Borenstein: Martinez pension spike scheme costing other California local governments

In yet another gaming of a California public employee retirement system, Martinez City Council members have preserved a lucrative police pension spike by sticking hundreds of other local governments with much of the cost.

The losers include not only Martinez taxpayers, but also the East Bay Regional Park District and cities across the state, including El Cerrito, Emeryville, Hercules, Livermore, Piedmont, Pittsburg, Pleasant Hill, Pleasanton, San Pablo, San Ramon and Walnut Creek.

The cost-shifting scheme, which maintains expensive pensions without requiring meaningful employee contributions, should be banned. Here's how it works:

The annual police pension costs for Martinez, a member of the California Public Employees' Retirement System, add 58 cents to every dollar of payroll.

Of that, 49 cents is the city's share and 9 cents is the official employee portion.

Like many public agencies, Martinez picked up the employee share. The officers paid nothing.

Moreover, when they retire, the amount of the pickup increases their salary figure used for calculating their pensions. That boosts retirement pay by 9 percent for the rest of their lives.

Nearly one-fourth of local public agencies in CalPERS pension plans pay part or all of the employees' share, then count the pickup in retirement pay calculations.

It's wrong. First, employees should contribute. They should have skin in the game so they have an

interest in cost containment. Second, pension calculations should be based only on direct salary.

Like leaders in other cities, Martinez officials realized they couldn't afford the entire bill. So they recently negotiated a contract that calls for phase-in of an employee contribution, reaching 4 percent of salary by 2015.

That still leaves a whopping 54 percent for the city.

There's also a catch. Usually, when employees contribute to their pensions, the money is applied to the employee share. That reduces the pickup, and in turn reduces the inflated salary used for pension calculations.

As a result, annual pension costs shrink, as do the system's long-term obligations. It's like lowering the installment payments on a loan and lowering the total balance due.

But, as Bay Area News Group reporter Lisa P. White noted, Martinez police won't be paying the 4 percent toward the 9 percent employee share. They'll pay toward the city's share. In addition, the city will continue paying the full pickup of the employees' share.

So when it comes time to calculate pensions, retiring police will still use the full pickup to spike their pensions.

The cost of future pensions will not change.

Consequently, the total annual payments will remain the same, although police will now contribute a tiny portion, saving the city about $126,000 a year.

Had police instead contributed to the employee share, the city would have saved about $199,000 a year and, more significantly, the pension plan's long-term liability would have been reduced.

Which brings us to the second catch: It turns out that the city has almost no incentive to reduce that liability, even though it's badly underfunded.

That's because small cities in CalPERS often are pooled together to spread risk. And they collectively share the unfunded liability.

Martinez is part of a pool with 230 other local governments. So Martinez bears only a tiny fraction of the liability for the City Council's foolish actions. Nobody has calculated how much could have been saved by reducing the pickup, but whatever the sum, the Martinez deal is unfair to other pool members.

There are two culprits here: CalPERS, while setting up the pools, failed to require that all members play by the same rules. The Martinez City Council refused to reduce pension spiking by trimming the pickup.

Not surprisingly, CalPERS reports that it sees more cities, although it can't quantify how many, applying the employee contributions to the employer share to preserve the pickup. Antioch last week cut a similar deal with its officers, although it was accompanied by major salary concessions. Also, the city is not part of a risk pool.

State lawmakers must end pickups and the practice of adding in their value for pension calculations in the CalPERS system. And they must require uniform rules for pension pool participants.

Otherwise shameless cities like Martinez will continue dumping their liabilities on other communities.

Daniel Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or dborenstein@bayareanewsgroup.com. Follow him at Twitter.com/borensteindan. For a list of the cities and other government agencies in the CalPERS pool affected by the Martinez decision, go to contracostatimes.com/daniel-borenstein.

Source: http://www.contracostatimes.com/news/ci_20139820/daniel-borenstein-martinez-pension-spike-scheme-costing-other?source=rss

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