Running head: CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS
Recommendations to Reduce Costs for the City of Bakersfield’s Defined Benefit Pension Plans –
Focus on Plans Financed within the General Fund
By
Georgina Lorenzi
California State University, Bakersfield
A Policy Analysis Presented to the Faculty of the Department of Public Policy and Administration
CALIFORNIA STATE UNIVERSITY, BAKERSFIELD
In Partial Fulfillment of the Requirements for the Degree
MASTERS OF PUBLIC ADMINISTRATION
Spring 2012
Copyright
By
Georgina Lorenzi
2012
------CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS
Recommendations to Reduce Costs for the City of Bakersfield's Defined Benefit Pension Plans-
Focus on Plans Financed within the General Fund
By
Georgina Lorenzi
This thesis project has been accepted on behalf of the Department of Public Policy and Administration by their supervisory committee:
2
Dr. Jinping Sun, Ph.D. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS i
Table of Contents
List of Tables ...... iii List of Figures ...... iv Executive Summary ...... v Chapter 1 - Introduction ...... 1 Pension Costs within the General Fund ...... 2
Unfunded Pension Liabilities ...... 7
Summary of Participant Data ...... 9
Statement of the Problem ...... 10
Purpose of the Study ...... 11
Importance of the Study ...... 12
Chapter 2 – Literature Review ...... 13 Factors Leading to Increased Pension Costs ...... 13
Factors Impacting Public Sector Defined Benefit Pension Plans ...... 16
Unfunded Pension Liability ...... 18
Little Hoover Commission’s Report – “Public Pensions for Retirement Security” ...... 19
Governor Jerry Brown’s “Twelve Point Pension Reform Plan” ...... 21
Legislative Analyst’s Office Initial Response to Governor’s Proposal ...... 25
Additional Responses to Governor’s Proposal ...... 29
Synthesis of Literature Review ...... 31
Chapter 3 – Analysis of Alternatives ...... 33 City of Bakersfield Pension Plan Changes for Bargaining Units ...... 34 CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS ii
City of Bakersfield Pension Enhancements per CalPERS’ Actuarial Reports ...... 37
Analysis of Recommendations Proposed by Little Hoover Commission...... 38
Analysis of Recommendations Proposed by Governor Brown ...... 40
Synthesis of Analyses ...... 43
Chapter 4 - Summary ...... 45 Conclusion ...... 45
Recommendations ...... 46
Limitations of Study ...... 49
Research Recommendations ...... 49
References ...... 51 Appendix A: City of Bakersfield – PERS Reportable / Nonreportable Compensation ...... 58 Appendix B: IRB ...... 60
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS iii
List of Tables
Table 1: General Fund Only - Employer Share of Pension Costs as Compared to Total General Fund Expenditures…………………………………………………5
Table 2: PERS – Changes in Actuarial Liabilities (Inclusive of All Pension Plan Types and All City of Bakersfield Funds)………………………………………...8
Table 3: Unfunded Liability by Plan Type as of June 30, 2010…………………………………7
Table 4: Number of Members per Plan Type as of June 30, 2010………………………………9
Table 5: Number of Members per Plan Type as of June 30, 1995………………………………9
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS iv
List of Figures
Figure 1: FY 11/12 General Fund Budget by Governmental Activity…………………………...4
Figure 2: Allocation of FY 11/12 Appropriations for Employer Share of Pension Obligations by Plan Type – General Fund Only……………………………..…………………..6
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS v
Executive Summary
Government agencies throughout California face complicated issues with public employee defined benefit pension plans. Market earnings on pension investments have plummeted with the decline of the U.S. economy. This market downturn increases pension costs for governmental agencies. As pension costs continue to command a significant allocation of governmental funding, services offered to citizens may decline to levels unsatisfactory to various stakeholders – citizens, elected officials, government agencies, private sector, and employees of these government agencies. However, salaries and benefits not comparable with the private sector and other governmental agencies may fail to attract qualified personnel to provide these very same services to citizens and the community. Public employee pension plans create political and emotional arguments by a myriad of stakeholders that may compromise and inhibit objective decision-making. Therefore, unbiased and objective analysis and interpretation is required even more with the politics and emotions inherent with this issue. This study explores pension costs, as reported within the General Fund, for the City of Bakersfield. The City of Bakersfield’s pension costs increased from a low of $3.7 Million in Fiscal Year 2000/01 to a high of $24.7 Million in Fiscal Year 2011/12 – a 562% increase. In addition, the actuarial value of the City of Bakersfield’s PERS plan assets, inclusive of all funding sources, over the accrued liability was $94 Million to the good in Fiscal Year 1998/99. For Fiscal Year 2009/10, the accrued liabilities exceeded plan assets by approximately $149 Million. Literary review of issues impacting public employee pension plans is also included in this study. Recommendations to curb public sector pension costs abound. This study focuses on recommendations offered by the Little Hoover Commission and Governor Brown’s “Twelve Point Pension Reform Plan.” This study then concludes with suggestions dealing specifically with rising costs for the City of Bakersfield’s defined benefit pension plans. At this point, a disclosure is necessary to address potential bias on the author’s part. The author of this study is currently a 26-year employee with the City of Bakersfield and is a participant in the Miscellaneous defined benefit pension plan.
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 1
Chapter 1 - Introduction
Public employee retirement plans continue to be a concern of various stakeholder groups.
Within the State of California, state and local agency employees participate in a defined benefit pension plan. Defined benefit pension plans afford plan participants a fixed monthly benefit based upon years of service and compensation. This means the employer (government agencies) bear both the benefit and cost of market value fluctuations. In contrast, private sector employers are primarily covered under a defined contribution plan. For the most part, this plan shifts both the future benefits and costs of market fluctuations to the employee and not the employer. Thus, a fundamental divide exists between defined benefit and defined contribution plans. Opponents of defined benefit pension plans assert, “Why should government employees enjoy retirement benefits greater than that earned in the private sector, such as retiring at an earlier age and fixed monthly benefits?” Proponents of defined benefit pension plans assert, “Government employees typically earn less than private sector employees; the enhanced pension plan lessens the severity of this disparity.”
According to an editorial in The Modesto Bee regarding pension measures coming before local voters in the November 8, 2011 election, “Today’s biggest problems date back to 1999, when the Legislature approved significantly enhanced pensions for state workers. The basic formula went to 3 percent at 50 for police and other public safety employees and 2.5 percent at
55 for other workers…The City of Modesto was among the first local governments to follow the state’s move to the higher retirement promises, subscribing to the argument the city would lose good employees or wouldn’t be able to hire good people if its retirement benefits were below the norm” (Editorial, “Pension Measures Inadequate,” 2011). Within the State of California, many governmental agencies adopted this enhanced retirement benefit for the same reason as the City CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 2 of Modesto. Now, with governmental agencies facing budget challenges because of decreasing revenue, various stakeholder groups challenge the very existence of this enhanced retirement benefit, while at the same time, other stakeholder groups adamantly defend this benefit.
This study focuses on the retirement plan for one government agency, the City of
Bakersfield. As did the City of Modesto, the City of Bakersfield also adopted the enhanced retirement benefit initiated by the State of California. The City of Bakersfield is a Charter City, incorporated on January 11, 1898. The City has a Council – Manager Form of government (City of Bakersfield, 2011, Comprehensive Annual Financial Report, p. 47). The City is typical of other government agencies in that the City provides a myriad of services to the community.
Funding sources for these services vary by legislative oversight, types of services provided, and funding restrictions. This study focuses on the impact of the City’s defined benefit pension plan on one major funding source, specifically the General Fund. “The General Fund is the principal operating fund of the City. It is used to account for financial resources except those required to be accounted for in another fund. For the City, the General Fund includes basic governmental activities such as general government, public safety, public works and community services”
(City of Bakersfield, 2011, Comprehensive Annual Financial Report, p. 48).
Pension Costs within the General Fund
The adopted Fiscal Year 2011/12 budget for the General Fund was $176,431,500 (City of
Bakersfield Fiscal Year 2011/12 Budget, p. 12). Of this amount, $25,118,250 was budgeted for nondepartmental costs, contingencies, and transfers out to other funds; generally, these costs are not attributable to a specific department. Therefore, the net General Fund budget for departmental costs was $151,313,250. Of that amount, $24,701,080 was budgeted for miscellaneous, police, and fire pension costs (City of Bakersfield expenditure reports, 2011-12). CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 3
Therefore, public employee retirement costs currently command 16% of the FY 2011/12 General
Fund departmental budget.
Figure 1 illustrates the allocation of General Fund monies to various governmental activities for FY 2011/12. The largest share of the General Fund budget is allocated to public safety with the Police Department’s allocation at 38% and the Fire Department’s allocation at
17%. Consequently, pension obligations impact public safety service levels provided to citizens.
Table 1 summarizes pension costs for the last 18 fiscal years for the City of Bakersfield.
The table also compares pension costs as a percentage of total General Fund expenditures, net of nondepartmental costs and transfers out. However, the following table does not take into account the unfunded pension liability for the various units. In addition, the retirement costs reported for
Fiscal Year 2011/12 budget excludes $4.5 Million appropriated as one-time monies to stabilize future rate increases (City of Bakersfield Fiscal Year 2011/12 Budget, p. vii). Essentially, this
$4.5 Million is reserved to offset future pension costs. Pension costs increased from a low of 4% of General Fund expenditures to a high of 16% in current fiscal years. In monetary terms, pension costs grew from a low of $3.7 Million in Fiscal Year 2000/01 to a high of $24.7 Million in Fiscal Year 2011/12. This amounts to a 562% increase.
