20120821 Late CorrespondenceCity Hall East
200 N.Main Street
Room 800
Los Angeles,CA 90012
(213)978-8100 Tel
(213)978-8312 Fax
CTrutanich@lacity.org
www.Iacity.orgiatty
AND MADE A PART OFltHE RECORD AT THE
COUNCIL MEETING OF~02?M/~
OFFICE OF THE C Y CLERK
CARLA MORREALE,CITY CLERK
RECEIVED FROM AnA .."III'•September 22,2011
Mr.Anthony G.Patchett,Esq.
Law Offices of Anthony G.Patchett
P.O.Box 5232
Glendale,California 91221-1099
Thank you for your letters expressing various concerns regarding the Rancho,LPG facility
located in San Pedro (hereinafter "Rancho Facility").To summarize your primary issues,you have
requested that this Office seek an injunction in Superior Court against this privately~owned Facility,
as well as raised questions relating to the City's previous environmental review of the Facility and
related pipelines.Separately,you sent a letter to the President of the Los Angeles Board of Harbor
Commissioners,who has forwarded it to this Office for response.Lastly,you recently alleged that
there is a conflict of interest in the Office of the Los Angeles City Attorney that purportedly would
preclude this Office from further reviewing these matters.I respond to all of these issues below,
after a brief discussion of the relevant background facts,as I currently understand them.
Obviously,City Attorney Carmen Trutanich takes any allegations of potential threats to public
safety very seriously.As a former environmental crimes prosecutor,and current City Attorney,
who has successfully prosecuted,and continues to prosecute,environmental violations and
polluters,City Attorney Trutanich is fully committed to undertake every effort within the power and
authority of his Office and the law to investigate,prosecute,abate and remediate any actual or
potential threats to the residents of this City.'With that commitment in mind,on Friday,August 26,
2011,the City Attorney personally visited and toured the Rancho Facility over the course of three
hours to inspect and review its operations.Drawing upon his decades of environmental and
regulatory experience,the City Attorney directly questioned the Facility's operators regarding any
potential threats to public safety,including those raised in both your letters and from others in the
community.
I As you are aware,1 have also served as a local,state and federal environmental crimes and workplace safety
prosecutor for nearly 25 years,and once served as Assistant Secretary for Law Enforcement and General Counsel for
the California Environmental Protection Agency ("Cal/EPA").
I.Overview
As you are aware,there is a lengthy regulatory and permitting history at the Rancho Facility,
including its'interactions with the community.I will attempt to summarize my current
understanding of the Facility's relevant history.
A.City's Past and Current Involvement with the Rancho Facility.
The Rancho Facility property was originally acquired in fee simple by Rancho's predecessor,
Petro lane,and developed into a liquid bulk tank facility pursuant to an environmental impact report
(EIR)certified in 1973 under the California Environmental Quality Act by the City of Los Angeles
as lead agency.There were no legal challenges to the EIR at that time and the project was therefore
approved.
On JUly 1,1974,the Los Angeles Harbor Department entered into Revocable Permit No.1212
for the construction and operation of a railroad spur track.On May 27,1974,the Los Angeles
Harbor Department entered into Permit No.263 with Rancho's predecessor,Petrolane,for
subsurface pipelines on Harbor Department property,which was subsequently terminated in
October 2010.The Harbor Department had previously terminated the use of Berth 120,closing
down the ocean shipping operation.
Rancho currently possesses Harbor Department Revocable Permit No.10-05 dated February
.23,2011,which authorizes a right of way for a railroad spur --the same one permitted under the
1974 Permit No.1212.The railroad spur is one section of railroad used by the Pacific Harbor Line.
The City does not own or lease the property comprising the Rancho Facility.
B.Other Federal,State and Local Agencies.
The most serious concerns that you and the community members have raised obviously relate
to the potential risk of explosion resulting from operations occurring on the premises of the Rancho
Facility.For that precise reason,the Rancho Facility is heavily regulated by many local,state and
federal regulatory and enforcement agencies,including,but not limited to,the following:U.s.
Department of Homeland Security,U.S.Department of Transportation,U.S.Environmental
Protection Agency (EPA),U.S.Department of Occupational Safety and Health Administration,
CaI/EPA,California Emergency Management Agency,California Department of Toxic Substances
Control,the South Coast Air Quality Management District,the Los Angeles County Fire
Department,the City of Los Angeles Fire Department,the Los Angeles Police Department,and the
City of Los Angeles Bureau of Sanitation Industrial Waste Management Division among others.
These agencies have the regulatory authority to issue applicable permits,review,assess and require
safety procedures and protocols,as well as the enforcement authority over the operation of such
facilities should they fail to comply with any applicable environmental,public safety and other
requirements.
C.Technical Analysis of Faciliry Risk.
The concerns expressed in Dr,Miller's note (included in your letter)and in the Cornerstone
Quantitative Risk Analysis (Attachment A),have been provided to the EPA's Risk Management
Plan Enforcement Unit,which is an agency responsible for determining the acceptable level of risk
for the Rancho Facility.In direct response to these concerns,the EPA engaged Michigan
2
Technological University's Department of Chemical Engineering to conduct essentially a peer
review'of the Cornerstone Risk Analysis and Rancho's assertions (Attachment B)regarding the
potential risk that the location poses to the community.The independent expert opinion from
Michigan Tech is noteworthy (Attachment C).In sum,the Michigan Tech Report states that the
Rancho Facility has design features that significantly reduce the risk the Facility poses to the
community.The Report further notes that any analysis that does not recognize and analyze these
features "...will not have a meaningful result and will very likely dramatically overestimate the
consequence and risk."(Michigan Tech Report,2 emphasis added).'Specifically,according to the
Michigan Tech Report,these design features at the Rancho Facility include:
1.The butane is stored in refrigerated storage vessels at a temperature of 28°F,below
the normal (1 atm)boiling point of 31.1°F.
2.A remote impoundment area exists a short distance from the storage vessels to
collect and contain any liquid that is discharged during an emergency situation.
'3.The storage vessels are insulated,low pressure,vertical storage vessels.(Michigan
Tech Report,2).
Accordingly,Professor Crowl,the author ofthe Michigan Tech Report,concludes:
"...the design features I ...discussed [those listed above]dramatically reduce the
accident consequences and risk.If these features are not included in the QRA,the
consequences of an accident and subsequent risk will be substantially
overestimated.
It is clear to me that the Cornerstone Technologies report did not include these
design features in their analysis and as a result they overestimated the
consequences of an accident scenario and over-predicted the risk."(Michigan
Tech Report,4).
It appears that the note from Dr.Miller does not reflect the hereinabove-described low
pressure/temperature method in which butane is stored in the subject tanks at the Rancho Facility.
Consequently,Dr.Miller states that:
"[b]utane must be stored at elevated pressure.The pressure within the tank varies
according to temperature.Pressure is needed to maintain the butane in a liquid
state.At 68 degrees F;the tank pressure is approximately 16 pounds per square
inch (PSF)greater than atmospheric pressure."(Patchett letter dated August 24,
2011,page,2).
It is therefore my understanding that,contrary to Dr.Miller's assertions,the Rancho Facility
uses refrigerated,low pressure insulated tanks that maintain the butane in a liquid state at 28°F.
(Michigan Tech Report,3).Nor does Dr.Miller's note mention the existence of the remote
impoundment area or other existing design features that the Michigan Tech Report emphasized are
critical to a complete and accurate risk analysis.
Michigan Tech's Professor Crowl also discusses Rancho's existing design features,
including its use of refrigerated tanks,to conclude that the potential for a disastrous boiling liquid
expanding vapor explosion (BLEVE)"is not possible"at that Facility's storage tanks.Specifically,
in opining that such an explosion is p.ot physically possible,Professor Crowl states in pertinent part:
3
"The remote impoundment area also decreases the consequences of an accident
and decreases the risk.Any liquid butane that leaks out of the storage vessels or
associated piping is drained away from the storage vessels to the impoundment
area.This decreases the accident consequences in the following two ways.First,
the impoundment area is remote from the storage vessels.·Thus,if the
impoundment ar~a fills with butane and catches on fire,the storage vessels will not
be directly exposed to this fire.This is important since a storage vessel exposed to
fire might eventually fail.Second,the impoundment area reduces the surface area
of the potential pool decreasing the evaporation rate of the butane.
The North Gaffey Street facility storage vessels are also insulated.This is used to
reduce the heat transfer to the butane from the outside of the tanks to reduce the
refrigeration load required to keep the butane at 28°F.It also decreases the
consequences of an accident by providing addition (sic)fire protection in the event
of an external fire.The insulation decreases the heat transfer to the butane liquid
from the external flames.
The storage vessels are also low pressure storage vessels.This means that a
BLEVE -boiling liquid expanding vapor explosion -is not possible.A BLEVE
requires a high pressure storage vessel."(Michigan Tech Report 3-4).
As you know,the City Attorney's Office does not have the authority nor the resources to
directly employ in-house technical personnel having the capability to respond to the direct technical
questions raised in your letters..However,during my inspection of the Rancho Facility,I
challenged its operators to address each and every question and concern found in your letters based
purely upon scientific evidence.(Attachment D).I welcome and would greatly appreciate your
thoughts and those of others to their responses.
This Office has also reviewed the results of all recent inspections conducted by the above-
mentioned government regulatory agencies charged with the oversight of the Rancho Facility.
More specifically,I have been advised that on May 12,2011 1 an environmental strike force
conducted an unannounced inspection of the Facility.The task force members included Cal/EPA's
Department of Toxic Substances Control,the South Coast Air Quality Management District,the
Los Angeles County Fire Department,the City of Los Angeles Fire Department,and the Los
Angeles Industrial Waste Management Division.The surprise inspection included:
1.Review of air permits;
2.Compliance with Department of Toxic Substance Control regulations regarding
toxic substances;
3.A physical audit of hazardous waste storage and handling procedures and
associated permits;
4.Review of emergency plans;and
5.A physical inspection of the entire facility.
It is my understanding that this inspection found no violations at the Rancho Facility.
Similarly,I understand that on August 9,2011,the Federal Department of Transportation Federal
Railroad Administration (FRA),conducted a hazardous materials inspection at the Facility.The
4
FRA inspected security plans,security training,hazmat training,and other elements of the Facility's
operations and also apparently found no violations.
The foregoing information is the general,relevant evidentiary backdrop in which you have
requested this Office to file an injunction against the Rancho Facility,as well as contend that further
environmental review is required by the City of Los Angeles.
II.The Ultrahazardous Standard for Tort Liability Does Not Apply Where,as Here,No
Harm has Occurred
As you recognize in your letter,the Rancho Facility has been in business,in various forms,at
its current location on Gaffey Street in San Pedro since the 1970s.Your letter also asserts that its
business activities are "ultrahazardous,"as defined in Section 520 of the Restatement Second of
Torts,and contends that such activities can be enjoined on that theory.However,your letter does
not provide facts that would support a valid cause of action upon which to seek injunctive relief in
the Los Angeles Superior Court.The "ultrahazardous"legal concept is one of tort law.The SKF
Farms v.Superior Court case that you have cited defines an "ultrahazardous"activity,but does not
obviate proof of the legallyMrequired elements of the underlying tort necessary to obtain legal relief
and is therefore,not a legal basis upon which to seek an injunction.
As you know,"ultrahazardous"activities can be,and often are,legally permitted and
regulated throughout the state.Accordingly,the activity,as shown in the case you cite,is argued to
be "ultrahazardous"in a tort action brought after the damage has occurred to determine the
appropriate standard of proof (strict liability vs.negligence),not as a basis for halting or enjoining
the activity from taking place:
"The doctrine of ultrahazardous activity provides that one who undertakes an
ultrahazardous activity is liable to every person who is injured as a proximate result of
that activity,regardless of the amount of care he uses."(Pierce v.Pacific Gas &
Electric Co.(1985)166 Cal.App.3d 68,85 emphasis added).
Further,you cite CACI Jury Instruction 460 in support of your position that the Rancho
Facility is engaged in ultrahazardous activity and should be enjoined as such,yet that instruction's
second element also requires that the plaintiff establish that he/she"...was harmed."(CACI 460).
As discussed hereinabove,to date,there has been no demonstration of facts leading to a claim
of harm or damage caused as a result of Rancho's activities.Similarly,while there is considerable
concern expressed for the possibility of a threat to safety,we have not received any factual
information documenting the allegations of unsafe situations necessary to counter the inspection
and audit results from any governmental agencies,including those listed hereinabove.
Unfortunately,although we recognize the potential threats posed by such operations,and clearly
understand and sympathize with the community's sincere and longstanding concerns,without more
information and a factual basis,this Office cannot at this time proceed with any legal or
enforcement action.Obviously,you may (and are certainly within your rights to)disagree with the
current assessment of this Office.As such,if you believe there is any credible evidence of
violations at the Facility,you have the right to independently assess and initiate any appropriate
civil suit on behalf of your clients.
5
III.Iniunctive Reli~f is Not Available Based on Known Fads
It appears from your correspondence that the community's goal is the cessation of all activities
and operations at the Rancho Facility.However,as a general matter,injunctions prohibit specific
activities that are found unlawful,but would not necessarily shut down a facility unless the entirety
of the operation was found unlawful.Therefore,in addition to analyzing potential liability under
the "ultrahazardous activity"standard that you proposed,we have reviewed two other legal theories
that could serve as the basis for such an injunction,namely:California Business and Professions
Code Section 17200 et.seq.,commonly referred to as California's Unfair Competition Law,and a .
public nuisance theory under California Civil Code Sections 3479 and 3480.This Office has been
very successful in obtaining injunctive relief under both theories in situations involving
environmental,workplace safety,health care fraud,slumlords,billboards,gang headquarters,red
light abatements,narcotics locations and many other public health and safety violations and
nuisances.
An irtiunction sought through Business and Professions Code Section 17200 et seq.requires ..
an unlawful or unfair business practice -essentially something "...that can properly be called a
business practice and that at the same time is forbidden by law."(People v.McKale (1975)25
CaI.3d 626 at 634.)While our Office welcomes new and credible information,we are not aware,at
this time,of any conduct on the part of the Rancho Facility that can be considered an unlawful or
unfair business practice.As detailed hereinabove,the Facility has been recently inspected by local,
state,and federal regulators,who to our knowledge,apparently did not fmd any violations.I know
that you,also as a former and well-respected and experienced environmental prosecutor,understand
that this Office has a professional responsibility to uphold the law,and that courts have warned
prosecutors that "...the unfair competition law is not a roving warrant for a prosecutor to use
injunctions and civil penalties to enforce criminal laws.Its application to conduct which violates
the penal law is limited to circumstances where such conduct is also a business practice."(People
v.E.W.A.P.Inc.(1980)106 Cal.App.3d 315,320).
As such,without an underlying violation of the law that constitutes a business practice,a
Section 17200 action seeking a permanent injunction does not appear to be legally cognizable at this
time.Your letters do not indicate that you are aware of any such violation upon which such an
action can be pursued.Furthermore,assuming that there were such an underlying violation of law
and that the violation could be considered a business practice sufficient to warrant the filing of a
Section 17200 action,any injunction would likely be fashioned to address the specific violation and
award civil penalties -not necessarily authorize the complete closure of the Facility.
We have also considered a nuisance theory,but found that the Rancho Facility's predecessor,
Petrolane,was unsuccessfully sued on both private and public nuisance theories in a case decided in
1980.(See Don Brown v.Petrolane (1980)102 Cal.App.3d 720).More importantly,as mentioned
hereinabove,recent surprise inspections conducted by the agencies charged with regulating this
permitted Facility apparently found no violations.
My Office relies upon the diligent and competent performance of regulatory and law
enforcement agencies in developing the technical information and evidence of violations of law
upon which we can act.To date,no enforcement agency has provided any information alleging or
suggesting any unlawful or dangerous conduct,nor requested in any manner whatsoever that this
Office file any form of law suit or enforcement action,including any such action whose object is the
6
cessation of all operations at the Facility.Moreover,as discussed above,the Michigan Tech Report
conflicts with the results of the studies upon which you apparently rely.
In considering a public nuisance theory,we recognize that there are numerous public nuisance
cases brought under California Civil Code 3479 and 3480 against activity which "...interfere[s]
with the comfortable enjoyment of life or property ...."(California Civil Code section 3479).
California courts have found a wide variety of different activities that constitute a nuisance:
offensive odors,the sale of narcotics,loud noises,display of offensive materials,and others.At this
time,this Office,however,either through your letters or otherwise,possesses no evidence that any
previously recognized nuisance activities are occurring at the Facility.Rather,what is clearly at
issue here is the potential for a disaster,combined with our residents'sincere concern relating to
that possibility.Unfortunately,I am aware of no California court that has held that fear or concern
for future harm alone,no matter how sincere and understandable,is sufficient to constitute a public
nuisance and thereby support a request for an injunction of that activity.
As I have stated hereinabove,the door to my Office is always open to additional evidence that
would change the analysis of the situation.At this time,however,we are not aware of any legal
basis ~pon which to bring an action seeking to enjoin any permitted business activities or operations
at the Facility.
IV.CEQA Comments are Untimely and/or Misinformed
Your letters also contend that the City improperly exempted the Rancho Facility from
CEQA.Contrary to your claims,the environmental impacts of the Rancho Facility,pipelines,rail
line and marine terminal were in fact fully assessed in an Environmental Impact Report certified as
compliant with the California Environmental Quality Act by the City prior to approval of the
Rancho Facility project (for Rancho's predecessor Petrolane)in 1973.In the very same letter you
also referenced and stated that you have reviewed the Petro lane EIR,which clearly covered the
Facility:
"This project is composed of three elements:first,a marine unloading arm supported on
four (4)new piles at the outboard side of existing Berth 120;second,an underground
pipe supply line which commences at Berth 120 in Los Angeles Harbor and ends at the
terminal facility approximately one mile inland;and third;a storage and distribution
terminal facility.
