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HomeMy WebLinkAboutCouncilmember Item - Councilmembers Semeta and Peterson - A 0 �� ti CITY OF HUNTINGTON BEACH c � City Council Interoffice Communication To: Honorable Mayor and City Council Me Tbers From: Lyn Semeta, City Council Member & Erik Peterson, City Council Member Ep Date: April 10, 2017 Subject: CITY COUNCIL MEMBER ITEM FOR THE APRIL 17, 2017, CITY COUNCIL MEETING—APPROVAL OF A CITY POSITION OF SUPPORT ON LEGISLATION RELATED TO PENSION REFORM STATEMENT OF ISSUE: California is heading toward a fiscal crisis. We're facing the high cost of retiree medical healthcare, massive unfunded liabilities for public employee pension benefits, the recently passed 'Secure Choice' public retirement plan for private business (which is a candidate for abuse), and a $1.6 billion budget deficit. It is time for California to demonstrate fiscal integrity and reform California's failing fiscal infrastructure. It is in the best interest of all Californians to encourage pensions that provide reasonable retirement benefits for our public workers. Public employees play a critical role in serving our residents and keeping us safe. These employees have a reasonable expectation that when they retire, funds will be available to pay their pensions. It is vitally important to provide a fair, workable plan to pay down the accumulated pension debt as quickly as possible to reduce future obligations so that cities can meet their future obligations to employees. Growing unfunded public employee pension obligations will have serious ramifications for future generations unless changes are made to California's public employee retirement systems. California has more unfunded liabilities than any other state. Recent reforms were a great start to addressing California's pension crisis; but substantial changes are still needed. Huntington Beach, like many municipalities, is facing huge increases in payments to CalPERS for our employee pensions due to the Fund vastly overestimating its assumed rate of return for several years. For the 2015-16 fiscal year, CalPERS planned for a 7.5% rate of return but only managed to achieve 0.6%. The shortfall has led to CalPERS requiring increased payments from cities. Huntington Beach estimates we will owe approximately 35.4 million in fiscal year 2016-17. The cost will rise and is anticipated to increase to approximately 65 million in 2022-23. The rising cost of pension liabilities will increasingly crowd out the availability of funds to pay for infrastructure, park repairs, and improvements and necessary services including public safety. Senator John Moorlach has introduced a fiscal reform legislative package to minimize California's exposure to a growing financial disaster and address the CalPERS related problems. 2S �` � ,4�e� Tv Zi �)�Fs,6; v7- 'M C'oc�c,� 47- CCM Item for the April 17, 2017, City Council Meeting Page 2 April 10, 2017 RECOMMENDED ACTION: Approve a City Position of Support on the following legislation pending before the State Legislature: Senate Constitutional Amendment 1: No Secure Choice Bailout SCA 1 would prohibit California taxpayer funds from being used to fund the newly created California Secure Choice Retirement Savings Program or cover any potential unfunded liabilities. Senate Constitutional Amendment 8: California Rule SCA 8 gives the legislature and public pension systems the ability to adjust public employees' retirement benefit formulas on a prospective basis without impacting any benefits earned. Senate Constitutional Amendment 10: Pension Transparency SCA 10 will prohibit public employers from increasing retirement benefits for their employees without two-thirds voter approval. Senate Bill 32: Public Employees' Pension Reform Act of 2018 SB 32 establishes the California Public Employees' Pension Reform Act of 2018 (PEPRA II) which continues substantial reform to California's broken public employee pension system began in 2012. Senate Bill 454: Retiree Medical Healthcare Reform SB 454 will make reforms to retired state employee medical healthcare including requiring the Annual OPEB Cost be 100% funded; eliminate the Other Post-Employment Benefits 50/50 