HomeMy WebLinkAboutLevying a Retirement Property Tax Rate of 00696% Representin x�
' ate CITE OF HUNTINGTON
Finance Office
Dan T.Villefla,CPA
Finance Officer
August 16, 2005
Mr. Neal Gruber, Auditor-Controller
County of Orange Tax gait
P. 0. Box 567
Beata Ana, CA 92702-0567
SUBJECT: CITY OF H€NTINGTON BEACH TAX RATE — FISCAL YEAR 200512006
On August 15, 2005, the City of Huntington Beach adopted the Fiscal Year 2005/2006 Tax
Rate by Resolution Number 2005-56, which levies a retirement property tax for Fiscal Year
005/ 006 to pay for pre-1075 employee retirement benefits. Enclosed are the executed
Resolution and staff report.
Please incorporate the retirement tax levy of Zero and 0.00696/100" Dollars ( 0.00606) per
$100 of assessed value for the City of Huntington Beach.
If you have any questions or mead additional information, please call gay office.
Sincerely,
Daniel T. Villella, CPA
Finance Officer
DTV/RS.ngs
G",ftaw,eltax rate trii41smotal letter 20051-06
Enclosures: 1) City of Huntington Beach Resolution lumber 2005--56
Request for Cif Council ,fiction
C: Penelope Culbreth-Graft, DPP, City Administrator
Joan Flynn„ City Clerkl
Robert Sadlak, Principal Accountant
2000 'Main Street, California 92648 * Phone 714-536-5630* Fax 714-374-1 571 Wikrw Surfe'ity-.hb'0rg
RESOLUTION NO. 2 0 05-5 6
--------------------
A RESOLUTION OF THE CITY COUNCIL
OF TIDE CITY OF HLNTfNGT0N BEIACH
LEVYING A RETIREMEN't' PROPERTY TAX FOR
FISCAL YEAR 2005,12006 TO PAY FOR.PRE-1978
EMPLOYEE R.ETIREMENT BENEFITS
WHEREAS, since 1948, the City has provided for employee pensions through a contract
Stith the California Public Employees Retirement System ((--'alPE,RS). 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. Section 607(b)(2) of the 19118 Charter
provides that the City niay 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. It the local
property tax to 1%of assessed value, except that the City may levy art override tax in excess of
1% to pay "any indebtedness approved by the voters prior to July L. 1978"; and
In the case entitled Carman v. Alvord, 31 Cal. 3d 318 (1982), the California Supreme
Court detemilned that under Proposition 13, an override property tax In excess of I% of assessed
value may be levied to pay for employee pension beriefits the voters approved prior to 1978.
Consequently, after Proposition 13,the City Council continued to levy all 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
In 2001, Proposition 13, as applied to the City Charter, was interpreted in 11oward,kirvis
Tax,payers Association, et al., v. County QfOrange, and Cicy qf Huntington Beach as Real 1'arl.v
in Interest, Orange County Superior Court Case No. 81-87-W The Court held that the override
tax i-nay only be levied to pay for retirement benefits the City contracted for before July 1, 1978,
and may not encompass the benefit-, the City added after the passage of Proposition 13. This
interpretation was upheld in Howari.l Jarvis Taxpqyers Ass'n v. Coun4lc?f Orange (2003) 110
Cal.App.4th 1375, 2 Cal.Rptr.3d 514, Court of Appeal Case No. G029292; and
Prior to hily 1, 1978, the City entered into collective bargaining agreements with
employee associations representing Its safety employees providing that, effective Jolly 1, 1978,
they would be entitled to a CAPERS retirement benefit known as "2% @ 50." Subsequently, 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% @,1 50. Consequently, it is necessary to allocate the employer contribution to
CalPEIZS for safety retirement between 2/EE @�, 50 and 3% fir} 50, because only the employer
contribution for 2% 50 may be paid through the override property tax; and
flic City has receivedI a report from John Bartel of Bartel Associates, a profession
al
actuary experienced in pension calculations, entitled, "City of Huntington Beach CalPERS
Actuarial Issues---"Cost" of 3% kl&, 50," dated August 10, 2004, The Report identified the
W)reso/adopi cwy`s m rate.18/1/45
-------------------------
esos 2€1 5-56
additional cost of 3% @ 50 as,Oiat CalPERS refers to as the "normal cast" of the benefit, which
represents the present value of future benefits employees earned during the current year. Under
this approach, the incremental cost of 3% @, 50 is 4.6°o of sif- ty payroll" and the remainder of
the employer contribution represents the cost of 2% 50; and
In April 2004, Assemblyman Harman formally asked the Attorney General regarding the
correct method of allocating the employer contribution to CAPERS between its pre:-1978 and
post-1978 components. In has February 7, 2005, Opinion (Opinion No. 04413) the attorney,
General opined that "any reasonable:accounting method may be used for purposes of
deteirnini.ng which costs are not subject to the 1a"4 property tax limitation of the Constitution';
and
The City Council has determined that the allocation approach presented in the Bartel
Report is a reasonable accounting method for determining which costs are not subject to the 1%
property tax limitation of the Constitution; and
In 200312004, C;a1FERS required the City to contribute 9% of safety employee payroll as
the C"ity's employer's contribution_ In order to set the tax override, tile. City subtracted the 4.6%
normal cost of 3% @ 50 from the g% to scat the override tax at the, equivalent of 4AOX,of safety
employee payroll. The cost to the:City of 4.4%of safety employee payroll for 2003/2€04 was
$1,279,113, and consequently, the City set the override tax for 2€0 sr2004 at $0,00696 per$100
of assessed value, which amount was designed to yield $1,279,0€0; and
For 2005/2006, Cal is requiring the City to contribute 29.9970%of safety employee
payroll as the City's employer's contribution. In order to set the tax override, the City may
subtracted the 4.6%normal cost of 3% to 50 frorn the 29 9970%to set the override tags at the
equivalent of 25.3970% of safety employee payroll. The€:cast to the City of 25.39 70%of safety
employee payroll for 200512006 will be$7,777,61I5, and consequently, the City may set the
override tax for 2005/2006 at W03670 per $100 of assessed value; and
Notkvithstaardinq this authority, the C:lty C ouracil chooses to set the override tax rate for
2005r'2006 at$0.00696 per$100 of assessed value, the same rate imposed for 200312004, which
will yield approximately$1,475,000 in revenues, This amounts to an override tax of
approximately $7.00 per$100,000 of assessed value.
NOW,THERE"FORf ICE IT RESOLVED by the City Council of the City of Huntington
Beach that a retirement property tax levy of Zero and 0.00696./1 OV' Dollars($0.€10696.)Her$100
of assessed value shall be levied for employee retirement costs for Fiscal Year 2€ 05/06;
BE, IT FURTHER RESC1f.VEJ) that the remainder of the Zero and 0.0367 100tIa Dollars
(W0467) per$100 of assessed value: levy authorized under Revenue & Taxation Code: Section
96,31(a)(4) is suspended .Ihr Fiscal Year 200512006;
BE TT F URTI-1E;R RJH.SOLVED that the City Council declares thatalthough it is
suspending a portion of the retirement property tax for Fiscal Year 2005/21006, it retains the
authority to levy the:tax in facture years cap to the rate of$0.0493%per $100 of assessed value.
05resoiar opz city s tax raie/Sr',l05 2
Re-so. 2005-bb
PASS]_iD AND ADOPTED by the City € f the City of ffi € ngton Beach at a
regular mecting thereof on theday'-AI---------Aust------- 205
ATTEST: APPROVIi1)AS TO FORM:
f �w�
y
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s.�'. . � Bits% At€r mej,
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--------------------------------
"`.€ty Administrator Rtm�€ ee Ot ic er
05veaa ,Idopt cit's tax ease 1911fos '
-----------------------------
eev No. 2005w 6
STATE OF CALIFORNIA
COUNTY OF ORANGE sse
CITE' OF HUNTIN TON BEACH �
I, JOAN L. FLYNN the duly elected, qualified City Clerk of the
City of Huntington Beach, and ex-o cio 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 are regular meeting thereof held on the 1 fh day of
August, 2005 by the following vote:
AYES Hansen, Coerpor, Sullivan, Hardy, Greer, Bohr, Cook
NOES: None
ABSENT: None
ABSTAIM horse
The foregoing kwoum"Isa conva
Copy of ft Cdt Clerk er�d ea�f€ode >i k of the
City Council of the City of
Huntington Beach, California
4 tk
U of," Cfty of HU"1kVbDn Be**
m< t Pt
------------ ------------4---------- ------
Council/Agency Meeting Held: D
DeferredlContinued to:--
)�Approved 0 Conditionally Approved U Denied City §er 's S, natul�f
..........--------------- ------- ---- - . . . .........
Council Meeting Date- August 15, 2005 1 Department I umber FN 05-005
CITY OF HUNTINGTON BEACH
REQUEST FOR CITY COUNCIL ACTION
SUBMITTED TO: HONORAW MAYORAND CITY COU EMBERS
CULBRETH-GRAP-T bc,A,
SUBMITTED Y. PE-,.NELQPE C ' D N.tSTRAT%R
PREPARED BY. CIAN VILLELLA, CPA, FINANCE OFFICER
Z7
eg
SUBJECT: ADOPT RESOLUTION TO ESTABLISH FISCAL �12 YEAR 20004
TAX RATE
Statement of Issue:
Should the City of Huntington Beach adopt a tax rate to fund the portion of retirement costs
that can be legally collected in accordance with court cases, state law, and the City Charter?