The storage and distribution facility is located on the east side of Gaffey Street
approximately one and one-third (1 1/3)miles north of the intersection of Gaffey Street
and the Harbor Freeway in San Pedro.It occupies a site of approximately 20 acres and
is directly opposite a two-tank petroleum storage facility occupied by the Bray Oil
Company."(petrolane EIR,p.1).
Furthermore,the rail line leading to the Rancho Facility was analyzed and depicted in the site
plan in the Petrolane EIR (Petrolane EIR,Figure 2).As such,there is no question that the Rancho
Facility and associated rail line were assessed in the EIR.Moreover,the public comment period
and legal challenge period for the 1973 Petrolane EIR expired 38 years ago.There is no provision
within CEQA that would apply the CEQA standards in 2011 to invalidate an EIR that was certified
as compliant with CEQA 38 years earlier.In addition,there is no provision in CEQA mandating a
new environmental impact report of the Rancllo Facility at this time in the absence of a new
7
discretionary project proposing a physical change to the Facility and the environment.This Office
is not aware of any new such discretionary project at or concerning the Facility.
In addition,following the City's 1973 EIR assessment of the Rancho Facility's environmental
impacts,the Harbor Department entered into various permits covering Berth 120 and associated
pipelines that were previously assessed in the EIR,as described in the EIR excerpt above.The
Harbor Commission Board Order 4579 from a 1976 board action referenced in your letter was an
amendment to Permit No.263,which governed the pipelines from Petrolane to Berth 120 and was
previously assessed in the EIR.This action was found exempt and,as explained above in regard to
the EIR itself,the comment and legal challenge period has long since expired.In any event,a
challenge at this time is moot in that Permit No.263 was terminated by the Harbor Department in
October 2010.
Lastly,you have stated in letters to this Office and to Harbor Commission President
Miscikowski that the closure of Berth 120 and the pipelines leading to the Rancho Facility caused
an increase in truck and rail traffic that should have caused the City to conduct an environmental
review.The Harbor Department informs me that the pipelines have not been used since 2004.
Consequently,the termination of inactive pipelines in 2010 would have no effect on the
environment as it could not have increased rail or truck traffic.More importantly,the termination
of both the Berth 120 Permit and the pipelines Permit were within each Permit's terms,did not alter
the Permit premises and therefore,did not constitute a new discretionary project subject to CEQA.
Furthermore,you request that the Port suspend Rancho's existing use of a rail spur under its
existing pennit based upon your opinion that CEQA was not followed in the closing of Berth 120
(which caused the pipelines to the Rancho Facility to become inactive).This Office does not agree
with your assertion,as the Port's pennit for the rail spur is an existing use of a previously assessed
rail line and exempt pursuant to Article III,Class 1 (3)of the Los Angeles City CEQA guidelines.
We also note that the time period to contest the action under CEQA has expired.
Moreover,California Code of Regulations Section 15321 that you cite in support of your
contention that CEQA was not adhered to in relation to the closure of Berth 120,is actually a
Categorical Exemption from CEQA that would exempt both the Port of Los Angeles and the City
from having to take the action that you have requested,However,Section 15321 does not apply
here,as it relates to regulatory agencies and not an entity such as the Port.
V.There is No Conflict of Interest
Finally,you allege that this Office has a conflict of interest and therefore,request that the
matter be reviewed by the Los Angles County District Attorney's Office.Nowhere,however,do
you identify the specific nature of the alleged conflict -making an informed response to your
allegation impossible at this time.This Office is aware of no actual or perceived conflict.To the
extent that you wish for the District Attorney's Office to investigate the Rancho Facility,we
certainly have no objection and openly welcome review by any and all local,state and federal
agencies.We do understand,'however,that you have already contacted the District Attorney's
Office and that it responded to you on or about October 28,2010,informing you that it was
reviewing the matter.I have not been advised of the current status of any such investigation being
conducted by the District Attorney's Office.
I again state and affIrm that this Office has been,and always will be,willing to review any and
all evidence relating to this Facility or any other potential threat to public safety or the environment.
8
However,this Office,as a public law office governed by prosecutorial rules of ethics,as well as the
guardian of the public trust and treasury,does not,at this.time,possess any facts or evidence upon
which it can justify the expenditure of the significant amount of public resources necessary to
commence and maintain a credible lawsuit or any other enforcement action against the Rancho
Facility.The receipt of any relevant and credible evidence could obviously change that current
posture.
I look forward to receiving and reviewing any additional information and materials on this
matter,including additional complaint or inspection reports,as well as meeting with residents and
other members of the community to fully discuss their concerns and any proposed solutions.Thank
you again for your continued attention,commitment and service to the community,and for
providing this Office with this very important information.
Sincerely,
CARMEN A.TRUTANICH
City Attorney
~
WILLIAM W.CARTER
Chief Deputy City Attorney
Attachments
cc:Honorable Harbor Commissioners
Geraldine Knatz,Ph.D,Executive Director
Brian 1.Cummings,Fire Chief,Los Angeles Fire Department
Thomas Russell,General Counsel,Harbor Department
Janet Jackson,Fire General Counsel
Reed Sato,Chief Counsel,California Dept.of Toxic Substances Comrol
Brian Hembacher,Deputy Attorney General,California Dept.of Justice
9
KAMALA D.HARRIS
Attorney General
State of California
DEPARTMENT OF JUSTICE
,Anthony G.Patchett
Law Office$of Anthony G.Patchett.
P.O.Box 5232 .
Glendale;CA 91221-1099
October 4,2011
300 soum SPRING STREET,SUITE 1702
LOS ANGELES,CA 90013
,Public:(213)897-2000
Telephone:(213)897-2638
Facsimile:(213)897-2802
E-Mail:Brian.Hembacher@doj.ca.gov ,
RE:Letters Concerning Butane Storage Tanles in San Pedro
Dear Mr.Patchett:
Thank you for your letters of October 14,2010 and April 3 ,2011,wherein you asked our
.office to investigate whether the storage by Rancho Holdings L.L.P of liquid butane in very large
storage tanles located at 2011 North Gaffey Street in San Pedro,California,should be enjoined as,
a public nuisance or as an ultra'hazardous activity.We have looked int~your request.
Our investigation included a review of the consultant reports that you supplied to us,"In
My Backyard"(Ml:\Tch 7,2011),'anq."Quantitative Risk Analysis of Amerigas Butane Storage
Facility"(September 2010)(Risk Report)by Cornerstone Technologies,Inc.We have ,
.reviewed response's to the September 2010 Risk Report by'Quest Consultants,hired by the
facility'operator~and the letter from Professor Daniel Crowl of Mic:pigan Tech to Mary Wesling
of the United States Environmental Protection Agency (EPA),dated April 11,2011.
Additionally,we have interviewed local and state fue,hazardous substances and health and
safety regulators who have recently inspected the premises at 2011 North Gaffey Stre~t.Our
understanding is that no violations were found during a May 12,2011 multi-agency inspection of
the facility,and that the facility has also been detennined to be in compliance with air emission
requirements.We have also been infonned that the facility was inspected by the United States
Department of Transportation on August'9,2011,and again,no violation of law or regulations
.governiI1;g the handling of hazardous materials was found.Finally,we received a copy of the
response from the City Attorney of Los Angeles addressed to you and dated September 22;2011,
which responded to your concerns about public nuisance,ultra hazardous activity,and CEQA
violations,determining that there was insufficient evidence to talee action at this time.
Based on this review,we have determined that the evidence to date would not support a
public nuisance claim by the Attorney General's Office,nor have we found evidence that any
other law is'currently being violated.We agree with the conclusions in the September 22 letter ~""L
fromthe Los Angeles City Attorney's office that there appear to be a number of safety measures \e::AJoLD
RECEIVED FROM
AND MADE A PART 0 HE RECO~ATJH
COUNCIL MEETING OllY~!SL~~~'"1
OFFICE OF THE CI CLERK
CARLA MORFlEALE.CITY CLERK
October 4,2011
Page 2
at the facility to protect against a cataclysmic event ofthe type described in your letters and your
consultant's reports,that the existence of an ultra hazardous activity is only relevant to the
burden of proof where a harm has occurred,and that no specific harm has been identified
relating to the butarie storage tanlcs.The facility appears to have passed all inspections and is
complying with air,hazardous materials,fire .and health and safety requirements promulgated by
local,state and federal governments.
While we are syrripath~tic to your concerns and those ofthe community given the close
proximity ofth~se large butane storage tanks,there is no evidence to support an enforcement
action at this time.We remain willing to take another look at this matter if evidence of non-
compliance or harm is later discovered.
Sincerely,.
BRIAN W.HEMBACHER
Supervisin~Deputy Attorney General
For~LAD.HARRIS
Attorney Gene!,al
cc William W.Carter,Chief Deputy City Attorney.Los Angeles
Vincent Sato,Deputy City Attorney,Los Angeles
Reed Sato,Chief Counsel,CaliforniaDep~rtmentof Toxic Substarices Control
Michigan Technological University
Department of Chemical E~~ineering
---------~--_.-
203 Chemical Sciences and Engineering Building
1400 Townsend Drive
Houghton,Michigan 49931-1295
906-487-3132 •Fax 906-487-3213
www.chem.mtu.edu
April 11,2011
Ms.Mary Wesling
EPCRA!RMP Enforcement Coordinator
US EPA Region IX (SFD-9-3)
75 Hawthorne Street
San Francisco,CA 94105
Dear Ms.,Wesling,
On March 3 I received an email from you requesting that I perform the following services:
Evaluate accuracy of four documents with regards to potential damage caused from a worst-case
chemical release of butane and/or propane from the Rancho LPG Holdings LLC,(parent
Company:Plains LPG,Inc and Plains All American,Inc.)San Pedro,California Terminal,
located at 2110 North Gaffey Street,San Pedro,CA.Prepare a report detailing your analysis of
the risk analyses detailed in the following documents.Please provide your expert opinion on the
validity of conclusions in each report.
The documents include:
1)"Quantitative Risk Analysis for Amerigas Terminal;prepared in consideration of Amerigas
Propane L.P.;2110 North Gaffey Street,San Pedro,CA 90731"dated September 2010,by
Cornerstone Technologies,Inc.Long Beach,CA.(35 pp)
[Note:the facility was purchased 3 years ago by Plains LPG,Inc.and has not operated under
the Amerigas nanle since purchase.]
2)Letter Report,dated 9/21/10,Quest Consultants,Inc.to Tony Puckett,Plains All Anlerican,
Re:Butane Depot Consequence Analysis (12 pp)
3)Letter,dated 10/27/10,Rancho LPG Holding LLC to Mr.Jolm Greenwood,Chair Planning
and Land Use Committee,San Pedro CA,Re:Cornerstone Technologies,Inc.'s Quantitative
Risk Analysisfor Amel'igas Butane Storage Facility,dated September}2010.(3 pp)
4)Letter Report,dated 10/27/1O~Quest Consultants,Inc.to Ronald Conrow,Rancho LPG
Holdings,LLC~Re:Review of Cornerstone Report,QCI Project 6774.(13 pages)
During this evaluation I did not receive any additional information beyond what was provided in
the reports,not did I have any contact with any of the principals involved.
For full disc1osure~I have heard of Quest Consultants in the past.I believe they presented papers
at the AICHE Global Congress on Process Safety in the past,which I attend.They also
www.mtu.edu
We prepare students to create the future.
Michigan Technological University Is an equal opportunity educational institution/equal opportunity employer.
D.A.Crowl to M.Wesling
April 11,2011
Page 2
published a paper in Process Safety Progress in 2009 - I was co~editor of that journal at that time
but I cannot recall ifI was assigned this paper.I do not recall ever meeting or talking with any
of the Quest folks,but this might have occurred casually during the Global Congress.I have
never had a business relationship with Quest,or any meaningful contact with any oftheir
employees,that I can recall.
I have never heard of Cornerstone Technologies,nor am I aware of having any contact or
relationship of any kind with any of the principals involved.
I do not have any financial interest or any past or present relationship with Rancho LPG
Holdings LLC,or its parent company Plains LPG,Inc and Plains All American,Inc.
The North Gaffey Street facility has two very large storage tanks containing liquid butane.
This facility has several design features that dramatically impact the quantitative risk analysis
(QRA)for this facility.These features reduce the consequences of an accident and tituS reduce
the risk.Thus,any QRA procedure that ignores these features will not have a me~gful result
and will very likely dramatically overestimate the consequences and risk.
These design features are:
1.The butane is stored in refrigerated storage vessels at a temperature of28OP,below the
normal (1 atm)boiling point of 31.1 of.
2.A remote impoundment area exists a short distance from the storage vessels to collect and
contain any liquid that is discharged during an emergency situation.
3.The storage vessels are insulated,low pressure,vertical storage vessels.
I will discuss these features in more detail so that the reader can understand how these design
features impact the QRA.
Butane at room temperature and pressure is a gas.It is liquefied to decrease the vOlume in order
to malce it easier to store and ship.There are two approaches to storing butane as a liquid.
In the first approach (pressure case),the butane is stored in a high pressure vessel which exerts
adequate pressure on tI1e butane to maintain it in liquid form at room temperature.In this case,
to store liquid butane at a temperature of 77°F requires a pressure equal to its vapCilr pressure at
this temperature,which is 35.2 psia (20.5 psig =1.4 atm gauge).If a hole develops in the storage
vessel below the liquid level,the liquid will be driven out of the hole at a high rate by the high
storage pressure in the vessel.Furthermore,since tile butane liquid is stored at a ~emperature
above its normal boiling point,a large fraction of the butane liquid will almost instantly flash
into vapor as it escapes tIrrough the hole.This vapor will tI1en mix with the surrounding air to
form a potentially flammable mixture.Ifthe mixture is ignited,an explosion or fireball will
result.This type of accident would have considerable impact on the surrounding area.
The second approach (refrigeration case)is to refrigerate the butane to keep the temperature
below its nonnal boiling point.Since the refrigeratiol1-not tile pressure ~maintains the butane
D.A.Crowl to M.Westing
April 11,2011
Page 3
as a liquid,the butane liquid can be·stored in a low pressure vessel.The pressure ip this vessel
must be maintained at a pressure equai to or above the vapor pressure of the liquidibutane at
28°P,which is 0.94 atm absolute.A small amount of nitrogen is probably added t~the vapor
space ofthe·vessel to maintain the pressure slightly above the outside pressure -for tIus specific
butane case the storage vessel pressure is slightly less than 1 psig.If a hole develqps in the tank
below the liquid level,the discharge rate of the liquid tIrrough the hole will be smailler than the
discharge rate for the pressure case due to the lower pressure in the vessel.Furthennore,none of
the butane liquid will flash into vapor until its temperature is increased to its boilil1g point of
31.1 ~.The liquid will drop to the ground and form a pool of boiling butane with the boiling
rate determined by the heat transfer from the ground.The boiling·rate for tIus poo~will initially
be high since the ground is warm,but the boiling rate will diminish as tile ground ~s cooled by
the colder butane.The rate at wlllch butane vapor is formed in this case will be milch less than
for the pressure case.Thus,the geometric extent of the vapor cloud will be less,IW the vapor
were ignited,the explosion would be smaller.A flash fire and subsequent pool fir¢are more
likely.
The advantages to tile refrigeration case over the pressure case are:1)the storage rvessel pressure
is much lower,resulting in a lower discharge of liquid,and 2)very little of the co1(:1 butane liquid
will flash into vapor until it reaches the warmer ground and more will remain as liquid in the
boiling pool.
The consequences for tile refrigeration case are less tIlan the pressure case becaus~the rate at
which butane vapor is produced will be less,resulting in a smaller vapor cloud tha!J.l in the
pressure case.
Since the consequences ofthe refrigeration case are less,so is tile risk,assuming the probability
stays the same.
The North Gaffey Street facility uses the refrigeration case,
The remote impoundment area also decreases the consequences of an accident anq decreases the
risk.Any liquid butane that leaks out of tile storage vessels or associated piping iSidrained away
from the storage vessels to the impoundment area.This decreases the accident cOllsequences in
the following two ways.Pirst,the impoundment area is remote from the storage "\fessels.Thus,
if the impoundment area mls with butane and catches on fIre,the storage vessels Will not be
directly exposed to this fire.This is important since a storage vessel exposed to fI~e might
eventually fail.Second,tile impoundment area reduces the surface area of the potential pool
decreasing the evaporation rate of the butane.
The North Gaffey Street facility storage vessels are also insulated.This is used tQ reduce the
heat transfer to the butane from the outside of the tanke to reduce the refrigeration load required
to keep the butane at 28°P.It also decreases the consequences of an accident by providing
addition fire protection in the event of an external fire.The insulation decreases the heat transfer
to the butane liquid from tile external flames.
D.A.Crowl to M.Wesling
April 11,2011
Page 4
The storage vessels are also low pressure storage vessels.This means that a BLEVE -boiling
liquid expanding vapor explosion -is not possible.A BLEVE requires a high pre~sure storage
vessel.
Finally,the storage vessels are vertical storage vessels,rather than more traditiollaf spheres.
Spheres have the problem that they must be elevated from the ground,providing 8fl exposed
surface at the bottom of the sphere.This exposed surface would have high heat transfer from
any ground fires during an accident.For a vertical vessel,with the bottom of the 'fesse1 on the
ground,only the outer lower surface of the vessel is exposed to the fire.The expo~ed area is less
than the exposed area for the sphere.Thus,the total heat transferred from the fITe ~s less for a
vertical vessel than for a sphere.
,
As I stated earlier,the design features I just discussed dramatically reduce the acc~(lent
consequences and risk.Ifthese features are not included in the QRA,then the co~sequences of
an accident and subsequent risk will be substantially overestin1ated.!