Figure 2 illustrates FY 2011/12 appropriations for pension obligations by plan type for the General Fund. The Police plan type commands approximately 50% of General Fund pension obligations, followed by the Miscellaneous plan type at 30%, with the Fire plan type at 21%.
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 4
Figure 1: FY 11/12 General Fund Budget by Governmental Activity
Police 38.18% Fire 17.44%
Transfers 3.89% Public Works Non-Departmental 10.70% 10.34% Recreation & Parks 9.35% Economic Development General Development Government 6.17% Services 3.93% 0.00%
Source: City of Bakersfield Proposed Budget Fiscal Year 2011/2012, p. 13 CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 5
Table 1: General Fund Only - Employer Share of Pension Costs as Compared to Total General Fund Expenditures
Employer Share of Pension Costs
Total General Fund Expenditures Fiscal Year Fire Police Miscellaneous Total - A – B (Note 1) A/B 2011/12 5,169,800 12,037,375 7,493,905 24,701,080 151,215,250 16% 2010/11 4,592,178 10,282,004 5,994,601 20,868,783 141,827,009 15% 2009/10 4,442,206 10,129,905 6,263,669 20,835,780 145,285,933 14% 2008/09 4,636,784 10,178,069 6,806,479 21,621,332 155,003,535 14% 2007/08 4,587,886 10,021,324 6,654,242 21,263,452 160,395,332 13% 2006/07 4,586,887 9,502,395 6,453,529 20,542,811 151,901,851 14% 2005/06 4,898,408 9,944,318 5,951,784 20,794,510 136,749,473 15% 2004/05 5,077,237 8,680,666 4,054,856 17,812,759 123,133,966 14% 2003/04 2,798,473 5,519,294 2,225,861 10,543,628 108,442,520 10% 2002/03 1,285,175 2,840,138 1,488,917 5,614,230 104,706,837 5% 2001/02 953,416 1,927,664 1,085,211 3,966,291 95,625,766 4% 2000/01 909,168 1,785,801 1,035,723 3,730,692 92,383,793 4% 1999/2000 1,498,751 2,439,774 1,011,266 4,949,791 87,648,559 6% 1998/99 2,167,629 3,655,141 1,871,666 7,694,435 85,190,474 9% 1997/98 1,602,016 3,358,406 2,109,194 7,069,617 81,532,773 9% 1996/97 1,687,858 2,802,634 2,026,530 6,517,022 75,996,136 9% 1995/96 1,719,165 2,430,360 2,194,047 6,343,572 71,316,880 9% 1994/95 1,665,500 2,308,982 2,224,965 6,199,447 67,867,684 9%
Source: Data for expenditure and appropriation amounts reported in the above table were obtained from the City of Bakersfield’s General Fund expenditure and appropriation reports from Fiscal Years 1994/1995 to 2011/2012. Fiscal Year 2011/12 appropriation for the General Fund and Development Fund per the appropriation report totaled $176,361,500. The City of Bakersfield Final Budget for Fiscal Year 2011/12, as reported on page 12 of the budget document for the same funds, totaled $176,431,500. This is a minor variance of $70,000. The above table uses the appropriation report.
Note 1 – Nondepartmental costs and transfers out were omitted from this Table. Nondepartmental costs reflect costs not attributable to a specific department. Examples include, but are not limited to, retiree medical benefits, elections, and bond payments. Transfers out reflect transfers to other funding sources.
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 6
Figure 2: Allocation of FY 11/12 Appropriations for Employer Share of Pension Obligations by Plan Type – General Fund Only
Fire Misc 21% 30%
Police 49%
Source: Information for Figure 2 obtained from Table 1.
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 7
Unfunded Pension Liabilities
Table 2, obtained from the City of Bakersfield’s Finance Department, illustrates the
City’s escalating unfunded pension liability. The figures shown in this table includes all funding sources for the City of Bakersfield rather than solely the General Fund. Information isolating the unfunded pension liability for the General Fund was not available. The table, however, succinctly depicts the City’s growing pension obligations. In Fiscal Year 1998/99, the actuarial value of plan assets as compared to the accrued pension liability reflected a favorable $94
Million. Eleven years later, in Fiscal Year 2009/10, the actuarial value of plan assets as compared to the accrued pension liability reflects a shortfall of $149 Million.
Table 3 summarizes the unfunded liability by plan type as of June 30, 2010.
Table 3: Unfunded Liability by Plan Type as of June 30, 2010
Actuarial Accrued Value of Unfunded Funded Type of Plan Liability Assets Liability Status Miscellaneous Plan $353,164,518 $298,395,830 $54,768,688 84.5%
Safety Fire Plan 196,834,345 173,944,069 22,890,276 88.4% Safety Police Plan 299,121,868 228,195,091 70,926,777 76.3%
$849,120,731 $700,534,990 $148,585,741 82.5% Source: Information obtained from CalPERS Annual Valuation Reports as of June 30, 2010 for each plan type.
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 8
Table 2: PERS – Changes in Actuarial Liabilities (Inclusive of All Pension Plan Types and All City of Bakersfield Funds) City of Bakersfield PERS - Changes in Actuarial Liabilities
Actuarial Value of Assets Unfunded Accrued Funded Rates of Liability Actuarials Liability Amount Ratio Return (Excess Assets)
June 30, 1995 219,248,273 220,945,178 100.8% 16.3% (1,696,905)
June 30, 1996 245,030,778 249,992,622 102.0% 15.3% (4,961,844)
June 30, 1997 257,713,133 287,986,995 111.7% 20.1% (30,273,862)
June 30, 1998 286,769,738 360,754,856 125.8% 19.5% (73,985,118)
June 30, 1999 307,202,932 401,527,937 130.7% 12.5% (94,325,005)
June 30, 2000 354,930,418 440,711,475 124.2% 10.5% (85,781,057)
June 30, 2001 403,134,303 452,859,557 112.3% (7.2%) (49,725,254)
June 30, 2002 452,567,329 424,829,183 93.9% (5.9%) 27,738,146
June 30, 2003 498,947,473 431,660,964 86.5% 3.9% 67,286,509
June 30, 2004 551,590,833 459,851,010 83.4% 16.7% 91,739,823
June 30, 2005 591,996,498 498,488,041 84.2% 12.7% 93,508,457
June 30, 2006 639,547,063 542,328,893 84.8% 12.3% 97,218,170
June 30, 2007 690,846,839 592,207,250 85.7% 19.1% 98,639,589
June 30, 2008 739,842,496 636,609,076 86.0% (4.9%) 103,233,420
June 30, 2009 813,589,843 668,358,460 82.1% (23.4%) 145,231,383
June 30, 2010 849,120,731 700,534,990 82.5% 11.6% 148,585,741
* Actuarials are used to set the City's Employer PERS Rates for the third fiscal year following the date of the actuarial (i.e. June 30, 2010 actuarial was used to set the rates for the 2012-13 fiscal year budget).
Source: City of Bakersfield Finance Department. Asterisked footnote also obtained from City of Bakersfield Finance Department.
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 9
Summary of Participant Data
Participant plan data, as stated in the CalPERS Annual Valuation Reports as of June 30,
2010 and 1995, provided the number of members per plan type (refer to Tables 4 and 5). In addition, members are further classified according to active, terminated, and retired members.
The active to retired ratio illustrates the number of active members as compared to the number of retired members. In comparing these two fiscal years, the active to retired ratio has increased for each plan type.
Table 4: Number of Members per Plan Type as of June 30, 2010
Member Classification Active to Retired Type of Plan Active Transferred Terminated Retired Total Ratio Miscellaneous Plan 909 417 259 571 2156 1.59 Safety Fire Plan 178 18 10 175 381 1.02 Safety Police Plan 351 47 25 316 739 1.11 Source: Information obtained from CalPERS Annual Valuation Reports as of June 30, 2010 for each plan type.
Table 5: Number of Members per Plan Type as of June 30, 1995
Member Classification Active to Retired Type of Plan Active Transferred Terminated Retired Total Ratio Miscellaneous Plan 650 149 46 294 1139 2.21 Safety Fire Plan 176 15 4 103 298 1.71 Safety Police Plan 251 73 29 156 509 1.61 Source: Information obtained from CalPERS Annual Valuation Reports as of June 30, 1995 for each plan type.
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 10
Statement of the Problem
Similar to other public agencies, employee benefit pension costs for the City of
Bakersfield have escalated. The City of Bakersfield’s pension costs increased from a low of $3.7
Million in FY 2000-01 to a high of $24.7 Million in FY 2011-12 within the General Fund’s operating budget. The unfunded pension liability for the City as a whole climbed to $149 Million as of June 30, 2010. General Fund operating budget represents the primary funding source for basic community services including public safety, parks, recreation, and public works. If pension costs continue to escalate or remain static, services offered to the public could very likely be negatively impacted. Therefore, the fiscal sustainability of the current level of public employee defined benefit pension plans has become an important policy analysis issue, commanding the attention of various stakeholders.
Essentially, can the City of Bakersfield’s General Fund maintain current pension benefits for police, fire, and miscellaneous employees while maintaining customary and acceptable service levels to the community? Numerous other public agencies grapple with the same issue albeit different funding source(s). Fiscal sustainability of public employee pension plans remains a part of the public policy agenda for many reasons, including soaring costs; impact on taxpayers and recipients of government services; self-interest; politics; union influence and power; and, a broad array of stakeholders. Ideas from multiple sources have been offered with, to date, no one idea acceptable to the myriad of stakeholders. Lately, pension reform appears to evolve through local ballot measures, such as Measure D for the City of Bakersfield. Measure D is summarized later in this study.