The fiscal year 2005/2006 General Fund proposed budget contains estimated retirement tax
4
revenue of $1.4 million to fund a portion of the cost of pre-1978 employee retirement
benefits. This amount is consistent with the adopted tax rate for FY 2004/2005.
Funding_-Source-
blot applicable.
Recommended Action:
XjW-Ve;oiution Number "A Resolution of the City Council of the City of
Huntington Beach Levying a Retirement Property Tax for Fiscal Year 200512006 to pay for
Pre-1978 Employee Retirement Benefits" of $,00696 per $100 of assessed valuation to pay
for pre-1978 employee retirement benefits.
Alternative 82fion s 1. Do not adopt a tax rate that will cause a reduction of $1,475,000 in estimated General
Fund revenue for FY 2005/2006.
2. Adopt a tax rate that will fully recover the allowable portion of the safety employer
contribution rate. This will result in an additional $6.3 million of General Fund revenue
for FY 2005/2006.
3. Adopt an alternative less than the maximum rate.
-----------------
RREQUEST FOR ACTION
MEETING DATE: August 15, 2005 DEPARTMENT ID NUMBER: FN 0"05
Analysis:
Hj�i�the Retirement Levi
The city receives a pro-rata (approximately 16 percent) of the one percent basic levy
collected as property taxes on all real property within the city limits. In addition, the city can
legally levy taxes to recover costs related to pre-1978 retirement benefits.
The city has levied a retirement property tax since 1966, when a City Charter amendment
allowed the city to recover retirement costs. Section 607(b)2 of the City Charter states,
"There shall be levied and collected at the same time and in the same manner as other
property taxes for municipal purposes are levied and collected—tax sufficient to meet all
obligations of the city for the retirement system in which the city participates, due and
unpaid or to become due during the ensuing fiscal year." In 1978, after the passage of
Proposition 13, the city was still allowed to levy tax overrides above the one percent basic
levy. This authority was limited by Revenue and Taxation Section 96.31(a)(4), which
effectively set the city's maximum retirement tax rate at $.04930 per $100 of assessed
valuation.
In 1999, the Howard Jarvis Taxpayer's Association filed a lawsuit against the city
concerning the levying of these taxes. The court determined that the city could only levy
taxes for retirement costs that were in effect prior to 1978. Determining the exact amount
of pre-1978 benefits in any given year requires an actuarial report. In 2004, the city
commissioned a report from an actuary, John Bartel of Bartel Associates, which made
assumptions and recommendations concerning how to determine these amounts.
Subsequently, the California Attorney General issued an opinion supporting the
assumptions made by the city.
Staff is recommending that the City Council adopt the same tax rate as in the prior year(FY
200412005), which is $.00696 per $100 of assessed valuation. This will yield approximately
$1,475,000 of revenue to the city in FY 200512006.
Calculation of Possible Tax Rates
The city may levy any tax rate between zero and the maximum allowable tax rate. To
compute the maximum tax levy, the pre-1978 retirement costs are divided by the assessed
valuation. For FY 200512006, the city's secured assessed valuation (not including
Redevelopment Agency incremental assessed valuation) was $21,194,964,629. This was
an increase of approximately $1.4 billion, or 7.03 percent from the prior year. Unsecured
valuation is levied at the prior year secured rate so it is not used in determining the current
year tax rate.
On July 5, 2005, the City Council approved a prepayment of retirement costs that will result
in savings to the city and taxpayer. Since the city can recover only its actual costs, only the
discounted amounts can be recovered.
G:IFINANCBRCAbRGA 05-005 Adopt Tax Rate 2005-2006.doc -2-
812/2005 10:54 AM
REQUEST FOR. ACTION
MEETING DATE: August 15, 2005 DEPARTMENT ID NUMBER- Fly 05-005
The calculation of the amount of estimated FY 2005/2006 retirement costs that can be
recovered through an override levy is Summarized in the following table:
FY 200512009 Budget
Amounts
---------------- .......... --l---—-------------------
Full Amount of Estimated Sateiy $ 9,535,740
—------------------ ... ......... ----—-------
Discount Amount from PER S_Prep�!yj2ient $ 331
----------- ........ -----------
Discounted Sa!tty-costs $ 9,186,409
-—-----------------—-----—---------------------.....—-------------------....... —----------
Less Amount Related to Post-1978 Benefits 50) $
---------------- ------------ ---------- J:!��n724)1�
----------- --------
,Cost X 9yerable Throuqq�!�jopi�_q
--- _!a ...... ------------ ------
The amount of retirement costs related to the post-1 978 benefits was computed as follows:
Estimated
Employer Safety Employer Safety
Retirement Rate Retirement Costs
FY 2005/2006 Ratio of Costs FY 200512006
-------------- -------- ...... --------...........----------
Retirement Percentaq�,A,q(kqtable to Pre-1978 Benefits 25�3970W. 84 67%i$ 7 777 685
------------—-—--------------------
Retirement!�trqerjqg Attrit� ! ble to Post-1 978 Benefits 4.6000%4i
15. 1,408,724
- .... --------
----—----------------- 4 100
-------
FY 200512006
The following table summarizes the results of levying the maximum allowable rate versus
levying the prior year tax rate (staff recommendation)-
Maximum Allowable Staff
Rate Recommendation
------------ ----------- ---------- -------------—---—-------------------- -------- ---
otal Pre-i"7- Retirement Costs $ 7,777,685 I.
$ 7,777,655
-o---f--P,r...e-1 9-78....C...o's---ts--to--be'—Reco'v"'e...r,e----d-----",—----------------$—-—--------7,777,655----------,i$—--------1-,,475,000
—---------------—---—-------------------—---—-------------------—--—----------------------——----------------------
6videj...b"y' Assessed Valuation $ 21,194,964,629 $ 21,194,964,629
—--—-------------.....—------------------—--—-------------- ------
Tax R�tWior FY 200512006(per$100) $ 0,03670 $ 0.00696
------------------—----—----------------- --------- ---------—-—----------
f-6--r---P---a-rcel with Assessed VaWtion of$500,000 $ 183 $ 35
----------- -—------------------—---—----------------- ----------—-—-------------------------------C----—------- ----------
The maximum allowable rate is the lesser of the above calculation ($.03670 per $100 of
assessed valuation) and the amount allowed under Revenue and Taxation Code
96.31(a)(4) ($.04930 per$100 of assessed valuation for Huntington Beach).
Environmental Status:
Not applicable.
G:W1NANGBRCA\RCA 05-005 Adopt Tax Rate 2005-2006,doc -3-
8/212005 10:54 AM
-------------
REQUEST FOR ACTION
MEETING DATE: August 15, 2005 DEPARTMENT ID NUMBER: FN 05-005
Attachment
1, Resolution Number;` -0k, i'csalutibr€ of the City Council of
the CW�y cof Hunfington Beach Levyiag a Ro-tirement Pmperty Tax
,for Fiscal Year 20055,12006 to, pay for Pro,-1976 Ea pfd'yee
Refim,ment Benefiks" of $.006S-6, per $100 of assessed valuation to
pay for pre-1978 employee retirement benefits.
2, February 113 2005 memo from Jennifer McGrath, City Attorney,
subject: "Afforney General Opinion Regarding Retirement Property
G:\F1NANCBRCA\RCA 05-005 Adopt Tax Rate 2005-200&doc -4-
W212005 W54 AM
Council/Agency Meeting Held: of
Deferred/Continued to:
1 Approved ❑ Conditionally Approved ❑ Denied City der 's 5 natur
Council Meeting Date: August 15, 2005 Department I umber: FN 05-005
CITY OF HUNTINGTON BEACH
REQUEST FOR CITY COUNCIL ACTION Q
SUBMITTED TO: HONORAB E MAYOR AND CITY COUNLX MEMBERS
SUBMITTED BY: PENELOPE C�TH-GRAFT, DPA, C ADMINISTRATQR CD
n
PREPARED BY: DAN VILLELLA, CPA, FINANCE OFFICER
SUBJECT: ADOPT RESOLUTION TO ESTABLISH FISCAL YEAR 2005t2006
TAX RATE
Statement of Issue,Funding Source,Recommended Action,Alternative Action(s),Analysis,Environmental Status,Attachment(s)
Statement of Issue:
Should the City of Huntington Beach adopt a tax rate to fund the portion of retirement costs
that can be legally collected in accordance with court cases, state law, and the City Charter?
The fiscal year 2005/2006 General Fund proposed budget contains estimated retirement tax
p 9
revenue of $1.4 million to fund a portion of the cost of pre-1978 employee retirement
benefits. This amount is consistent with the adopted tax rate for FY 2004/2005.
Funding Source:
Not applicable.
Recommended Action:
Adopt Resolution Number "A Resolution of the City Council of the City of
Huntington Beach Levying a Retirement Property Tax for Fiscal Year 200512006 to pay for
Pre-1978 Employee Retirement Benefits" of $.00696 per $100 of assessed valuation to pay
for pre-1978 employee retirement benefits.
Alternative Action(s):
1. Do not adopt a tax rate that will cause a reduction of $1,475,000 in estimated General
Fund revenue for FY 2005/2006.
2. Adopt a tax rate that will fully recover the allowable portion of the safety employer
contribution rate. This will result in an additional $6.3 million of General Fund revenue
for FY 2005/2006.