It is clear to me that the Cornerstone Teclmo10gies report did not include these de1ign features in
their analysis and as a result they overestimated the consequences of an accident spenario and
over-predicted the risk.j
I will review each of the scenarios from the Cornerstone Technologies report (rep~rt 1).
Alternative Release -Vapor Cloud Explosion #1
This assumes a puncture of the vessel.This in itself is not a likely scenario since the vessel is in
a protected area.A more realistic scenario is rupture of a pipe connected to the v~ssel.
The scenario also assumes that all of the liquid escaping will vaporize instantly -~physically
impossible situation with refrigerated butane as discussed above.
Alternative Release -Vapor Cloud Explosion #2
The scenario also assumes that all oftl1e vapor escaping will vaporize instantly -~physically
impossible situation with refrigerated butane as discussed above.
Alternative Release -Pool Fire #1
In this case the size ofthe pool is very important to estimate the heat load.The Cprnerstone
Technologies repOlt does not say anything about the pool size.The size of the popl is limited by
the size of the impoundment area.I believe the area of the impoundment area is l~ss than the
area ofthe pool used for the Cornerstone Teclmologies calculation.Thus,the vaporization rate
of the butane is much too high.
Alternative Release -Pool Fire #2
Same issues as Alternative Release -Pool Fire #1
WorstNCase Scenario -Vapor Cloud Explosion #1
This scenario assumes that the entire butane liquid inventory of one tank is instantly vaporized -
a phenomenon that is physically impossible.In reality,ifthis were to occur the lnquid would
D.A.Crowl to M.Wesling
April 11,2011
Page 5
flow into the impoundment area and a boiling pool would result.The rate of vapor release would
be significantly lower than an instantaneous release.
It is also unlikely that the vapor would disperse to a precisely flammable mixture fd then ignite
at that exact instant.
Worst-Case Scenario -Vapor Cloud Explosion #2
Same issues as Worst Case Scenario -Vapor Cloud Explosion #1.
Alternative Release -BLEVE #1
The definition of a BLEVE used in the Cornerstone Teclmologies report is not cortect.Thus,
this case is teclmically invalid.I
Alternative Release -BLEVE #2 I
Same issue as Alternative Release -BLEVE #1.TIllS is technically invalid.I
The Cornerstone Technologies Report used the EPA's RMP*Comp software to eStIimate the
consequences of each scenario.This software is free from EPA and is not approp .ate for
application to do a QRA.I would never recommend or consider use of this softw e for tillS
application.i
I
I
I
The Quest Consultants Report contains much more realistic scenarios that inc1Udlthe safety
features that I described at the beginning of my report.They used the CANARY c mputer code
to estimate the consequences of the scenarios.I do not have access to this code,n r have I used
it.I have heard of CANARY and believe that it is a very credible code for applic tiOll for these
scenarios.I
The Quest Consultants repurt assumed a full-hore rupture of a l4-inch line.This il actually fairly
conservative -most risk analysts I know assume that only a fraction of the pipe ata contributes
to the release -some as low as 20%of the pipe area for this size pipe.i
i
..'
D.A.Crowl to M.Wesling
April 11,2011
Page 6
I
~m~ry i
I
The Cornerstone Technologies report defines unrealistic scenarios by not inelUdintmany of the
safety design features used in this facility.Many of the scenarios were not physic ly possible or
technically invalid.Furthermore,they used a free computer code that was not des gned for this
type of analysis.;
The Quest Consultants report defmes very realistic scenarios which properly inel es the safety
design features for this facility.They used a much more capable computer code t estimate the
consequences.The calculations were completed using teclmically valid and indu ry standard
approaches.
To the best of my expert opinion,the Quest Consultants report is by far the superifr analysis of
the consequences of an accident at the Plains LPG North Gaffey Street facility.I
rt~0.f/utv-P'II
Professor I
906-487-3221
crowl@mtu.edu
TO:
FROM:
DATE:
SUBJECT:
HONORABLE MAYOR &CITY COUNCIL MEMBERS
CITY CLERK
AUGUST 21,2012
ADDITIONS/REVISIONS AND AMENDMENTS TO
AGENDA**
Attached are revisions/additions and/or amendments to the agenda material presented
for tonight's meeting:
Item No.
G
Description of Material
Staff's response to Mayor Pro Tem Campbell's prior email;Email
exchange between Mayor Pro Tem Campbell and City Manager
Lehr
Respectfully submitted,
~d£.
Carla Morreale
**PLEASE NOTE:Materials attached after the color page(s)were submitted
through Monday,August 20,2012**.
W:\AGENDA\2012 Additions Revisions to agendaS20120821 additions revisions to agenda.doc
Page 1 of 1
From:Carolyn Lehr
Sent:Tuesday,August 21,20122:23 PM
To:CC
Cc:Carla Morreale
Subject:Late Correspondence:Pension Spiking Safeguards
Attachments:Pension Spiking.doc
Mr.Mayor and Council Members,
Attached is the document I requested of our HR Manager,Steve Larson.In it,he gives
examples of the most common ways that cities have "spiked"employees'reportable
compensation for the purpose of offering a more generous pension benefit.In each
case,he discusses how these practices are precluded in our city.
This question 'came up in connection to the agenda item on approving the second tier
pension formula for reduced costs to the City for future hires.
Thank You,
Carolyn
8/21/2012 G
PENSION SPIKING
TYPICAL TYPES OF SPIKING
Final Year Increase in Compensation
City grants employee large increase in last 12 months.
New PERS contract -retirement compensation is average of usually last 36 months of
employment.(Employee selects the consecutive 36 month period).If an employee had a
pay cut or demotion,they could still pick that period of higher pay as part of their 36
consecutive months.
PERS Audits:PERS now audits each retirement where there is a large increase in
final pay over prior year(s)and requires cities to provide backup to justify any
unusual increase in pay in those time periods.
Employer Paying Employee Retirement Costs
Cities can either by resolution or contract amendment,report the employers'pickup of
the employee contribution as "special compensation".However,that must be done for
ALL employees in a group and cannot do it for only one individual.This option had
NOT been adopted by the City prior to the change of having employees now pay their
full PERS contribution.No employerpickup related compensation has been reported to
PERS by the city.
Now that Employees are paying their full contribution this can no longer be an issue.
PERS Audits:PERS requires all cities to adopt a resolution or contract
amendment and send PERS a copy oftheir adopted resolution,before they would
include this amount in the final compensation calculation.
Sick Leave Service Credit
Not technically "spiking",but the PERS contract options allow for the reporting of
accumulated sick leave upon retirement to be converted into "service time"
Since the City was put into a "pool"in the early 2000's PERS required all agencies in the
"pool"to have this "benefit"included.This will be the same for the new 2%@60 plan.
Current City policy allows employees to accumulate a maximum of 720 hours of sick
leave (approximately 4 months)on the books.This is the maximum amount oftime that
can be converted at retirement for service time.
PERS Audits:PERS now includes the cost of this benefit in its actuarial
calculations and the city has been billed to cover the cost of this benefit over the
last few years in its contribution rate.
Cashout of Leave Benefits
Reporting of the cashout of vacation,sick leave,administrative leave,etc has been
reported to PERS by agencies as "special compensation".It does not qualify under the
PERS regulations that were adopted in the mid 1990's as "compensation"and has not
done by the City.The City has not allowed anyone to report any cashout of leaves to
PERS as compensation.
PERS Audits:PERS now audits each retirement where there is a large increase in
final pay over prior year(s)and requires cities to provide backup to justify any
unusual increase in compensation/pay in those time periods.
Bonuses
Bonuses not tied to work performance that are not part of regular salary are not
"compensation"that is eligible to be reported to PERS,(per the regulations adopted in
mid 90's).
PERS Audits:PERS now audits each retirement where there is a large increase in
final pay over prior year(s)and requires cities to provide backup to justify any
unusual increase in compensation/pay in those time periods.
Special Compensation Pay
Many employees'in other agencies can receive special pay related to their classification.
Things like motorcycle pay,pay for educational related accomplishments like CPA,
Licensed Engineer,etc ..If these pays do not meet the standards set by PERS as "special
compeI\sation pay",they are not eligible to be reported as compensation to PERS (per the
regulations adopted in mid 90's).
Auto Allowance
This type of payment is not an eligible reportable compensation"under the PERS
regulations adopted in the 90's.The City has not allowed anyone to report any auto
allowance as "compensation"to PERS.
Final Settlement Pay
Any payment or cash conversion of employee benefits that are in excess of compensation
earnable that are granted or awarded an employee in connection with,or in anticipation
of,a separation from employment are no eligible reportable compensation per PERS
regulations.The City does not allow anyone to report any final settlement pay as "other
compensation"to PERS
Overtime Pay
Except in certain specific circumstances overtime pay in not eligible to be reported as
special compensation.This is only allowed in special areas where an employee works a
regular scheduled shift that is over 40 hours in a week,such as firefighters,who work a
56 hour work week.Firefighters are eligible for overtime after working 53 hours in a
week.In this case only the 3 hours of overtime regularly worked would be reported as
reportable compensation.This area was included in regulations PERS adopted in the mid
90's.The City does not have employees in this category.
Salary
The only salary that can be reported to PERS as compensation is that which has been
adopted by the City Council in a public document (resolution,MOD or contract)and is
posted on the cities website.This change was made by PERS in 2011,after the issues at a
couple of cites where the pay being reported was not a result of the action of the City
Councilor where the pay was adopted in two or more documents.
PERS Audits:PERS now audits each retirement and may require the city submit
a copy of the resolution or contract to verify that the pay being reported is within
the salary range shown in the documents.
[P
Additional Service Credit
Military Service time:Until the early 2000's the only additional service credits
and employee could purchase was time spent in the "Military",which could only be done
through a contract amendment.PERS law allows the employee to purchase typically up
to four years of military service time.The employee must pay for both the employee and
employer costs as calculated by PERS.This amendment is in the cities current "Pooled"
contract with PERS and will also be in the new contract.PERS has recalculated the cost
of this benefit and significantly increased the cost to purchase this time by the employees.
Additional Service Time:In the early 2000's legislation was passed to allow any
employees to buy additional service credit of up to five (5)year.Because this was law
and not a contract amendment,cities could not prohibit its employees from taking
advantage ofthis provision.The employee must pay for both the employee and employer
costs as calculated by PERS.This item has been commonly referred to as "Air Time"
because it did not require any related service to any governmental agency.Unfortunately,
the costs,which were suppose to be covered entirely by the employee,where not covered
by the.amount of contributions made by the employee and in 2011,PERS changed how it
calculated these costs.The new calculations for cost to purchase this benefit have been
raised significantly.The elimination of this benefit is on almost everyone's "pension
reform"list.
Summary
This is not an all inclusive list of areas that PERS and auditors have discovered over the
past 20 years,but these items have been the typical areas where pension spiking have
been found and what has been done to eliminate them.
(8/21/12)
From:Brian Campbell [mailto:b.camp@cox.net]
Sent:Monday,August 20,20125:34 PM
To:Carolyn Lehr
Cc:FAC;CC
Subject:RE:Late Correspondence:RPV new 2nd TIer Pension Plan
Thanks Carolyn,
I agree that it is not central to tomorrow nights agenda item on the 2nd Tier but it is important to
have all available information at hand if it is pulled from the consent calendar for discussion.
Pension spiking (or not)in RPV is frequently a question that is asked in the community when our
local pensions are discussed.
Brian C.
From:Carolyn Lehr [mailto:c1ehr@rpv.com]
Sent:Monday,August 20,20125:20 PM
To:Brian Campbell <b.camp@cox.net>
Cc:FAC;CC
Subject:RE:Late Correspondence:RPV new 2nd Tier Pension Plan
Brian,
This afternoon I asked the HR Manager to summarize the practices typically
considered pension spiking,and the various ways in which the City is
safeguarding against it.I believe we can send out a memo as further late
correspondence tomorrow in advance of the meeting as a reference.However,I
don't think pension spiking is directly related to the creation of the second tier
agenda item.I just would like to be prepared for any questions that may come up
on the subject.
Thanks,
Carolyn
From:Brian Campbell [mailto:b.camp@cox.net]
Sent:Monday,August 20,20123:13 PM
To:carolyn Lehr
Cc:FAC;CC
Subject:RE:Late Correspondence:RPV new 2nd Tier Pension Plan
Thanks Carolyn,
\o~3
Since you brought up "anti-pension spiking policies"below in your email,can you direct us to
the city web page that explains any city policies that exist on this subject in more detail?I have
not yet been able to find any information on the city site but may have possibly overlooked it.
Thanks,
Brian
Brian Campbell
Mayor Pro Tem
City of Rancho Palos Verdes,CA 424-255-8887 office
310-544-7400 office +text
888-855-9619 fax
"Reply"to sign up for my Email Newsletter
RPV Website:www.palosverdes.com/rpv
Twitter:http://twitter.com/CampbellforRPV
Notice:The information contained in this electronic e-mail and any accompanying attachment(s)is intended only for the use of the
intended recipient and may be confidential/or privileged.If any reader of this communication is not the intended recipient,
unauthorized use,disclosure or copying is strictly prohibited,and may be unlawful.If you have received this communication in
error,please immediately notify the sender by return e-mail and delete the original message and all copies from your system.
Thank you.
From:Carolyn Lehr
Sent:Monday,August 20,2012 12:22 PM
To:Brian Campbell <b.camp@cox.net>
Cc:FAC;CC
Subject:Late Correspondence:RPV new 2nd Tier Pension Plan
Good Day Council Members--and copy to Finance Advisory Committee Members,
Noting the points raised by MPT Campbell in his email below regarding Item G of the August 21 Council
meeting (tomorrow evening),I felt it would be helpful to provide all of you with the September 20,2011
staff report that prompted Council to direct that staff initiate a contract amendment with CalPERS,creating
a second-tier reduced pension benefit for the City of Rancho Palos Verdes.
This background report is one of many documents relating to pension revision that can be found on the
City's website.Please let me know if staff can be of further assistance,and we will try to anticipate any
questions that may come up relating to anti-pension spiking policies or other important issues.
City Clerk,please include this in Late Correspondence.
Thank You,
Carolyn Lehr
Begin forwarded message:
From:"Brian Campbell"<b.camp@cox.net<mailto:b.camp@cox.net»
To:"FAC"<FAC@rpv.com<mailto:FAC@rpv.com»
Subject:RPV new 2nd Tier Pension Plan
FAC members,
Question;Has the FAC been consulted or advance copied either individually or as a committee regarding
this pension item coming in front of the city council this Tuesday?You have done the most thorough and
accurate work in the city on this subject just a few months ago when you revealed that the previous
estimates of the RPV unfunded pension liabilities were in fact many times higher than previously reported.
I hope that the community will continue to have the benefit of your expertise on this subject.
I would welcome any input,ideas or suggestions of questions to ask of city staff that you have prior to our
meeting this Tuesday.Currently,for example,I am not aware of any protections or limits (other than the
weak ones at the state level)against pension enhancements (spiking)in RPV and the lack of transparency
regarding such.
I have also attached below two links to web sites of interest that were provided to me.
http://www.califomiapensiomeform.coml
http://www.pars.org/pars-solutions/
If you would like to assist on this important item please either call me at my numbers below or reply to this
personal email address.
Thanks for your service to all of us in RPV.
Brian
Brian Campbell
Mayor Pro Tern
City of Rancho Palos Verdes,CA
[cid:image002.png@0 1CD7E3B.5IB2B950]
310-544-7400 cell +text
424-255-8887 office
888-855-9619 fax
"Reply"to sign up for my Email
Newsletter<blocked::http://visitor.r20.constantcontact.comld.jsp?11r=k7fsecgab&p=oi&m=1106025977738
>
RPV Website:
www.palosverdes.comlrpv<http://www.palosverdes.comlrpv><http://www.palosverdes.com/rpv>
Twitter:http://twitter.com/CampbellforRPV
Notice:The information contained in this electronic e-mail and any accompanying attachment(s)is
intended only for the use of the intended recipient and may be confidential/or privileged.If any reader of
this communication is not the intended recipient,unauthorized use,disclosure or copying is strictly
prohibited,and may be unlawful.If you have received this communication in error,please immediately
notify the sender by return e-mail and delete the original message and all copies from your system.Thank
you.
TO:
FROM:
DATE:
SUBJECT:
HONORABLE MAYOR &CITY COUNCIL MEMBERS
CITY CLERK
AUGUST 20,2012
ADDITIONS/REVISIONS AND AMENDMENTS TO
AGENDA
Attached are revisions/additions and/or amendments to the agenda material received
through 'Monday afternoon for the Tuesday,August 21,2012 City Council meeting:
Item No.
G
J
Description of Material
Email exchange between Mayor Pro Tem Campbell and City
Manager Lehr
Email exchange between Staff and Ken Dyda
Staff Report Clarification;Email from Sharon Yarber
W:\AGENDA\2012 Additions Revisions to agendaS20120821 additions revisions to agenda through Monday aftenoon.doc
From:Brian Campbell [mailto:b.camp@cox.net]
Sent:Monday,August 20,20123:13 PM
To:Carolyn Lehr
Cc:FAC;CC
Subject:RE:Late Correspondence:RPV new 2nd lier Pension Plan
Thanks Carolyn,
Since you brought up "anti-pension spiking policies"below in your email,can you direct us to
the city web page that explains any city policies that exist on this sUbject in more detail?I have
not yet been able to find any information on the city site but may have possibly overlooked it.