cost- share-split between the state and its employees, and require 100% of the benefit be paid by the state; and require all state employees to use the 80/80 formula for basic health benefit plan premiums. Senate Bill 681: Local Pension Control SB 681 will give local jurisdictions the ability to leave their contracts with the California Public Employees' Retirement System (CaIPERS) for their employees' retirement plans without being excessively charged or penalized. xc: Fred Wilson, City Manager Ken Domer, Assistant City Manager Robin Estanislau, City Clerk Lori Ann Farrell Harrison, Chief Financial Officer Michele Warren, Director of Human Resources CAPITOL OFFICE g'' '� 'g 4} ry CGMMITTEES STATE CAPITOL (� gg "�'}"('t"µ y,'Yt+;b' �g � � 0.6.1tL JUDICIARY SACRAMENTO.CA 95874 ..'6-tA a-lat.4 A�LGC C-i. VICE CHAIR (916)651-4037 BUDGET&FISCAL REVIEW DISTRICT OFFICE `"'5r A'q GOVERNANCE&FINANCE 940 SOUTH COAST DR. s SUITE 785 �t� :r ,__G PUBLIC EMPLOYMENT AND COSTA MESA,CA 92626 �,,�. _i,,, _. „��r RETIREMENT SENATOR JOHN M. W. MOORLACH THIRTY-SEVENTH SENATE DISTRICT FACT SHEET Senate Constitutional Amendment 1 — No Secure Choice Bailout BILL SUMMARY SUPPORT Senate Constitutional Amendment 1 would prohibit • None on file California taxpayer funds from being used to fund the newly created California Secure Choice OPPOSITION Retirement Savings Program (SB 1234, 2016), aside from initial startup costs for the program, as • None on file anticipated in the statute. This measure will neither prevent nor prohibit the Secure Choice program from being established or operating. This measure CONTACT merely ensures that California taxpayers do not cover the costs and/or unfunded liabilities for a Eric Dietz, Policy Consultant state-run retirement system for private-sector eric.dietz@sen.ca.gov, (916) 651-4037 employees. Proponents of this program claimed that no state money would be used to fund Secure Choice. Because statute can be changed with a simple piece of legislation, this measure has been introduced as a constitutional amendment to ensure that promise is kept and no extra financial burden is passed along to California taxpayers. ISSUE BACKGROUND Senate Bill 1234 (De Leon, Chapter 804, statutes of 2016) created the Secure Choice Retirement Savings Program, a defined contribution, individual retirement account (IRA) that mandates private employees participate through payroll deduction into a retirement savings account managed by the state. The program requires employees to contribute up to 8% of their salary into their newly established personal retirement plan. 11B 7- Item 9. - 3 C: -OL 7 F(CE _ _ COMMITTEES STATE CAPITOL (/j' i'�' 'f' �'f JUDICIARY SACRAMENTO.CA OSS14 +'` '�-^ >- �^ � VICE CHAIR f 916,651-4037 BUDGET&FISCAL REVIEW —TRI:.: Cr�lcEI='1=qt. GOVERNANCE&FIN.ANCE 940 SOUTHI COAST OR. 4 � SUITE 785 �e'r.st ix� PUBLIC EMPLOYMENT AND COSTA MESA 6 CA 92b2 `F3- 3 RETIREMENT -, , ) 1 �711�662 6050 SENATOR JOHN M. W. MOORLACH THIRTY-SEVENTH SENATE DISTRICT FACT SHEET Senate Constitutional Amendment 8 —"California Rule" pension plans to reasonably reduce future benefits will SUMMARY help keep plans sustainable and keep local governments Senate Constitutional Amendment 8 gives the legislature solvent. and public pension systems the ability to adjust public employees' retirement benefit formulas on a prospective California's public pension systems currently have over basis.' $202 billion in unfunded liabilities.2 The California Public Employees' Retirement System (CaIPERS), the nation's BACKGROUND largest public pension fund, has not reached its assumed The "California Rule" was created by judicial fiat when the rate of return for several years.3 For the 2015-16 fiscal California Supreme Court issued an opinion in 1955 on year, CalPERS planned for a 7.5% rate of return, but only Allen v. City of Long Beach. The Court ruled that future managed to achieve 0.6%.4 This shortfall equals nearly$28 pension benefits can be changed, but only if a comparable billion in liability-equal to almost 20%of Governor or better benefit is offered.This means public employees' Brown's general fund budget. benefits become a vested right at the moment of hire. Essentially benefits can