May 11 2012

Piedmont’s Employee Pension Plans Explained by Actuarial Consultant

Piedmont’s Actuarial Consultant attended the May 8 meeting of the Budget Advisory and Financial Planning Committee (BAFPC).  For the first two hours of the meeting, actuary Marilyn Oliver of Bartel Associates, LLC answered the committee’s questions about Piedmont’s employee pension plans so that they could evaluate its possible future costs for the City.

CalPERS Pools for Cities with Less than 100 Employees

Piedmont, like many California cities, provides employee pension plans administered by the California Public Employees Pension System (CalPERS).  For ease of administration, on June 30, 2003, CalPERS established discrete pools of employees with identical defined benefit pensions, Oliver explained.  Each pool is composed of employees of public entities (local governments and agencies) with fewer than 100 employees.  All employees in each pool have the same pension benefit formula and same job classification, (“Safety” or  “Miscellaneous”).  Piedmont’s fire & police employees are in a CalPERS Safety pool; all have a benefit formula of 3% at age 50 x FAE1 x years of employment with a CalPERS participating public entity.  All other Piedmont employees are in a CalPERS Miscellaneous pool with a benefit formula of 3% at age 60 x FAE1 x years of employment with a CalPERS participating public entity. (FAE1 = average monthly earnings in the last year of employment before retirement.)

CalPERS Pension Plan Costs are Unpredictable

BAFPC chair Bill Hosler observed, “It’s an uncontrollable cost to the City.  You want to hire a police officer but you don’t know what that police officer will cost over the next 25 years.”  The BAFPC is charged with reviewing five year budget projections, so the members were frustrated with the uncontrollable and unknowable future costs of Piedmont’s pension plans.

The consultant explained that CalPERS is an administrator, rather than a traditional insurer since Piedmont and the other public entities participating in CalPERS plans bear ultimate liability.  The liability risks are shared within each pool.  If too many people retire in a given pool, the costs go up.  If employers in the pool downsize their staffs, the costs go up because there are smaller payrolls, so the contribution must go up.  In addition, when CalPERS investment decisions result in net losses, rather than providing income, Piedmont and other participants are liable.

Oliver explained accrued unfunded liability can result from erroneous assumptions.  The amount of CalPERS unfunded future obligations is calculated on a “rolling”, 30-year amortization.  Each year is the first year of the re-calibrated, or new, 30-year amortization.

BAFPC members noted that one variable is the financial security of other public entities in the Safety and Miscellaneous pools in which Piedmont participates.  The consultant noted that some similarly situated communities are not in CalPERS. 

The BAFPC members are writing short narratives on critical budget issues to accompany draft five-year budget projections.  Both will be available for the City Council’s budget workshop on Saturday, May 19, 9am – 2pm.  The next meeting of the BAFPC will be Tuesday, May 15, at 6pm.

Related articles of interest:

More California Cities face Ballooning Public Employee Benefits or Bankruptcy

Stockton Leaders cite Hidden Costs for Fiscal Woes

Leave a Comment