Thanks,
Brian
Brian Campbell
Mayor Pro Tern
City of Rancho Palos Verdes,CA
424-255-8887 office
31 0-544-7400 office +text
888-855-9619 fax
"Reply"to sign up for my Email Newsletter
RPV Website:www.palosverdes.comJrpv
Twitter:http://twitter.comJCampbellforRPV
Notice:The information contained in this electronic e-mail and any accompanying attachment(s)is intended only for the use of the
intended recipient and may be confidential/or privileged.If any reader of this communication is not the intended recipient,
unauthorized use,disclosure or copying is strictly prohibited,and may be unlawful.If you have received this communication in
error,please immediately notify the sender by return e-mail and delete the original message and all copies from your system.
Thank you.
From:Carolyn Lebr
Sent:Monday,August 20,2012 12:22 PM
To:Brian Campbell <b.camp@cox.net>
Cc:FAC;CC
Subject:Late Correspondence:RPV new 2ndTier Pension Plan
Good Day Council Members--and copy to Finance Advisory Committee Members,
Noting the points raised by MPT Campbell in his email below regarding Item G of the August 21 Council
meeting (tomorrow evening),I felt it would be helpful to provide all of you with the September 20,2011
staff report that prompted Council to direct that staff initiate a contract amendment with CalPERS,creating
a second-tier reduced pension benefit for the City of Rancho Palos Verdes.
I oC;-5
This background report is one of many documents relating to pension revision that can be found on the
City's website.Please let me know if staff can be of further assistance,and we will try to anticipate any
questions that may come up relating to anti-pension spiking policies or other important issues.
City Clerk,please include this in Late Correspondence.
Thank You,
Carolyn Lehr
Begin forwarded message:
From:"Brian Campbell"<b.camp@cox.net<mailto:b.camp@cox.net»
To:"FAC"<FAC@rpv.com<mailto:FAC@rpv.com»
Subject:RPV new 2nd Tier Pension Plan
FAC members,
Question;Has the FAC been consulted or advance copied either individually or as a committee regarding
this pension item coming in front of the city council this Tuesday?You have done the most thorough and
accurate work in the city on this subject just a few months ago when you revealed that the previous
estimates of the RPV unfunded pension liabilities were in fact many times higher than previously reported.
I hope that the community will continue to have the benefit of your expertise on this subject.
I would welcome any input,ideas or suggestions of questions to ask of city staff that you have prior to our
meeting this Tuesday.Currently,for example,I am not aware of any protections or limits (other than the
weak ones at the state level)against pension enhancements (spiking)in RPV and the lack of transparency
regarding such.
I have also attached below two links to web sites of interest that were provided to me.
http://www.califomiapensionreform.com/
http://www .pars.org/pars-solutions/
If you would like to assist on this important item please either call me at my numbers below or reply to this
personal email address.
Thanks for your service to all of us in RPV.
Brian
Brian Campbell
Mayor Pro Tem
City of Rancho Palos Verdes,CA
[cid:image002.png@0 1CD7E3B.5lB2B950]
310-544-7400 cell +text
424-255-8887 office
888-855-9619 fax
"Reply"to sign up for my Email
N ewsletter<blocked::http://visitor.r20.constantcontact.com/d.j sp?lIr=k7fsecgab&p=oi&m=11 0602597773 8
>
RPV Website:
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MEMORANDUM
TO:
FROM:
DATE:
HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
CAROLYN LEHR,CITY MANAGER ~
ERIC MAUSSER,HUMAN RESOURCE~
SEPTEMBER 20,2011
SUBJECT: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 sustainal)lIity 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 2nd 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 of5
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 conc~rn 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%of their EPMC.Assuming the
City Council elects to follow the recommendation made by the Subcommittee and
Management Pa;rtners,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.
FIS~AL ANALYSIS:
With a -history of stable revenue streams,the City has been governed with a conservative
fiscal philosophy that has Jed 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 t;lke 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 a2nd 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 a2nd 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 of5
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
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,gepending 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.BlJt,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'deman~for high quality services.
6-4
PENSION REVISION
September 20,2011
Page 50f5
At a meeting held with Mayor Pro Tern 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 Tern 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 2nd Tier Survey (Late Correspondence)
I
6-5
MEMORANDUM
TO:CITY COUNCil
FROM:MAYOR TOM LONG AND COUNCILMAN STEFAN WOLOWlCZ\
PENSION REVISION SUBCOMMITTEE
DATE:
SUBJECT:
SEPTEMBER 6,2011
PENSION REVISION
RECOMMENDATION
Approve the recommendations made by Management Partners,Inc.lCity Council
Pension Revision SUbcommittee regarding revisions to the Clty's pension program for
current employees and·new hires,and provide further direction to staff.
DISCUSSION
The City engaged Management Partners to provide anobjedive look at pension
benefits provided In the CalifornIa local government setting and to Identify what options
are availablero 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 benefrt plans;researched pensions
modifications being considered by CaIPE.RS,the State Legislature and public agencles
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 Revision White Paper,Management Partners Inc..
Augus12011
ATTACHMENT 6-1
August 2011
MANAGEMENT PARTNERS
INCORPORATED
ATTACHMENT 6-2
MANAGEMENT PARTNERS
INCORPORATED
August 31,2011
Ms.Carolyn Lehr
City Manager
City of Rancho Palos Verdes
30940 Hawthorne Boulevard
Rancl'lOPalos Verdes,CA 90275
Dear Carolyn:
Management Partners is pleased tor:ransmit a dfaR of the Pension Reform White Paper for the
City of Rancho Palos Verdes.In developing this paper we met with the City CouncilPensron
Revision Subcommittee;reviewed and analyzed City stafes assumptions and calculations;
surveyed competitor cities'retirement benefit plans;researched pension modifications being
considered by CalPERS,the Stale Legislature and public agencies throughout the state;and
researched retirement laws and regulations.These efforts were undertaken to deternline:
1.What options are available for the City?
2.What options would the City be precluded from pursuing either on legal,technical or
pradi.cal grounds?
3.What are the grey areas and uncertainties that rnust be confronted as the pUblic pension
environment shifts?
TIus paper answers these questions and should help City decision-makers to approach the
discussion about what,if any,changes to propose in the currentretirernent system armed with
full informa non about the state of the ind usl:ry with respect to such 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,#L ~f~trfl/_.-
Andrew S.Belknap
Regional Vice President
2107 North Fi rsl Street Suile 470
San Jose,CA 95131
w\vw.managementpartners.com 4084375400
Fax4536191
ATTACHMENT 6-3
Pension Revision White Paper
Table of Contents
Table of Contents
Management Partners
Parameters :3
Distinction Between Defined 8enefit and Defined COntribution -4
Background 6
Retirement Benefits in the Local Government Sector 6
Rancho Palos Verdes'Ret:irementPlan I-listory 7
Chronology of Rancho Palos Verdes'Pension Revision Subcommittee Activities 7
Revi:sion 'B..ffbrts ..,·..,·',.."",'' ,'ll'•••••••••••,","':-•••:••'9
City ocEanlose Ballot lV!easure 9
Californians for Fiscal Responsibility Initiative 10
State Legislature 8i1ls 11
Initiative process 13
CalPERS Position on Reform Efforts 13
Rancho Palos Verdes Data and Assumplions .-15
Turnover Rate 15
Salary Increases 15
Projected Savings 15
Employee Retention ,'16
CalPERS Contribution Projections 16
Obs·erva:ti·ons and Op·ti:ons •••·.'.'11 •••••••·."•••••",••••·,..""1,8
Retire·menl:Formula 18
final Co.mpensation Calculation Basis ;20
Employer~paid Member Contributions 20
Retirement Spiking 20
Current Options Compared with New Employee Options within Subcommittee
Parameters 21
Options for Consideration 22
ATTACHMENT 6-4
Pension Revision While Paper
Table of COnt~nls Management Partners
Current Employees :24
New f-lires 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 m 29
.Appendix D-Vested Rights of CalPERS Members 30
Tables
Table 1.CalPERS Rates under Vmous Scenarlos 17
Table 2.City Discretion with Changes to Basic CalPERS Attributes 22
Table··3,.Pe,er 'Com:p:aris'on .••••11 ••_•••"'·,::•••••.•••••••"'·•·•••••"'·•••••.••""'•••••••••23
Figures
Figtrre 1,.Ca.lPERS In'vestment ,Returnsl w '.,••,..'"••••u ,u:.~.,.t!••••••••••••••1l.17
Figure 2.Percentage of Compensation Under Various Plans 19
jj
ATTACHMENT 6-5
Pension Revision While Paper
Introduction Managemenl Partners
The City of Rancho Palos Verdes (RPV)engaged Management Partners to
provide an objective look at pension benefits provided in the Califomia
local govemment setting.This was undertaken with a focus on how
plans are being modified to be fiscally sustainable over the long tenn in
the current economic environment while stiU prOViding competitive and
reasonable benefits so dties can recruit and retain the experienced staff
they require.Management Partners has reviewed changes being
considered by some jurisdictions such as the San Jose ballot measure.We
have also reviewed and considered the changes proposed by the
Califomians for Fiscal Responslbilily initiative as well as other initiatives
and changes proposed by and being considered by the Legislators.
Management Partners does not consider these potential dlanges 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 andlor changes in the law
or the State constitution.These 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 tegisla.tive process and subsequent litigation and be found
legal,the City retains the option of adopting them at that time while
avoiding the cost of litigation.
Most cities in California contract with the California Public Employee
Retirement System (CaIPERS)fot'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 substan.tially in the last several years.TItis is due 1:0 losses
sustained in agency investments (such as stock market losses)and
enhancements granted in pension programs,primarily in the late 1990s
and the early 2OOOs.The most often cited enhancement was the creation
of a "3%at SO"program for public safety workers that can result in a
1
ATTACHMENT 6-6
Pension Rcvision White Paper
Introduction Management Partners
pension equal to about 90%of final compensation after a ~ormaI30.year
working career.As a result,CalPERS has had to increase payments
demanded of its contract agendes,particularly those agendes 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,cities 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 sedor.Instead,defined contribution plans
have become more commonplace.They typically pay a lower benefit and
have much greater uncertainty than 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 council
has sought to modi.fy pensions to assure that Rancho Palos Verdes avoids
financial difficul ties in the futu re and to stabilize pension costs as a
percentage of payroll.
As a result of pension cost increases,Rancho Palos Verdes,like many
other ci ties..is looking at options for changing eXisting CalPERS pension
benefits.A number of California dties have already introduced lower
benefit plans for new workers and raised contribution levels for existing
employees.
Rancho Palos Verdes is seeking a retirement plan that is sustainable in
the long term.In this case,sustainable is defined as a pensioll structure
with predictable expenditures that are generally a flat percentage of
payroll and that are both economical to the City and beneficial to
employees.TI,e inability to achieve a sustainable pension.structure may
resul t 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 the number of City employees,the
elimination of City programs and/or a general reduction in the quality,
frequen~and number of services provided to the public.The City is
understandably concerned about costs,while also conscious of the fad
that it needs to remain an employer that can recruit and retain employees
in the public employee labor market.
To develop options for the City,the Pension Revision Subcommittee
needs a solid analysis of basic facts regarding pension issues.This white
paper was created to examine the following issues:
2
ATTACHMENT 6-7
Pension Revision WhltePaper
Introduction Management Partners
1.What options are available for the City?,
2.What options would the Oty be precluded from·pursuing either
on legal,\:ec:hnica!or pracl:ical grounds?
3.What are the grey areas and uncertainties that must be confronted
as the public pension enVironment shifts?
The paper objectively presents tht:!cutrentpublicpension enVironment
and reform efforts,City pension assumptions,information about how
peer organIzations structure their plans,and finally,alterna.tives and
recommendations for Rancho Palos Verdes leaders to consider.
Parameters
At the start or this engagement the City's Pension ReVision Subcommittee
established the follOWing parameters to be used when evaluating
alternatives for pension structure changes.
•L{)n~term sustalnability.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
peltsion system remains economical to the City and beneficial to
the employees.
•Maintain the abUity to attract and retain Quality employees.To
continue to utilize high-quality staff to provide excellent service to
residents.it is important for the City to provide a pension system
th~t is competitive wi th other jurlsdktiOl1s competing fOl'the same
employees.
•Avoid Significal1tIltiggtion risk.Litigation is costly and lengthy
and the City does not wish toincui'unwarranted costs in
reforming its pension plan.Once the courts have made rulings on
litigation over changes made by ()tner jUrisdictions,and/or if the
State Legislature enacts changes that proVide more options for
pension reform,the City has the ability to adopt those changes
determined to be legal and desirable.
•ProVide protection against any possible retirement spjking.The
City wishes toprecltide the actuality of pension spiking but also
any appearance or perception of spiking.
•Maintain the City's non-participation status with respectto Social
Security..Social Securltyis intended to be a safety net by
redistributing wealth and is neither economical nor cost-effective
as a means of delivering pension benefits to a primarily
professional workforce such as that the City employs.It provides
3
ATTACHMENT 6-8
Pension Revision White Paper
Introduction Management Partners
far Jess value for itscostthan is provided by pensi~h behefits.
The City wishes to maximize the use oiits funds and provide a
superior benefit fol'employees.
Distinction Between Defined Benefit and Defined Contribution
Two basic categories of retirement plans exist:defined benefit plans and
defined contribution plans.A defined bellefit plan is a guaranteed aMlJal
pension (benefit)based on retirement age,years ofservice and salary.
The employer contribution is a variable amount actuariaUy determined as
sufficient to provide the guaranteed benefit.A defiued contributioll plan is
one in which the employer contribution is a fixed amount.n,e benefit is
a variable based on investment eamingsfrom the fixed contribution offset
bye),:penses.Ifthe 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 cOnlTibtlfion plan is not availablewithinCalPERSi
therefore,the City would have to establish its own defined contribution
plan outside of CaIPERS.Such plans have their own costs,including
administration costs.The City of Irvine had a DC plan several years ago,
but they moved into Cc1IPERS in the early 20005 after determining that it
was less costly and less burdensome.
The City of Rancho 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 altematives not feasible.
The cost of leaving CalPERS is substantial.The City would be reqUired to
pay an amountto CalPERS to fund its liability for retirees.n,e amount of
this liability d,arge would have to be negotiated with CalPERS and
would include possible later Increases in liability because of reciprocity
affecting final average compensation of future retirees.Although it is not
possible to estimate this cost without a full actuarial study,the cost
potentially would be large.In essence,the City would be selJingits share
of CalPERS assets at a bad time to do so.Other 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 this.Aside from the administrative cost issues related to
offering a defined contribution plan discussed above,CalPERS has stated
informally,that its position is that agencies cannot keep current
ATTACHMENT 6-9
Pension Revision While Paper
Introduction Management Partners
employees in CalPERS while excluding new hires.Management Partners'
reading of the City's contract with CalPERS is that it prohibits any such
exclusion of new employees.
Sections 20502 and 20303 of the Government Code appear to support the
ability of an agency to exclude new employees from CaIPERS.However,
CalPERS would probably challenge such an exclusion and,given the
Cily'sstated desire to avoid costly litigation,we do not recommend that
the City take this path.
Given the current legislation and lack ofaltematives,Management .
Partners beHeves the costs and risks associated with moving from a
defined benefit to a defined contnbution plan far outweigh any potential
benefits.We recommend that the City reform its defined benefit plan at
this time and retain the option of moving to a defined contribution plan
in the future if economic conditions,the job market and legislative
changes provide a more sound basis for such a move.
5
ATTACHMENT 6-10
Pension Revision White Paper
Background Management Partners
t.
Retirement Benefits in the Local Government Sector
The California Public Employees Retirement System began operation in
1932 as the retirement system for state employees.In 1941,CalPERS first
began contracting with public agencies and school districts.CalPERS is
the largest public pension fund in the country with over $217 billion in
assets.As ofJune 30,2010,1,568 agencies wi th 1.6 million members
contracted with CalPERS.
Public sector agencies in California have historically packaged relatively
modest compensation with more ge.nerous benefits,including a defined
benefit pension program.This was partially in recognition of the fact that
local government employees were not initially covered by Sodal Security;
many are still not covered·including those in Rancho Palos Verdes.Since
public sector employees obtained the right to collectively bargain in the
1970s compensation has become more competitive with private sector
levels.
Private industry has the choice of multiple pension administrators and
investment advisors to provide pension and investment services.These
alternatives are not financiaUyfeasible for California municipalities the
size of Rancho 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
chat'ter cities and counties maIntain their O\\Tn retirement systems but this
is practical only for large cities and counties.To maintain its own
retirement system,an agency must establish a treasurer function and
must have the staffing and ability to invest funds to maximize returns,
Setting up and establishing investment systems is cost-prohibitive and
inefficient for small agencies.Agencies which elect to leave CalPERS are
required to pay significant termination costs to cover future retirement
cost liabili ties.
6
ATTACHMENT 6-11
Pension Revision White Paper
BackFund Management Partners
Most local govemment executives serve with multiple agencies during
their careers.It is,therefore,important to have the availaliilil:y of
reciprocity (portability),provided by CalPERS for members who move
from one agency to another.
Rancho Palos Verdes'Retirement Plan History
n,e retirement plan provided to employees of Rancho Palos Verdes has
changed twice since the City first incorporaredin 1974.The chronology of
the plan changes follows:
•On December I,197't the aly or Ranchos Palos Verdes
established a 2%@ 60 retirement formula based on three-year
average final compensation
•On April 21,2001,the Oty changed to the 2%@ 55 formula
and went to the single highest year final compensation.
•On September 29,2007,the City changed to the 2.5%@ 55
formula while maintaining single highest year final
compensation.
n,e decisions to enhance the retirement formula in 2001 and 2007 were
based on surveys oicities'benefits with whom Rancho Palos Verdes
competed for talent.The changes were made to ensure that Rancho Palos
Verdes was able to altractand retainhigh-quality staff.Due to the
downtum·in the economy as weU 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,Cotmcilmember Steven Wolowicz presented a
memorandum on Pension Revision to the City Council,recommending
that the Council appoint a two-member subcommitree to work with 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-Pel Hwang and retirement plan consultant John Barrel.