3. Adopt an alternative less than the maximum rate.
E \\
REQUEST FOR ACTION
MEETING DATE: August 15, 2005 DEPARTMENT ID NUMBER: FN 05-005
Analysis:
History of the Retirement Levy
The city receives a pro-rata (approximately 16 percent) of the one percent basic levy
collected as property taxes on all real property within the city limits. In addition, the city can
legally levy taxes to recover costs related to pre-1978 retirement benefits.
The city has levied a retirement property tax since 1966, when a City Charter amendment
allowed the city to recover retirement costs. Section 607(b)2 of the City Charter states,
"There shall be levied and collected at the same time and in the same manner as other
property taxes for municipal purposes are levied and collected...tax sufficient to meet all
obligations of the city for the retirement system in which the city participates, due and
unpaid or to become due during the ensuing fiscal year." In 1978, after the passage of
Proposition 13, the city was still allowed to levy tax overrides above the one percent basic
levy. This authority was limited by Revenue and Taxation Section 96.31(a)(4), which
effectively set the city's maximum retirement tax rate at $.04930 per $100 of assessed
valuation.
In 1999, the Howard Jarvis Taxpayer's Association filed a lawsuit against the city
concerning the levying of these taxes. The court determined that the city could only levy
taxes for retirement costs that were in effect prior to 1978. Determining the exact amount
of pre-1978 benefits in any given year requires an actuarial report. In 2004, the city
commissioned a report from an actuary, John Bartel of Bartel Associates, which made
assumptions and recommendations concerning how to determine these amounts.
Subsequently, the California Attorney General issued an opinion supporting the
assumptions made by the city.
Staff is recommending that the City Council adopt the same tax rate as in the prior year FY
2004/2005), which is $.00696 per $100 of assessed valuation. This will yield approximately
$1,475,000 of revenue to the city in FY 2005/2006.
Calculation of Possible Tax Rates
The city may levy any tax rate between zero and the maximum allowable tax rate. To
compute the maximum tax levy, the pre-1978 retirement costs are divided by the assessed
valuation. For FY 2005/2006, the city's secured assessed valuation (not including
Redevelopment Agency incremental assessed valuation) was $21,194,964,629. This was
an increase of approximately $1.4 billion, or 7.03 percent from the prior year. Unsecured
valuation is levied at the prior year secured rate so it is not used in determining the current
year tax rate.
On July 5, 2005, the City Council approved a prepayment of retirement costs that will result
in savings to the city and taxpayer. Since the city can recover only Its actual costs, only the
discounted amounts can be recovered.
G:\FINANCE\RCA\RCA 05-005 Adopt Tax Rate 2005-2006.doc -2-
8/2/2005 10:54 AM
REQUEST FOR ACTION
MEETING DATE: August 15, 2005 DEPARTMENT ID NUMBER: FN 05-005
The calculation of the amount of estimated FY 2005/2006 retirement costs that can be
recovered through an override levy is summarized in the following table:
FY 2005/2006 Budget
Amounts
Full Amount of Estimated Employer Safety Costs $ 9,535,740
Discount Amount from PERS Prepayment $ 349,331
Discounted Safety Costs $ 9,186,409
Less Amount Related to Post-1978 Benefits 3%at 50 $ 1,408,724
Costs Recoverable Through Property Tax $ 7,777,685
The amount of retirement costs related to the post-1978 benefits was computed as follows:
Estimated
Employer Safety Employer Safety
Retirement Rate Retirement Costs
FY 2005/2006 Ratio of Costs FY 2005/2006
Retirement Percentage Attributable to Pre-1978 Benefits 25.3970% 84.67% $ 7,777,685
Retirement Percentage Attributable to Post-1978 Benefits 4.6000% 15.33% $ 1,408,724
Total Safety Employer Rate FY 2005/2006 29.9970% 100.00% $ 9,186,409
The following table summarizes the results of levying the maximum allowable rate versus
levying the prior year tax rate (staff recommendation):
Maximum Allowable Staff
Rate Recommendation
Total Pre-1978 Retirement Costs $ 7,777,685 $ 7,777,685
Amount of Pre-1978 Costs to be Recovered $ 7,777,685 $ 1,475,000
Divided by Assessed Valuation $ 21,194,964,629 $ 21,194,964,629
Tax Rate for FY 2005/2006 (per$100) $ 0.03670 $ 0.00696
Estimated Cost for Parcel with Assessed Valuation of$500,000 $ 183 $ 35
The maximum allowable rate is the lesser of the above calculation ($.03670 per $100 of
assessed valuation) and the amount allowed under Revenue and Taxation Code
96.31(a)(4) ($.04930 per $100 of assessed valuation for Huntington Beach).
Environmental Status:
Not applicable.
G:\FINANCE\RCA\RCA 05-005 Adopt Tax Rate 2005-2006.doc -3-
8/2/2005 10:54 AM
REQUEST FOR ACTION
MEETING DATE: August 15, 2005 DEPARTMENT ID NUMBER: FN 05-005
Attachment(s):
City Clerk's
Page Number No. Description
1. Resolution Number Q,oi;� din, "A Resolution of the City Council of
the City of Huntington Beach Levying a Retirement Property Tax
for Fiscal Year 200512006 to pay for Pre-1978 Employee
Retirement Benefits" of $.00696 per $100 of assessed valuation to
pay for pre-1978 employee retirement benefits.
2. February 11, 2005 memo from Jennifer McGrath, City Attorney,
subject: "Attorney General Opinion Regarding Retirement Property
Tax"
G:\FINANCE\RCA\RCA 05-005 Adopt Tax Rate 2005-2006.doc -4-
8/2/2005 10:54 AM
ATTACHMENT 1
RESOLUTION NO. 2005-56
A RESOLUTION OF THE CITY COUNCIL
OF THE CITY OF HUNTINGTON BEACH
LEVYING A RETIREMENT PROPERTY TAX FOR
FISCAL YEAR 2005/2006 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(CalPERS). 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. 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. It 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
In 2001, Proposition 13, as applied to the City Charter, was interpreted 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. 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. This
interpretation was upheld in Howard Jarvis Taxpayers Assn v. County of Orange (2003) 110
Cal.AppAth 1375, 2 Ca1.Rptr.3d 514, Court of Appeal Case No. G029292; 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." Subsequently, 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. Consequently, it is necessary to allocate the employer contribution to
CalPERS for safety retirement between 2%@ 50 and 3% @ 50, because only the employer
0
contribution for 2%@ 50 may be paid through the override property tax; 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 identified the
05reso/adopt city's tax rate/8/1/05 1
Reso. 2005-56
additional cost of 3%@ 50 as what CalPERS refers to as the "normal cost"of the benefit, which
represents the present value of future benefits employees earned during the current year. Under
this approach, the incremental cost of 3% @ 50 is 4.6%of safety payroll, and the remainder of
the employer contribution represents the cost of 2% @ 50; and
In April 2004, Assemblyman Harman formally asked the Attorney General regarding the
correct method of allocating the employer contribution to CalPERS between its pre-1978 and
post-1978 components. In his February 7, 2005, Opinion(Opinion No. 04-413) the Attorney
General opined that "any reasonable accounting method may be used for purposes of
determining which costs are not subject to the 1% property tax limitation of the Constitution";
and
The City Council has determined that the allocation approach presented in the Bartel
Report is a reasonable accounting method for determining which costs are not subject to the 1%
property tax limitation of the Constitution; 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
For 2005/2006, CalPERS is requiring the City to contribute 29.9970%of safety employee
payroll as the City's employer's contribution. In order to set the tax override, the City may
subtracted the 4.6%normal cost of 3% @ 50 from the 29.9970%to set the override tax at the
equivalent of 25.3970%of safety employee payroll. The cost to the City of 25.3970%of safety
employee payroll for 2005/2006 will be $ 7,777,685, and consequently, the City may set the
override tax for 2005/2006 at$0.03670 per$100 of assessed value; and
Notwithstanding this authority, the City Council chooses to set the override tax rate for
2005/2006 at$0.00696 per$100 of assessed value, the same rate imposed for.2003/2004, which
will yield approximately $1,475,000 in revenues. This amounts to an override tax of
approximately$7.00 per$100,000 of assessed value.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Huntington-
Beach that a retirement property tax levy of Zero and 0.00696/100th Dollars ($0.00696) per$100
of assessed value shall be levied for employee retirement costs for Fiscal Year 2005/06;
BE IT FURTHER RESOLVED that the remainder of the Zero and 0.0367/100th Dollars
($0.0467) per$100 of assessed value levy authorized under Revenue &Taxation Code Section
96.31(a)(4) is suspended for Fiscal Year 2005/2006;
BE IT FURTHER RESOLVED that the City Council declares that although it is
suspending a portion of the retirement property tax for Fiscal Year 2005/2006, it retains the
authority to levy the tax in future years up to the rate of$0.0493% per$100 of assessed value.
05reso/adopt city's tax rate!8/1/05 2
K@SD. L1)vJ—fib
PASSED AND ADOPTED by the City Council of the City of Huntington Beach at a
regular meeting thereof held on the 15th day of August , 2005.