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 11
Purpose of the Study
The purpose of this study is:
First, in Chapter 2 to review the literature regarding public sector pension plans.
• Factors Leading to Increased Pension Costs – This section includes several benefit
enhancements impacting pension obligations for the City of Bakersfield. Pension
enhancements enacted by the Bakersfield City Council are summarized within Chapter 3
of this study.
• Factors Impacting Public Sector Defined Benefit Pension Plans – This section includes
research on the disparity between public and private pension plans, the role of unions in
this issue, and advantages of defined benefit pension plans.
• Although ideas abound in the field of pension reform, this study focuses on only two
sources of pension reform recommendations, namely:
o The “Public Pensions for Retirement Security” Report issued by the Little Hoover Commission in February 2011; and,
o Governor Jerry Brown’s “Twelve Point Pension Reform Plan.” This Section also includes comments regarding the Governor’s Plan.
Second, in Chapter 3 this study examines options that could be useful to the City of
Bakersfield to curb escalating pension costs. This study shall use the analysis of the key reports
identified in Chapter 2 to determine plausibility of these recommendations for the City of
Bakersfield. However, before attempting to address the escalating pension obligation costs for the City of Bakersfield’s General Fund, this study first explores factors contributing to the increase in General Fund pension obligations from a low of $3.7 Million in FY 2000/01 to a high of $24 Million in FY 2011/12. Chapter 3 includes: CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 12
• Summary of pension enhancements approved by the City Council
• Summary of pension enhancements per CalPERS’ actuarial reports
• Analysis of selected recommendations proposed by the Little Hoover Commission
• Analysis of selected recommendations proposed by Governor Brown
Lastly, Chapter 4 of this study concludes with plausible recommendations for the City of
Bakersfield and an identification of hurdles to implementing these recommendations.
Recommendations for further research are also provided.
Importance of the Study
Public sector employees deliver basic core services to citizens. For instance, one cannot imagine how one’s community will devolve without police and fire personnel protecting citizens.
Unarguably, public sector employees should receive equitable pay and benefits for the services they provide. One can reasonably argue that without adequate pay and benefits, the public sector may fail to attract top candidates for a position. On the other hand, unless other funding sources can be identified, public sector compensation and benefits are bounded by both the fiscal sustainability of these benefits and the level of services to be offered to the public. Public sector pension plans remain a highly contested topic for today’s stakeholders. There is no easy answer to satisfy the myriad of stakeholders. More and more, the decisions regarding public sector pension plans are going to the voters since the public sector seems either unable or unwilling to tackle this issue. Therefore, this study offers insight into how one public agency arrived at the point where pension obligations account for 16% of its General Fund operating budget and alternatives to control these costs in the future. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 13
Chapter 2 – Literature Review
This review of the literature examines factors leading to increased pension costs for government agencies in general, including the City of Bakersfield. Moreover, also reviewed are factors affecting public sector defined benefit pension plans and factors contributing to escalating costs amongst public sector agencies. For instance, solutions to curb rising pension costs would most likely be unsuccessful without consideration of both internal and external stakeholders, such as unions. This study includes a brief overview of the complexity of computing future pension obligations. The literature review concludes with recommendations proposed by the
Little Hoover Commission and Governor Brown to determine the plausibility of these recommendations for the City of Bakersfield.
Factors Leading to Increased Pension Costs
Factors other than market conditions contributed to increased pension obligation costs.
This Section identifies several benefit enhancements impacting pension costs for the City of
Bakersfield.
The City of Bakersfield, as did many other agencies, followed the State’s lead in approving enhanced employee retirement benefits. One significant enhancement was the change in retirement benefit formulas for state employees in both the miscellaneous and safety groups.
The Legislative Analyst’s Office Report titled “State Employee Compensation: The
Recently Approved Package” (1999) summarized the fiscal impact of both compensation and benefit enhancements approved by the Legislature for the States’ 21 collective bargaining units.
One retirement benefit enhancement, as provided for under Senate Bill No. 400 Chapter 555, was approved by the Legislature and the Governor in September 1999. The standard formula, per year of service, was enhanced as follows (State of California LAO, 1999, p. 7): CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 14
• Miscellaneous / Industrial – Existing: 2 percent at 60; New: 2 percent at 55
• Safety – Existing: 2 percent at 55; New: 2.5 percent at 55
• Peace Officer / Firefighter – Existing: 2.5 percent at 55; New: 3 percent at 55
• Highway Patrol - Existing: 2 percent at 50; New: 3 percent at 50
LAO findings indicated that the enhanced retirement benefits would cost over $400
million for all funds beginning in fiscal year 2001-02. LAO concluded, “These costs will be
offset in part by actuarial changes adopted by the Public Employees’ Retirement System board”
(State of California LAO, 1999, p. 1). In fact, the same LAO Report stated that the enhanced
retirement benefits provided under Chapter 555 would become effective January 1, 2000 subject
to three conditions. The third condition “required the PERS board to approve the changes to the
actuarial valuation methods that the board committed to when it proposed enhancement benefits
earlier this year” (State of California LAO, 1999, pp. 5-6).
An article prepared by CalPERS is included in the literature review even though
CalPERS should not be considered as an objective source. This article, “Addressing Benefit
Equity: The CalPERS Proposal SB 400 (Ortiz and Burton),” illustrates the frame of reference of a major stakeholder in the public arena of public sector pension benefits. CalPERS provided justifications for the proposal to improve retirement benefits in 1999. As pointed out by
CalPERS, one justification to improve retirement benefits for miscellaneous employees was that in 1990 Governor Deukmejian signed legislation allowing local agencies to provide miscellaneous employees a 2 percent at 55 retirement package based upon the final year of compensation (CalPERS, 1999, p. 8). The City of Bakersfield was included on the list of local agencies providing the 2 percent at 55 retirement package. Before Chapter 555, State miscellaneous employees had a 2 percent at 60 retirement package. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 15
Several questions surface which are beyond the scope of this study:
• Based upon the LAO Report, it appears that the CalPERS board made the initial
recommendation for this enhanced benefit. Is this an appropriate role for the CalPERS
board?
• Should governmental agencies throughout California adopt similar retirement packages
to alleviate potential for sequential enhancements if one agency enhances benefits within
their jurisdiction?
• How large a role should CalPERS play in determining retirement packages offered by
governmental agencies? Should CalPERS’ role be limited to fiduciary responsibilities?
Additionally, Chapter 231 (Assembly Bill 2099), approved by the Governor August 3,
1998, provided local agencies greater flexibility in funding pension obligation costs. This Act amended Section 20816 of the Government Code, specifically the Public Employees’ Retirement
System. Chapter 231 stipulates that “On and after January 1, 1999, contracting agencies for which the actuarial value of assets exceed the present value of benefits as of the most recently completed valuation, as determined by the chief actuary, may request that the board transfer employer assets to member-accumulated contribution accounts to satisfy all member contributions required by this part” (State of California State Senate, 1998). As instructed in a
CalPERS Circular Letter to member agencies, Chapter 231 allowed for agencies with super- funded status, defined as the actuarial value of assets exceeding the present value of benefits, to transfer employer assets to “member accumulated contribution accounts” (CalPERS, 1999).
Retirement plan changes specific to the City of Bakersfield are summarized in Chapter 3 of this study. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 16
Factors Impacting Public Sector Defined Benefit Pension Plans
Why do public sector defined benefit pension plans significantly impact public agencies’ budgets? One reason is that public sector defined benefit pension plans offer participants more generous retirement benefits than private sector employees (Edwards, 2010).
Edwards argues that current public sector pensions afford employees: a) the ability to retire earlier than private sector employees; and b) the ability for some public employees to spike their salaries in the base period used to compute pension benefits (2010). Edwards provides summary information regarding the disparity between public and private sector compensation costs, including retirement benefits. For example, Edwards compared the gap between the public and private sectors for both salaries and benefits, including defined benefit pension plans, in June
2009 dollars per hour worked. Edwards’ analysis found that while private sector workers earned
$.41 per hour worked in a defined benefit retirement plan, public sector employees earned $2.85 per hour worked for the same benefit (2010). However, detailed statistical analysis of the impact of public sector pension plans on specific state and local agencies’ budgets should be analyzed to provide real examples of the impact of pension costs in communities. This study would either prove or disprove the hypothesis that public pensions command a significant share of public agencies’ budgets and therefore must be addressed when examining a public agency’s fiscal stability.
Another contributing factor to the costs of public sector defined benefit pension plans lies with public sector unions. Edwards provided empirical evidence of the impact of public sector unions on members’ compensation and benefits. Edwards (2010) compares public sector compensation with and without union presentation, and finds a positive correlation with union representation and higher compensation and benefits. For example, Edwards asserts that CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 17
California’s 62 percent union membership “translates into a statewide boost in public sector
compensation costs of more than 10 percent, according to these regression results” (2010, p.
109). Providing further evidence of the influence of public sector unions, Mitchell notes, “In
public employment in California, the union representation rate was 57.5 percent compared with
only 10.2 percent in private employment” (Mitchell, 2006, p. 105). Mitchell argues that
California Governor Schwarzenegger’s November 2005 special election antagonized unions,
which contributed to the defeat of all initiatives (Mitchell, 2009). These initiatives represented
the Governor’s attempt to bring budget solutions to the voters. Mitchell argues that
Schwarzenegger, recognizing the power of the unions, attempted to work with the unions on
propositions placed on the May 2009 special election (Mitchell, 2009). However, the California
Teachers Association “was the only statewide public-sector union to buy into the full package”
(Mitchell, 2009, p. 603). All but one of the propositions was defeated. In these two articles,
Mitchell argues that the power of public sector unions influenced both special elections. Mitchell explores the role of unions in both special elections, but does not explore other factors contributing to the defeat of the initiatives and propositions. However, one can reasonably conclude that public sector unions influence public sector retirement benefits. This correlation makes the need greater to obtain objective data to evaluate the impact of pension costs on a public agency’s fiscal sustainability.