only ratchet up and never be CalPERS has fallen nearly$50 billion short in the last two decreased in the public sector. years on its investment returns; California has an unfunded liability of$77 billion for retiree medical Since then, in order to provide a sustainable pension healthcare, and the recently released state budget shows system, municipalities have attempted to change vested that we have a $1.6 billion deficit.5 6 Therefore, it is more employee benefits but have been unsuccessful-until last important than ever for us to find a way to minimize the year when the California I"District Court of Appeal ruled state's massive pension obligations. in the Morin Association of Public Employees v. Morin County Employees'Retirement Association case("Marin SCA 8 gives us that ability. Decision"). In a truly forward-thinking decision,the Court found that public retirement benefits can be reduced. SUPPORT • None on file This decision was appealed by the Marin Association of Public Employees and ultimately granted review by the OPPOSITION California Supreme Court.The high court has not yet • None on File scheduled a hearing date. CONTACT THIS BILL Eric Dietz, Policy Consultant California needs to clarify the state's constitution and eric.dietz@sen.ca.gov, (916) 651-4037 provide tools to strengthen its fiscal integrity. SCA 8 gives pension systems the ability to change benefits going Z CalPERS 2015-16 CARF, CaISTRS 2016 CARF, UC Retirement forward. It does not eliminate pension benefits already Plan Actuarial Valuation Report 2014 earned by a public employee. The employee is entitled to 3 CalPERS 2015-16 CARF every benefit accrued to the point of the change. Allowing 4 CalPERS 2015-16 CARF 5 http://www.ocregister.com/articles/announced-737337- office-billion.html 1 Marin Assn. of Public Employees v. Marin County 6 http://www.sco.ca.gov/Content- Item 9. - 4letirement Assn., 2 Cal.App. 5th 674 HB -2 78-cages/ARD/AV Report June 30 2016.pdf CAPITO_OFFICE ' r �` "l" gyg��g COMMITTEES STATE CAPITOL (@ 1 q y'y4"t+}'�'�cy- � .L� L.R�4lt� JUDICIARY SACRAMENTO,CA 95814 ti.',,;�a-1�-11.$$j.4.ate C�C VICE CHAIR (916)651-4037 BUDGET&FISCAL REVIEW DISTRICT OFFICEP'/°"'S y'�?'A)., GOVERNANCE&FINANCE 940 SOUTH COAST DR. SUITE I85 +%u� '. PUBLIC EMPLOYMENT AND COSTA MESA,CA 92626 .X�'i Ali RETIREMENT (714)652-6050 SENATOR JOHN M. W. MOORLACH THIRTY-SEVENTH SENATE DISTRICT FACT SHEET Senate Constitutional Amendment 10 — Public Pension Transparency BILL SUMMARY that any increase to pension benefits must also be passed with a two-thirds voter approval from the Senate Constitutional Amendment (SCA) 10 will prohibit electorate of the applicable jurisdiction. public employers from increasing retirement benefits for their employees without two-thirds voter approval. This constitutional amendment does not prohibit public employees from receiving additional retirement ISSUE BACKGROUND benefits. SCA 10 simply requires approval from the very taxpayers who are going to be responsible for paying Growing unfunded public pension obligations will have the generous public employee retirement benefits such serious ramifications for future generations unless as increased retirement formula, cost-of-living changes are made to California's public employee adjustments, and reduced retirement age. retirement systems. California has more unfunded RELATED LEGISLATION liabilities than any other state.' Recent reforms were a great start to addressing • Measure J, Orange County. Passed in 2008 with California's pension crisis; but substantial changes are over 75%voter approval. still needed. Additionally, taxpayers who bear a • Measure B, San Jose. Passed in 2012 with nearly significant cost of public employee pensions should 70%voter approval. • Proposition B, San Diego. Passed in 2012 with over have a voice if those costs are increased. 