As Chair of the CSMFO Debt, Treasury and Retirement Committee, I
thought you might find the following information of interest or
value.
The City of Tracy's Police MOU will expire June 30, 2000 having first
been effective 1/1/97. One of the last provisions in the current
contract calls for police to receive PERS based on "single highest
year" rather than the highest 3 years of compensation. This was to be
effective 1/1/00. PERS just completed the actuarial valuation for
this contract amendment. Our PERS rate was going to be 8.802% on
7/1/00 and with this contract amendment it will actually drop to
7.276% (the 9% employee share stays the same - employee share is also
paid by City).
How can a benefit increase actually cost less money? Well, don't be
deceived by the numbers. Remember PERS has offered "funny money" to
agencies to induce benefit increases. The City had long ago scheduled
this benefit improvement before PERS got creative. If you provide a
benefit increase, PERS will value you plan assets (for that employee
group) at 95% instead of 90% of market. Now you can spend this new
funny money to pay for the benefit increase.
The actual cost of single highest year for Police was .679% plus an
additional rate of .5% to catch up on the unfunded cost (someone could
now retire with single highest year rather than highest 3 years and
this additional retirement cost has not been paid to date through PERS
rates, this is the unfunded cost). Thus the true cost of the benefit
increase was 1.179%. By valuing plan assets for Police at 95% this
had the effect of providing a rate reduction of 2.7%. The result is
our PERS safety rate dropping from 8.802% to 7.276%, a reduction of
1.53% (which equals the 2.7% reduction due to the 95% valuation offset
by the cost of the benefit increase which was 1.179%)
I do not recommend benefit increases merely to receive the 95%
valuation as once the funny money is used up, you have the ongoing
expense of the new benefit. Salary and benefit increases should
always be granted within the framework of negotiations and City
resources available to pay for such increases - the costs of which
should always be measured in terms of real dollars and not potentially
offsetting valuation methods.
The ironic twist of this situation is that a benefit increase agreed
to in a contract 3 years ago, now has the advantage of lowering a PERS
rate because it is a relatively "cheap" benefit that triggers a much
greater offset in plan valuation. What remains is still the
unanswered question of whether 95% is an appropriate value of plan
assets rather than 90%, and if 95% is appropriate, why shouldn't
cities be afforded this valuation without first having to increase
retirement benefits?
The 95% of market valuation is available to agencies amending their
plan to improve benefits during PERS fiscal years of 7/1/99 to 6/30/00
or 7/1/00 to 6/30/01. If you are going to give a benefit increase
anyway regardless of the availability of "funny money" in any upcoming
contract, you might consider scheduling it prior to 6/30/01 so that
the City can take advantage of 95% if so desired.
In closing, I've been told the League has obtained a Legislative
Counsel's opinion that PERS cannot value plans differently based on
whether a City opts for a benefit increase. Of course this is just an
opinion and it looks like a city would actually have to sue PERS to
gain 95% valuation without a benefit increase.