Proponents of defined benefit pension plans offer counter arguments to the need for pension reform. In an article in the Government Finance Officers Association’s Government
Finance Review, Snell (2011) argues that government pension plans are affordable and the
“public sector pension system is not in crisis” (p. 15). Snell argues that the public sector must compete with the private sector for talented employees. Since the public sector cannot offer CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 18
perks such as stock options, profit sharing plans, or other similarly themed enhancements, the
public sector uses employee benefits to attract employees (p. 12). Snell, based upon analysis
offered by the National Institute on Retirement Security, states that “it was determined that
delivering the same retirement income to a group of workers is 46 percent cheaper using a defined benefit (DB) plan than a DC plan (p. 13).” DC refers to a defined contribution plan.
Ennis (2007) argues that the defined benefit pension plan should be preserved and that it is an efficient method to provide retirement benefits to public sector employees. Ennis does not address the impact of defined benefit pension costs on local agencies’ budgets. Again, empirical evidence is needed to determine if defined benefit pension plans are an affordable method to provide retirement income for public sector employees.
Unfunded Pension Liability
Unfunded pension liabilities present challenges to public sector agencies. Although the unfunded pension liability is a deferred cost, one could surmise that if public agencies are to become fiscally stable, both short-term and long-term costs must be taken into consideration.
Chapman argues, “Defined benefit plan sponsors bear the risk of fluctuating investment returns and must make up any shortfalls” (2008, p. S122). This creates the situation whereby the pension plan’s commitments (liabilities) exceed the pension plan’s value (assets). Although Chapman’s article offers solutions to fix the pension problem, examples of the impact of unfunded pension costs for specific public agencies are needed to encourage public officials to address this problem. The fiscal sustainability of public sector agencies must address this unfunded liability.
Researchers with the Stanford Institute for Economic Policy Research have issued several reports addressing public employee pension costs. Nation’s report “Pension Math: How
California’s Retirement Spending is Squeezing the State Budget” performed stimulated models CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 19 as to the probability of three pension plans - CalPERS, California State Teachers’ Retirement
System (CalSTRS), and the University of California Retirement Plan (UCRP) – meeting its pension obligations (Nation, 2011). Nation offers, “Accounting methods and demographic and financial assumptions can have tremendous impacts on the reported financial condition of pension systems” (2011, p. 9). Furthermore, discount rates are the most powerful assumption in determining financial conditions of the plan. “Relatively small changes in discount rates can result in large changes in funded status and other measures of pension health condition” (Nation,
2011, p. 9). Nation argues that high discount rates do not take into account market volatility.
“Even if the system earns 7.75 percent each year and all other actuarial assumptions are realized,
CalPERS and CalSTRS are only about three-fourths funded” (Nation, 2011, P. 21).
In a policy brief entitled “Going for Broke: Reforming California’s Public Employee
Pension Systems,” graduate students at Stanford University addressed the current funding shortfall of CalPERS, CalSTRS, and UCRS (same as UCRP). The actuarial calculations, involving geometric compounding, illustrated the complexity of these calculations. CalPERS issued comments on the policy brief and countered with equally complex assumptions.
Bornstein, Markuze, Percy, Wang, and Zander conclude, “Since pension liabilities are effectively riskless, we believe they should be discounted and reported at risk-free rates” (Bornstein,
Markuze, Percy, Wang, & Zander, 2010, p.2).
Little Hoover Commission’s Report – “Public Pensions for Retirement Security”
The Little Hoover Commission (Commission), an independent and bipartisan state agency, makes recommendations to the governor and the legislature on improving state programs. In February 2011, the Commission issued a report entitled “Public Pensions for CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 20
Retirement Security.” The Commission began its study in April in 2010 and focused on the state’s 85 defined-benefit programs, which included (Little Hoover Commission, 2011, p. 4):
• “Six state plans.”
• “21 county plan[s].”
• “32 city plans.”
• “26 special district and other plans.”
The Commission found that “pension costs will crush government. Government budgets are being cut while pension costs continue to rise and squeeze other government priorities”
(Little Hoover Commission, 2011, p. iii). The Commission Report also found that pension reform could not be achieved with limiting reform on new hires only. Pension reform must involve current public sector employees. “Every month, local governments announce steps to fix their pension systems. Much of the attention centers on imposing a lower tier of retirement benefits for new workers. These fixes, while important, are not adequate to meet the size and urgency of the problem. The real consequence – still unaddressed – is the growing overhang of liabilities caused by unfunded pension obligations for current employees” (Little Hoover
Commission, 2011, p. 41). This is an important finding with far reaching implications. The study found that new hires could not be the sole solution to the pension issues; thereby, complicating the probability of successful pension reform.
Recommendations offered by the Commission include:
• “To reduce growing pension liabilities of current public workers, state and local
governments must pursue aggressive strategies on multiple fronts (p. vii).”
• “To restore the financial health and security in California’s public pension systems,
California should move to a ‘hybrid’ retirement model (p. vii).” CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 21
• To build a sustainable pension model that the public can support, the state must take
immediate action to realign pension benefits and expectations (p. viii).”
• “To improve transparency and accountability, more information about pension costs must
be provided regularly to the public (p. ix).”
Governor Jerry Brown’s “Twelve Point Pension Reform Plan”
In 2011, California Governor Edmund G. Brown Jr. issued a “Twelve Point Pension
Reform Plan” which applies to “all California state, local, school and other public employers, new public employees, and current employees as legally permissible” (State of California Office of the Governor, 2011, p. 1). Furthermore, the Plan proposes to “…put California on a more sustainable path to providing fair public retirement benefits.” Proposals under the Governor’s
Pension Reform Plan include:
• “Equal Sharing of Pension Costs: All Employees and Employers” (p. 1) – This proposal’s
goal requires all new and current employees to move towards contribution levels where
both the employer and the employee share equally in annual pension costs. This proposal
strives for an employee contribution level of at least 50 percent. However, the Plan
acknowledges that “current contribution levels, current contracts and the collective
bargaining process” must be taken into account in transitioning towards equal sharing of
pension costs.
• “’Hybrid’” Risk-Sharing Pension Plan: New Employees” (pp. 1-2) – The goal of this
proposal replaces the sole defined benefit pension plan with a mixed retirement funding
plan. This proposal adds a defined contribution element which would be professionally
managed to minimize employee risk. In addition, Social Security would be added to the
funding package for those employees covered by Social Security. This “hybrid” package CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 22
provides annual retirement benefits which replace 75 percent of an employee’s salary –
dependent upon the public employee’s length of service. Each of these three funding
mechanisms (defined benefit, defined contribution, and Social Security) would each
contribute to the annual pension cost in equal proportions. For those employees not
covered by Social Security, this proposal suggests that defined benefit plans fund two-
thirds of the targeted retirement benefit and defined contribution plans fund the
remainder. This “hybrid” proposal also includes a caveat that additional study and design
is required to impose a cap on the defined benefit portion to ensure high-income earners
do not create an unreasonable burden for employers.
• “Increase Retirement Ages: New Employees” (p. 2) – Enhanced pension benefits allow a
safety employee to retire at age 50 and a non-safety employee to retire at age 55 – with
full retirement benefits. After retirement from public service, employees can still pursue a
second career while collecting pension benefits. In addition, people are living longer.
This proposal attempts to align the retirement age for non-safety personnel to take into
account actual working years and life expectancy. For non-safety personnel, retirement
ages would be set at the Social Security retirement age – which is currently 67. The plan
acknowledges that the Social Security retirement age for safety new hires should not be
tied to the Social Security retirement age. The plan did not offer a recommendation as to
a retirement age for new hires in public safety. The plan simply states, “The retirement
age for new safety employees will be less than 67, but commensurate with the ability of
those employees to perform their jobs in a way that protects public safety.”
• “Require Three-Year Final Compensation to Stop Spiking: New Employees” (p.2) –
Although the plan did not offer examples of how final compensation could be CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 23
manipulated to increase retirement benefits, this proposal recommends that the final
compensation used to calculate retirement benefits should be based upon “highest
average annual compensation over a three-year period.” The proposal applies only to new
employees. Currently, retirement benefits for some public employees are based upon a
single year of compensation which can encourage pension spiking.
• “Calculate Benefits Based on Regular, Recurring Pay to Stop Spiking: New Employees”
(p. 3) – As in the preceding proposal, this item addresses the ability of some public
employees to spike retirement benefits by manipulating bonuses, excessive overtime, sick
leave and vacation pay-outs, and other special pay perks. This proposal limits retirement
income to base pay only.
• “Limit Post-Retirement Employment: All Employees” (p. 3) – This proposal eliminates
the opportunity for public employees to retire from a public agency and then go back to
work for a public agency and continue to accrue retirement benefits. This proposal limits
retirees’ ability to work for a public agency to 960 hours a year. No additional retirement
benefits accrue if work is limited to 960 hours a year. In addition, this proposal prohibits
retired employees who serve on public boards or commissions from accruing additional
retirement benefits for serving on public boards or commissions.
