would not assure its validity.
"Some current 'rerorm'proposals suggest changing the State Constitution
to reduce or eliminate public employee retirement benefits ...Presumably,proponents
or these measures assume that by amending the State Constitution,they can avoid
a constitutional challenge to their proposed impairment or vested retirement benefits.
The assumption is misplaced ..."
Second,even if:1 proposed ::unendment eliminOlred d1t:Scare Constitution's Conrracr
Clause in its enrin:ry,tilL'COl1tracr Clnwt'il1 rlJL'United Stares Comu'tutioll lUonld gjllL~nIL'to
the sault'protr!ctiol1 ofut'stedpL'l1Si01J rig/Hs as rhe StOlte Consritution.Most of rhe published
Califotnia cases that have analyzed the constitutionality of modifying vested pension rights
of public employ«s have not meaningfully distinguished between me Contract Clause in me
California Constitution and me Contract Clause in the United States Constitution.In 1991,
me California Supreme Courr removed any doubt that me United States Constitution proteCts
public c:mploye~pension rightS in California to the same e..xtent as the CaliforniOl Constitution,
by explaining that prior case law had "never rejecred the federal clause as a source of protec-
tion"and "in lighr of prior CaJifornia decisions consistently c:.."rcnding federal conrract clause
prorection [0 stare:public officers,it is simply 'coo late'to retreat from the clear implication of
those holdings."
Therefore,amending the California Constitution likely would not open the way to lawfully
impairing vesred pension rights.All of the rules discussed in Section rv above likely would still
apply,no matter how the California Consciruoon may be amended,so long as the Contract
Clause of me United Stares Constirution remains unchanged.
12 J Vested Rights of CalPERS Members
ATTACHMENT 6-57
VI.CalPERS Members'Rights
Based on [he logal analysis Set forth above.CalPERS here artieulat<:s its undemanding of [he
currenc stare of vested rights law in California,as it applies ro CalPERS members'benefirs.
An011Y-ling :lny parricular member's vested rights.however,must he done on a case-by-ClSc
basis.Thus,nothing in this section is inrended [Q express J view on any individual member's
rights or any specific lcgislacive or consci[U[ional proposal.Furrher.me discussion in (his
section is not imended [0 be exhaustive,but rather (Q provide a general overview of our
members'primary rights.
A.Vested Rights
In general.CalPERS members have v<:sted rights ro:
»Have [heir service retirement allowance dcu:rmincd b:ucd on the benefit formula that
existed in the law when they provided service.jf they satisfy all eligibility requirements.
1I Have their retirement allowance based upon all seJvice credit that mey .ccrued by
providing service or by purchasing service credit.
l)Have [heir rcriremem allowance c.1Icubre:d using the:definicion of"finaJ compc::nsacion"
mat existed in the bw when chey provided service.
»Have their "final compcnsacion"decermined ;Iccording to the definition of ucompcnsarion
earnabJe"rhat e.xisted in the law when they provided service.
l)Receive a disability allowance or an industriaJ disability allowance determined in
>lccordance wirh rhe law rhac existed when they provided service,if the member sarisfies
all eligibility requiremenrs.
»Purchase service credit under the:(crms thar exisred in the:Jaw when they provided service,
if the member satisfies .11 e1igibili[y requirements.
»Receive COSt ofJiving adjustments to their reciremcnt allowance:undc:r the terms mat
existed in the law when they provided service.This includc:.s "Purchasing Power
Protection ...
»Have their beneficiaries receive death and survivor bc:nefics provided under rhe:rer.ms
rhat existed in rhe law when the member provided service.
»Receive che benefits of reciprocicy chm existed in the law when rhey provided service,
if they satisfy all eligibility requirements.
»\'V'jthdr.lw their contributions,plus accrued imercst.upon separation from c:mploymcm,
when eligible for such.wi[hdrawal.