On December 7,2010,the subcommitree presented its first report to the
City Council (see Appendix A).
7
ATTACHMENT 6-12
Pension Revision White Paper
Background Milnilgemf:lnt Partners
On January 18,2011.Bartel Associates.LLC submitted a~port on the
City's CalPERS Unfunded Actuarial Accrued Liability (UAAL).
On June 7,2011.the subcommittee presented its second report (see
Appendix B).
Onj1.1ne 17,2011.Finance &:IT Director Dennis McLean and Human
Resources Manager E.ric Mausser presented a memorandum to the
subcommittee providing an update on the request for qualifications
(REO)and proposals for an independent retirement plan consultant to
anaI)'7.e possible altematives of the Cty's existing pension plan..
On1uly 1,2011,thcsubcommittee presented its third report to the Cty
Council (see Appendix C).
Management Partners bas reviewed and researclled the preliminary
findings of the subcommittee and have had those findings reviewed by
an attomey experienced in public pension law.We have determined that
these preliminary findings are valid and realistic.The California
Constitution and the regulations of CalPERSgreatly limit the alternatives
available to public sector agencies in terms of pension benefit options.
The options that are available as weU as various efforts by public agencies
and the legislature to increase those options through legislative
proposals,initiatives and ballot measures are discussed in detail in below.
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ATTACHMENT 6-13
Pension Revision White Paper
Revision Efforts Management Partners
Some local agencies Mve esl;ablished a second tier of benefits for new
employees and greater cost-sharing by current employees.Both .
approaches are possible through CalPERS.There is some movement in
Charter cities to amend basic parameters in pension plans even for
existing employees,but there 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 ~ture as weU as current employees.However,for
local agency members of CaIPERS,reform options are limited absent state
legislation.Any more significant change must,therefore accurst the
sta.te level through the legislature or through the initiative process in
order to allow greater flexibility to those agencies contracting with
CalPERS.
The following sections present current efforts to affect change (or public
sector pension options.
City ofSan Jose Ballot Measure
On May 13,2011,Mayor Chuck Reed.Vice Mayor Madison Nguyen and
Councllmembers Rose Herrera and Sam Licardo placed presented an
agenda item to the City Council recommending that the City:1)declare a
fiscal and public safety emergency,and 2)amend the City Charter to limit
retirement benefits and require voter approval of increases in retirement
benefits.Thespedfic recommendations were as follows:
•For new employees,absent vorer approval for enhancements or
increases,limit retirement benefits to a hybrid plan that may
consist of sodal security,defined benefits or defined contributions
with maximum City contributions in total being not less than 6.2%
or greater than 9%of base salary or 50%of the costs of the benefits
whichever is less.
•For existing employees,without voter approval of enhancements
or increases/limit retirement benefits as follows:
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Pension Revision White Paper
Revision Efforts Management Partners
o Benentseamed 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.
•For existing and future retirees,without voter approval or
enhancements or increases,institute the rollowing changes:
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.
•Place addil:ionallimitatlons on growth in retirement benefits if the
fiscal and public safety emergency gets worse.
Four legislators asked the Office of State Attomey General to review the
San Jose emergency proposal.The response was that "unilateral
impairment"of any contract "causes us deep concern,"This 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 such expected litigation costs.
Californians for Fiscal Responsibility Initiative
The Pension Revision Subcommittee requested that Management
Partners identify the provisions oCthe Fair and Sensible Public Employee
Retirement Plan Reform Act.This initiative is sponsored by the nonprofit
organization Californians for Fiscal Responsibility.The stated provisions
of the Fair and Sensible Public Employee Retirement Plan 'Reform Act are
as follows:
•Aligns state and local government retirement benefits with those
offered by the federal govemmentand large private employers.
o Employees hired after JulyI,2013 are eligible for a defined
contribution (DC)plan.
o Defined benefit (DB)pension for new employees will not
exceed the plan offered to federal workers on Juiy1,2011
(1.1%of highest three-year average at age 62 multiplied by
years of service).
o Qualifying compensation will not exceed 75%of taxable
social security wages.
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Pension Revision White Paper
Revision Efforts Management Partners
o Defined bsnefitsarEl payablewben employ~es reach the
retirement age established by Social Security (Currently age
62).
o Employees not covered by Social Security shall be
provided with a supplemental defined benefit equivalent
oEsocial security.
•Public employees and taxpayers share costs.
o Current and futUre employees pay halE the cost of pension
and retiree health benefits.
o Defined benefits shall be based on an average of three'
years of quaIifyingcompensalion 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 join t powers
authority,self*insurance or private companies.
o PUblic employers shall provide competitive life insurance
and disability benefits integrated with retirement benefits
and other insurance.
o Public employees may opt aUlaE l:heirretiree healthpJan.
•Improves governance and accountability of pUblic pension plans.
o Two--thirds of a public pension plart's governing trustees
shall be independent of the retirement.system and two~
thirds of independent lTust.ees shall 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 the legislature at reform.In
2010,two bills,AB 194 and AB 827 were passed by the Legislamre but
then vetoed by the Governor.
AB 194 would have limited the maximum salary upon whid1 retirement
benefits are based to no more than 125%of the salary recommended by
the California Citizens Compensation Committee for the position of
Governor.An 827 w()uld have prohibited an empl()}'ntent contract for a
local excluded employee from including any clause that provides for an
aut.omatic renewal,an automatic compensation increase,or an automatic
compensation increase in excess of a cost*of-living adjustmel'lt.The bill
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ATTACHMENT 6-16
Pension Revision White Paper
Revision Efforts Management Partners
would also have required localagencies to complete a performance
review for any excluded employee before an increase in compensation in
excess of a cost-of-Iiving adjustment may be implemented for that
individual.
So far in 2011,a number of Assembly Bills and Senate Bills have been
proposed that wouldmal~e significant cli.tt\ges topenslonslfucturcs.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.
•AS 646 which would prohibit a public agency from implementing
its last.bestand final offer in bargaining until atleastlO 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 at'
after January 1,2012 from using credit for acerued leave or
overtime tor purposes of determining final compensation.
•AB 961,whicl1 would exclude matters relating to pension benefits
from the scope of representation of public employees,thereby
prohibiting employee organitat:ions from negotiating pension
benefits with public employers.
•AS 1184,which would require the contracting agency from which
a non-represented CalPERS member retires to pay that portion of
the liability for creditable service performed 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 firstbecome
CalPERSmembers on or after January 1,2013.
•AB 1248,which would requIre a local public employer to prOVide
coverage under the federal Social Security system to all employees
who are not covered by a defined benefil:plan.
•AU 1320,which would establish a Taxpayer Adverse Risk
Prevention Account for each CalPERS employer whose assets
would be invested with other CaIPERS assets and be available to
pay employer retirement contributions that exceed the normal
cost of benefits.
•SB 27,which would provide that 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 the calculation of the member's final compensation.
It would also prohibit any member who relires on or after January
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ATTACHMENT 6-17
Pension Revision 'While Paper
Revision Efforts Management Partners
1,2013 from periormingsetvices for any employer ,covered by
their retirement system for 180 days..
•sa 520,which would require CalPERS to establish a hybrid
retirement plan for public employees who become members on or
after January 11 2013 and would prohibit those plans from creating
a vested property right for members with respect to any employer
contributions before retirement.
•5B 526,which would specify for employees hired on or after
January],2013 that final compensation means the highest annual
average compensation earnable during a consecutive 36·month
period of membership.The biU would also prohibit the addition
of compensation fur acetl.1ed leave at overtime wotkin the
cal(:tjlation of final compensation.
Initiative process
In addition to the bllls moving through the Assembly and State$enate,
there is a state initiative called the "Public Employee Pension Reform Act"
(Initiative 11·0007)that would change the State Constitution and:
•Set the retirement age at 62 for current and new employees.
•Limit pensions to 60%of a thr~year average salary.
•Require employees to match public agency retirement
contributions.
•Allow public agencies to modify pensions.
•Ptevent pension changes through collective bargaining.
CaJPERS Position on Reform Efforts
In July 2011,CalPERSissueda paper titled Vested Rigltts oj CofFERS
MumlJars (included as Appendix D).The document states:.
• A public employee's right to the retirement benefits earned during
employment is generally a vested righl:.
•Public employee retirement benefits are contractual obligations
entitled to the protection of the "Contract Clause"of the State
Constitution as well as provisions of the Federal Constitution
forbidding the impairment of contracts.
•Promised benefits may be increased during employment but not
decreased,absent the employee's consent.
•The courts have established that this rule prevents not only a
reduction in the benefits that have already been earned,but also a
reduction in the benefits that a member is eligible to earn during
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ATTACHMENT 6-18
Pension Revision White Paper
Revision Efforts Management Partners
future service.This statement is particularIypertinent to the San
Jose ballot measure.I
•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 redudng (or even eliminating)
retirement benefits for new hires.
•Some employers may l:ohoose 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 CarPERS would go to court to protect the rights
of its members as outlined above.
ATTACHMENT 6-19
Pension Revision While Paper
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 periodof]anuary 1,2005 through April 30,2011,turnover
averaged 2.8 employees per year.This equates to an average annual
turnover rate of 5%.This 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 this writing,City staff are re-
calculating iii 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 current employees under the
2.5%@ 55 1011"l1ula are replaced by new employees with a different
retirement tier (with a lower formula).
Salary Increases
Rancho Palos Verdes staff assumed annual salary rate increases of 3%
based on historical data (2.8%annual cost of living adjustment [COLA1
increases and 2.2%merit increases).Even though salary increases may
average less than 3%over the next six years,we are using that projection
as Management Partners does not want to OVerS&1te the savings which
wiJIbe higher if salary increases average less than 3%.
Projected Savings
If the City were to grant a one-time 5%pay increase in exchange for
employees paying the full 8%employer retirement contribution (instead
of paying 1.5%as they currently do),and establish a 2nd tier with a
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ATTACHMENT 6-20
Pension Revision White Paper
Rancho Palos Verdes Data and Assumpllons Management Partners
2%@l6O formula and three year average compensation basil!tor new
employees,projected savings from current pension costs would range
between approximately $81,000 and $98,000 in year one based upon a
turnover rate of 5%and 7%,with increased savings each subsequent year
rising to approximately $347,000 to $478,000 in year six.Therefore,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 bave
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 fom'lulas both read'l their maximum percentage
(2418%)at age 63.Under both of these formulas,employees have an
incentive to remain with the public agency beyond age 55 and up to the
more realistic retirement age of 63.
CalPERS Contribution Projections
Under the current 2.5%@ 55 formula with single highest year
compemiation 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%
These 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 three retirement plan scenarios.
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ATTACHMENT 6-21
Pension Revision While Paper
Rancho Palos Verdes Data and Assumptions
TaMe 1.CnIPERS RIlles Ilnder Various Satlltlrios
Managemenl Parlners
Figure 1 shows CalPERS'historical investment returns.
Figure 1.CalPERS hIVes/lllcnl Ret1l11lS l
I Stmm::Actlmr/al Presi!lIfalioll/or till:City of Rnm:/ro Pnlos Vcrd5 by Kung-pe;Hwang.CnIPERS Senior Pensio/l
Achmry.111JOnO
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ATTACHMENT 6-22
Pension Revision White Paper
Observations and Options Management Partners
It is neither practical nor feasible for the City to move out of the CaIPERS
retirement system and into another system.Rancho Palos Verdes is a
General Law City rather than a Charter City.Thls 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 CalPERS,the City would have to
pay a large "termination fee"to cover liability forlUture retirees,
pursuant to the existing agreement with CalPERS.ntis is something the
City cannotunilateraUy change.Given the realities of remaining within
tile CalPERSsystem we looked at theoptionsthnt are available to the
Cily within CalPERS.
There are three primary ractors that determine the City's retirement costs:
•Type of retirement formula offered to employees,
•Final compensation basis that is used for benefit calculations,and
•Any portion of the employer retirement contribution that is paid
by the City (referred to asemployer"paid member contributions
[EPMC]).
An additional factor that may impact costs is whether employees have
the ability to increase the compensation basis during their finalyear(s)
or service ("retirement spiking").
RetiretnentFornnuJa
Ci ty employees are currently under the 2.5%@ 55 formula.With this
formula,at age 55 an employee's retirement benefit is calculated by
multiplying the years ofquaHfied service by 2.5%and then multiplying
final compensation by that percentage.For example,an employee 55 or
older with 25 years of qualified service would receive 62.5%of their final
compensation (2.5%x25 years).Under this formula,the multiplier (2.5%)
does not increase after age 55.
Another formula commonly used by public agencies is the 2%@ 55
formula.Under this formula,al age 55 an enlployee's retirement benefit
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ATTACHMENT 6-23
Pension Revision While Paper
Observations and Oplions Mllflilgement Partners
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
mull:iplier (2%)increases up to 2.418%at age 63 or older.So,an
employee who i563 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 tl,e 2%@ 60 formula.With this formula,at age 60 an
employee's retirement benefit is calculated by multiplying the years or
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 thisfurmula,the multiplier (2%)also increases up to
1.418%at age 63 or older.So,an employee who is 63 \vith 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 1.Pcrccnttlge oj CompctlSlltioll Under Various Pillus
--20/.@55
-+-2%@60
-;;r25t.@55
55 575 ao fl3
I I
Additional yean ofsentice
525
1.0 .!--_..;..:;:=-__-.l.-._-__--_
RollrBmantAga
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ATTACHMENT 6-24
Pension Revision White Paper
Observations and Options
Final Compensation Calculation Basis
Management Partners
For current City employees,the final compensation basis is known as
single highest year.The 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 this
case,the employee's highest average compensation over 36 consecutive
months is to calculate the benefit.NormaHy,but not always,the highest
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 at8%
of salary.Of this B%,the City currently pays 6.5%and employees pay
1.5%,The current employer contribution rate for both the 2%(!!lS5 and
2%@60 plans is 7%rather than the 8%contribution rate for the 2.5%@S 5
plan.
For both current and future employees,the City could decide to pay all,
parlf or none of the employee contribution.So,for employees under the
2.5%@55 plan.the Oty could reduce its EPMC to.O%o1'any other
percentage with employees paying the remainder of the 8%employee
contribution.
The City also has the latitude to establish different £FMC percentages ror
different plans.For example,the C.ty could set a 0%EPMC for
employees under the 2.5%@55 plan with employees paying the full 8%
while setting a different £FMC percentage (e.g.,3%}for employees under
a 2%@ 55 or 2%@ 60 plan.
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 interesft and in the interest of taxpayers,to ensure that
employees do not manipulate their final compensation for the purpose of
increasing their retirement benefit.
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ATTACHMENT 6-25
Pension r~evision White Paper
Observations and Options Management Parlners
One way in ~V'hich spiking can occur is to promote an employee at the
end of their career or explicitly to increase their final c:om~nsation.
Other 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 the best interests of the City and that they are not being implemented
to increase final compensation for retirement purposes.
CalPERS has instituted a number of regulations to limit opportunities for
retirement spiking.For example,EPMCs are not counted 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 a.re 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 evel')'250 days (2,000 hours)of unused sick leave,the
employee is credited with one additional year of service.This credit is
mandated for pooled agendes such as Rancho Palos Verdes.CalPERS
estimates the cost this benefit as 0.2%to 0.7%of payroll depending on the
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:
•Cal1nOt change formula
•Cannot change compensation calculation basis
•Can change EPMC
Additionally,the City could provide a Voluntill')'deferred.compensation
plan \vith or without the City making a contribution to assist in retaining
employees who reach the current retirement age of 55.This 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.
n,e following applies to new employees:
o Can change formula
o Can change compensation calculation basis
o Can change EPMC
Additionally,the City can.provide a voluntary deferred compensation
plan with or without the City making a contribution.
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ATTACHMENT 6-26
Pension Revision White Paper
Observations and Options Management Partners
Table 2 below summarizes the City's ability to change basic attributes
associated with the CalPERS plan based on currenllegal understandings
and CalPERS positions.
Table 2.City Discl'ctioll with CIltmges to Basic CalPERS Attributes
Options for Consideration
The following options could be considered by City Council.
• Adopt alternative CalPERS formulas ror new hires
o 2%®5S
o 2%@60
•Institute a threi?year salary basis for new hires
•Modify EPMC for new hires and/or current employees
•Offer a deferred compensation plan supplement rar 2%@ 55 or 2%
@60plans
Approaches utilized by benchmark dties are presented in Table 3.
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ATTACHMENT 6-27
Pension Revision White Paper
Observiltjons and Options
Table 3.Peel'Compariso1l
Management Partners
sanjuan
capistrano 2.7%@SS
Classified:
27.11%
Management:
27.11"
Average of three Executives:
highest yeatS'salary 27.11"
Single highest year
Classified:Less
tnan two years
of service
4.47%
contribution;
after two
yeQrsof
sl!Nlce 6.26%
contribution.
Management;
5.01'K.
EXecutives:
7.74%
Classified staff fOf
first twO years:
3.6%-emplovee
paysO"'17'K.
Classified after
two Years,
Management,
EXecutive:Cltv
pays 100%of
employee's snare.
Clll5smed:
33.37%
ManaBement:
32.12%
EXecutive:
34.85%
I City impfc11lclItl!d Ticr 2 (2%@'60 lVitJt iJtret-yoor nverngeJ 717111.
zAolll:·fime 7%sa/my illcrease lI1as providc:d OS 1111 of!5d.
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ATTACHMENT 6-28
Pension Revision White Paper
Recommendations Management Partners
Based on the parameters identified by the Pension Revision
Subcommitte,analysis of available options,and review of peer
jurisdiction systems,Management Partners offers the follo\'ving
recommendations.
Current Employees
The City should retain the 2.5%@ 55 formula and retain the single-
highest year basis.In addition,Management Parmers recommends that
the City:
•Decrease EPMC from 6.5%to 0%.