• “Felons Forfeit Pension Benefits: All Employees” (p. 3) – Admittedly infrequent, public
employees convicted of a felony in carrying out their official duties would lose accrued
retirement benefits. The City of Bell scandal offers an example of the reasoning behind
this proposal.
• “Prohibit Retroactive Pension Increases: All Employees” (p. 3) – Public agencies
approved enhanced retirement benefits for current employees and retirees for past years CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 24
of service. Therefore, since prior employer pension payments did not fund these
enhanced benefits for prior years of service, future pension payments must bear the full
cost for these enhanced benefits. The Governor’s Proposal concludes, “Billions of dollars
in unfunded liabilities continue to plague the system.” This proposal prohibits retroactive
pension enhancements.
• “Prohibit Pension Holidays: All Employees and Employers” (p. 3) – Many public
employers ceased making annual pension contributions during Wall Street’s boom years.
This proposal would prohibit public agencies from suspending annual pension obligation
payments.
• “Prohibit Purchases of Service Credit: All Employees” (p. 4) – Many pension systems
allow public employees to purchase additional years of service, typically referred to as
airtime. Although the employee funds the cost of the airtime based upon calculations
from the pension system, investment risk becomes the burden of the public employer and
ultimately the taxpayer. This proposal eliminates airtime. An interesting field of study
would be to trace the origins of airtime. Why was airtime offered to CalPERS members
in the first place?
• “Increase Pension Board Independence and Expertise” (p. 4) – The premise behind this
proposal is that public retirement boards lack the necessary independence and financial
expertise which contributes to unsustainable pension plans. This proposal starts with the
CalPERS Board by adding two independent members with financial expertise. The plan
encourages other government agencies with public retirement boards to do the same.
• “Reduce Retiree Health Care Costs: State Employees” (p.4) – This proposal addresses
retiree health costs; therefore, this proposal is outside the scope of this study. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 25
Legislative Analyst’s Office Initial Response to Governor’s Proposal
The Legislative Analyst’s Office (LAO) issued a response to the Governor’s “Twelve
Point Pension Reform Plan” in November 2011. The LAO report, “Public Pension and Retiree
Health Benefits: An Initial Response to the Governor’s Proposal,” provides background, summary of the Governor’s proposals, and LAO comments. Moreover, this Report analyzed the
Governor’s proposals in relation to case law. According to the LAO, “In our view, perhaps the most significant retirement benefit challenge facing California governments is that there is very little flexibility for governmental employers under decades of case law that are extremely protective of employee and retiree pension rights” (State of California LAO, 2011, p. 13). The
LAO’s review of the Governor’s 12 proposals reasonably included the potential caveat of case law. LAO comments specific to each proposal follow. The definition of replacement rate is important before commencing further in this analysis. For purposes of this analysis, the term replacement rate is “the percentage of income a person has in retirement compared to his working income prior to retirement is called the ‘replacement ratio’ or ‘replacement rate’ by retirement experts” (State of California LAO, 2011, p. 8).
• Equal Sharing of Pension Costs: All Employees and Employers (pp. 14-16) – LAO
concurs with the Governor’s proposal that future employees should pay a portion pension
benefits. Furthermore, the LAO offers that future employees should fund a portion of not
only normal pension costs, but also any unfunded liabilities created by market conditions.
On the other hand, if market conditions are favorable, an employee may see a drop in
pension contribution rates. LAO also contends that requiring future employees to fund a
portion of both normal retirement costs and any unfunded liabilities would encourage
retirement boards to become more prudent with investment decisions and assumptions. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 26
The LAO report provides the following quote from the Governor at a press conference
for the proposal, “the Governor said his proposal addressed ‘existing employees by
increasing their contribution rate.” He added, ‘One thing we know for sure: under
constitutional law, the employer can require higher contributions (State of California
LAO, 2011, p. 16).’” LAO does not concur with the Governor’s proposal that increasing
current employee contribution rates is plausible in case law. Several examples of case law
protecting the retirement benefits of current and past employees were offered. Based
upon the case law presented in the LAO report, government’s ability to scale back
pension benefits for current employees are limited at best.
• “Hybrid” Risk-Sharing Pension Plan: New Employees (pp. 17 & 20) – LAO has offered
this recommendation to the Legislature in the past. The Hybrid Plan includes a defined
contribution plan. Investment risks in defined contribution plans are not borne by the
employer. Therefore, according to the LAO report, unfunded liabilities are not possible
under a defined contribution plan. LAO also contends that the Hybrid plan would place
public sector retirement packages and private sector retirement packages closer together.
Lastly, the LAO concurs with the Governor’s recommendation that a 75% replacement
ratio is adequate to preserve an employee’s lifestyle.
• Increase Retirement Ages: New Employees (pp. 20-22) – The LAO points out a few
inconsistencies with this portion of the Governor’s plan to other proposals. Increasing
retirement age for public employees, however, is justified. With increased life
expectancies, the LAO contends an increased retirement age is appropriate. The LAO
recommends that the Legislature set specific policies for retirement ages for public safety
employees rather than the vague recommendation included in the Governor’s plan. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 27
• Require Three-Year Final Compensation to Stop Spiking: New Employees (p. 22) –
Although the LAO concurs with this recommendation, the report acknowledges that
significant cost savings are not likely to be realized. However, adoption of this proposal
could increase public confidence in public sector pension benefits. An interesting point
offered in the report is “this single-year formula for determining pension benefits is very
rare among state and local employees in the United States; in fact, it is a feature of public
pensions in California and almost nowhere else” (State of California LAO, 2011, p. 22).
• Calculate Benefits Based on Regular, Recurring Pay to Stop Spiking: New Employees (p.
22-23) – Similar to the proposal previously cited, the LAO concurs with this
recommendation, but projects that this change would not result in significant cost
savings. However, this proposal could also increase public confidence in public sector
pension plans.
• Limit Post-Retirement Employment: All Employees (p. 23) – LAO concluded that this
proposal appears reasonable, but that the Governor’s proposal lacks detail.
• Felons Forfeit Pension Benefits: All Employees (pp. 23-24) - LAO raised issues
regarding this proposal for the Legislature to consider. LAO contends that it is unclear if
this provision could be applied to current and past public employees.
• Prohibit Retroactive Pension Increases: All Employees (p. 24) – LAO recommends that
the Legislature approve this proposal. Justifications for this position follow:
o Retroactive pension increases generally end up costing taxpayers since overfunding is not long-term and unfunded liabilities always result from
retroactive pension changes.
o Career public employees may retire earlier because of the enhanced plan changes. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 28
o Retroactive pension increases do not attract new recruits. New recruits do not benefit from the retroactive pension changes.
• Prohibit Pension Holidays: All Employees and Employers (pp. 24-25) – LAO concurs
that pension holidays should be sharply limited. The report suggests to the Legislature
that the Public Employee Post-Employment Benefits Commission’s (PEBC)
recommendation be used as a starting point for discussion on this issue. “The PEBC
recommended that employers be permitted to implement contribution holidays only based
on the amortization of their surplus over a 30-year period” (State of California LAO,
2011, p. 25).
• Prohibit Purchases of Service Credit: All Employees (p. 25) – LAO contends that the cost
of pricing airtime is difficult and may result in unfunded liabilities for the employer and
taxpayers. Therefore, LAO concurs with the Governor’s recommendation to ban purchase
of airtime for current and future employers. Prior airtime purchases would remain intact.
• Increase Pension Board Independence and Expertise (pp. 25-26) - LAO has no issues
with the Governor’s proposal. LAO concurs that members of the CalPERS and other
pension boards should have significant financial expertise. The report cautions that
financial expertise is a subjective term. Furthermore, LAO concurs that the State Director
of Finance should be a member of the CalPERS Board since the state is “CalPERS’
largest financial contributor” (State of California LAO, 2011, p. 26).
• Reduce Retiree Health Care Costs: State Employees (pp. 26-27) – Although this proposal
is outside the scope of this study, the LAO report stated that this proposal, combined with
other proposals, could potentially have huge long-term cost decreases. “Combined with
other proposals in the Governor’s package, which would encourage employees to retire CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 29
later, this change could dramatically reduce long-term state retiree health costs below
what they otherwise would be under current law” (State of Californai LAO, 2011. P. 26).
The fiscal impact of this proposal on public agencies’ budgets presents a complicated,
and interesting, field of study.
Additional Responses to Governor’s Proposal
Rhee, a Ph.D. and an Associate Academic Specialist with UC Berkeley Center for
Labor Research and Education, analyzed the potential impact of Governor Brown’s “Twelve
Point Pension Reform Plan” on low-wage workers. Rhee concludes that two points of the twelve point plan presents a significant disadvantage for low-wage employees – namely the “hybrid” pension plan for new employees and setting the retirement age to 67 in order to receive full retirement benefits for non-safety personnel (Rhee, 2012, p. 1).
Rhee offers, “401 (k) plans were originally instituted as a tax shelter for corporate executives, and were never meant to be a vehicle through which to save and invest for basic living expenses” (Rhee, 2012, p. 2). 401 (k), a defined contribution plan, shifts market risks to the employee – many of which are ill equipped to bear the cost of downward market trends. Rhee offers the following justifications as to why the “hybrid” pension model disproportionately affects low-wage workers:
• Individual 401 (k) plans typically earn less than defined benefit plans. In addition,
“retirement benefits that rely heavily on 401 (k)s also require funding to last several years
past average life expectancy, while DB plans pool longevity risk and thus only need to be
funded for the group’s average life expectancy” (p. 2).