65%voter approval. It is certainly in the interest of all Californians to • California Public Employees' Pension Reform Act of encourage pensions that provide reasonable retirement 2013. benefits for our public workers. It is also very important • California Public Vote on Pensions Initiative (2016). to provide a fair, workable plan to pay down the Proposed constitutional amendment,failed to make accumulated pension debt as quickly as possible—and 11/8/2016 ballot. to reduce future obligations. By requiring two-thirds voter approval for increased retirement benefits the SUPPORT legislature would be taking a very important step toward fiscal responsibility. • None on file THIS BILL CO-AUTHORS Unions negotiate with elected officials for increased • None on file retirement benefits and pay raises. This bill requires CONTACT https://www.alec.org/app/uploads/2016/10/2016-10-13- Eric Dietz, Policy Consultant Unaccountable-and-Unaffordable.pdf(page 8) eric.dietz@sen.ca.gov, (916) 651-4037 HB -2 i9- Item 9. - 5 CAPITOL OFFICE COMMI'T'T"EES STATE CAPITOL C�1I V1r�[`�" �" _IUDICIARY SACRAMENTO.CA 95814 `�-�'a A w^�"�'"rui tate v: t ate VICE CHAIR (916)651-4037 BUDGET&FISCAL REVIEW DISTRICT OFFICE �'q} GOVERNANCE&FINANCE 940 SOUTH COAST"DR. �c.x- 13��s ' �, PUBLIC EMPLOYMENT.AND SUITE 185 al -," . IsI � &1 o RETIREMENT COSTA MESA,CA 92626 1714`662605p �4aGdI��� SENATOR JOHN M. W. MOORLACH THIRTY-SEVENTH SENATE DISTRICT FACT SHEET Senate Bill 32 — CA Public Employees' Pension Reform Act of 2018 BILL SUMMARY 9 Require CalPERS to reduce its unfunded liabilities to 1980 levels; to be achieved by 2030. Senate Bill 32 establishes the California Public Employees' Pension Reform Act of 2018 (PEPRA II) ISSUE BACKGROUND which continues substantial reform to California's broken public employee pension system began in 2012. It State pensions are funded by regular deductions from addresses the following: public employees' paychecks and contributions made by the employer, the state along with anticipated returns on • Establishes a Citizens' Pension Oversight investments as determined by actuarial analysis. Committee to review pensions year by year, and CalPERS invests the money to cover future benefits report o the public on actual pension costs and balancing contributions and benefit payouts. The obligations; • Bases final compensation for all public employees employee contribution, typically determined through collective bargaining, remains fairly constant. The on an average of five of highest years' salary; employer contribution fluctuates based on CalPERS • Prohibits or"freezes"the ability for cost-of-living- investment returns.' adjustments until CalPERS and CaISTRS are 100% funded; In the past, like any investments system, CalPERS • Requires pension boards to create a defined experiences normal ups and downs in the market. It benefit/defined contribution hybrid pension plan for plans for the good years, and the bad. However, in the new employees who opt-into the system; late 1990's, during the "dotcom era" CalPERS was • Requires that any employee who separates from the briefly overfunded which meant its assets were greater state pension system for a different job and returns than its liabilities. The legislature decided to take after more than one year be re-classified in that advantage of that surplus and pass substantive benefit increases to public employee's pension plans in Senate pension system as a "new employee;" Bill 400. Believing the increases would never impose • Requires CalPERS to limit special compensation new costs onto the taxpayer; SB 400 easily cleared the categories by significantly narrowing its list of special legislature and was signed into law by Governor Gray compensation; Davis. • Defines pensionable pay as "the normal monthly rate of pay or base pay" for all public employees; Within a few years of passing SB 400, the economy took • Requires pension boards to narrow the "safety a turn for the worse and the market collapsed. Due to employees" classification to include only employees miscalculations in assumed rate of returns by CaIPERS, who regularly perform their duties at great risk and the gap in pension funding continued to grow and the who are in harm's way; return on investment that CalPERS assumed did not • Requires CaISTRS and CalPERS to build/increase materialize. Additionally, because of the retroactive funding levels by 10% each year until the systems are 100% funded; ' http://www.latimes.com/projects/la-me-pension-crisis- davis-deal " Item 9_ - 6sheet HEM -22so- Page 1 nature of the pension