1I H.ve an ,cl'Uarially sound retiremem fund.which requires (.J m.r rhe CaJPERS Ba.rd
establish employer comribution r.J.res sufficient [0 maintain rhe acruarial soundness of
me system so mO[rhe competency afits :t.55ets is assured .•nd (bJ mar [he employers
timely pay rhose:ra[e5.
Vested Rights of CalPERS Members I 13
ATTACHMENT 6-58
Because the above righ"of CalPERS members arc vested,they may only be modified
if such modifications a.re:·'reasonable.and [0 be sustained i15 such,alterations of employees'
pension rights must bear some marerial rclarion to rh(theory of a pension system and its
successful operation.and changes in a pension plan which result in disadvantage [Q employees
should be accompanied by comparable nelV advantages."
Finally,there remains a qucnion as to whether vested rights may be consensuaJly modified
rhrough collective bargaining without offending U1C Contracrs Clause.
B.Non-Vested Rights
In general.CalPERS members do nor have ves<cd righrs roo
»Benefit improvc:mc:nu that arc granted co them after they have terminated employment
(e.g ..rhe "":ld hoc"COSt ofliving improvements granted [Q retirees based upon reriremem
done).unless such benefic improvemencs have been granted in e.xch::mge for a vested riglH
that the recired members gave up volunGlfily.
»Windf.:a.JI be:ne:firs that arise:oue of drcumsrancts rh:u were never comempl:ue:d ro be P:Ut
of the employmenc concracr.
»Paymcnrs in c:xceS5 of rhose authorized by law,or arising from an error by rhe member,
rhe member's employer or CalPERS.
»Perperu:J.rion of the:Board's discrcdonary Jctions affecting conrributions and benefits.For
example.rhe Board may change irs acruarial assumptions and methodologies for calculat-
ing rhe COSt for purchilSing service credit.or for derermining acruariaJ equivalency (for a
variery of purposes).The Board has fuji authoriry to change acruarial assumprions and
methodologies in rhe sound exercise of ics discrecion.and doing 50 docs nor impair any
vested right.even if a change does nor appear rnvorable to CalPERS members.
»Cominuarion of:l benefit or contribution r:l[C where me benefit or comribudon rarc
is subject to change under me rnms of me applicable sracutc,memorandum of under-
standing or employment contract.
»Continued employmem with their employer or the continuation of d1C:his[~rical
compensation practices of that employer,even if those practices impact the calculation
of members'"compensation earnable"and "final compensation."For example,an
employer may have hisrorically paid certain premium amounrs that qualify as pension-
able "compensarion earnable."\'(!hile the:member hilS a vc:.5tcd right to have such amounts
included in "compensation earnable"when paid,th<:member does not have a ve5[ed righr
to continue to be paid dlOse amounts.
14 I V""ted Righls of CalPERS Mambers
ATTACHMENT 6-59
Because the above righrs are nor U ve5te d"under me Conrract Clauses of the California
and United Sr;:m:s Consrirurions,mae is no consticurional impediment to the Legislarure
or a member's public employer (or ,he Board,in [he CLSe of irs own discretionary accs)from
unilater.tJly alrcring chose righrs.Unless and unril such aJn:r.uions arc made.howcver,members
of courst:have a right [0 receive all benefits provided to rhem under law.Furmer,other laws
may limit the ability to make such ahefiuions.For cxample,although specific employment
practices may nor be vestcd in perperuity,the terms of a collective bargaining agreemc:nr must
be honored during [he period of [hat agreemenr's applicability.
Vested Rights of (aIPERS Members I 15
ATTACHMENT 6-60
VII.The Role of CalPERS in Protecting Members'Vested Rights
Und<r [he S",rc Consdrudon and me PERL,[he Board (which is me 13-memlier governing
body of CalPERS)h:IS the exclusive and plenary aumority and fiduciar)'duty [0 administer
CalPERS in a mmn«char will assure promp[delivery of benefits and relared services ro [he
m~mbers and bendici:J.ries of rhe system.Board members are eithcr elected by members of
[he system,appoimed by Sme e1ecred officials or sir ex officio.