• Rhee asserts that it costs less to offer comparable benefits under a defined benefit pension
plan than a 401 (k) plan. “The University of California recently chose to maintain its DB CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 30
pension system rather than to convert to a 401 (k) system for new hires because it found
that the latter would be significantly more expensive” (p. 2).
• Because 401 (k)s are market sensitive, a retiree’s actual retirement income may be
significantly less than anticipated. “DB plans manage this problem by averaging high and
low returns across age groups, but the only strategy available to workers in individual
401 (k) accounts is to contribute a much higher percentage of earnings” (p. 3).
• Dependent upon the degree to which 401 (k) contributions are borne between the
employer and the employee, a low-wage worker may have less disposable income and
thus could fall short of desired contribution amounts (p. 3).
• Rhee acknowledges that dependent upon the level of income provided by Social Security
and defined benefit plans, the risk posed with 401 (k) may be acceptable. However, a
low-wage worker has little room to absorb market losses. “Consequently, a retirement
benefit that depends significantly on a 401 (k) plan means much greater hardship than for
them than it would for a higher paid worker with the same benefit structure. In some
cases, it may mean reliance on public assistance” (p. 3).
Rhee also offers that the Governor’s proposal to increase the retirement age of non- safety employees to 67 disproportionately impacts low-wage workers. Justifications for this position include:
• College-educated employees normally enter the workforce later than blue-collar positions
which are typically more physically demanding. Employees in more physically
demanding jobs may have their bodies give out “after 40 or even 45 years of work” (p.
6). CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 31
• The Governor’s proposal to increase the retirement age translates to lower retirement
benefits for those who earn less and are less educated. These low-wage employees
typically do not live as long as higher-wage earners. “The growing gap in life expectancy
by education and income in the US is well documented. For instance, between the
generation that retired in the 1960s and the one that retired in the 2000s, life expectancy
at age 65 increased by 5.5 years to age 86 for men in the top half of the income spectrum.
Their counterparts in the bottom half of the income spectrum gained one year, to age 81”
(p. 6).
Synthesis of Literature Review
The readings illustrate the complexity of addressing escalating costs in public employer defined benefit pension plans. In addition to market volatility, several enhancements to public sector defined benefit pension plans have contributed to rising costs. Chapters 231 and 555, both amending the California Government Code, significantly influenced the current structure of public sector retirement systems. Unfunded pension liabilities involve complicated actuarial assumptions, thus adding another layer of complexity to this issue. Numerous stakeholders, with varying agendas, impede the likelihood of consensus. Unions, for example, influence members’ compensation and benefits (Edwards, 2010) and the political process (Mitchell, 2009).
Proponents of the defined benefit pension plan claim that the public sector must compete with the private sector for talented employees and benefits provide one means for the public sector to attract employees (Snell, 2011).
Despite, or because of, the complexity of this issue, proposals to modify public sector defined benefit pension plans abound. Proposals offered by The Little Hoover Commission and
Governor Brown are the focus of this study since the probability of successful pension reform CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 32 must start from some point. This study uses proposals from these two sources as the starting point to determine what, if any, options are plausible for the City of Bakersfield to challenge escalating pension obligations.
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 33
Chapter 3 – Analysis of Alternatives
This Chapter focuses on what reform proposals could be useful to the City of Bakersfield to curb escalating pension costs. These proposals shall use the analyses of literature reviews in
Chapter 2 to determine plausibility of applying previously identified recommendations to the
City of Bakersfield. Reform proposals meeting the following criteria were selected for further analyses:
• Feasibility of implementation – Proposals plausible for the City of Bakersfield were
included for further review;
• Fiscal impact – Proposals with minimal fiscal impact were excluded from further review.
For instance, the proposal to forfeit pension benefits for felons, albeit reasonable, was
excluded since the fiscal impact to the City of Bakersfield should be minimal;
• Impact on low-wage workers – Proposals may disproportionately impact low-wage
workers. Whenever possible, analyses included consideration for low-wage workers;
• Legal constraints – Case law severely limits the ability of government employers from
reducing employee benefits outside the collective bargaining process. Analyses of the
proposals reflected this limitation; and,
• Transparency – Transparency increases accountability. Accountability leads to the more
effective allocation of limited resources.
However, before attempting to address the escalating costs for the City of Bakersfield’s
General Fund pension costs, this study first explores factors contributing to the increase in
General Fund pension costs - from a low of $3.7 Million in FY 2000/01 to a high of $24 Million in FY 2011/12. Market conditions alone did not create this increase. Numerous retroactive plan changes were approved by the City Council during this period, which enhanced benefits for CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 34 various bargaining units and increased both short-term and long-term pension obligations. This chapter includes:
• Summary of pension enhancements approved by the City Council
• Summary of pension enhancements per CalPERS’ actuarial repots for the City of
Bakersfield
• Analysis of recommendations proposed by the Little Hoover Commission
• Analysis of recommendations proposed by Governor Brown
City of Bakersfield Pension Plan Changes for Bargaining Units
Market conditions were not the sole cause of the climb of pension costs from a low of
$3.7 Million in FY 2000/01 to a high of $24 Million in FY 2011/12 for the City of Bakersfield’s
General Fund. Within the last 13 years, changes to the miscellaneous, fire, and police pension plans significantly affected the City’s annual pension obligations. Changes include:
• On April 25, 2001, the City Council approved Amendment No. 2 to Contract No. 97-39
with the Public Employees’ Retirement System (PERS). This Amendment provided a
more generous retirement plan for local fire personnel by increasing the retirement
benefit from 2% at 50 to 3% at 50 (City of Bakersfield, City Clerk’s Office, 2001, April
25, City Council Agenda Item 8.c.).
• On June 12, 2002, the City Council approved Amendment No. 3 to Contract No. 97-39
with PERS, which provided a more generous retirement plan for local miscellaneous
employees by increasing the benefit from 2% at 55 to 3% at 60. This Amendment
included the Blue and White Collar unit, Miscellaneous Supervisory and Miscellaneous
Management units (City of Bakersfield, City Clerk’s Office, 2002, June 12, City Council
Agenda Item 8.l.). CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 35
• On December 11, 2002, the City Council approved nine separate resolutions dealing with
the calculation of retiree benefits. These resolutions provided for Employer Paid Member
Contributions (EPMC) to be reported as additional compensation according to CalPERS’
regulations. These resolutions enhanced the retirement plan for current employees of the
various bargaining units (City of Bakersfield, City Clerk’s Office, 2002, December 11,
City Council Agenda Item 8.k.). This Resolution allowed for EPMC to be included in
calculating retiree benefits.
• On October 22, 2003, the City Council approved Amendment No. 4 to Contract No. 97-
39. This Amendment provided a more generous retirement plan for local police
employees by increasing the benefit from 2% at 50 to 3% at 50 (City of Bakersfield, City
Clerk’s Office, 2003, October 22, City Council Agenda Item 8.g.).
• On November 19, 2008, the City Council approved Amendment No. 5 to Contract No.
97-39 for Blue and White Collar, Miscellaneous Supervisory, and Miscellaneous
Management employees. Amendment No. 5 affected new hires only and lowered the
retirement benefit from 3% at 60 to 2.7% at 55. Retirement benefits could not exceed the
2.7% cap. In addition, the base period to determine monthly benefits increased from a
one-year base to a three-year base (City of Bakersfield, City Clerk’s Office, 2008,
November 19, City Council Agenda Item 4.g.).
• On February 25, 2009, the City Council approved Amendment No. 6 to Contract No. 97-
39. Amendment No. 6 applied to local miscellaneous members in two specific CalPERS
groups. This Amendment provided benefits to eligible survivors of a City employee who
passed away before retirement (City of Bakersfield, City Clerk’s Office, 2009, February
25, City Council Agenda Item 8.e.). CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 36
• On June 9, 2010, the City Council approved Alternate A: Resolution ordering the
submission to the qualified electors of the City of a certain measure relating to pension
benefits at the general election to be held on Tuesday, November 2, 2010 (City of
Bakersfield, City Clerk’s Office, 2010, June 9, City Council Agenda Item 8.e.).
• Measure D, Bakersfield Pension Reform, passed on November 2, 2010. Measure D
reduces pension benefits for “newly hired police and firefighters starting in January but
will not affect current employees” (Wenner, 2010). New hires will receive 2% for each
year of service (2% at 50 years of age). The current plan is 3% for each year of service
(3% at 50). In addition, new hires will no longer be eligible for PERS pickup. The
employee share will be paid by the employee for the duration of employment.
• On March 9, 2011, the City Council approved Amendment No. 7 to Contract No. 97-39.
This item “represents the procedural steps required by CalPERS in order for the City to
implement changes to the contract that have been brought about by prior Council action
and as a result of the November 2, 2010 General Election” (City of Bakersfield, City
Clerk’s Office, 2011, March 9, City Council Agenda Item 8.g.). This Amendment
reduced pension benefits for local police and fire units. This Amendment also provided
specific survivor benefits for local fire members (City of Bakersfield, City Clerk’s Office,
2011, March 9, City Council Agenda Item 8.g.).
• On June 8, 2011, the City Council adopted Resolution 039-11, A Resolution of the
Council of the City of Bakersfield Adopting a Policy Regarding a Pension Stabilization
Fund Pertaining to the City Retirement Programs Held with CalPERS. The resolution
directs the City Manager to: CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 37
o “Calculate and maintain a ten year rolling average calculation regarding the total costs paid to CalPERS on an annual fiscal year basis…”
o “Make recommendations to the City Council regarding suggested amounts for deposit into a Pension Stabilization Fund, and to incorporate these
recommendations into the proposed budget in any fiscal year where the estimated
costs to CalPERS in that future budget year drops below the ten year rolling
average amount” (City of Bakersfield, City Clerk’s Office, 2011, June 8,
Resolution No. 039-11).
