HomeMy WebLinkAboutCity Council - 2004-71 RESOLUTION NO. 2004-71
A RESOLUTION OF THE CITY COUNCIL
OF THE CITY OF HUNTINGTON BEACH
LEVYING A RETIREMENT PROPERTY TAX FOR
FISCAL YEAR 2004/2005 TO PAY FOR PRE-1978
EMPLOYEE RETIREMENT BENEFITS
WHEREAS, since 1948,the City has provided for employee pensions through a contract
with the California Public Employees Retirement System(Ca1PERS). Pursuant to the 1966 and
1978 Charter, the voters of the City authorized the City Council to pay for the cost of employee
pensions through a separate retirement property tax. For example, Section 607(b)(2) of the 1978
Charter provides that the City may impose a retirement tax"sufficient to meet all obligations of
the City for the retirement system in which the City participates;"and
Proposition 13 was added to the California Constitution in 1978. 1t limits the local
property tax to 1%of assessed value, except that the City may levy an override tax in excess of
1%to pay"any indebtedness approved by the voters prior to July 1, 1978;"and
In the case entitled Carman v. Alvord, 31 Cal. 3d 318 (1982),the California Supreme
Court determined that under Proposition 13, an override property tax in excess of 1% of assessed
value may be levied to pay for employee pension benefits the voters approved prior to 1978.
Consequently, after Proposition 13,the City Council continued to levy an override tax to pay for
employee pensions. Since 1983-84, Revenue and Taxation Code Section 96.31(a)(4)has limited
the City to levying a maximum override tax of$0.04930 per$100 of assessed value to pay for its
retirement system; and
For many years after 1978,there was no question whether the City could levy the full
0.0493%tax rate because the cost to the City for pre-1978 pension benefits always exceeded the
tax proceeds. However, when the annual cost for pre-1978 benefits declined after 2000 due to,
among other things, higher than expected investment earnings, the question arose whether the
Override tax could be used to pay for pension benefit improvements the City implemented after
1978. In Howard Jarvis Taxpayers Association, et al., v. County of Orange, and City of
Huntington Beach as Real Party in Interest, Orange County Superior Court Case No. 81-87-80,
Court of Appeal Case No. G029292, the Court held that the override tax may only be levied to
pay for retirement benefits the City contracted for before July 1, 1978, and may not encompass
the benefits the City added after the passage of Proposition 13; and
Prior to July 1, 1978, the City entered into collective bargaining agreements with
employee associations representing its safety employees providing that, effective July 1, 1978,
they would be entitled to a CalPERS retirement benefit known as"2% @ 50;" and
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Resolution No. 2004-71
On June 30, 1999,pursuant to collective bargaining agreements the City had entered into
with its safety employees, the City provided its safety employees with the CalPERS retirement
benefit known as "3% @ 50;"and
For fiscal year 2004/2005, CalPERS requires the City to contribute 25.144%of safety
employee payroll as the City's employer contribution. However, under the Jarvis decision,the
City only may levy an override tax sufficient to pay the portion of the 25.144%attributable to the
pre-1978, 2% @ 50 CalPERS contract,but not the 3% @ 50 CalPERS contract; and
There is no single means to precisely calculate what the City's payment to CalPERS
would have been in 2004/05 had the City not added the 3% @ 50 benefits in 1999. However,
there are reasonable actuarial methods to identify the incremental cost of changing the safety
employee retirement plan from 2% @ 50 to 3% @ 50; and
The City has received a report from John Bartel of Bartel Associates, a professional
actuary experienced in pension calculations, entitled, "City of Huntington Beach CalPERS
Actuarial Issues—"Cost" of 3% @ 50," dated August 10, 2004. The Report is designed to
identify one or more reasonable methodologies to determine the cost of 3% @ 50. The Bartel
Report identifies two components to determining the cost of 3% @ 50. First, there is the
"normal cost,"which represents the present value of future benefits employees earned during the
current year. Second, there is the "prior cost"that represents the incremental increase in the
present value of assets needed to fund benefits that present and former employees earned in
previous years due to the 3% @ 50 amendment; and
The Bartel Report recommends that the cost of 3% @ 50 is the normal cost, but not the
prior cost, because CalPERS had made a determination that the prior cost would be paid for with
excess assets in the City's account when the increased pension benefit was granted in 1999, due
largely to unexpectedly high investment earnings in the late 1990s. Under this approach,the cost
of 3% @ 50 is 4.6% of safety payroll. However,the Bartel Report also suggests alternative
reasonable methodologies for determining the cost of 3% @ 50 by including some or all of the
prior cost. One methodology would set the cost of 3% @ 50 at 6.5% of safety payroll, and the
other would set it at 9.1% of safety payroll; and
In 2003/2004, CalPERS required the City to contribute 9%of safety employee payroll as
the City's employer's contribution. In order to set the tax override, the City subtracted the 4.6%
normal cost of 3% @ 50 from the 9%to set the override tax at the equivalent of 4.4%of safety
employee payroll. The cost to the City of 4.4%of safety employee payroll for 2003/2004 was
$1,279,113, and consequently, the City set the override tax for 2003/2004 at$0.00696 per $100
of assessed value, which amount was designed to yield $1,279,000; and
Subsequently, the City Council decided to request an opinion from the California
Attorney General regarding the correct method to implement the Jarvis decision. Consequently,
the $1,279,000 raised through the 2003/2004 tax levy has been set aside pending the Attorney
General's opinion; and
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Resolution No. 2004-71
Assemblymember Harman submitted a request for an Attorney General opinion on behalf
of the City on April 14, 2004. The City will be forwarding the Bartel Report to the Attorney
General shortly to assist in the preparation of the requested opinion. Although the City believes
the Attorney General will conclude the City Council was well within its discretion to establish
the cost of 3% @ 50 as 4.6% of safety payroll,the Council recognizes the Attorney General
might conclude that the cost is as high as 9.1%of safety payroll; and
Pending receipt of the Attorney General opinion,the City Council will set the override
tax rate for 2004/2005 at $0.00696 per $100 of assessed value, the same rate imposed for
2003/2004, which will yield approximately $1,387,710 in revenues. This amounts to an override
tax of approximately $7.00 per$100,000 of assessed value.