•Grant a one-time 5%salary increase in conjunction with
increasing the employees'portion of retirement contribution from
1.5%to 8%.This results in a net savings to the 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 nopomon of the contribution.In 2007,
City employees were asked to vote on whether to increase their
contribution from 0%to 1.5%in conjunction \vith improving the
retirement formula from 2%@55 to 2.5%@55.TI'Ieemployees voted to
do so.
Although we beHeve the City has a good legal basis to reduce the EPMC
for CUr.tent employees,City employees might take the position that since
they voted on setting the EPMC at 6.5%,the 6.5%EPMC is a vested right.
This 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 that the 6.5%EPMC
is a vested right.
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ATTACHMENT 6-29
Pension Revision White Paper
Recommendatiol'lS
New Hires
Management 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.
•lnstituteEPMC of CI%with employees paying the full 7%
employee contribution.
•Offer an optional deferred compensation plan r401(a)or 457{b}
plan]with the City contributing up to 1%or 1.5%to new
employees who elect to participate in and make contributions to
the plan.In the interest of faimess 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 unantiopated finanoal orcumstances.
Note:the cost to the City for the 2%@60 plan with a matd1ing 1.5%
contribution to a 457(0)plan is slightly less than the cost of the 2%@ 55
without any matd,ing.Since both plans "top out"at 2.418%at age 63,the
benefit to employees whowork until age 63 is significantly greater under
the 2%@ 60 plan with the 1.5%match than under the 2%@55 plan
without the match.
Moving the age at which the retirement formula "tops out"to 63 has
benefits fur both the City and its employees.the City will retain
experienced employees beyond the current retirement age of 55 while
also reducing recruitment and training costs for senior level positions.
Employees ,"ho retire at age 63 rather than the current age of 55 while
enjoying a City contribution into a deferred compensation play will enjoy
a mota secure retirement In several ways:
By working for the City to age 63 rather than age 55,employees
will retire with more years of service which is a major factor in the
retirement benefit.Since employees who retire from the City at
age 55 often continue in employment elsewhere,the employee'S
work years will,in many cases,remain the same.
The 2.5%@5S tier has a maximum benefit of 2.5%while the 2M'60
tier has a maximum benefit of 2.418%(less than 0.1 %difference).
111e cumulative effect of the City's deferred compensation
contribution of 1%--1.5%over the course ofemployees'careers
more than makes up for the minor ciiffetance In the maximum
formulas in the two tiers.
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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 City will achieve immediate first
year savings 0£1.5%or payroH.Absentany current staff leaving the City,
ongping annual savings of 1.5%wiH 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 the 2%@ 60 formula.
ATTACHMENT 6-31
Pension Revision White Pilper
Appendix A -First Pension Subcommittee Report Management Parmers
27
ATTACHMENT 6-32
Members:Stefan Wolowicz and Thomas Long
Initial Meeting:December 1,2010
Although tl1e sUbcommittee antfcipafes conducting additional meetings and working with
an Independent consuJlant to attempt to fOrmulate one or morEl proposals fOr pOSSible
penSion revIsion to beconsldered by the city councllas a whole.the subcommittee felt if
.would be useful to issue a set of preliminary observatlonsand common agreements
under which the subcommittee is working fortl1e 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.
QpelYdons:
A.The average benefit collected from the City of Rancho Palos Ven:les pension
plan by retlreesls apprOXimately $1,000 per month.Rancho Palos Ven:les
employees do not eam Sooial Security benefits based on thefr time with the City.
Accon:ling to the speakers at the Deeernber 7,2010 meeting the City's pension
benefits are about average When compared to those offered by other comparable
cltIes.
13.Funding the CIty's pension benefits,even afterslgnlflcant investment losses have
required large increases in contributions,consumes about 3%of the City's
general revenue budget.Protective service employee pension costs ere not
under the control of.the city council.Fire Department penslons are under the fire
department's budget wIfhin the County of Los Angeles.Sheriff Department's
pensions are under tl1e control or the st1edff.AlthOugh the Cft¥contracts will1 the
Sheriff to provide police services,the City has no control over the SherIffs
pension pondes.
C.Prior to the Initial subcommittee meetlng the CitY Manager relayada concern
expressed by Staff that included in the concept of "Ve$tedbenetitS"ls the
percentage of employees'portion of contnbUtiOl1.While 1hecora elements ofthe
existing employees plan shoUld not change,the d'lSl::I'eticnary latitUde ofthfs
percentage needs to be clarified and Understood.Moreover the independent
aon~uJtants I'llaV identify other factors that are not now known for eonstderation.
D.The subcommittee was established by the CounoHto 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
suboommittee was also tasked to consider the potential Impact,IT any,of
underfundIng of vested benefits.
1
ATTACHMENT 6-33
(2)
.(3)
E.Various factors contribute to the oomplexity of the subcoml1'1ittee's tast<s end may
be beyond the control ofthe council end the City.These [nciude:
(1)Unpredictable and uncontrollable impacts on investments from market
performance and changes In actuarial factors that affect the costs of
benefits.
CmPERS offersomya limited set of options.Based on comments from the
speakers during the Oecember7,2010 it is our understanding that
CalPERS does not provide service for Defined Contrlbufionretirement
plans.CalPERS would require citles offering a second tier defined
contribution plan to place the defined benefit plan with another plen
adminlstrator.
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,end/or legittative action.
Oommon Asl!@!l!@rrt!:
1.The subcommittee is considering changes In pe:nsion fonnu'as,
contrtbutlon~and benefits only for ne:wly..flired employees.The subcommlf:fee Is
not now considering any cha Whether It Is In benefits or funding of conlnbutions.
for existing employees and of the City of Rancho Palos Verdes.
2.The subcommittee is not considering options which involve the City
departing from the califomia PUblic Employees Retirement System (J#caJPERSn ).
Given the preliminary comments received.the subcommittee has found that departing
from caJPERS Is not now practk::aJ or cost~.
3.Any revisions made to the City's pension benefits should not
degrade theCity's abflllyto recrui'tand ....n hlghquality professional
employees.The City has a long established poUcy of attempting to provide
compensation at the 15U1 percentile when compared to ether comparable ·CaJifomla
cities as a way of recruiting andrefainingskilled employees.
4.The primary purpose of pension revisions Is to control cOS'fs and to
provide a sustainable pention plan.If may ba found that given viable alternatives
now available retirement costs cannot be significantly reduced but onlY limited In the
increasas.The purpO$El of pension revisions is not to cut pension benefits to existing
employees or otherwise disrupt the CilYs relationships with its employees Of with
potenlial recruits.Instead,the PurPose is to assure that pension contributIons both
appropriately fund promised benefits but also are within the Cif.Ys abilities to support.
Future pension cost increases should be controlled such that the City's overaJ]pension
costs remain a relatively low share of the City's bUdget and do not grow
dIsproportionately compared to other ofthe eIYs costs.A sustainable pension plan
providing goed value benefits is In the common interest ofbofh the City's employees
and·if$residents.
i..
2
ATTACHMENT 6-34
s.Broader pension revisions are likely to be effective,ifat aIt,only at a
higher government level.Members of the SUbcommittee and/or members of the
public may support different and more considerable reVfslons to pension benefits for
public employees,However.a broader scope of revision may notbe possible at the
level.of a CIty the Consultants wllJ be asked to identify viable (practical and cost-
effective)alternatives.Significant alternatives may beroade available to muniCipalities
through action by the govemor.legislature,ballot Initiative,or new models developed for
munlcipafrtfes.The current orfuture Councifs should be free to consider those
altematives as they arise.
As the subcommltteeproceeds forward,lt hopes to develop a consensus as to
Whether or not a viable revillon to the CIy's existing pension program •necessary and
pO$$lble.Ifsuch a consensus in favor of a revi&ion emerges,the subcommittee Win
either reech a consensus on a single proposed option for a revision or perhaps f.lNo 01"
more optfonsforthe entire Council to choose among.We anticipate at least ORe
additional report summari2:fng the results of recommendations from tha retained
lndepende"nt consultant and our additional work.
Dated January 4,2011
Slncarely,
3
ATTACHMENT 6-35
Pension Revision White Paper
AppendixB -Second Pension Subcommltl@ Report Management Partners
28
ATTACHMENT 6-36
second Report of the Pension Sl.IbcornmittM pi the gtv.Counml fgr the .City pi
Rancho Palos Verd.~.
Members:Stefan WoIowlcz and Thomas Long
Date 7 June 2011
This l'Iportsupptements 1he SubcommiUeE!'searller report of December 7,2010,a copy
ofwhlch is attached for your reference.nm Subcommittee reaffirms the observations
and common agreements announced in its firSt report Of December 7.2010.The
.purpose oftilis report is to adVise tile Council.the City employees and the publio of
further efforts by tile Subc:ommitteesince the time of our last report.
The Subcommittee is continuing to study options designed to assure th:et the Gity's
pension plan remains sustainable and practtoal.Based on information gathered and .r··'"
pending meeting with an advisory consultant the SubCOl1'll11fl.teehes 'tentatively.';,,,:;.',
concluded that the present range of options avaUabJe to It is faJtJy llmltad.The~··".'.·"l!.>~
Subcommittee tentaflvely does not expect to recommend that Rancho Palos'Verdes .,';',.
leave CalPERS.These 'tentative conclusions have been reached due to two primary:"..,
reasons.First.the Cf4t Is too small to bearthe costs Of maintaining its own pension'plan ",.
aqd .presently securinganaJtematJve plan and sponsor does not appear viable,.
accordingly leaving CaJPERS is not a viable opflon at this time.It is expected it1at .
uitlmataJy major reform by the state legislature will be necessary to provide the1evels of...
changes now required by CALPERS.Second,the SubcomlTl1ltee hopes to avoid.","
recommendiJ'lg changes to the City's pension that couid pose a Significant risk 10 the'
City In~litigation.
With the above restrictions in mind,the Subcommittee is continuing to work to develop a
consensus propcsal to the COuncil for changes In the City's pension plan that wi'll
bolster its sustalnabUf4t by stabillzing 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 eJq)loring adjusflng the contributions of current
employees toward the pension plan coupled ..an equltabfe adjustment in the salaries
of current employees.Staff has presented the SUbcommittee with a number ofoptlons
and predicted savings from each of the options.The Subcommittee needs addilional
time to study these options and needs to confer with an independent pension
consuJtant.We hope to select and begin conferring with the Independent consultant
within the followlng 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 SubcommiUeEI felt it was
necessary 10 circulate a new proposal and to soJiclt 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 indep'endent
1
ATTACHMENT 6-37
consultant to confirm Its own assumptions and the Information that staff has provided to
it and develop1ns a final reporttotha Counclhvlthelther a consensus recommendation
orvlable alternative proposals fOr the Council to consider within the next three months.
The Sl.1bOommlttee attended III recent presentation of the Los Angeles Oivlsionofthe
l..eague ofcarlfomia Oltieson Pension Reform.A handout containing some .
backsround informstiondlscwssed attl1at meeting Is alSo altached to fiareport The
Subcomrnitfee is providif'lg this report and the attaChed infOI'n'Iatk)n and will be Prepared
at our meeting on June 7.2011 to respond to q.uestions by the Council.
Dated.&.,.2011
Sincerely,
'....
ATTACHMENT 6-38
Pension Revision White Paper
Appendl~C-Third Pension Subcommittee Repprt Management Partners
29
ATTACHMENT 6-39
Third Report of the Pension Subcommittee of the City Cpunei!
for the Cltv of Rancho Palos Verdes
Summary of Meeting of July 1,2011
Members:Couneilmember 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 proiect
•Consider recommendations to the Council for possible changes in RPV's pension
structure to assure long term sustainabUity that does not expose the City to risk of
litigation or deteriorated employee relationships..
•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 definedcontribution·type plan.
•Sustainabllity generally means ensuring that pension expenditures become a predictable
and generally flat percentage of payroll.
•Management Partners will assist the Council Subcommittee in reaChing a
recommendation and will prepare further interim reports after each meeting with the
sub-committee.
•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.
e Whether to move from a single highest year salary basis to a three year average salary
basis.
•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
II Whether to offer a one-time 5%salary increase in exchange for increasing employee
contribution from 1.5%currently as follows:
o Current employees pay 8%retirement contribution and stay in 2.5%@ 55 plan
o Future employees pay B%retirement contribution and move to 2%@ S5 plan or
2%@GOplan.
ATTACHMENT 6-40
•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.
•Determine how to ensure that any new pension plan does not require Social Security
coverage
Desired action Items:
•Examine and comment on assumptions in the Subcommitee's two prior reports.
•Confirm staffs data as submitted to the Subcommittee and the Consultant.
•Determine the City's actual turnover rate for the past 10 years.
•Determine if the a.nnuity percentage for 2.596 @ sS and 2%@ $5 even out at any age.
•Cite potential pension reform ballot issues (David Crane and Marcia Fritz or other
credible expected sponsors of pension refOrm initiatives IIke.ly to be proposed to
California voters)in the report.
•Explore the assumption and explain why it is not feasible or practical to move beyond
the concept ofsustainabiiity (i.e.,a defined contribution play).
•Estab.lish the credibility of the data and numbers.
•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
•Show the experience agencies with their own pension plans (e.g.,Orange County)hava
had.
•Gather hIstorical records of CalPERS contributions foru.nfunded future liability.
•Address the Issue which some raise that pension reform must come from the State
level.
•Beahle to say to staff,"Yes,these changes will cost you more but it will assure pian
sustainable.You don't want to be a mambet of a retirement plan that is not
sustainable."
•Also be able to explain the reasons that now exist which are likely and valid reasons
which now ptevent discontinuation of defined benefit plans in favor of defined
contribution plans.
Questions to answer by the Consulting Advisors:
•Ifthe City moves to a two tier plan (2.5%@ 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
o Variability I volatility of contribution ratesi'
o Unfunded future liability?Note:ltis expected that the Advisors must be
prepared to fully explain the Importance or lack of importance ana 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 (457
Plan)?
•Can a 2%@60Planbeenrichedbyaddingadeferred compensation component?
•Is it legal and otherwise advisable for the City to make contributions to a deferred
co.mpensation plan based on age or years of service (as an incentive for staff to work
beyond age 55)?
• A critical and important part of the consultants'advice includes a full description ahll
viable,legal and practical alternative retirement plans which reasonably considered for
adoption by the City.
Timeline:
Develop a draft report for review by the Coundl Subcommlttee.in advance of a final report
presentation for the September 6,2011 Council meeting.
ATTACHMENT 6-42
Pension Revision Whit!!Paper
Appendix 0 -Vested Rights of CalPERSMembers Manageml?rtt Partners
30
ATTACHMENT 6-43
Vested Rights of CalPERS Members
Protecting the pension promises made
to public employees
July 2011
ATTACHMENT 6-44
CalPERS Profile
The California Public Employees'Retirement System (CalPERS)is the
nation's larg~t public pCll$ion fund with l1SseU ofapproximately 5240 billion.
HClIdqu\\tterc:d in Sacr:unelltO,CaIPERS provid~retirement and hc:alth
bcnefi [services [0 more than 1.6 million members and 3,033 school and public
employe:l'$.The:Systcm also operates eight Regional OffiCeS located in Fresno,
Glendale,OrangJ:',Sacmmento,San Diego,San aernardinc,San Jose,and
\'<Iatnut Creek.Lcd by a 13·member Board ofAdministrarion.consisting of
mcmber·elettc:d.appointed,and ex officio membets,QIPERS mc:mbel'$hip
consists ofapproximately I.I million aCTive and inactive:membcnandmore
than 500.000 retirees,beneficiaries,and survivol'!from State.school and
public agencies.
Estnblished by l,:gislation in 1951.the SyStem became opcrationuJ in
1932 for the:purpose of providing a secure retirement to State c:mployc:c:s
who dediatC:their areers to public service.In 1939.new legislation allowc:d
public agency and c:lassi.fic:d school employees m join the:System for retirement
benefits.CaIPERS began administering heuJdl bc:m:fits for SUte employees
in 1962,and five years later.public agencies joinc:d the Health Program on
a comraCt basis.
A defined benefit retirement plan,CalPERS provides benefitS based
on :l member'syc:ars ofservice.age,and highest compeu5:ltlon.In addition,
benefitS are provided for disability and death.
Toda}'C:dPERS offers addirional progmms,including a deferred
compenstion retirement 5:lvings plan,member education services,and
an emploj'cr frust for po5t~rctirement benefits.Learn more at our website
at www.cuJper.s.ca.gov.
ATTACHMENT 6-45
Contents
I.Introduction .3
II.Overview:Member Benefits And Contributions.• 4
Ill.Overview:Employer Funding Obligations.. .. 7
IV.California Contract Clause as Applied to Public
Employees'Retirement Benefit Rights . ...•..•.8
V.Federal Contract Clause as Applied to Public
Employees'Rights in California..12
VI.CslPERS Members'Rights . . .... •.13
VII.The Role of CalPERS in Protecting Members'
Vested Rights ..16
VIII.Conclusion .. . . . ... . . • . ..17
ATTACHMENT 6-46
2 I Vested Rights of CalPERS Members
ATTACHMENT 6-47
I.Introduction
RL'Cem economic crises affecting the world's governments and markets have brought hscal
pressures an state and local budgets in California.Budgetary constraintS have:focused linen-
cion on the cose of providing public services.and no COSt has received more attention than the
compensation and benefits earned by our public employees.Commissions.poliricalleaders
and private citizens ail have weighed in on the subject.each proposing wide-ranging "reforms"
aimed at reducing theretirc:mC:At benefits earned by public servants.Proposals have included.
for example:moving to less advantageous benefit formulas.imposing caps on pensionable
compensation.dlanging the definition of pensionable compensation to exclude items that are
currently induded,lengthening the "final compensation"period on whkh benefits are calcu-
lated.restricting employees'rights to purchase additional service credit.lengthening eligibility
periods,increasing employee contributions and eliminating employer paid member contribu-
tions.Many of these proposals seek to apply d,ese "reforms"to currendyactive employees as
well as ri,ose who may be hired in the furure.