City of Bakersfield Pension Enhancements per CalPERS’ Actuarial Reports
Based upon CalPERS’ actuarial reports as of June 30, 2010, the retirement benefit is not capped for miscellaneous employees (CalPERS Miscellaneous Plan, 2011). This means that miscellaneous employees could receive more than 100% of their final compensation, depending upon length of service and age of retirement. The retirement benefit calculation for safety employees is currently capped at 90% (CalPERS Safety Fire Plan & Safety Police Plan, 2011).
Summary of revisions to the cap for safety employees follows:
• The CalPERS’ actuarial report as of June 30, 1998 disclosed a 75% cap for safety
employees (CalPERS Safety Fire Plan & Safety Police Plan, 1999).
• The actuarial report as of June 30, 1999 disclosed an 85% cap for the safety group
(CalPERS Safety Fire Plan & Safety Police Plan, 2000).
• The cap increased to 90% as of the June 30, 2001 actuarial report (CalPERS
Safety Fire Plan & Safety Police Plan, 2002).
The final enhancement to be discussed can also be found in CalPERS’ actuarial reports.
The Purchasing Power Protection Allowance (PPPA) increased from 75% as of the June 30, CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 38
1999 actuarial reports (CalPERS Miscellaneous Plan, Safety Fire Plan, & Safety Police Plan,
2000) to 80% as of the June 30, 2000 actuarial reports (CalPERS Miscellaneous Plan, Safety Fire
Plan, & Safety Police Plan, 2001). PPPA provides protection to retirement and survivor allowances against inflation. “PPPA benefits are cost-of-living adjustments that are intended to maintain an individual’s allowance at 80% of the initial allowance at retirement adjusted for inflation since retirement. The PPPA benefit will be coordinated with other cost-of-living adjustments provided under the plan” (CalPERS Miscellaneous Plan, Safety Fire Plan, & Safety
Police Plan, 2011, p. B-9).
Analysis of Recommendations Proposed by Little Hoover Commission
The Little Hoover Commission concluded that pension reform was necessary to control rising pension costs and to maintain acceptable service levels for government priorities. In addition, the Commission recommended that pension reform should not be limited to new hires only – pension reform was also needed for current employees. In regards to the City of
Bakersfield, this finding seems reasonable based upon rising pension costs for the City. The
Report encouraged state and local governments to “pursue aggressive strategies on multiple fronts” (Little Hoover Commission, 2011, p. vii). If implemented, this recommendation may present the most promising option to addressing pensions for current employees. Examples of pension reform abound in the local media. Several local governmental agencies have recently brought pension reform to the voters. For example, the City of Bakersfield placed Measure D on the ballot. This type of pension reform impacts new hires only. Through the collective bargaining process, the County of Kern recently took steps to lower the employer’s share of pension costs for current employees. If state and local agencies worked together, as recommended by the Little
Hoover Commission, the probability of incremental success should increase. Although unions CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 39 and case law present major obstacles in addressing pension benefits for current employees, the ability of state and local agencies to collaboratively focus their efforts should yield favorable results. Suggestions for collaborative work efforts include:
• State and local agencies should strive for uniformity in the offering of pension benefits.
In some cases, prior pension changes resulted from one agency adopting the enhanced
pension benefits of another agency. Once enhancements are adopted, they are difficult to
take back.
• State and local agencies should strive for public transparency. For the most part, public
input provides essential feedback to governmental agencies. The Commission
recommended more accountability and transparency in regards to pension costs.
• Unions play a significant role in the arena of pension reform. This study makes no
attempt to evaluate the role of unions. This study limits the discussion of unions to their
impact on the political process (Mitchell, 2009) and pension reform. State and local
agencies may be more likely to counter strong union involvement with collaboration.
Numerous obstacles, however, stand in the way of collaborative efforts with the state and local agencies. The inability or unwillingness of the state and local agencies to work together presents a challenge to pension reform, especially pension reform for current employees.
The Little Hoover Commission also recommended that California should move to a
“hybrid” pension system. Although a “hybrid” pension system shifts the cost of market volatility from the employer to the employee, this system does have its disadvantages. As discussed in
Chapter 2, the “hybrid” recommendation disproportionately impacts low-wage workers (Rhee,
2012). A “hybrid” system may be appropriate for income above a threshold. This threshold could be equivalent to maximum taxable earnings as defined by the Social Security Administration CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 40
which for 2012 is $110,100 (United States Social Security Administration, 2012). This threshold
is substantially higher than low-wage income. The recommended threshold offers both financial security for low-wage workers and maintains a desirable benefit package for new hires.
Analysis of Recommendations Proposed by Governor Brown
Governor Brown’s Twelve Point Pension Reform Plan can be recapped as follows:
• Proposals impacting all employees and employers
o Equal sharing of pension costs (included in analysis)
o Prohibit pension holidays (included in analysis)
• Proposals impacting all employees
o Limit post-retirement employment (excluded from analysis – limited fiscal impact)
o Felons forfeit pension benefits (excluded from analysis – limited fiscal impact)
o Prohibit retroactive pension increases (included in analysis)
o Prohibit purchases of service credit (excluded from analysis – limited fiscal impact)
• Proposals impacting new employees only
o Hybrid risk-sharing pension plan (included in analysis)
o Increase retirement age (included in analysis)
o Require three-year final compensation to stop spiking (included in analysis)
o Calculate benefits based on regular, recurring pay to stop spiking (included in analysis) CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 41
• Other
o Increase pension board independence and expertise (outside City of Bakersfield purview)
o Reduce retiree health care costs – state employees (outside scope of study) Pension reform continues to be a politically sensitive issue. No legislative action on the
Twelve Point Plan has occurred as of the date of this study. Special committees and commissions have devoted countless hours of research and analyzing of potential solutions. Because of case law, current employees are considered by some to be untouchable. This next section reviews seven of the Governor’s proposals.
Review of Governor’s proposals which have been described as impacting all employees and employers:
• Equal sharing of pension costs – In the private sector, employees typically contribute to
their future retirement costs. For instance, social security payroll taxes are funded with
both employer and employee contributions. The City of Bakersfield picks up the
employee share of pension costs after a specific number of years of service; the
timeframe for EPMC (Employer Paid Member Contribution) is different for
miscellaneous and safety units with safety being more favorable. Measure D eliminated
the EPMC for newly hired police and firefighters. When the Memorandum of
Understanding (MOU) for the miscellaneous group ends, EPMC for this group will likely
be eliminated. Case law protects current employees from elimination of EPMC outside
the collective bargaining process.
• Prohibit pension holidays – PEBC (Public Employee Post-Employment Benefits
Commission) recommended a 30-year amortization period for surpluses (State of CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 42
California LAO, 2011, p. 25). Employers could implement pension holidays only if
surpluses are amortized over a 30-year period. This proposal levels annual pension
contributions by taking a long-term perspective on pension costs.
Review of the Governor’s proposals which have been described as impacting all employees:
• Prohibit retroactive pension increases – In the early 2000s, enhanced pension benefits
were approved for City of Bakersfield employees. These enhancements were
retroactively applied to all existing employees. A reasonable conclusion is that these
retroactive enhancements were to be funded with the excess of plan assets as identified in
Table 2. The funded ratio dropped from a favorable 130.7% in FY 1998/99 to a low of
82.5% in FY 2009/10. As noted by the LAO, retroactive benefit enhancements do not
attract new hires (State of California LAO, 2011, p. 24).
Review of the Governor’s proposals which have been described as impacting new employees only:
• Hybrid risk-sharing pension plan – Analysis of the hybrid plan can be found in the
section of Chapter 3 entitled, Analysis of Recommendations Proposed by Little Hoover
Commission.
• Increase retirement age – Increased longevity impacts an agency’s annual pension
obligation in addition to the unfunded pension liability. Likewise, longevity has impacted
pension costs and the unfunded pension liability for the City of Bakersfield. Increasing
the retirement age for new employees is a reasonable proposal. Determining normal
retirement age for public safety employees will require additional analysis. Again,
because of case law, it is unlikely retirement ages can be increased for current employees. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 43
• Require three-year final compensation to stop spiking - In agencies that base retirement
benefits on the last year of compensation, an employee could be motivated to seek a
higher level position for only one year to obtain higher pension benefits. This type of
practice can occur at the City of Bakersfield. This proposal is reasonable and was
included in Measure D. In addition, the recently approved MOU for miscellaneous
employees increased the base period to determine monthly benefits from a one-year base
to a three-year base.
• Calculate benefits based on regular, recurring pay to stop spiking – Some agencies
include retirement pay-off in the calculations of retirement benefits. Retirement pay-off
includes sick leave and vacation accruals. Although the City of Bakersfield does not
allow retirement pay-offs to be considered in calculating retiree benefits, EPMC was
added to retirement benefit calculations in December 2002 (City of Bakersfield, City
Clerk’s Office, 2002, December 11, City Council Agenda Item 8.k.). Measure D
mandated that new employees hired after the enactment date fund the employee share for
the duration of their employment. Therefore, employees subject to Measure D no longer
benefit from inclusion of EPMC in retirement calculations. Appendix A summarizes
reportable and non-reportable compensation. This study does not analyze compensation
included or excluded from retirement calculations; however, comparisons with other
agencies may add relevant information to this field of study.