ATTEST: APPROVED AS TO FORM:
C
Clerk ity Attorne
REVIEWED AND APPROVED: INITI D AND APP OVE :
oe
ity Administrator Finance Officer
16
05reso/adopt city's tax rate/8/1/05 3
Res. No. 2005-56
i
STATE OF CALIFORNIA
COUNTY OF ORANGE ) ss
CITY OF HUNTINGTON BEACH )
1, JOAN L. FLYNN the duly elected, 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 15th day of
August, 2005 by the following vote:
AYES: Hansen, Coerper, Sullivan, Hardy, Green, Bohr, Cook
NOES: None
ABSENT: None
ABSTAIN: None
01
Clerk and ex-offici Jerk of the
City Council of the City of
Huntington Beach, California
i
ATTACHMENT 2
CITY OF HUNTINGTON BEACH
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
PENELOPE CULBRETH-GRAFT, City Administrator
CHUCK THOMAS, Acting Director of Administrative Services
DANIEL VILLELLA,Finance Officer
FROM: JENNIFER McGRATH, City Attorney
DATE: February 11,2005
SUBJECT: Attorney General Opinion Regarding Retirement Property Tax
In August 2003,the City Council directed this Office to request through Assemblyman
Harman an Attorney General opinion regarding the proper methodology to determine the
amount of retirement property tax the City may levy after the decision in Howard Jarvis
Taxpayers Association v. County of Orange (2003) 110 Cal.App.4th 1375. The Attorney
General issued the Opinion on February 7, 2005. The Opinion validates the methodology the
Council adopted in August 2003 to determine the retirement tax rate.
Backv-round. Since 1948,the City has provided retirement benefits through a contract with
the Public Employees Retirement System(PERS). Under its PERS contract, the City must
make an annual employer contribution to PERS. This contribution—a percentage of
payroll-fluctuates from year to year.
In 1976,the City Council agreed through MOUs with the police and lifeguard employee
associations to amend the PERS contract to increase police and marine safety benefits to 2%
@ 50 by July 1, 1978. (The City was already offering the 2% @ 50 benefit to fire
employees.) However,the effective date of the PERS contract amendment was September
1978- This increase in benefits effected the employer contribution to PERS.
Since 1979,the City instituted several additional retirement benefits,including amending the
PERS contract to offer 3%@ 50 for safety personnel.
Since at least 1966,the City has levied a retirement property tax to pay for at Ieast a portion
of the cost of the retirement program. In June 1978, the voters of the City of Huntington
Beach adopted a new City Charter. The Charter continued to authorize the City Council to
levy a retirement property tax.
GAFIELDl2005 Memos\AG Opinion re Retirement Tax.doc
HONORABLE MAY` AND MEMBERS OF THE CITY CL-jNCIL
PENELOPE CULBRETH-GRAFT, City Administrator
CHUCK THOMAS, Acting Director of Administrative Services
DANIEL VILLELLA, Finance Officer
February 11,2005
Page 2 of 4
Also in June 1978, California voters approved Proposition 13, which limited the property tax
to one percent of property value. One exception to Proposition 13's 1% limit is
"indebtedness approved by the voters prior to July 1, 1978." In 1982, the California Supreme
Court held in the case of Carmen v. Alvord that pension plans were such indebtedness up to
the level of benefits approved by the voters before July 1, 1978.
One difficulty in applying the Carmen decision was determining which retirement
obligations were approved prior to 1978. For example,the Huntington Beach Charter, as
approved by voters in 1978, merely states that the City shall "participate in a retirement
system,"but the voters never approved a specific retirement system. For many years after
Proposition 13,determining what retirement system could be supported by the retirement tax
was never an issue because the employer contribution to PERS substantially exceeded the
maximum retirement tax rate of.049%.1 However, when the employer contributions to
PERS declined between FY 1997/98 through FY 2000/01, a portion of the retirement
property tax was used to pay for retirement-related benefits first offered after July 1, 1978.
In December 1999,the Howard Jarvis Taxpayers Association(HJTA) filed suit challenging
whether the retirement tax could be used to pay for benefits approved after 1978. In April
2001,the Superior Court held in Howard Jarvis Taxpayers Association v. County of Orange
that the use of the retirement tax was Iimited to those retirement benefits in place prior to
July 1, 1978. The Court of Appeal affirmed this ruling in July 2003.
During FYs 2001/02 and 2002/03,the period following the Superior Court decision until the
Court of Appeal decision,the City suspended the tax levy because its employer contribution
to PERS for those years was 0%. Then for FY 2003/04,PERS set the safety employer
contribution at 9%of payroll. Given that the Court ruling permitted the City to levy the
retirement tax to pay for employer contributions associated with pre-1978 retirement
programs, it was necessary for the City to allocate the 9%employer contribution rate
between pre-1978 benefit of 2%@ 50 and the post-1978 benefit of 3% at 50. Based upon
the recommendation of John Bartel, a professional actuary,the City allocated the first 4.6%
of the employer contribution to the incremental cost of 3% at 50, and the remaining 4.4%
contribution to 2%@ 50. The tax levy was then set at a rate sufficient to pay 4.4% of safety
payroll. This recommendation was based principally on a 1999 PERS actuarial study
identifying the"normal cost" attributable to the benefit increase to 3%at 50 as 4.6% of
payroll.
1 After Proposition 13 was adopted,the Legislature adopted a statute limiting a retirement tax
to no more than the highest rate charged in 1981 or earlier. For Huntington Beach,this rate
was .049%of assessed value.
G.TMLD\2005 MemosWG Opinion re Retirement Tax.doc
HONORABLE MAYS AND MEMBERS OF THE CITY Ct,-jNCIL
PENELOPE CULBRETH-GRAFT, City Administrator
CHUCK THOMAS,Acting Director of Administrative Services
DANIEL VILLELLA,Finance Officer
February 11,2005
Page 3 of 4
The Attorney General Opinion. The Jarvis opinion presented three immediate questions
regarding how to set the retirement tax in the future. First, after suspending the tax for two
years, did the levy of the retirement property tax for 2003/2004 require new voter approval
under Proposition 218? Our office opined that this was not a new tax under Proposition 218.
Second, did the 2%@ 50 retirement program for police and marine safety officers approved
prior to July 1, 1978,but implemented afterwards constitute a pre-1978 indebtedness? In
August 2003,the City Attorney opined that this was a pre-1978 retirement obligation and the
Council set the 2003/04 retirement tax in reliance on that Opinion.
Third,how should the City Council allocate the employer contribution between the pre-1978
component of 2%@ 50 for safety officers, and the 2001 amendment of 3%@ 50? Our
office recommended using a"reasonable" actuarial approach, such as recommended by Mr.
Bartel.
In April 2004, Assemblyman Harman formally asked the Attorney General to answer these
three questions.
In the attached Opinion,the Attorney General answers all three questions consistent with the
City Attorney's earlier advice. First, suspending and then re-levying a tax does not amount
to a new tax that must be voter-approved under Proposition 218. Notably,the HJTA advised
the Attorney General that it agreed with this conclusion, so the Attorney General's Opinion is
of little surprise.
Second, the Attorney General agreed that where the 2%@ 50 retirement program for police
and marine safety officers was approved prior to July 1, 1978, but offering the benefit was
delayed until after July 1, 1978,it still constituted a pre-1978 indebtedness. Again, HJTA
had agreed with our Opinion.
Most importantly, the Attorney General agreed with our conclusion that any reasonable
accounting method could be used to allocate the employer contribution to PERS between the
2%@ 50 and the 3%@ 50 safety program. The Attorney General states that: "any
reasonable accounting method may be used for purposes of determining which costs are not
subject to the 1%property tax limitation of the Constitution." While the Attorney General
has not specifically approved the allocation Mr. Bartel recommended, we do conclude his
approach is a reasonable accounting method, and consequently, we recommend continuing to
use his allocation in the future.
GAFEELD\2005 Memos\AG Opinion re Retirement Tax.doc
HONORABLE MAYt_.AND MEMBERS OF THE CITY CE..,NCIL
PENELOPE CULBRETH-GRAFT, City Administrator
CHUCK THOMAS,Acting Director of Administrative Services
DANIEL VILLELLA, Finance Officer
February 11, 2005
Page 4 of 4
For the Council's further information,prior to the Attorney General issuing his Opinion,we
had forwarded to his Office the most current revised versions of Mr. Bartel's analysis. A
copy of that analysis is attached along with the Attorney General Opinion.
JENNIFER McGRATH
City Attorney
Attachments: Attorney General Opinion
Bartel Associates Report
GAFIELD\2005 Memos\WG Opinion re Retirement Tax.doc
RCA ROUTING SHEET
INITIATING DEPARTMENT: Finance Office
SUBJECT: Adopt Resolution to Establish Fiscal Year 2005/2006
Tax Rate
COUNCIL MEETING DATE: August 15, 2005
RCA ATTACHMENTS STATUS
Ordinance (w/exhibits & legislative draft if applicable) Attached ❑
Not Applicable
Resolution (w/exhibits & legislative draft if applicable) Attached
Not A plicable ❑
Tract Map, Location Map and/or other Exhibits Attached ❑
Not Applicable
Attached ❑
Contract/Agreement (w/exhibits if applicable) Not Applicable
(Signed in full by the City Attorney)
Attached ❑
Subleases, Third Party Agreements, etc. Not Applicable
(Approved as to form by City Attorney)
Certificates of Insurance (Approved b the City Attorne Attached ❑
( pp Y Y Y) Not Applicable
Attached ❑
Fiscal Impact Statement (Unbudget, over $5,000) Not Applicable
Attached ❑
Bonds (If applicable) Not Applicable
❑
Staff Report (If applicable) AttachedNot Applicable
Commission, Board or Committee Re ort applicable If a Attached El
p ( pp ) Not Applicable
Findings/Conditions for Approval and/or Denial Attached ❑
Not Applicable
EXPLANATION POR MISSING ATTACHMENTS
REVIEWED RETURNED FOR `AR ,RL
Administrative Staff ( )
Assistant City Administrator (Initial)
City Administrator Initial ) )
City Clerk ( )
EXPLANATION FOR RETURN OF ITEM:
Only)(Below Space For City Clerk's Use
RCA Author: Robert Sedlak, Principal Accountant
/L7 C, /I
*ITY _ ��� M f}yt 77�1
OFIII� �.�"'Irry
HUNTINGTON BEA '5 � f> &--& ?./�
MEETING DATE: AUGUST 16, 2004 DEPARTMENT ID NUMBER: AS-04-030
Council/Agency Meeting Held: iT(.7otl
Deferred/Continued to:
Approved ❑ Conditionally Approved ❑ Denied Ity Cl rk' ignat re
Council Meeting Date: AUGUST 16, 2004 Department I Number: ASE;04430
CITY OF HUNTINGTON BEACH
REQUEST FOR ACTION .