One coun explained me fiduciary du[ies of members of a public redremem board [husly:
"rAJ [[ume's primary duty ofloyaJty is to [he beneficiaries of the [[Ust.The [[US[c<is under
a duty to [he beneficiary to administer me [[uS[solely in me imerest of rhe beneficiary.The
[rus<ce must nor be guided by the imercs[of any [hird person.This unwavering duty of .
complc:rc loyalty ro the beneficiary of rhe tfUSC must be:co [he exclusion of rhe:interest of all
mher p:lrcic:s.Under [he rule against divided loyalties.a fiduciary cannor comend lhat ahhough
he had conRic[ing imerests,he served his m:ISrers equally well or char his primary loyalty W:IS
nor weakened by me pull of his sccondary one."
The California Consticution provides:uA rcrin:mem board's dury co irs participants and
[heir beneficiaries shall [ake precedence over any orher dury."The California Supreme COUrt
has c:xp!:J.incd:"[Plc:nsion plans crcare a [[USt rdacionship bcrween pensioner bc:ncfici3rics and
the:trustees of pension funds who administer retirement benefirs and rhe rrusrces must exercise
rheir fiduciary cruS[in good fairh and musr deal fairly with [he pensioners~bc:ndiciaries."
The Board will acr consisrencly wim mese principles.\'(Ij[h respeer co legisla[ive and cons [i-
turional proposals that may impacr its members'vcsre:d rights,me:Board will exercise its best
judgmem and aer appropriarely under all existing circumsranccs.In doing so,the Board will
observe certain general guidelines.including:
»CalPERS will make reasonable efforts co keep its members and beneficiaries apprised of
changes or poremial changes co [he law thar may impac[rheir riglus md responsibili[ic.s.
l>CalPERS will ensure [hac funds spe",in any process «laring [Q porenrial changcs in
funding or benefir strucmrcs arc appropriatc expcndjmrcs of crusc funds under Aniclc:
XVl,seerion 17 of [he California Consti[U[ion and other applicable Jaw.
l>CalPERS'aerions will be carried our in a manner char implements me law.In [he eve",
CalPERS quesdons wherher changcs in [he PERL or orher applicable law may c.1use an
unconS[iruriollal impairmellr Onts members'vesred rights,CalPERS will exercise its besr
judgmenc,based on all e.xisting circumsrances,as to whether to initiate or participa[e in
judicial challenges to such changes.
16 I Vested Righls of CalPERS Members
ATTACHMENT 6-61
VIII.Conclusion
CaJPERS is dedicated co administering me system in a manner [hat will ensure mat [he:
promises made ro CalPERS'members and beneficiaries will be kepr.CalPERS acknowledges
rhe budgerary challenges thar rhe State and orher public agencies throughout California are
presendy facing,and will play an appropriare role in rhe addressing rhese challenges.In rhis
process,ir will be virally importanr for all inreresred parries [Q heed rhe legal rules prorecring
rhe vesred righrs of CalPERS'members,which have developed over rhe course of many
decades.''(Iirhour due consideration of these rules.wdl-imenrioned proposals may nor achieve
rhe purposes for which they are designed;indeed,rhey may lead only [Q addirionallitigarion
and adminiscr.ltive COStS,which can only increase me long term COSt of delivering rhe benefics
rhar have been promised ro CalPERS members.lr is rhe hope of CalPERS rhar rhis paper will
provide guidance [Q all parries as dley address rhese challenges.
Vested Rights of CaJPERS Members I 17
ATTACHMENT 6-62
I~CalPERS
California Public Employees'
Retirement System
400 QStreet
P.O.Box 942701
Sacmmenlo,CA 94229·2701
(916)795·3991
(916)795-3507 iax
nv:(916)795·3240
legal Office
ATTACHMENT 6-63