[Alternative: Pending receipt of the Attorney General opinion,the City Council will set
the override tax rate for 2004/2005 assuming that the cost of 3%@ 50 is 9.1% of safety payroll.
Subtracting 9.1%,plus the 4.4%over-collected in 2003/2004 from the 25.144%of safety
employee payroll that Ca1PERS requires the City to contribute for fiscal year 2004/2005 yields
11.6%of safety payroll. The estimated cost to the City of 11.6%of safety employee payroll for
2004/05 is $3,256,000. A retirement property tax levy sufficient to raise this amount of money is
$0.01507 per $100 of assessed value. This amounts to an override retirement tax of
approximately$15.07 per$100,000 of assessed value; and]
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Huntington
Beach that a retirement property tax levy of Zero and 0.00696/100h Dollars ($0.00696)per $100
of assessed value shall be levied for employee retirement costs for Fiscal Year 2004/05, and the
remainder of the Zero and 0,04234/100th Dollars ($0.04234) per $100 of assessed value levy
authorized under Revenue & Taxation Code Section 96.31(a)(4) is suspended for Fiscal Year
2004/2005:
[Alternative: NOW, THEREFORE, BE IT RESOLVED by the City Council of the City
of Huntington Beach that a retirement property tax levy of Zero and 0.1507/100b Dollars
($0.01507) per $100 of assessed value shall be levied for employee retirement costs for Fiscal
Year 2004/05, and the remainder of the Zero and 0.03423/100th Dollars ($0.03423) per$100 of
assessed value levy authorized under Revenue & Taxation Code Section 96.31(a)(4) is
suspended for Fiscal Year 2004/2005.
BE IT FURTHER RESOLVED that to the extent the 2004/05 levy actually produces
more or less revenues than the actual cost of 11.6% of safety employee payroll,then the City
Council shall adjust the 2005/2006 override tax rate to recover the shortfall or refund the excess.]
BE IT FURTHER RESOLVED that the City Council declares that although it is
suspending a portion of the retirement property tax for Fiscal Year 2004/2005, it retains the
authority to levy the tax in future years up to the rate of$0.0493%per $100 of assessed value.
04reso/property tax override/8/12/04 3
Resolution No. 2004-71
PASSED AND ADOPTED by the City Council of the City of Huntington Beach at a
regular meeting thereof held on the 16th day of August 2004•
ATTEST: APPROVED AS TO FORM:
Ci lerk ty Attorney �K t,z,(0�z' ',
AND APPROVED: INITIATP16LND APPROVED:
ity Adm#iistrator Director Administra ive Services
04reso/property tax override/g/12/04 4
Res. No. 2004-71
STATE OF CALIFORNIA
COUNTY OF ORANGE ) ss:
CITY OF HUNTINGTON BEACH
1, JOAN L. FLYNN the duly appointed, qualified City Clerk of the
City of Huntington Beach, and ex-officio Clerk of the City Council of said City,
do hereby certify that the whole number of members of the City Council of the
City of Huntington Beach is seven; that the foregoing resolution was passed
and adopted by the affirmative vote of at least a majority of all the members of
said City Council at an regular meeting thereof held on the 16th day of
August, 2004 by the following vote:
AYES: Sullivan, Coerper, Green, Boardman, Cook, Houchen
NOES: None
ABSENT: Hardy
ABSTAIN: None
12�-
ty Clerk and ex-off ex-offi(9 Clerk of the
City Council of the City of
Huntington Beach, California