SUBMITTED TO: HONORABLE MAYOR AND CITY COUNC L
SUBMITTED BY: PENELOPE CULBR -G FT, CI ADMINISTRA OR
PREPARED BY: JENNIFER McGRA ITY ATTORNEY
CLAY MARTIN, DIRECTOR OF ADMINISTRATIVE SERVICES
SUBJECT: ADOPTION OF 2004/2005 TAX RATE
Statement of Issue,Funding Source,Recommended Action,Alternative Action(s),Analysis,Environmental Status,Attachment(s)
Statement of Issue:
Should the City adopt a tax rate consistent with the City Charter and California State Law?
The fiscal year 2004/2005 General Fund proposed budget includes estimated retirement tax
revenue of $1.4 million to fund a portion of cost of the pre-1978 employee retirement
benefits. The remaining costs will be paid from other available city revenue.
Funding Source:
Not Applicable
Recommended Action:
Adopt Resolution No. —q , A Resolution of the City Council of the City of Huntington
Beach levying a retirement property tax rate for fiscal year 2004/2005 of .00696% of
assessed value (approximately $7.00 per $100,000 of assessed value).
Alternative Action(s):
Adopt a different tax rate (higher or lower).
G:\RCA\2004\Tax Rate 2004-2005.doc -2! 8/12/2004 11:34 AM
10 REQUEST FOR ACTION
MEETING DATE: AUGUST 16, 2004 DEPARTMENT ID NUMBER: AS-04-030
Analysis:
A. Background.
Since 1948, the City has provided for employee pensions through a contract with the
California Public Employees Retirement System (CaIPERS). Pursuant to the 1966 and 1978
City Charter amendments, City voters authorized the City Council to pay for the cost of
employee pensions through a separate retirement property tax. Charter Section 607(b)(2)
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."
Pursuant to this authority, the City has levied a retirement property tax since 1966.
Proposition 13 was added to the California Constitution in 1978, which limited the local
property tax to 1% of assessed value, except that a locality may levy an override tax in
excess of 1% to pay "any indebtedness approved by the voters prior to July 1, 1978." The
adoption of Proposition 13 presented the question of whether cities could continue to levy
voter-approved retirement taxes. In the case entitled Carman v. Alvord, 31 Cal. 3d 318
(1982), the California Supreme Court answered in the affirmative, holding that an override
tax may be levied to pay an employee pension the voters approved prior to 1978.
Consequently, after Proposition 13, the City continued to levy an override tax above the 1%
limit to a for employee pensions. This authority was later limited b Revenue and Taxation
payp Y Y
Code Section 96.31(a)(4), which effectively sets the City's maximum retirement tax at
0.0493% (i.e., $49.30 per $100,000 in assessed value).
For many years after 1978, there was no question whether the City could levy the full
0.0493% tax rate because the City's employer contribution to CalPERS always exceeded the
override tax proceeds. However, when the employer obligation declined after 2000 due to
higher than expected investment earnings, the question arose whether the tax could be used
to pay for pension benefit improvements the City implemented after 1978. This was the
question presented 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, where the Court held that the override tax
pp
may only be levied to pay for retirement benefits the City contracted for prior to July 1, 1978,
and may not encompass the benefits the City added after the passage of Proposition 13.
B. Applying the Jarvis Decision to the 2004/2005 CalPERS Payment.
1. The Problem: Identifying the Cost of 3% Cad 50.
For fiscal year 2004/2005, CalPERS requires the City to pay 25.144% of safety employee
payroll as the City's employer contribution to the retirement plan. Under the Jarvis decision,
the override tax may only be levied to pay for the benefit program contracted for prior to July
1, 1978, which was the "2% @ 50" retirement formula. This means the tax may not pay for
the cost of the "3% @ 50" retirement formula the City implemented on June 30, 2001.
G:\RCA\2004\Tax Rate 2004-2005.doc 8112/200411:34 AM
0 REQUEST FOR ACTION
MEETING DATE: AUGUST 16, 2004 DEPARTMENT ID NUMBER: AS-04-030
Consequently, the City must calculate what its payment would be if it had not added 3% @
50 retirement formula to determine the override tax.
There is no single means to determine the cost of 3% @ 50, but instead there are instead
several reasonable actuarial methods. 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.
2. There are Three Alternatives: Last Year's Approach Which is the Recommended
Approach ("4.6%1 A Very Conservative Approach ("9.1 W), and an Intermediate
Approach ("6.5%").
The Bartel Report recommends that the cost of 3% @ 50 is its normal cost, but not its prior
cost. Under this approach, the cost of 3% @ 50 is 4.6% of safety payroll. His
recommendation is based upon CalPERS' determination in 1999 that the prior cost would be
paid for with excess assets in the City's account when the increased pension benefit was
granted in 2001, due largely to unexpectedly high investment earnings in the late 1990s.
In 2003/2004, the City Council set the override tax using Mr. Bartel's recommended
approach. Accordingly, when CalPERS required the City to pay 9% of safety employee
payroll for 2003/2004, the City subtracted 4.6% as the normal cost of 3% @ 50 from the 9%
rate 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.
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.
In selecting a cost methodology for 2004/2005, the City Council must take into account that if
it adopts either of the more conservative options of the Bartel Report, then in effect, the City
set too high an override tax rate for 2003/2004. To the extent the rate was set too high, it
should be adjusted downwards for 2004/2005 in a corresponding amount.
G:\RCA\2004\Tax Rate 2004-2005.doc a*� 8/121200411:34 AM
3
10 REQUEST FOR ACTION
MEETING DATE: AUGUST 16, 2004 DEPARTMENT ID NUMBER: AS-04-030
In summary, the Bartel Report gives the City Council three options for setting the 2004/2005
override tax rate:
2004/2005 Incremental Formula for Cost of Revenue Potential
Payment to Cost of 2% @ 50 Required Maximum Tax
CalPERS 3% @ 50 Rate
25.1% 4.6% 25.1% - 4.6% $5,753,000 $26.63/$100,000
25.1% 6.5% 25.1% - 6.5% - 1.9%* $4,687,000 $21.70/$100,000
25.1% 9.1% 1 25.1% - 9.1% - 4.4%* $3,250,000 $15.07/$100,000
*-represents the deduction for overpayment of taxes of the tax rate is adopted
It should be noted that last year, after the City Council set the override tax rate, it 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 budgetarily set-aside by staff pending the Attorney General's opinion.
Assemblymember Harman submitted a request for an Attorney General opinion on behalf of
the City on April 14, 2004. The Attorney General then requested comments from interested
parties, including the Howard Jarvis Taxpayers Association (HJTA). There were three
questions presented to the Attorney General.
1. Where a charter city imposes a property tax to fund a voter-approved retirement
plan, but suspends the tax with respect to a fiscal year in which it has no current
obligations for that plan, must the city obtain additional voter approval to resume
its levy of the tax in subsequent years during which the city has current plan
obligations?
2. Prior to voter approval of its retirement obligations in June 1978, the charter city
agreed to provide its employees with a benefit to begin in Fiscal Year 1978-79.
Is that agreed benefit part of the voter-approved retirement plan such that it may
be funded by the special property tax?
3. The charter city, subsequent to voter approval of its retirement plan, increased
the benefits available under that plan. Pursuant to the decision in Howard Jarvis
Taxpayers Association v. County of Orange, the city must separate the cost of
the voter-approved benefits from the cost of subsequently conferred benefits.
What methodology should the city use to separate these costs?
In its comments to the Attorney General, HJTA suggested that the first two concerns were
non-issues. Specifically, HJTA agrees that additional taxpayer approval is not required and
that retirement obligations agreed to prior to 1978, but that had not been implemented until
after July 1, 1978, were still part of the voter-approved retirement plan.
However, HJTA also thought that rather than using a City consultant to analyze the allocation
of the pension cost between pre-1978 and post-1978 plans, the City should ask PERS to
G:\RCA\2004\Tax Rate 2004-2005.doc __5__ 8/1 212004 1 1:34 AM
y
10 REQUEST FOR ACTION
MEETING DATE: AUGUST 16, 2004 DEPARTMENT ID NUMBER: AS-04-030
perform this analysis. In response, Staff commissioned the Bartel Report, a draft of which
was then provided to CaIPERS for review. CalPERS' comments on the draft were
incorporated into the final Bartel Report, a copy of which is attached. CaIPERS preferred the
methodology resulting in the 6.5% cost for 3% @ 50 that is presented in the Bartel Report.
