Pensions: City can’t keep up with cost

Glendale’s contribution to employee pension plans in 2001: zero. The city’s check in 2009: $22.6 million.

The growing burden of the California Public Employees Retirement System on Glendale’s bottom line in the last decade has been steep, and city officials are asking employees to pay a larger share of the costs.

In addition to increased contributions from current employees, city officials are proposing a two-tier retirement system with scaled-back benefits for all new hires.

“I don’t know how we justify these levels of benefits for public employees,” City Manager Jim Starbird said. “Not only are they terribly costly, and we can no longer support the structure financially, but I don’t know how we justify this to the public.”

Representatives from three of the city’s employee unions — who would have to approve the proposed changes — say they are willing to negotiate. The Glendale Police Officers’ Assn. could not be reached for comment.

“We certainly want to do our share to make sure we don’t lose employees and keep things in the positions where we can hire the right people,” said Craig Hinckley, president of the city’s largest employee bargaining group, the Glendale City Employees’ Assn.

Still, union representatives said any changes must be made carefully so as not to hurt the city’s ability to attract quality employees.

“We have to make sure we don’t short ourselves with regard to surrounding cities . . .” said Jay Kreitz, president of the Glendale Managers’ Assn. “Or we’re not going to be able to hire the brightest and the best like we normally do.”

The proposed changes come as pension payments on behalf of city employees have added up to about $90 million in the last five years alone, according to a News-Press analysis of city budgets. That’s nearly double the total amount spent on library operations during the same time period.

The sharp increase was fueled by significant increases in benefits and salaries that the City Council approved in the stock market boom years when Glendale had little or no required contribution. And forecasts from state pension officials show little indication that the trend will plateau soon, as Glendale and other cities face major investment losses from the state system.

The pension system works like this: The city and its employees make annual contributions to the state Public Employees Retirement System, the pension giant that public agencies across the state pay into. The city has no control over how those funds are invested.

A decade ago, the system’s major stock-market gains meant that the city had to make little or no annual contributions. But when investments tank as they did last year, the city is forced to make up for the losses.

Add to the mix the drain on city revenues caused by the protracted recession, and the pension burden will be increasingly hard to bear without slashing city services if the retirement system is not overhauled, officials said.

“We are to the point now where further cuts continue to cut to the bone,” Starbird said at a recent City Council budget meeting. City Hall faces a multimillion-dollar shortfall for the third fiscal year in a row.

‘The Big Lie’

Much of the pension crunch can be traced back to about 10 years ago, when the value of many local cities’ retirement portfolios far exceeded their promised payouts, experts said, resulting in multiple years of little or no required contributions.

In 1999, then-Gov. Gray Davis and the state Legislature approved increased retirement benefits for state employees. Employee unions across the state began to push for the increased benefits, and many cities followed suit.

Glendale eventually joined in, increasing retirement benefits by as much as 50%, which city officials at the time said would attract quality employees and encourage earlier retirement.

Under a plan approved by the City Council in 2003, firefighters and police officers can now retire at age 50 with 3% of their highest salary per year of service. Two years later, the council approved a plan for all other employees that granted 2.5% of their highest salary per year of service starting at age 55.

At the time, state pension system officials and hired experts pledged that the city’s annual contribution rate would not spike as a result of the increased benefits packages.

Starbird now dubs those promises “the big lie.”

Within a year of approving the increased benefits for public safety employees, the city’s required contribution jumped dramatically, as it was forced to make up for tens of millions in unfunded liability, or the difference between promised benefits and the value of the city’s current portfolio.

Katherine Barrett, a pension expert who has studied the issue extensively for the Pew Center on the States, describes the pension plight as the fruit of faulty income projections from stock-market returns.

“The returns were so good in the 1990s, particularly the end of the 1990s, that I think people just kind of forgot that they could go in the opposite direction,” she said.

At the same time, the City Council approved several multiyear contracts for police and fire that increased salaries across the board.

“Our pay was inferior to other departments of similar size, and that led to a lot of people leaving our department for other departments,” said Capt. Chris Stavros, president of the Glendale Firefighters’ Assn. “And the fact is even now we would be considered to be middle-of-road compensation.”

The higher salaries combined with the increased benefits resulted in soaring pension obligations as the city adjusted to plummeting revenues, officials said.

Moving forward

So far, Glendale has been able to fill budget shortfalls without the unpopular furloughs or layoffs that so many agencies have been forced to implement. But officials have said further department reductions could result in job losses at a time when the city has already lost 100 vacant positions in the past two years.

So this year, city officials are turning to city employees to help balance a projected $8.1-million deficit by increasing the employee’s contribution to the state pension system. Employees already contribute between 8.5% and 10.5% of every paycheck.

Stavros said he understands that percentage may need to increase during the current budget crunch.

“We are willing to listen and help any way we can,” he said. “We’ve done that before, and we will again.”

The city has also set aside about $5 million in savings from pre-paying its retirement obligations, officials said, to help lessen the effect of retirement payments in coming years.

In the long run though, city officials say more radical changes are needed. They propose a two-tier system with lower benefits and a higher retirement age for new employees.

Under the proposed plan, a 55-year-old police officer retiring at a salary of $90,000 after 30 years of service would receive a retirement of about $54,000 per year. Under the current plan, the same officer could retire at 50, after 25 years of service, and receive a $67,500 annual check.

Union representatives have cautioned that the city must keep benefits strong enough to recruit future hires.

But with almost a third of the city’s workforce at age 50 or older, city officials say they can’t sustain the current level of benefits.

“We got into these programs. We are seeing the impact of it,” Starbird said. “My view is we should have stayed where we were. And to the extent we can’t stay where we were, we need to get ourselves back to where we were for at least the new people coming into the system.”