Magazine article Government Finance Review

Working Together for Understanding: A Coalition Discusses Retirement Issues in California

Magazine article Government Finance Review

Working Together for Understanding: A Coalition Discusses Retirement Issues in California

Article excerpt

A coalition of public agencies and state retirement system staff formed by the City of Long Beach, California, has improved the timeliness and quality of their communications and identified methods to minimize major rate fluctuations.

Each year the Government Finance Officers Association bestows its prestigious Award for Excellence to recognize outstanding contributions in the field of government finance. The awards stress practical, documented work that offers leadership to the profession and promotes improved public finance. This article describes the 1996 winning entry in the communications and reporting subcategory of the pension and benefits category.

Pension benefits often represent a major expenditure for public agencies, totaling in many cases up to 20 percent of base compensation. Yet many finance directors have little or no understanding of how their agency's pension rates are calculated. At the same time, state retirement system staff do not always understand that changes in contribution rates can dramatically affect local government budgets. In an effort to improve understanding between these two groups, the City of Long Beach, California, formed a coalition of local governments and California Public Employees Retirement System (CalPERS) staff to discuss retirement benefit issues.

Background

Like many cities throughout the country in the early 1990s, Long Beach was taking a pounding from the recession. Long Beach was especially hard hit because of the local economy's heavy dependence on the aerospace industry and the U.S. Navy, both of which took major broadsides with the continued thawing of superpower relations. In addition, the State of California was shifting significant portions of various local tax revenues, including property taxes, from local governments to the state as a budget balancing tactic. In short, balancing a municipal budget was becoming a nightmare.

One action taken by the City of Long Beach to cut costs and preserve jobs was to negotiate a lower tier of retirement benefits for employees hired after October 1989. This meant that the contribution rates for these "tier 2" employees were much lower than for "tier 1" employees. For several years, the city benefited from paying these lower rates while continuing to pay higher rates for its tier I employees plus amortization of a large unfunded actuarial liability (UAL). This arrangement came to a halt, however, during FY1994.

Early in 1993, CalPERS reported that the city's FY1994 contribution rates were expected either to be flat or to decrease, and the city developed its FY1994 budget based on those expectations. Then came the formal announcement from the state agency - a wake-up call for the city - that CalPERS had developed a composite contribution rate for both tier 1 and tier 2 employees to pay off the tier 1 UAL by the established funding deadline of 2011. As a result, miscellaneous tier 2 rates quadrupled, and tier 2 safety employees' rates tripled, instantly creating a $4.5 million general fund deficit.

City of Long Beach officials went immediately to CalPERS staff to reach some kind of compromise to salvage its budget. CalPERS staff, however, did not understand why the unexpected rate increase caused a severe budget deficit nor the impact the deficit would have on city services. After encountering this reaction from CalPERS, the city contacted other agencies in the state and learned that they, too, had based their budgets on CalPERS' earlier predictions that contribution rates would either stay the same or drop. Long Beach was the only agency served by CalPERS other than the state with multiple tiers and rates for each tier. Other agencies' rate fluctuations were due to variances of actual experiences from the assumptions CalPERS used to calculate prior years' contribution rates. Half of all CalPERS contracting agencies had experienced an increase, often exceeding 10 percent, leaving most of them struggling with unbalanced budgets. …

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