However, as indicated in the Bartel Report, this methodology relies on numerous
assumptions and is not recommended by the Bartel Report.
C. Staff Recommendation.
Staff is now awaiting final comments from CaIPERS on the final Bartel Report. Once we
receive those comments, both the Bartel Report and the CaIPERS comments will be
forwarded to the Attorney General. The Attorney General will then issue an opinion. We
expect to receive the Attorney General opinion by the end of October 2004, too late for
purposes of setting the 2004/2005 tax rate.
In the City Attorney's opinion, any of the Bartel Report's three approaches is permissible and
we are suggesting to the Attorney General that the City Council should have the discretion to
select the approach of its choosing since all of them are reasonable. However, because the
Attorney General may come to a different conclusion, we suggest following the most
conservative approach while the Attorney General's opinion is pending. The Staff
Recommendation is consistent with taking the most conservative approach.
The Staff Recommendation is to use the 4.6% approach. Until the City receives the opinion
from the California Attorney General's Office regarding the retirement tax, the City Council
should adopt the same tax rate as it did under fiscal year 2003/2004: 0.00696% of assessed
valuation. This rate equals approximately $6.96 per year per $100,000 of assessed
valuation, and will generate revenue of approximately $1.4 million in the General Fund in
fiscal year 2004/2005. This property tax revenue was included in the budget submitted to
the City Council on August 2, 2004. Because such a rate is substantially less than any
possible cost amount for 3% @ 50, Staff would further recommend spending last year's tax
of$1,279,000, which has been set aside.
AttachmeDgs):
City Clerk's
Page Number No. Description
1 Adopt Resolution No. rdW4-r-\ A Resolution of the City Council of the
City of Huntington Beach levying a retirement property tax rate for fiscal year
2004/2005 to pay for pre-1978 employee retirement benefits.
2 Bartel Associates report.
Author: Scott Field
G:\RCA\2004\Tax Rate 2004-2005.doc 8/12/200411:34 AM
S
ATTACHMENT 1
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 (CalPERS). 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. It 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 Ca1PERS retirement benefit known as"2%@ 50;"and
04res&property=overridel&12104 1
• Resoluflon 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 Ca1PERS
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 earnedin.
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, Ca1PERS 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
04reso/property tax override/W12/04 2
ResolWn 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 0.00696/100t'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 0.1507/10&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 0 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 12004.
ATTEST: APPROVED AS TO FORM:
Ci Jerk ty Attorney WO) ,
REVIEWED AND APPROVED: INITIATE D APPROVED: t
(,,," C-,�C,54�
ity Adn4histrator Director Adrrnnistra 1ve Services
04reso/property tax override/8/12/04 4
Res. No. 2004-71
STATE OF CALIFORNIA
COUNTY OF ORANGE ) ss:
CITY OF HUNTINGTON BEACH )
I, 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
ty Clerk and ex-offi# Clerk of the
City Council of the City of
Huntington Beach, California
ATTACHMENT 2
City of Huntington Beach
DEL
Ca1PERS Actuarial Issues
"Cost" of 3% @ 50
August 10,2004
o:\clients\city of huntington beach\report 04-08-10.doc
i •
City of Huntington Beach
CalPERS Actuarial Issues — "Cost" of 3% @ 50
BACKGROUND
We understand the City of Huntington Beach' retirement property tax can be used to pay for
only those benefits either contracted for or effective before July 1, 1978. Furthermore we
understand the only benefit improvement effective after July 1, 1978 that affects the City's
CalPERS contribution rates has been 3% @ 50. Accordingly the City has hired Bartel
Associates to review the "Cost" of 3% @ 50 so that the retirement property tax can be
limited to 2% @ 50. This report's goal is to identify the most reasonable methodology to
determine this cost. Before discussing the "Cost" of 3% @ 50, it's important to understand
some basic terms. The following Basic Definitions have been taken from the January 2001
issue of Western City magazine.
BASIC DEFINITIONS
Understanding these terms makes it easier to understand how well funded the City's
CalPERS plan is and understand the "Cost" of a benefit improvement.
Present Value of Benefits: When CalPERS (or any actuary) prepares a pension valuation,
they first gather participant data (including active employees, former employees not in
payment status, participants and beneficiaries in payment status) at the valuation date (for
example June 30, 2002). Using this data and some actuarial assumptions, they project future
benefit payments. (The assumptions predict, among other things, when people will retire,
terminate, die or become disabled, as well as what salary increases, inflation and investment
return might be.) Those future benefit payments are discounted, using expected future
investment return, back to the valuation date. This discounted present value is the plan's
present value of benefits. It represents the amount the plan needs as of the valuation date to
pay all future benefits — if all assumptions are met and no future contributions (employee or
employer) are made.
Actuarial Liability: This represents the portion of the present value of benefits that
participants have earned (on an actuarial, not actual, basis) through the valuation date.
Actuarial Liability is also referred to as Prior Cost.
Current Employer Normal Cost: The total normal cost represents the portion of the present
value of benefits expected to be earned (on an actuarial, not actual, basis) in the coming year.
The current employer normal cost represents the employer's portion of the total normal cost
—that is,the total normal cost offset by employee contributions.
1
City of Huntington B•h
CalPERS Actuarial Issues—"Cost" of 3% @ 50
Page 2
Present Value of Benefits
Current
Employer
Normal Cost
Actuarial
Liability
Once these amounts (present value of benefits, actuarial liability and normal cost) are
calculated, the actuary compares actuarial assets to the actuarial liability. When assets equal
liabilities, a plan is considered on track for funding. When assets are greater than liabilities,
the plan has excess assets; when assets are less than liabilities, the plan has an unfunded
liability.
Contribution Rate: Ca1PERS does not require an agency to make up any shortfall (unfunded
liability) immediately, nor do they allow an immediate credit for any excess assets. Instead,
the difference is amortized over time. An agency's contribution rate is nothing more
complicated than the current employer normal cost, plus the amortized unfunded liability or
less the amortized excess assets. Simply put, this contribution is the value of employer
benefits earned during the year plus something to move the plan toward being on track for
funding. There is a two-year delay from the valuation date to the contribution effective date.
For example, the June 30, 2002 valuation generates an agency's 2004/05 fiscal year
contribution.
Fresh Start: When CalPERS prepares a valuation and determines an agency's contribution
rate, it's usually in layers, such as gains/losses or plan changes, with each layer(base) adding
up to the contribution rate. But if that calculation results in a zero contribution rate,
CalPERS combines it into one base and tells the agency it will have a zero contribution for a
fixed period. That combination is called a "fresh start." An agency with a fresh start will
know it; the actuarial report (usually on page 10) will show several bases or a single base
(labeled fresh start).
Super-Funded: When actuarial assets are greater than the present value of benefits, a plan is
super-funded. When this happens, the excess of actuarial assets over present value of
benefits may perhaps be used to pay employee contributions. However, any super-surplus
use must occur in the fiscal year for which the valuation report's contribution rate was
calculated. For example, a plan super-funded in the June 30, 2002 valuation can use this
difference to pay 2003/04 fiscal year employee contributions.
*4,
: �
2
• •
City of Huntington Beach
Ca1PERS Actuarial Issues — "Cost" of 3% @ 50
FUNDED STATUS
The City's Ca1PERS Safety plan has moved from being over-funded in 2001 to under-funded
in 2002. The following shows the plan's funded status over the last several years':
300.0 ` v` _
250.0 ;
` A,
200.0
c
150.0
§
100.0
50.0
1993 1994 1995 1996 1997 11998 1999 2000 2001 2002
❑Actuarial Liability 126.9 140.1 158.5 176.9 183.9 1203.2 217.2 258.8 283.4 1299.1
—. --
■Actuarial Asset Value 127.4 140.8 152.3,170.6 194.8 229.5 257.3 290.7 295.3 272.4
The following chart shows more detailed information at the two most recent valuation dates
(June 30, 2001 and June 30, 2002).
Present Value of Benefits
June 30,2002
Present Value of Benefits
June 30,2001
Unfunded PVB
Iidultl PVB
E.-AaxNx
(Unfunded
Liabaity)
Act,ariel
I.iabttkv
ANuarial
' Liabnflt
June 30, 2001 June 30, 2002
$ 50,200,000 Unfunded PVB $ 88,800,000
11,900,000 Excess Assets/
(Unfunded Liability) (26,700,000)
283,400,000 Actuarial Liability -299,100,000
345,500,000 PVB 361,200,000
' Information prior to June 30, 1993 is not available.
(171)
3 red
thCitY of Huntin ton •
Ca1PERS Actuarial Issues—"Cost" of 3% @ 50
Page 4
The plan went from having $11.9 million in excess assets at June 30, 2001 to having an
unfunded liability of $26.7 million at June 30, 2002. This change in funded status was
caused by the following events:
■ $37.7 million asset loss Ca1PERS' investment return (on an actuarial basis) was
significantly lower than expected (4.7% compared to an 8.25% expected rate). By
comparison there was a $10.7 million asset loss in the prior year(June 30, 2001).
■ $3.2 million actuarial gain — An actuarial gain for the plan indicates that the City's
experience was better than expected. This gain was likely caused by a combination of
factors, including smaller than expected pay increases and fewer active participants than
expected.
At June 30, 2002 actuarial assets fell short of the actuarial liability by approximately 9%.
Additionally, on a market value basis, assets are short of liabilities by approximately 17%.
