Vallejo’s Pension Crisis

Vallejo like most other cities in California has a severe pension crisis. Pension promises have been made that can no longer be met without severely curtailing other needed city services. How did we get in this position and what can be done to solve the problem?

What caused the problem?

Back in the boom years of the 1990’s most government pension funds including Vallejo’s were adequately funded and many had generated surpluses. The CALPERS board with the help of the California legislature decided that they could increase pension benefits by 50% with no additional cost to the cities and counties. The investment gains of the 90’s were expected to continue for the foreseeable future and everyone would be happy. The S&P 500 index of the 500 largest companies in the US hit an all time high of 1553 on 3/24/2000 but at 6/30/2011 it had declined 15% to 1321. For the 10 years ending 6/30/2000 the S&P 500 increased at a compound annual rate of 14.1% and the CALPERS investment portfolio grew at a 12.4% rate. For the 11 years ending 6/30/2011 the S&P 500 index decreased at a compound annual rate of .87% and CALPERS investments grew at a rate of 3.93%. The promise of a 7.75% annual return never happened.

What are the pension benefits for Vallejo employees?

Police and fire sworn employees – 3% at age 50

New Fire sworn employees – 2% at age 50 (not yet implemented due to CALPERS regs 10/11)

Existing other city employees - 2.7% at age 55

New other city employees - 2.0% at age 60 (not implemented until all non safety employees agree to this change)

The pension benefit is based on the highest year compensation excluding overtime multiplied by the number of year’s service. A police or fire employee earning $150,000 would receive a pension of $135,000 (3% a year for 30 years = 90% of highest pay) if they retired at age 50 or more with 30 year’s service. The benefit increases each year based on inflation up to 2% annually.

Who pays for the pension costs?

Both the city and the employees contribute to the pension fund but the city is ultimately responsible to make up any shortfall if CALPERS doesn’t generate the 7.75% annual investment gains. The contribution levels as a percentage of pay are shown below:

City Paid Employee Paid

Police 37.558% 9.00%

Fire 37.558% 13.40% (implemented 7/1/11)

IBEW 23.300% 10.00% (not implemented until all non safety employees agree to this change)

CAMP & Executive 23.300% 9. 00%

What is the unfunded pension liability?

At 6/30/09 the unfunded pension liability was:

Police and fire employees $74.8 million

Other employees $49.1 million

Total $123.9 million

This unfunded liability is based on CALPERS assumption that it will earn an average of 7.75% each year, but that hasn’t happened. If CALPERS used a more realistic earnings assumption of 4.5% similar to that used in private industry the unfunded liability would increase dramatically. The city uses a 4.5% earnings assumption in calculating the unfunded liability for retiree health benefits. This unfunded liability is $81.2 million in addition to the unfunded pension liability of $123.9 million.

What is the solution?

The existing pension plans are not affordable and must be reduced. By FY 2014 the city contribution to police and fire pensions will be 45% of payroll and 26% of payroll for other employees. With the lower overall payroll levels and the investment losses of 2009 yet to be recognized the pension costs will increase significantly. Any meaningful reform must be done at the state level through the State Legislature as it would be difficult for one city to make major changes unless other cities do the same thing. With the passage of Measure A the City Council can impose new contract terms when the existing contracts expire. Police and fire contracts expire on 6/30/12, CAMP on 6/30/13 and the IBEW contract expires 12/31/12.

Here are some changes to consider:

Roll back the benefits to a level more consistent with private industry – 2% at 50 or 55 for police and fire and 1% to 2% at 65 for other employees.

Base the pension on the average of the last 5 year’s service not the highest year, and only include base pay in the calculation not all the extra pay. Purchasing service credit with unused sick leave should be disallowed.

Create a combination pension and 401K type plan like the federal government. The guaranteed pension might be 1% a year of service and the balance from employee and city contributions to a trust fund managed by the employee.

Increase the employee contribution to make up the difference that the city is unable to fund.