Understandably,this attention on me compensation and benefirs of members of the
California Public Employees'Retirement System C"CaiPERS")has raised concerns as to the
level ofassurance the law provides mat promised pensions will be available upon retirement,
C~IPER5 has prepared this paparior two purposes:
..To articulate the current state of 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 not intended to respond to any particular proposed legislation or initiative,
Rather.it is inrended to present CaIPERS'institutional views in the broader context Onts
primary governing laws:the California Public Employees'Retirement Law (GOV't Code
§§20000.er seq.)(the "PERL")and the California and United Stares Constitutions.The
merits and enforceability of:my new proposal must be analyzed on its own unique terms
and conditions.
Finally.although some of tlte general principles and aurhorities discussed in this paper
may be relevanr to plans CalPERS administers other than the Public Employee Retirement
Fund defined benefit plan,chis paper is not intended to address any issues related (0 the
CarPERS'ht."alrh benefits plans.defined contribudon plans.rhe Legislaror's Retirement
System or the Judicial Retirement Systems (I and Il).
Vested Rights of CalPERS Members I 3
ATTACHMENT 6-48
II.Overview:Member Benefits And Contributions
C:tIifornialaw dearly esmblishes chat public employee reriremenc benefits ate a form of
deferred compensation and pare of the employment conrmee.Rights co chis deferred compen-
sation are earned when the employee provides service:to the public employer.
By statute and contract.public employers.not CalPERS.decide how much of an
employee'scompensation will be paid currendy and how much will be deferred and paid in
the fueure.Simply put.employers grant che benefits owed co C.1.lPERS'members.CalPERS
in curn serves as the tru.n:ee ofthe trust created to fund these benefits,through the prudent
administl'l1tion and investmene of the retirement fund.
The rights of :til CalPERS members art':established by statute.In the elSe ofloc:tl agencies.
members'rights are also governed by the contract benveen ehe agency and CalPERS.When
contracting with CalPERS,loc:tl agencies may choose from a menu of options.Benefics for
CalPERS members are often the produce ofcollecrive bargaining.
This seceion provides a gener:tl overview of the core bendits earned by CalPERS
members.It is not intended to be 11 comprehensive description of aU benefics and rights
of all C:t!PERS members.
A.Service Retirement Allowance
Each CalPERS member earns service credit cowards a lifetime retirement allowance after
employmcnf,c:tlculated under a formula which accounts for the members years ofcredited
service,the member's "finlll compensation"and the member's age at retirement'.Each benefit
formula is commonly referred to as a specified percentage ofa member's "final compensation"
for each year ofservice.based on a particular age at retirement.For example,under a "2%
at 55"benent formula,a member receives 2%of his Or her "final compensllliion per year of
credited service.if that member retires at age 55.If the member retires earlier or later than age
55.the member receives a lower or higher percentage of"fjnal compensation,"according to
asraturory rable.For example,under the "State 2%at 55"mble.a member retiring at age 50
receives 1.1 %of "nnal compensation"per yellr of credited service.A member r.eriring ac age 63
or older receives 2.5%of "final compensation"per year of credited service.
As noeed,each formula applies a multiplier to i1 member's "final compensation."For some
members."final compensation"means the highest one-year average pensionable "compensation
earnable"that they earn during their careers.For other members,the highest annualized three-
year average "compensation eamable"that they (',1.m during their careers is used.In gener:tl
terms,"compensation earnable"includes the member's "payrace"(essenci:tlly base s:tlary)and
certain items of "special compensation,"which are established as pensionable by law or regula-
tion."Compensarion eamable"generally does nor include items such as overtime pay and
amounts that ate not available to employees in the same group or class of public employment.
4 I Vested Rights of CalPERS Members
ATTACHMENT 6-49
a.Disability Retirement Allowance
If a member has an injury or illness milt prevents the member from performing the customary
dudes of his or her regular position,the member may be eligible for 11 disability retirement.If
a member's disability is the result ofn job~related illness or injury,and the member is n school,
loal or State safety;State peace offic:erJ6refiglner,State industrial.or State patrol member.the
member may be emided to an industrial disability retiremenr.Local miscdlaneous membets
also may be eligible if their employer contraers with CalPERS to provide for an industrial
disability retirement.
. A member who is grameda disability retirement receives the greater of the service retire-
mt:or :dlowanct:(if eligible)or an allowance based on a specified formula applicable to rhar
member.A member who is gran red an indusrrial disability retirement allowance receives the
grc.'2ter of his or her service retirement allowance (if eligible)or a specified percentage of the
membet~"final compens:uion"(usually ;0%,but 60%for some members),plus an annuity
purchased with his or her accumulated additional conrributions.
"California law dearly·establishes that public employee
retirement benefits are a form of deferred compensation and
part of the employment contract."
C.Purchase of Service Credit
If they meet eligibility requirements.active members are entided to purchaseaddition:d
retirement service credit.which increases their retirement :dlowance.Addition:dly,where
eligible.members can purchase service credit for prior public service,milimry service and
certain adler r:ypesof service.The member's COSt to purchase additional service credit is
set by starute and is based 011 actuarial assumptions and methodologies determined by the
Board ofAdministration ("Board").
D.Death and Survivor Benefits
CalPERS provides benefits to the beneficiaries of active and rerired members upon me
member's death.Benefits and eligible recipic:nrs vary based on whether the membt!r wassrill
working at the time of death or was recired,and by the member's employer.occupation and
rhe specific provisions in the contracr berween CalPERS and the employer.Additionally.a
member may apr to have his or her retirement allowance reduced in order to increase the
benefits that will become payable to the member's beneficiaries after the::member's death.
Vested Rights 01 CalPERS Members 15
ATTACHMENT 6-50
E.Cost of living Adjustments
A member's (or bendici:uy's)initial allowance is subject to annual cost-of~!iving adjustments
("COLAs")that account for changes in the applicable COst ofIiving indc."each year.Members
and beneficiaries also may receive additional "Purchasing Power Protection"when annual
COLAs have been substantially eroded by inflation over time.
F.Member Contribution Rates
Members generally contribute portions of their paychecks towards the COSt of their future
retiremem benefits.These member contributions are established in various ways,including
among other b).StatutC,ordinance and memotnndttm of understanding.and they vary widely
based on such things as cite member's employer.occupation and bargaining unit,ifany.In
general.member comribution rates are established as a percentage of the member's monthly
compensation.With respeCt to member conrributionsestablished by statute under the PERL:
"The Legislature reserves the right to increase or otherw'ise adjust the rates of [member}COntri-
bution •..in amounrs and in a manner it may from time to time find appropriate."Some
member conctibudon rates also are expressly subjeCt to collective bargaining.
Some employers mlty choose to pay a portion or all of the retirement contributions other-
wise required of their employees.These payments rypically are negotiated during collective
bargaining and the law provides mat the employer may "periodically increase,reduce.or
c1imimm:"such payments.
G.Reciprocity
The "reciprocity"provisions of the PE.RL (and related provisions in the retirement:laws govern-
ing other California public retirement system)provide for certain reciprocal retirement benefits
for a person who works for tWO or more public employers during his or her career,with
membership in twO or more California public retirement:systems.
The prim:uy purpose of reciprocity is to "eliminateD the adverse consequences 11 member
might otherwise suffer when moving from one retirement system to another.""Reciprocity
provisions accomplish this in a number a ways,including.for c.'Cample,allowing a member to
use his or her highest compensation in any reciprocal system to determine rile compensarion
used to calculate benefits from all such systems.
6 I Vested RIghts of CalPERS Members
ATTACHMENT 6-51
IU.Overview:Employer funding Obligations
The Ctlifornia Supreme COUrt long ago established mat a promise of a pension made by
a public employer to its employees 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 regardless of how much money they have set aside for that purpose.
In order to ensure mat their promises are kept,me law requires Ctlifomia's public
employers to pre-fund the benefits they owe by making contributions to C:dPERS :dong
with the contributions of their employees.By investing me combined comributions of
members and employers.CaJPERS is able to pay all of the benefits as they come due.
.To successfully fund aU promised beneGts.the law requires the Board to maintain an
acmarially sound retirement fund.As one court explained:"Actuarial soundness of [CtlPERSj
is necessarily implied in the rotal concrnctual commirment.because a contrary conclusion
would lead to express impairment of employees'pension rights."Further.employees have a
vested right to statutorily required employer contributions,even where those contributions
are not linked to providing an "aCtuarially sound"retirement system .
.....a promise of a pension made bye public employer...is a promise the
employer must keep.In other words.public employers in Califbrnlaare legally
required to honor promises to current and former employees .....
The CaJifornia Constitution provides that the Board "sh:dl Uhave sole and exclusive
responsibility to lldminim:r the system in a mllnner thar will assure prompt deliver)'ofbenents
and related services to the participants and their benefidaries"and "consistent with the exclu-
sive fiduciary responsibilities vested in it,shall have the sole and exclusive power to provide
for actuarial services in order to ussure the competency of the wets of the public pension or
retirement system."The Bow hus authority to determine an actuariall)'sound rate orcontri-
bunoos chat.together with investment earnings,will "Msure the comperency ofthe ~ets"
ofC.llPE.RS such that all promised benefits are paid now and in the future.It is the Board's
exclusive responsibility to decermine the concdburions thac will be requIred of the participating
employers and the participating employers then have a mandatory "ministerial"duty to pay the
contributions chac the Board determines are necessary.This obligation will be quickly enforced
by the courts,by writ of mandate,if an employer fails to meet it.
As st3ted by the United Scates Supreme COUrt,a defined benefit plan "is one where the
employee,upon retirement.is entitled to a fixed periodic payment.The asset pool [available
to pay benefits]may be funded by employer or employee contributions,or a combination
of bach.Bur the employer typically bears the entire investment risk and ••.must cover any
underfunding as the result of a shortfallthar may occur from the plan's investments."
Vested Rights of CalPERS Members I 7
ATTACHMENT 6-52
IV.California Contrad Clause as Applied to Public
Employees'Retirement Benefit Rights
A "vested"benefit is one thae has matured into anirrevocahle contractual right:which cannot
be taken away or otherwise impaired without the member's conseor,except in el>tremely limit-
ed drcumscmces.A "non-vested"benefit,on the other hand,is one that has been promised
conditionally.Ie is generallraIterable or completely revocable by the appropriate authority
(usually the Legislature orrheemployer)without the member's ConSent.A public employee's
right to the retirement benefits earned during employment is generally a vested right.
California has a strong public policy,enunciated through published legaJ decisions over
the paSt half century,establishing thae public employee retirement benefits are contractual
obligations enrided to me protection of the "Contract Clausen of the State Constitution.
TIlat clause,found at Article I,section 9 of the California Constitution provides:"A ...law
impairing the obligation ofcontractS may nOt be passed."(Article 1,seCtion 10 of the United
States Consriturion similarly prohibits a stare from impairing the obligation of contracts.)
This means that an employee's vested pension righu may not be impaired except under
extremely limited circumstances.
The fundamental doctrine protecting California public employee pension rights is
succinctly scated:"A public employee's pension constitutes an element of compensation.
and u vested contracrual right to pension benefits accrues upon acceptance of employment.
Such a pension right may not be destroyed,once vested.without impairing a contractual
obligation of me employing public emity."
This doctrine has been applied and refined by dozens ofCalifornia ap(lellatc cases since
the 19405.Several general rules have emerged through this jurisprudence:
RUtE1:
Employees Are Entitled To Benefits In Place Ourfing Their Employment
Public employees obtain a vested right to the provisions of theapplietble retirement law
that 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 acdve CalPERS members,whether or not they have yet performed
the requirements necessary to qualifY for cenain benefits that arc parr ofthe applic.1ble retire-
ment law.for example.even ifa member has not yet satisfied the five year minimum service
prerequisite to receiving most service and disability benefits,the member's righe to qualifY for
those benefits upon completion of five years ofservice vesrs as soon as the member startS work.
The courtS have established that this rule prevents not only a reduction in the benefits that
have already been earned,but also a reduction in the benefits that a member is eligible to earn
during future service.For e.~ample.il ballot proposition thar purported to eliminate future
benefit accruals for legislators was held unconstitutional because legislators were entitled to
continue earning benefits under the law in place when they were first eleCted.
8 I Vested Rights of CalPERS Members
ATTACHMENT 6-53
RULE 2:
Employees Are Entitled Only to Amounts Reasonably Expected from the Contract
Vested rights protection does not extend to unreasonable or unanticipated windfaJls.In omer
words,the Contract Clause only protects the benentsthat are reasonably expected from the
contract,and does not protect "unforeseen advantages."
RUL£3:
Only Lawful Contracts with Mutual Consideration Are Protected by the Contract Clause .
"The con tract clause does not proteer cxpecmtionStMt ate based upon contracts mat are
invalid,unenforceable,or which arise without the giving ofcotlsidemrion.Nor does the
conuactclause protect expecrarions whichm based upon legaJ theories omer man contract,
such as quasi<ontract or estoppel."
For this reason,it is not an "impairment of contract"fOt CalPERS to correct an error by
a member,dlC member's employer or CalPERS'scaff that may have resulted in more mvorable
treatment to the member than the law allows.The PERL specifically authorizes CalPERS to
correct such errors.
RULE 4:
Future Employees Have No Vested Rights to the Current Statutory Scheme
Employees to be hired in the future do not have vesn:d rights to any particular retirement
benefits because they have not yet entered inco public employment.Thus,there is no constl~
turiana!impediment to unilaterally reducing (or even eliminating)retirement benefits for new
hires of public employers,even if the public employers historically have provided such bendits
to their employees as part of past employment conuacrs.
RULES:
Retired and Inactive MemberS Have Vested Rights to the Benefits Promised to
Them When They Worked
Like aceive employees,retirees and inactive members have a vested right to the benefits that
were in plnce when they were employed.However.retirees and inactive members generally
do not have vcsl'cd rights to beneficial changes created afu:r their employment terminates.
This is because a "member whose employment rerminated before enactment of a statute offer~
iug additional benefits does not exchange services for the right to me benefits."An exception
to the general rule that benefits grantedafier retirement are nor vested arises when the retiree
Vested Righlsof CalPERS Members I 9
ATTACHMENT 6-54
or inactive member gives up :lflother right acquired during employment in exdlange for the
right to receive post-employment improvements.In that case,the right eo a post-employmenc
improvement is generally a vested righe.
RUI.E6:
Active Employees'Vested Rights May Be Unilaterally Modified Only
Under Extremely Limited Circumstances
Active public employees have a vested right co a substantial pension.but,under limited
circumstances,the terms of their retirement rights may be modified before they retire.The
California Supreme Court has explained:"[V)esred contmcronl pension rights may be modified
prior to retirement for the purpose of keeping a pension system flexible to permit adjustments
in accord with chMging conditions Md at the same time maintain the integrity of the syStem.
Nonetheless,such modifications muse be reasonable,and to be sustained as such.alterations of
employees'pension rights must bear some materialre1at'ion to the theory ofa pension system
Md its successful operation,Md changes in a pension.,,1M which result in disadvantage to
employees should be accompanied by comparable new advantages.Further.it iii advanrnge or
disadvantage to the particular employees whose own conrrncrual pension rightS.already earned,
are involved which are the criteria by which modifications to pension plans muse be measured."
There are numerous California published decisions that discuss the circumstances under
which modifications to the vested rights of active employees may he permitted.There are four
primary steps for determining whether a modification is permissible:
(a)The lim step in determining whether a modification is permissible is to decennine if
the unmodified right isitl faer vested.meaning neither the employer nor the Legislature
reserved the right to change the benent.This is because the applicable retirement laws often
contemplate chMges.Indeed.the laws sometimes expressIyrcscrve to the employer or the
Legislature the right to modify or diminate certain benefits.A member's vcsted right is
only to the law as it is written ar rhe time of employment.including all ofits conditions.
(b)If a vested right exists,the lleXt step is to determine whether that vested right has been
changed in a way that is disadvantageous to the member.
(c)Int is determined that a vested right has been dl11nged in a way that is disadvantageous
to a member.cite next Step is to determine whether dlC:chMgc has a "material reladon
to the theory of a pension system and itS successful opemrion:'Ifit does not.then the
modification is not permissible.Case law is dear that "changes made co effect economies
Mel save the employer maney do bear some material relation to the theory of It pension
system and its successful operation."but,as discussed immediately below.this finding alone
is not sufficient to justifY a disadvantageous change to a member's vested rights.
10 I Vested Rights of CalPERS Members
ATTACHMENT 6-55
Cd)If the change bears a "material rdation to the theory ofa pension system and Its
successful opernrion."the final $fCP is to determine whecher the disadvantaged employees
wHl receive a "comparable neW advantage."When a cOUrt conducts this analysis.it looks
specifically at whar may be taken from and provided to the individually impacted employ-
ees.This member-by-member analysis.however.does not necessarily tal..~into account each
members unique personal circumstances.Thus.a member does not gee to pick and choose
which advantages or disadvantages will apply to him.and then argue that his vested rights
hnve been unconstitUtionally imp:tlreO.