Synthesis of Analyses
Pension obligations for the City of Bakersfield reflect the fiscal impact of numerous changes to the Fire, Miscellaneous, and Police pension plans. Public sector agencies throughout
California face the same fiscal challenges. Rising pension costs impact services offered to CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 44 taxpayers. Understandably, pension reform merits the attention of various stakeholder groups.
Selected proposals offered by both The Little Hoover Commission and Governor Brown may offer alternatives to the City of Bakersfield to address rising pension costs.
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 45
Chapter 4 - Summary
Government provided pensions are complicated and sensitive. Fiscal impact of
government provided pensions are complicated because of, but not limited to, actuarial assumptions, volatile markets, longevity assumptions, unfunded pension liabilities, policies adopted or not adopted by political leaders, political power of unions, and numerous other factors. Government provided pensions are sensitive because of the number of stakeholders involved. Government employees should receive reasonable compensation, including benefits, for the work they perform. However, what is reasonable to a government employee may not be reasonable to businesses and employees within the private sector, who may only have social security as their sole means of retirement income. Pension obligations impact the level of government provided services available to citizens. Any reductions in pension costs could be directed to increasing service levels to the community. Pension reform is a current public policy topic because of these factors. The City of Bakersfield is no different. Chapter 4 of this study focuses on a summary of findings relevant to the City of Bakersfield, followed by recommendations which could be considered by management to control escalating pension costs.
Conclusion
The sheer volume of pension reform research speaks to the complexity of this issue.
Significant pension reform appears directed only to new employees since limiting reforms to new employees is simpler. Pension reforms impacting current employees occur less frequently because of political and legal constraints. Kingdon, Ph.D., was a professor of American politics at the University of Michigan from 1965 to 1998. Kingdon received the 1994 Aaron Wildavsky
Award for Agendas, Alternatives, and Public Policies because of the contribution to the study of public policy. Agendas, Alternatives, and Public Policies provides insight as to why pension CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 46
reforms are difficult to implement. Although pension reform has remained on California’s
agenda setting stage for a considerable amount of time, the coupling of problems, solutions, and
politics has not yet occurred which would significantly alter the fiscal impact of pension plans.
Kingdon stresses the importance of policy windows (2003, p. 165). Challenges to existing case
law could provide such a window. Challenges to case law, however, are not likely in the short
term.
Likewise, there is not a window of opportunity for significant pension reform, especially
in the short term, at the City of Bakersfield. Pension reform at the City has been directed to new
employees. Reform impacting new employees should provide long term savings in pension costs.
The recommendations offered in the next section will be categorized as follows:
• Additional pension reform measures to consider for new hires; and,
• Pension reform measures to consider for current employees when the windows of
opportunity are open.
Recommendations
As previously noted, current pension reform measures at the City of Bakersfield have
been limited to new hires. Following are additional pension reform measures that could be considered for new hires:
• Cap defined benefit retirement income to the Social Security Administration’s definition
of maximum taxable earnings. Income earned beyond this maximum taxable earnings
amount would be directed towards a defined contribution plan. This recommendation is
based upon the hybrid proposals of both the Little Hoover Commission and Governor
Brown. Unlike Governor Brown’s proposal, this recommendation narrowly defines the
pension obligation costs directed to defined contribution pension plans. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 47
• Unquestionably, longevity has increased both pension obligations and the unfunded
liability. Normal retirement age should reflect increased longevity. No recommendation
is offered as to what the normal retirement age should be for miscellaneous and safety
employees. More research is needed to determine a recommendation that is as equitable
as reasonably attainable for employees, the City, taxpayers, and citizens who rely on
services provided by the City. In addition, this recommendation more closely aligns
private and public sector retirement benefits. This recommendation is based upon
Governor Brown’s proposal.
Following are additional pension reform measures that could be considered for current employees when, and especially if, the windows of opportunity are open:
• Measure D mandated that new safety employees fund the employee share of pension
costs for the duration of employment. Once the MOU for the miscellaneous group ends,
new hires within the miscellaneous group will most likely be required to fund the
employee share of pension costs for the duration of their employment. Employees hired
prior to the effective date of Measure D now have the employee’s share of pension costs
picked-up after working for the City for a set number of years. During the collective
bargaining process, consideration should be given to transitioning to a system where
employees fund a portion of their own retirement costs. Gradual transition of transferring
EPMC back to the employee may ease this process. For instance, 1% per year until the
employee share is fully transitioned back to the employee.
• Governor Brown proposed that retirement pay be based upon regular, recurring pay. This
recommendation is reasonable. Again, through the collective bargaining process, the
elimination of EPMC from the calculation of retirement benefits should be considered CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 48
since it is not part of regular, recurring pay. However, if EPMC is gradually transitioned
back to employees, the recommendation to exclude EPMC from retirement benefit
calculations would be mute.
• Current City employees benefitted from retroactive pension benefit enhancements.
Governor Brown’s proposal to prohibit retroactively applying such enhancements is
reasonable and should be considered for the City of Bakersfield. Admittedly, benefit
enhancements are not likely to occur in the near future.
• Hopefully, market conditions will improve which would favorably affect annual pension
costs and the unfunded liability. Acknowledging the uncertain pattern of market
volatility, the Governor’s proposal to prohibit pension holidays would benefit the City.
Reserves should be set aside even when required pension obligations are unusually low
because of favorable investment returns. Reserve funds would be used when pension
obligations are unusually high because of market losses. Resolution No. 039-11, adopted
by the City Council on June 8, 2011, established a Pension Stabilization Fund for the City
of Bakersfield.
• The City should strive for transparency regarding pension benefits. Transparency
increases accountability. As taxpayers are the funding source for government activities,
transparency is an obligation of all government officials.
As previously noted, pension reform for current employees is difficult to enact because of existing case law. At this point, pension reform, which would impact current employees at the
City of Bakersfield, must occur through the collective bargaining process. The Police MOU expired in January 2006. Negotiations are at an impasse for police employees subject to the
Police MOU. The remainder of the labor groups have current MOUs or contracts in place. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 49
Pension reforms for current employees are unlikely unless all labor groups are impacted proportionately by reform measures.
Limitations of Study
This study reviewed the fiscal impact of pension obligations for only one governmental agency. Comparative analysis with other agencies may have provided relevant information; however, such analysis was outside the scope of this study. In addition, this study did not undertake an analysis of the complicated actuarial assumptions used in arriving at the unfunded liability amount for the City of Bakersfield. Again, although such an analysis would provide useful information, this analysis was outside the scope of this study.
Research Recommendations
Much research has been offered in the field of government provided defined benefit pension plans. Most reform appears to target new hires since current employees possess vested rights protected by case law. Pension reform is needed to address escalating costs and unfunded pension liabilities. Rising pension costs impacts the level of services provided to citizens, such as the number of police officers per population. Research in the following areas may prove beneficial to this field of study:
• Analysis of pension reform measures undertaken by various governmental agencies
within California, such as Measure D within the City of Bakersfield;
• Analysis of pension reform measures resulting from collective bargaining process;
• Analysis of case law protecting pension benefits of current employees;
• Examples of pension abuses, such as the City of Bell and pension spiking. This could
include abuses within the CalPERS organization itself;
• Analysis of independence of CalPERS Board; CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 50
• Analysis of advantages and disadvantages of capping pension benefits. This could
include capping benefits at a fixed percent, such as a reasonable replacement ratio. Other
ceilings that could be considered include disallowing retirement benefits in excess of
100% or capping the dollar value of retirement benefits for high-income wage earners. As
noted by Rhee, the impact on low-wage workers should be included in any such analyses;
• Appropriateness of assumptions used in CalPERS actuarial calculations. For example, the
impact of the discount rate on actuarial calculations is substantial; and,
• Pension industry analysis of the funded ratio in actuarially valuing plan assets. For
instance, the City of Bakersfield has a funded ratio of 82.5% as of June 30, 2010. This
funded ratio is based upon complex actuarial assumptions. Does a funded ratio of 82.5%
provide sufficient coverage for market downturns?
• The Stanford Institute for Economic Policy Research issued a report in February 2012
entitled “More Pension Math: Funded Status, Benefits, and Spending Trends for
California’s Largest Independent Public Employee Pension Systems.” This report
provides interesting research on independent retirement systems, including the County of
Kern. Comparisons of independent retirement systems to CalPERS, CalSTRS, and UCRP
systems could add useful information to this field of study. For example, are instances of
pension spiking more likely, less likely, or equivalent in independent retirement systems
as compared to CalPERS, CalSTRS, and UCRP?
“Lack of transparency in government leads to the inefficient allocation of resources”1
1Unfortunately, the source of this statement will remain unknown. I first heard this comment on talk radio. CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 51
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CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 52
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CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 53
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earnings (1937-2012). Retrieved from http://www.socialsecurity.gov/planners/maxtax.htm
Wenner, G. (2010, November 5). Unions mull lawsuit after passage of pension reform. The
Bakersfield Califorian. Retrieved from http://proquest.umi.com/
pqdweb?index=1&did=2180705721&SrchMode=2&sid=1&Fmt=3&VInst=PROD&VTy
pe=PQD&RQT=309&VName=PQD&TS=1331142454&clientId=17830
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 58
Appendix A: City of Bakersfield – PERS Reportable / Nonreportable Compensation Page 1 of 2
Source: City of Bakersfield Finance Department.
CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 59
Appendix A: City of Bakersfield – PERS Reportable / Nonreportable Compensation Page 2 of 2
Source: City of Bakersfield Finance Department CITY OF BAKERSFIELD DEFINED BENEFIT PENSION PLANS 60
Appendix B: IRB