benefits, the overfunded system quickly became an expensive unfunded liability which continues to costs California taxpayers billions of dollars. The California Public Employees' Pension Reform Act (PEPRA)was approved in 2012 and took effect January 1, 2013.2 In 2012, the legislature's intention was principled. Unfortunately, the state of California is only SUPPORT making the minimum required annual contributions into its retirement plans and CalPERS alone has fallen • None on file behind nearly$50 billion in the last two years on its investment returns. OPPOSITION The original PEPRA law had several weaknesses. • None on File Unfortunately the reform legislation has had a negligible CONTACT impact to truly reduce— or even constrain - public pension costs and limit further unfunded liabilities. SIB 32 seeks to continue fixing the problem, consistent with Eric Dietz, Policy Consultant Governor Brown's original plan. eric.dietz@sen.ca.gov, (916) 651-4037 Separately, the state pays for lifetime health insurance for retirees who worked at least 20 years.3 California has an unfunded actuarial liability of nearly$80 billion for retiree medical. Promises to pay for the medical costs of retired state employees will come due. California needs to make a better effort to make sure our promises to our workers. Z https://www.calpers.ca.gov/page/employers/policies-and- procedures/pension-reform-impacts 3 http://www.latimes.com/proiects/la-me-pension-crisis- davis-deal SIB 32 Factsheet HB -28 I- Item 9. - 7 _, _ CAP170L C Flf F COMMITTEES STAT i E CAPITOL t JUDICIARY SACRAMENTO.CA 95814 Ll r1�`a t a t e ;^�`+ �I-Cate VICE CHAIR 1916,651 4037 BUDGET&FISCAL REVIEW" - "T-IT or. -E i�Se1q) GOVERNANCE Sr FINANCE 940 SOUTH COAST DR. SUITE 7a5 (J - PUBLIC EMPLOYMENT AND k x _, �. jl COSTA MESA,CA 92526 I �� � , RETIREMENT SENATOR JOHN M. W. MOORLACH THIRTY-SEVENTH SENATE DISTRICT FACT SHEET Senate Bill 454 — Retiree Medical Healthcare Costs SUMMARY OF OBEBs GOAL Public employees typically receive two types of SIB 454 has three goals: retirement benefits: pension and non-pension. The • Require the Annual OPEB Cost (AOC) be 100% pension benefit is income based on a formula decided funded. on when the employee was first hired. Non-pension • Eliminate the Other Post-Employment Benefits benefits, also known as OPEBs, are typically related to (OPEB) 50/50 cost-share-split between the state healthcare benefits which often include dental and and its employees by requiring 100%of the benefit vision benefits. The costs of these OPEBs are extremely be paid by the state. high. A recent actuarial valuation report determined • Require all state employees to use an 80/80 the cost for retiree health benefits to be $76.68 billion.' formula for basic health benefit plan premiums. This is $2.49 billion higher than the previous fiscal year and is not funded. BACKGROUND OPEBs are currently funded through a 50/50 premium As life expectancy continues to rise, health costs contribution split between the state (employer) and the continue to increase with the number of retired public participant (employee). The intentions for the cost employees growing. Unless we demonstrate fiscal sharing split were good seeking to get employees integrity these healthcare costs will hemorrhage and responsible for these costs. Over time, it developed cripple our state finances. into a broken system because the split is not even. The state pays its 50%, and technically, so does the State Controller Betty Yee recently said, "One of the employee. Because of union negotiations, state greatest fiscal challenges facing California is the employees often receive pay raises to cover the cost of mounting cost of providing health care benefits to their share of OPEBs. Being compensated for their share public sector workers."' of the OPEB not only completely negates the point of the cost sharing program, but ends up costing the state In addition to the high cost of retiree medical more money. healthcare,the state also has massive unfunded liabilities for public employee pension benefits, and is Currently, the state uses a pay-as-you-go system rather now facing a $1.6 billion deficit.' It is time for California than prefunding