RUt.E1:
The State's "Emergency"Powers Are Extremely Limited and Cannot Be Used
to Reduce tneBenefits that Have Been Promised
The courtS have carved out one narrow exception to the constitutional prohibition against
the impairmem ofcontracts,although there is no case where a courr has actually applied
thac exception in u way that has reduced the long tCl'm com of public retirement benefits in
California.Both the CaJifomiaand United Stares Supreme Courrs have held that "a substan-
tial impairment may be constitutional if it is "reasonable and necessary to serve an importaflt
public interest"during an emergency.The courtS pay time heed,however.to rhe "legisladve
assessment of reasonable and m..'Cessary."because "the Sratl:'s self-interest is at stake land aJ
governmental entity can always find a use forextm money.especially when taxes do not have to
be raised."Thus,the courrs apply a rigorous four-prong rest when determining if this limited
c.xception applies:(a)the legislative enactment must serve to protect "basic intere.sts of society;"
(b)there must be an "emergency justification for the enactment,"Cc)the enactment must be
"apptopriate for the emergency;"and Cd)the enactment must be "designed as a temporary
mcmure,during which rime the vested contract rights are not lost but merely deferred fora
brief period.interest running during me temporary deferment."
Thus,even if vested pension rights may be temporarily impaired in a.true emergency
siruadon,it is dear that the State's emergency powers do not enable it to solve its budgetary
problems by eliminating or reducing the l<mg term benefit promises it has made.
Vested Righis of CalPERS Members I 11
ATTACHMENT 6-56
V.federal Contract Clause as Applied to Public Employees'
Rights in Californ.ia
As stated above,it is dear that the "Contract Oausen of the Califnrnia Constirurion provides
broad prorecrions ofrhe vcsred pension righrsofCalifomia's public employees.Some cunene
"reform"proposals suggest changing the Stare Constitution to reduce or eliminate public
employee retirement benefits.in some instances even amending the Contract Clause itself.
Presumably,proponents ofthese measures assume that by amending the State Constitution.
they can avoid a constitutional challenge to their proposed impairment of vestt.'C!retirement
benefies.The assumption is misplaced,for twO reasons:
Pirst.if n proposed pension reform were to be enacted in the form ora constiturional
amendment.it \IIould still have to pass muster under the Contract Clause of the Smte
Constirurion.In other words.any new provision of the State Constitution would still be
subject to the requirement that it not impair the obligation of Contracts.Absent actUally
eliminating the entire Contract CI:tuse,the facr thar a pension .reform measure may be
adopted by way of:1 constitutional amendment would not assure irs v~l.lidiry.
"Some current 'reform'proposals suggest changing the State Constitution
to reduce or eliminate public employee retirement benefits ...Presumably,proponents
of these measures assume that by amending the State Constitution,they can avoid
a constitutional challenge to their proposed impairment of vested retirement benefits.
The assumption is misplaced .....
Second.even ifa proposed :tmendmenr e1imin:tted the State Constitution's Contract
Clause in its entirery,,!Je COlltrllet CltltlSt:ill the Ullitdd States Cr/llstitlltitm lUOJlldgiue rise to
the same protection of/Jested !c11sio"riglJts as the Stare Constitution.Most of the published
California cilses that haveanaJyzed the constitUtionality of modifYing vested pension rights
of public employees have not meaningfully distinguished between the Conmct Clause in the
California Constirution and the Contracr Clause in the United States Constirution.In 1991.
the California Supreme Court removed anydoubc that the United States Constitution protecrs
public employee pension rightS in California to the S3mC extent as the:California Constitution,
by explaining that prior C3Se law had "never rejected the federal clause as a source of protec-
tion"and "in light of prior California decisions consistently extending federal contract clause
protecrion to state public officers,it is simply lroo latc'to retreat from the dear implication of
those holdings.n
Therefore,amending the California Constitution likely would not open the way to lawfully
impairing vested pension rights.All of the rules discussed in Section IV above likely would still
apply,no matter how the California Constitution may be amended.so long as the Contract
Clause of the United Stares Consritution remains unchanged.
12 I Vested Rights of CillPERS Members
ATTACHMENT 6-57
VI.CalPERS Members'Rights
Based on the legaJ analysis set forth above,CnIPERS here articulates its undemanding of rhe
current stllte of vested rights b.w in California,as it applies to CalPERS members'benefits.
Anal)l?ing any particular member's vested rights.however,mUSt be done on a case-by-case
basis.Thus,nothing in this section is intended to enpress a view on any individual member's
rights or any specific legislative or c:onstiturional proposal.Funhel',the dis<:ussion in this
section is not intended to be exhaustive,bUt rather to provide a general overview of our
members'primary rights.
A.Vested Rights
In general,CaJPERS members have vested rights to:
»Have their service retirement allowance determined based on the benefit formula that
existed in the law when dley provided service,if they satisfy all eligibility requirements.
»Have their retirement allowance based upon all service credit tha.t they accrued by
providing service or by purchasing service credit.
»Have their retirement allowance atlculated using the definition of "final compensation"
that existed in the law when they provided service.
II Have their "final compensation"determined according to the definition of "compensation
earnable"that existed in the law when they provided service.
D Receive a disability allowance or an industrial disability allowance determined in
accordance with the law that existed when the!}'provided service,if the member satisfies
all eligibility requirements.
»Purchase service credit under me terms that existed in the law when they provided service,
if the member satisfies all eligibiliry requirements.
»Receive cost ofliving adjl..lStments to their retirement allowance under the terms that
e.xisted in the law when they provided service.This includes "Purchasing Power
PrOtection ...
»Have their beneficiaries receive death and survivor benefits provided under the rer.ms
that existed in the law when the member provided service.
»Receive the benefits of reciprocit)'that existed in the Inw when they provided service.
if dley satisfy all eligibility requirements.
»Withdraw their contributions,plus accrued interest,upon separation from employment.
when eligible for such a withdrawal.
»Have an acruarially sound retirement fund,which requires (a)that the CnIPERS Boatd
establish employer contribution races sufficient to maintain the acruarial soundness of
the system so tha.t the competency ofits assets is assured.and (b)that the employers
timely pay those rates.
Vested Rights of CalPERS Members I 13
ATTACHMENT 6-58
Because the above rignt'S ofCalPERS members are vested,they may only be modified
if such modifications ate "rel1Sonable,and to be sustained l1S such,alterations ofemployees'
pension rights must bear some material relation to the theory of a pension system and its
successful operation,and changes in a pension plan whkh result in disadvnntage ro employees
should be accompanied by comparable new advantages."
Pinally,there remains a question l1S ro whether vested right'S may be consensually modi/ied
through collective bargaining without offending the Conmtccs Clause.
B.Non-Vested Rights
In general,CalPE:RS members do not have vested rights to:
II Benefit improvementS that ate granted to them after they have terminated employment
(e.g.,the "ad hoc"COSt of living improvements granted to retirees bl1SCd upon retirement
date).unless such benefit improvementS have been granted in exchange for a vested right
that the retired members gave up voluntarily.
»Windfa.ll bendits that arise out ofdtcumsrances that were never contemplated to be part
of the employment comract.
»Payments in excess (jf those nUthorized by law,or nrising from an error by the member.
the member's employer or Ca.l.PERS.
II Perpetuation of the Board's discretionary actions affecting contributions and benefits.For
example,the Board may change its actuarial assumptions and methodologies for calculat-
ing the cost fur purchasing servia:credit.or for determining nctuarial equivalency (for a
variety ofpurposes).The Board has full authority to change actUarial assumptions and
methodologies in the sound Cltercise of itS discretion,and doing so dnes not impair any
vested right.even ifa change does not appear mvornble to CalPERSmembers.
»Continuation ora benefit or contribution rate where the benefit or contribution rate
is subjeCt to change under therermsof the applicable statUte.memorandum of under-
standing or employment contraet.
II Continued employment with their employer or the continuation of the hiswrical
compensation practices of that employer,even ifthose practices impaCt the calculation
of members'"compens:ltion earnable"and "final compensation.II Par example.an
employer may have historically paid certain premium amounts that qualifY as pension-
able "compensation earnable."\Vhile the member has a vested right to have such amounts
included in "compensation earnable"when paid.the member does not have a vested right
co continue to be paid those amounts.
14 I Vested Rights of CalPERS Members
ATTACHMENT 6-59
Beause the above rightS are nor "vested"under the Contract Clauses ofme California
and Uniced Stares ConstitUtions.there is no consritution.u impediment to rhe Legislature
or a member's public employer (or the Board,in the ase of its own discretionat')'acts)from
unilatera.lly .utering those rights.Unless and until such .urernrions are made.however.members
ofcourse have a right to receive all benefits provided to them under law.Funher.Other laws
may limit the ability to m.uec such alterations.For example•.uthough specific employment
practices may not be vested in perpetuity.the terms ofa collective bargaining agreement must
be honored during rhe period ofthat agreement's applicability.
Vested Riahls of CalPcRS Members I 15
ATTACHMENT 6-60
VII.The Role of CalPERS in Protecting Members'Vested Rights
Under the State Consocurlon and the PERl..the Board (which is the 13~memoer governing
body ofCalPERS)has the exclusive and plenary authority and fiduciary duty co adminiscer
CalPERS in a manner chat wiII llSSure prompt delivery of benefits and rdaced services to the
members and beneficiaries of the system.Board members are eicher elected by members of
the system.appointed·by Scate elecred officials at sit ex officio.
One court explained the fiduciary durics of members ofa public retirement board thusly~
"(A]trustee's primary duey ofloyaIty is to the beneficiaries ohhe trust.The trustee is under
a duty to the beneficiary to administer the trust solely in the interest of the beneficiary.The
truStee must not be guided by the interest of anyrhird person.This unwavering duey of '
complete loyalty to the beneficiary ofthe trUSt must be to the exclusion of the interest ofall
other pardes.Under the rule against divided loyalties.a fiduciary cannot contend that although
he had conflicting interests,he served his masters equally well or that his primary loyalty was
not weakened by the pun ofhis secondary one."
The California ConstitUtion provides:"A retirement board~dut)'to its participants and
their beneficiaries shall take precedence over any other duty."TIle California Supreme COUrt
has explained:"(Plension plans create a trust relatioMhip between pensioner beneficiaries a.nd
the trustees of pension fUnds wlto admInister retirement bendits and the trustees must exercise
their fiduciaty truSt in good faith and must deal mirly with the pensfl)ners~benelidarie$."
The Board will ace consistendy with these principles.With respeer to legislative and consti-
tutional proposals chal ma.y impact its members'vested rights.rhe Board wiU exercise its besc
Judgment and act appropriately under all existing cltcumstances.In doing so,the Board will
observe certain generol guidelines.including;
»CalPERS will make reasonable efforts to keep its members and beneficiaries apprised of
changes or potential changes to the law Ular may impact their righes and responsibilities.
»CalPERS will ensure thar funds spent in any process relating ro porential changes in
funding or benefit structures are appropriate expenditures of trust funds under Article
XVI.seecion 17 of the California Constitution and other applicable law.
»CalPERS'actions will be carried OUt in a manner that implemenrs the law.In the event
CalPERS questions whether changes in the PERL or othet applicable law may cause an
unconstitutional impairment ofits members'vcsredrighrs.CnJPERS will exercise irs best
judgment.based on all existing circumstances.as to whether to initiate or participate in
judicia.!ch;ulenges ro such changes.
16 I Vesled Rights of CalPERS Members
ATTACHMENT 6-61
VIII.Conclusion
C;UPERS is dedicated to administering tile system in a manner that witl ensure that tbe
promises made to CafFERS'members and beneficiaries will be kept.QUPERS acknowledges
the budgerary challenges mat the State and other public agencies tbroughout California are
presently facing,and will play an appropriate role in the addressing these challenges.In this
process,it will be vitally important for all interested parties to heed the legal rules protecting
the vested rights of CnlPERS'members,which have developed over tbe course of many
decadc.'S.\Vitbout due consideration of these rules,well-intentioned proposals may not achieve
the purposes for which they are designed;indeed.they may lead only to additional litigation
aNd administrative COStS,which can only increase the long term cast ofdelivering the benefits
thac have been promised ro CalPERS members.It is the hope of CalPERSthat mis paper will
provide guidance co all parties as they address these challenges.
Vested Rights of CalPERS Members I 17
ATTACHMENT 6-62
CalPERS Ilegal Office
Oillfomia PublleEmployass'
Retirement System
400 Q Street
P,O.Box 942701
Sacramento,CA 94229·2701
(916)795·3991
(916)795·3S07fax
TTY:(916)795.3240
ATTACHMENT 6-63
From:
Sent:
To:
Cc:
Subject:
Hi Ken
Dennis Mclean
Monday,August 20,20124:03 PM
Ken Dyda
Carla Morreale;Teresa Takaoka;Carolyn Lehr
FW:Register of Demands
Emilio has replied to your question.Feel free to contact him directly if you have any
follow-up questions.Your question and Emilio's reply will be provided to the Council as
Late Correspondence.
Thanks,
Dennis McLean
Director of Finance and Information Technology
City of Rancho Palos Verdes
Finance and Information Technology
30940 Hawthorne Blvd.
Rancho Palos Verdes,CA 90275
www.palosverdes.com/rpv
dennism@rpv.com -(310)544-5212 P -(310)544-5291 f
P Do you really need to print this e-mail?
This e-mail message contains information belonging to the City of Rancho Palos Verdes,
which may be privileged,confidential and/or protected from disclosure.The information
is intended only for use of the individual or entity named.Unauthorized dissemination,
distribution,or copying is strictly prohibited.If you received this email in error,or
are not an intended recipient,please notify the sender immediately.Thank you for your
assistance and cooperation.
-----Original Message-----
From:Emilio Blanco
Sent:Monday,August 20,2012 1:33 PM
To:Dennis Mclean
Subject:RE:Register of Demands
The bird survey is an annual requirement from the wildlife agencies for the migratory bird
treaty act,the National Community Conservation Plan (NCCP)and the Palos Verdes Peninsula
Land Conservancy for fuel modification work by Public Works.
Emilio Blanco
.It
Maintenance Superintendent
City of Rancho Palos Verdes
Public Works Department
30940 Hawthorne Boulevard
Rancho Palos Verdes,CA 90275
emiliob@rpv.com
310.544.5336
>
>From:<cprotem73®Verizon.net<mailto:cprotem73®verizon.net»
>Date:August 18,2012 2:58:40 PM PDT
>To:<finance@rpv.com<mailto:finance@rpv.com»
>Subject:Register of Demands
>
>What is the legal requirement for a bird survey costing $4,300 ?
>Who imposed the requirement?
>
>Ken Dyda
From:Matt Waters
Sent:Monday,August 20,20123:49 PM
To:Carolynn Petru
Cc:Carolyn Lehr
Subject:FW:Miss California USA updated info
Hi Carolynn,
I spoke with Ms.Lozano recently about her request to be officially recognized as Miss Rancho
Palos Verdes CA USA 2013.She shared that she would not be able to attend tonight's Council
meeting due to a prior conflict,but would be very willing to attend a future meeting.I asked her
about her significant volunteer and life experiences that related to the Miss California USA
contest and she offered the following information:
>Ms.Lozano was raised in Mexico and volunteered at an orphanage until she was 16
when her family moved to the United States.
>She spent several weeks volunteering in the New Orleans area after Hurricane Katrina.
>She said those experiences inspired her to find a way to try and make a difference both
locally and globally.
>She has volunteered many times in Downtown Los Angeles passing out food and
supplies to the homeless and needy.
>Ms.Lozano has worked with special needs and underprivileged children as a student at
Marymount College.
>She is concerned about global access to clean water sources and is working with the
World Wide Water organization to combat this health catastrophe.
>She is exploring possible fund raising approaches to increase access to clean water.
>She graduated from Palos Verdes High School,currently attends Marymount College,
and plans on attending law school.
Ms.Lozano reported that she went through several interviews before being designated as the
Rancho Palos Verdes representative by Miss California USA officials.Miss California USA
officials verified that contestants apply directly with the pageant and go through a series of
interviews.If selected,contestants are allowed to choose their own titles,since Miss USA does
not run preliminary pageants in advance of their state pageants.Miss California USA allows only
one contestant from a specific City or organization such as Rancho Palos Verdes or Torrance
Memorial Hospital.Ms.Lozano is the sole Rancho Palos Verdes representative for the
California pageant but she cannot refer to herself as "Miss Rancho Palos Verdes CA USA 2013"
without City Council approval.The California Pageant will be held in January,2013.
Ms.Lozano said that knowing her official title would help her with advance preparation details
such as pursuing sponsorship and ordering her pageant sash,but said there is no hard and fast
deadline for having her request to be named Miss Rancho Palos Verdes CA USA 2013 either
approved or denied.
Matt Waters
Senior Administrative Analyst
City of Rancho Palos Verdes
Finance and Information Technology
30940 Hawthorne Blvd.
Rancho Palos Verdes,CA 90275
:Y.
www.palosverdes.com/rpv
mattw@rpv.com -(310)544-5218 P -(310)544-5291 f
Page 1 of 1
Carla Morreale
From:
Sent:
To:
sharon yarber [momofyago@gmail.com]
Sunday,August 19,2012 2:27 PM
CC
Subject:Miss RPV?!?!?!?!?!?Huh?!?!?!?
Hello Council Members,
We have not held a beauty contest in RPV of which I am aware to select a Miss Rancho Palos
Verdes.If we did,please let me know when and where the contest occurred so I may have the
privilege of ascertaining independently who the winner was.
Our new and improved RULES of PROCEDURE,on which I spent untold numbers of hours
working,does NOT allow CONSENT CALENDAR items to include matters that have NOT
previously been the subject of a NOTICED public meeting.Ifthis was a matter previously duly
noticed please'let me know when this meeting occured.To my knowledge no notice was given,
no contest was held and it appears to me that someone with a hell of a lot of chutzpah is asking
you to simply agree to name her as Miss RPV to potentially improve her chances of being a
viable candidate to obtain a scholarship from the organization sponsoring this beauty contest she
seeks to win.
As such (typical staff lingo),it is inappropriate for you to act on this matter on Tuesday.
Sharon Yarber
8/20/2012