Furthermore, while Ca1PERS does not measure a plan's funded status on a market value
basis, if they did, then recognizing all asset losses through June 30, 2004 would mean the
plan's funded status would drop significantly. In fact, unless future gains offset recent
losses, the plan's contribution rates must increase significantly in future years to reflect these
losses.
The above actuarial obligations are calculated using the following key actuarial
assumptions 2:
■ Economic Assumptions:
• Investment return Ca1PERS long-term investment return assumption is 8.25%,
including 3.5% inflation. Investment returns greater than 9.25% result in investment
gains and returns less than 8.25% result in investment losses. It's important to note
Ca1PERS assets are invested in a diversified portfolio designed to have the following
mix:
♦ Fixed Income 29%
Equities 65%
♦ Real Estate 6%
Their current asset allocation is very similar to the above mix.
The following chart illustrates CalPERS market value and actuarial value investment
returns over the past several years:
2 Ca1PERS has announced they will change several actuarial assumptions with their June 30,2003 valuation,
including: investment return(7.75%);Inflation(3.0%);future salary increases and various demographic
assumptions.
4
City of Huntington t h •Ca1PERS Actuarial Issues—"Cost" of 3% @ 50
Page 5
24.75%
� � �
16.50% a
8.25%
0.00% a
ra
1994 1995 1996 1997 1998 199 22000 2001 2002 2003 2004
FA AVA Rate 10.3% 8.9% '13.6% 15.9%1 19.6% 13.9% 11.0% 4.5% -4.7% 3.3% 7.4%
—Rate- — --- _ __
E—MVARate 2.0% 16.3%115.3% 20.1%119.5% 12.5% 10.5% -7.2% -6.0% 3.7% 16.5%
The above chart shows two lines, MVA (or Market Value) Rate and AVA (or
Actuarial Value) Rate. The MVA Rate is the rate Ca1PERS' assets actually earned
during the respective fiscal year end, while the AVA Rate is a smoothed rate
reflecting asset gains and losses over a period of time, rather than immediately. The
AVA Rate directly affects the City's contribution rates.
• Salary increases:
♦ Aggregate payroll growth 3.75% annually.
♦ Individual annual salary increases (including inflation, promotion, step rate, etc.):
Service Increase3
0-2 11.6%
3-6 7.4
7 + 5.2
Salary increases greater than above generate actuarial losses and lower salary
increases generate actuarial gains.
■ Demographic Assumptions: CaIPERS demographic assumptions are based on their
1990-95 experience study. The rates used are based on Ca1PERS experience for agencies
with similar plans (for example Safety 3% @ 50 formulas). Generally we have found
this study to generate results consistent with actual experience. One assumption,
retirement age, does vary somewhat from one agency to the next. Ca1PERS assumptions
generally assume Safety employees with 3% @ 50 retire at approximately age 54.
3 For those hired under age 40.
(17 at.
5
City of Huntin g ton R h •
CalPERS Actuarial Issues—"Cost" of 3% @ 50
Page 6
Historical Contribution Rates
The following chart shows the City's historical contribution rates over the past several years:
30% ;.
25% `
�k
20/o ;.
i
o Ame
F
0 \
I
15/o
10%
5%
0% @\
-5% \ \\
�.... M OR
P
-15% \�\
-20% "
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
❑Normal Cost 12.9% 13.2% 133% 13.5% 11.0% 12.5% 12.5% 17.6% 17.2% 17.3%
EM Amort Bases 1-0.1% -0.2% 2.3% 2.8% -5.9% -12.5%-12.5%-17.6% -8.2% 7.8%
®Total 12.8% 13.0% 15.6%1 163% 5.1% 0.0% 0.0% 0.0% 9.0% 25.1%1
It is important and interesting to remember that if assets equal liabilities, then the City's
contribution rate would equal the Normal Cost. However, if assets are greater than liabilities
the contribution rate is less than the Normal Cost and if assets are less than liabilities the
contribution rate is more than the Normal Cost. The above chart shows the City's
contribution rate declined rapidly in the late 1990s and has only recently begun to climb
again.
R11
City of Huntington B•h •
CalPERS Actuarial Issues—"Cost" of 3% @ 50
Page 7
CalPERS Historical Investment Return
The following chart shows CalPERS' actual (market value) investment returns back to 1986:
CalPERS Historical Market Value Rates of Return-June 30 Year Ends
Actuarial Assumed Investment Return=8.25%
24.75%
r ,w
c a
20.63%
16.50%
a
12.38%
p
8.25%
4.13%
-4.13% K
-8.25°I
1986 1987 1988 1989 1990 1991 1992 1 1993 1 1994 1995511199-6 1997 1998 1999 2000 2001 2002
24.6%13.8%3.9% 15.7%9.7%16.5% 12.°°14.5° 2 ° 1—�° i] °-°2 1°°19 ° 12 °°1
CalPERS' actual investment return will significantly impact when future contributions might
be required because future contribution rates are highly dependent on CalPERS future
investment returns. In fact, Ca1PERS investment return is the single biggest reason why the
City's contribution rates will increase, having much more impact than the 3% @ 50 benefit
improvement.
"COST"OF 3% @ 50
First of all it's very important to understand there is no perfect way to determine the "cost
of any benefit improvement. For example 3% @ 50 likely caused Safety employees to
change behavior (principally retirement) from what they would have done under 2% @ 50.
That behavior might manifest itself as a difference in retirement age or even in who the City
might hire. For example, a Safety member hired at age 25 reaches the maximum eligible
benefit (90%) at age 55 under 3% @ 50, while it would take them 3 years more to reach the
maximum under 2% @ 50. On the other hand, agencies typically negotiated lower salary
increases than would otherwise have been provided when implementing 3% @ 50. All of
these various factors are virtually impossible to quantify, making it impossible to determine
the "true"cost of a benefit improvement.
Member's retirement benefits are calculated by multiplying final compensation (monthly
average of the highest 12 months for the City's Safety members) times years of City service
times the 2% @ 50 or 3% @ 50 benefit factor at retirement, with benefits capped at 90% of
final compensation. Final compensation is, generally, base pay and does not include
overtime. Members retiring at age 50 get a substantially (50%) higher benefit under
(17,)
" 7 lea
Cityof Huntington B•
g h
Ca1PERS Actuarial Issues—"Cost" of 3% @ 50
Page 8
3% @ 50 than under 2% @ 50, while those retiring at age 55 receive a more modest (11%)
increase. The following chart shows the benefit factors for both 2% @ 50 and 3% @ 50:
0--2% @50 -+-3% @50
3.50%
3.00%
... ........o..----. .. o,... .., .d
2.50%
`0 2.00% o -- -- ---
U
(0
L 1.50% — ---
1.00% -- --------
0.50%
0.00%
50 51 52 53 54 55 56 57 58 59 60
Retirement Age
Ca1PERS experience analysis has demonstrated that Safety members with the 3% @ 50
benefit, generally retire around age 54. The above chart does not reflect different salary
increases or changes in behavior. The following table illustrates how a different salary
increase might affect retirement benefits:
3% @50 3% @50
Same Final 5% Lower
2% @ 50 Comp. Final Comp.
1. Retirement Age 54 54 54
2. Benefit Factor 2.56% 3.00% 3.00%
3. Final Compensation $ 50,000 $ 50,000 $ 47,500
4. Service 30 years 30 years 30 years
5. Annual Retirement Benefit $ 38,400 $ 45,000 $ 42,750
[(2)x(3)x(4)1
6. 3% @ 50 Increase over 2% @ 50 17.2% 11.3%
[{(5)for 3%@ 501/{(5)for 2%@ 501 - 11
Actuaries typically determine the "cost" of a benefit improvement by preparing an actuarial
study using the two alternative benefit formulas, comparing the plan's funded status and
contribution rate before and after the change. This is what Ca1PERS did when the City was
considering implementing 3% @ 50. It would be theoretically possible to make this
comparison after benefits have been improved. However, doing so would require significant
8 '
City of Huntington Ith
Ca1PERS Actuarial Issues—"Cost" of 3% @ 50
Page 9
actuarial fees and results would not consider changes in behavior, salary increases, etc. For
these reasons I recommend agencies look to Ca1PERS original Contract Amendment Cost
Analysis to determine the "cost" of 3% @ 50. When benefits are improved under Ca1PERS
law the benefit improvement applies to prior and future service. The City should consider
the "cost" of a benefit improvement as the combination of prior cost (for service before the
effective date), how that prior cost is paid for, and the normal cost (for service after the
effective date). There are several ways to determine "cost". These include, but are not
limited to:
■ Short Term Cash Flow— This method refers to the change in the contribution rate when
implementing a benefit improvement. Ca1PERS' Contract Amendment Cost Analysis,
provided to the City when implementing 3% @ 50, shows there was no increase in the
City's contribution rate, meaning that 3% @ 50 had no short term cost. This essentially
freezes the "cost" at zero and allows excess assets ($31.8 million after the amendment) to
pay for both prior and future "cost". It is important to note this zero contribution rate is
consistent with Ca1PERS' Board contribution policy at the time, which was to minimize
agency contributions increases, within certain parameters, due to benefit improvements.
■ Normal Cost— Normal Cost represents the value of benefits being earned (or allocated)
to a particular year and is the best representation of the long term impact of a benefit
improvement. In fact Ca1PERS' Contract Amendment Cost Analysis said:
"Note that the change in normal cost in the table above may be much more indicative of
the long term change in the employer contribution rate due to the plan amendment."