the OPEBs. Prefunding is the preferred to demonstrate better control over its knowable future method because it could save California billions of costs. dollars over the lifetime of the fund due to the discounted rate.The pay-as-you-go system cost the state $5.77 billion last year; the prefund method would have only cost$4.11 billion. Those savings could have 1 Statement emailed from SCO communications, 1/25/17, titled: "State Controller Yee Updates State Retiree Health Care i_iahility" 3 http://www.sco.ca.gov/Conterlt- Item 9. — 8v.ebudget.ca.gov/ HB _78,_iages/ARD/AV Report June 30 2016.pdf almost filled the$1.6 billion deficit that the Governor's CONTACT recently released budget included Eric Dietz, Policy Consultant eric.dietz@sen.ca.gov, (916) 651-4037 Because OPEBs are so expensive, Memorandums of Understanding (MOU) are currently being negotiated toward an 80/80 medical cost split. Currently, the state uses a 100/90 model.5 This means certain bargaining units are now receiving 80 percent of the weighted average of the basic health benefit plan premiums for the employee and their annuitants. Previously 100 percent of the health benefit was covered for the employee, and 90 percent covered for their annuitant. The state has recognized the importance of decreasing the generous benefits for members of bargaining units; SB 454 extends that change to all state employees. THIS BILL SB 454 will require the state to pay off 100%of the employer's required contribution for OPEBs, known as the Annual OPEB Costs (AOC) and require the State Controller to release a fiscal report to the legislature at the same time the Governor's budget is due.This report will allow the legislative fiscal committees to calculate appropriate payments so the AOC can be funded. This bill also eliminates the 50/50 premium contribution split between the state (employer) and the participant (employee) for OPEBs; it instead requires 100% of the premium to be covered by the state.This prefunding requires more upfront costs, but it will result in drastic savings in future unfunded liabilities. Currently the 80/80 formula is applied to certain state employees who are part of specific MOUs; this bill will require that formula be applied to all new state workers eligible for retirement healthcare benefits that are hired after January 1, 2018. SUPPORT • None on file OPPOSITION • None on File 4 http://www.ebudget.ca.gov/ Continued on next page 5 https://www.caihr.ca.pov/state-hr-professionals/ HB -283- Item 9. - 9 Ct i70L.OFFICE // 7/ �` ! COMM17 EE5 STATE CAPITOL �a-*-!i g-�-y.1li s-�- ^ atv, ert a- to JUDICIARY SACR AMENTO.CA 95814 C-1 j l$it L$C l Ci. __ 1- �C -1 L$ $- VICE Cri AIF 19161 651-4037 BUDGET&FISCAL REVIEW' DISTRICT OFFICE 'c-'-Ej� COVER NANCE 8,:FINANCE 940 SOUTH COAST DR, SUITE 185 k+k+, S - �u PUBLIC EMPLOYMENT AND COSTA'71 MESA,CA 92626 I' 'y *Zc�. RETIREMENT `n+a 6050 SENATOR JOHN M. W. MOORLACH THIRTY-SEVENTH SENATE DISTRICT FACT SHEET Senate Bill 681 — Local Pension Control SUPPORT SUMMARY • None on file SB 681 will give local jurisdictions the ability to leave their contracts with the California Public Employees' OPPOSITION Retirement System (CaIPERS) for their employees' . None on File retirement plans without being excessively charged or penalized. CONTACT Eric Dietz, Policy Consultant BACKGROUND eric.dietz@sen.ca.gov, (916) 651-4037 CaIPERS,the nation's largest public pension fund, admittedly have not reached its assumed rate of return for several years.' For the 2015-16 fiscal year, CaIPERS planned for a 7.5% rate of return, but only managed to achieve 0.6%.2 THIS BILL This bill will allow jurisdictions that contract with the California Public Employees Retirement System (CaIPERS) for their employees' retirement plans to leave their defined benefit plan without excessive costs, penalties, etc. If contract jurisdictions believe they can contract or run their own retirement system cheaper or more effectively, they should have the ability to leave CaIPERS without being excessively penalized. It is fair to get out what you paid in with minor fees associated. But being unreasonably punished should not be encouraged, 1 CaIPFRS 2n15-16 CARF Item 9. - 1 01-16 CARF HB -284-