The Contract Amendment Cost Analysis indicates the Normal Cost increased 4.589%
due to the benefit improvement from 2% @ 50 to 3% @ 50. This method allows excess
assets to pay for the prior cost, while attributing future costs to the increase in the Normal
Cost.
■ Use No (or Limited) Excess Assets— The City's Safety plan was very well funded when
3% @ 50 was implemented. However, one measure of"cost" is to look at the theoretical
cash flow impact of the benefit improvement. This theoretical increase is comprised of
the Normal Cost plus an amortization of the increase in the Plan's Unfunded Actuarial
Liability due to the amendment. Ca1PERS' Contract Amendment Cost Analysis shows
the Plan's Unfunded Actuarial Liability increased $8.4 million due to the benefit
improvement. This increase was comprised of a $20.15 million Actuarial Liability
increase offset by a $11.74 million Actuarial Asset increase. The following table shows
the plan's funded status impact using and not using the additional Actuarial Asset
Increase:
After 3% @ 50
Including Excluding
Actuarial Asset Actuarial Asset
Before 3% (a, 50 Increase Increase
Unfunded PVB $ 6,300,000 $ 26,200,000 $ 37,900,000
Excess Assets 40,200,000 21,500,000 9,800,000
Actuarial Liability 217,200,000 247,600,000 247,600,000
PVB 263,700,000 295,300,000 295,300,000
9 Fed
City of Huntin g ton t h
Ca1PERS Actuarial Issues—"Cost" of 3% @ 50
Page 10
The following table shows the plan's contribution rate impact with and without the
additional Actuarial Asset Increase, irrespective of how well funded the plan was before
the benefit improvement:
Including Excluding
Actuarial Actuarial
Asset Increase Asset Increase
• Normal Cost 4.6% 4.6%
• Prior Cost Amortization(20-years) 3.7% 7.8%
• Total 8.3%4 12.4%5
This method includes either a small portion of excess assets (as indicated above under the
"Including Actuarial Asset Increase" column) or no excess assets (as indicated above
under the "Excluding Actuarial Asset Increase" column). Furthermore it amortizes the
prior cost over 20-years, consistent with Ca1PERS general actuarial policy. Using a
20-year amortization means the City would use one rate for 20-years (for example 8.3%)
and the Normal Cost (4.6%) beyond 20-years. However, as pointed out by Ca1PERS
staff, the City could amortize the prior cost in perpetuity. Under this method the City
could use one rate on into the future. The following table shows the contribution rate
impact using this method:
Excluding
Actuarial Asset
Increase
• Normal Cost 4.6%
• Prior Cost Amortization(perpetuity) 4.7%
• Total 9.1%6
We have only shown the perpetuity contribution impact excluding the actuarial asset
increase. Doing otherwise would perpetuate an asset gain and be inconsistent with
generally accepted actuarial practice.
■ Use A Portion of Excess Assets— This method excludes the portion of excess assets that
can be attributed to City contributions made after July 1, 1978 from paying for the benefit
increase. The above methods do not consider what portion of the plan's funded status
(when 3% @ 50 was implemented) was derived from sources that could legitimately be
used to fund the improved benefit. For example the plan's funded status (and
consequently contribution rate) can, theoretically, be segregated into three contribution
sources:
1. Pre July 1, 1978 employee and City contributions;
2. Post June 30, 1978 employee contributions; and
3. Post June 30, 1978 City contributions.
4 8.3%for first 20 years and 4.6%thereafter.
5 12.4%for first 20 years and 4.6%thereafter.
6 9.1%would be used for all years.
10
City of Huntington t h
Ca1PERS Actuarial Issues—"Cost" of 3% @ 50
Page 11
This method is a compromise between the Normal Cost method (which uses all plan
assets to offset the benefit improvement) and the Use No (or Limited) Excess Assets
method (which uses no assets to offset the benefit improvement). Essentially excess
assets attributable to item 3 above would be excluded in determining the plan's funded
status before the 3% @ 50 benefit cost is determined.
Bartel Associates discussed with Ca1PERS what historical information is available to do
this allocation. Complete historical records are not available. Ca1PERS provided Bartel
Associates with their readily available information. Based on this information, and
making several very significant assumptions for missing information, we've estimated
excess plan assets (before 3% @ 50 cost is calculated) may be attributable to the
following contribution sources:
Allocation Source Allocation %
1. Pre July 1, 1978 employee and City contributions 51%
2. Post June 30, 1978 employee contributions 18%
3. Post June 30, 1978 City contributions 31%
Applying the above percentages to the plan's funded status results in the following
funded status change:
Before 3% (a) 50
Before Excess is After Excess is
Allocated Allocated After 3% (& 50
$ 6,300,000 $ 20,400,000 Unfunded PVB $ 50,400,000
40,200,000 26,100,000 Excess Assets/
(Unfunded Liability) (2,700,000)
217,200,000 217,200,000 Actuarial Liability 247,600,000
263,700,000 263,700,000 PVB 295,300,000
Using the two amortization methods discussed earlier (20-year amortization and
perpetuity) results in the following 3% @ 50 "Cost" impact:
20-Year Perpetuity
Amortization Amortization
• Normal Cost 4.6% 4.6%
• Prior Cost Amortization(20-years) 3.3% 1.9%
• Total 7.9%8 6.5%9
The above indicated results should not be considered precise. Alternative assumptions
will likely yield very different results with a high degree of variance.
7 Assumptions made include: actual(City and employee)contribution amounts and Ca1PERS investment
returns before 1983,among others.
8 7.9%for first 20 years and 4.6%thereafter.
9 6.5%would be used for all years.
6711)",
�a
11
City g of Huntington Beach •
CalPERS Actuarial Issues—"Cost" of 3% @ 50
Page 12
For administrative simplicity a single determined rate is preferable. However, there is an
argument that the above method should also be used to allocate gains and losses after
June 30, 1999 (the valuation date from which the Contract Amendment Cost Analysis
was prepared). However, doing so will yield results that will vary from one year to the
next, become administratively difficult and likely yield unreliable results.
There are advantages and disadvantages to each of the above methods. The Short Term Cash
Flow method is not generally reasonable because it implies there is no "cost" to the benefit
improvement. Furthermore, the Use No (or Limited) Excess Assets method virtually ignores
how well funded the plan was when benefits were improved. Both the Normal Cost method
and the Use a Portion of Excess Assets method consider the Plan's funded status. It's
important to note that CalPERS' Contract Amendment Cost Analysis shows that, after
3% @ 50 was implemented, the plan still had very large excess assets. Consequently, if all
excess assets, which generally were due to CalPERS investment returns greater than
expected, are used to pay for the prior cost component of 3% @ 50, then it is reasonable to
consider the "Cost" of 3% @ 50 as being equal to the increase in the Normal Cost. An
additional advantage to Normal Cost is that it represents the "cost" of the benefit
improvement attributable to a single year. Another way to say this is that Normal Cost
represents the value of benefits being earned during the year by members providing services
to taxpayers. Consequently, from a taxpayer's generational equity standpoint the increase in
the Normal Cost, due to the new formula, represents the best and most reasonable estimate of
the value of the benefit increase. If the City wants to allocate excess assets based on their
contribution source, the Use a Portion of Excess Assets method is theoretically reasonable.
However, the available information is far from complete and different assumptions might
yield dramatically different results.
SUMMARY AND CONCLUSION
Determining the true "cost" of 3% @ 50 is virtually impossible. If accurate historical
information were available we would be inclined to recommend using the Use a Portion of
Excess Assets method. However, the available information is modest and assumptions used
to estimate missing information can significantly skew results. Consequently, unless
accurate historical information can be developed, we can not recommend this method.
The best information available is CalPERS Contract Amendment Cost Analysis. This
information suggests the best and most reasonable, long term indicator of "cost" is the
change in Normal Cost due to the benefit improvement. As mentioned before CalPERS
Contract Amendment Cost Analysis said:
"Note that the change in normal cost in the table above may be much more indicative of
the long term change in the employer contribution rate due to the plan amendment."
An additional advantage to using Normal Cost is that this amount is constant and should not
vary into the future. Consequently we recommend the City use 4.6% as the portion of the
Safety contribution rate that can not be paid from the retirement property tax.
12 mej,
R A ROUTING
C
INITIATING DEPARTMENT: ADMINISTRATIVE SERVICES
SUBJECT: ADOPTION OF 2004/2005 TAX RATE
COUNCIL MEETING DATE: August 16, 2004
IM
ST�T.
Ordinance (w/exhibits & legislative draft if applicable) Not Applicable
Resolution (w/exhibits & legislative draft if applicable) Attached
Tract Map, Location Map and/or other Exhibits Not Applicable
Contract/Agreement (w/exhibits if applicable)
(Signed in full by the City Attome Not Applicable
Subleases, Third Party Agreements, etc.
(Approved as to fonn by City Attome Not Applicable
Certificates of Insurance (Approved by the CityAttome ) Not Applicable
Financial Impact Statement (Unbudget, over $5,000) Not Applicable
Bonds (If applicable) Not Applicable
Staff Report If applicable) Not Applicable
Commission, Board or Committee Report (If applicable) Not Applicable
Find in s/Conditions for Approval and/or Denial Not Applicable
RE
I 0
Administrative Staff G-All
Assistant City Administrator Initial
City Administrator (Initial)
City Clerk
F IT
Only)(Below Space For City Clerk's Use
RCA Author: Scott Field