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PENSION REFORM ACTION PLAN City Manager's Department June 10,2011 This report to the League of California Cities Employee Relations and Revenue and Taxation Policy Committees and the Board of Directors is designed to address the League's 2011 Strategic Goal related to Pension Sustainability by providing information and recommendations that may be of assistance toward meeting the competing challenges of maintaining high-quality public services while providing fair and reasonable pensions for employees. THE PROBLEM Pension costs for many California municipalities continue to increase, threatening the delivery of basic public services, compromising general fund budgets, and indeed, posing a long-term fiscal challenge to the State itself. A former CaIPERS actuary warned that by 2014 it will be common for local governments to budget 50% of a police officer's salary, 40% of a fire fighter's salary and 25% of a miscellaneous employee's salary for their pensions; contributions that are fiscally unsustainable. Many cities face 25% or more increases in pension contribution costs in the next three years and those rates arc likely to remain high for a decade or more. Causes of the problem include: 1. Large losses on pension investments due to the Great Recession. 2. Enhanced benefit formulas granted after 1999(SB400/AB616). 3. Increased life span of retired employees. A PRINCIPLED APPROACH Public retirement systems should provide fair benefits for career employees, and: 1. Recognize the value of attracting and retaining high performing public employees to design and deliver vital public services to local communities. 2. Recognize and support the value of a dependable, sustainable, employer provided Defined Benefits Plan (DBP) for career employees; supplemented with other retirement options including personal savings(e.g. 457 Plan). 3. Public pension costs should be shared by employees and employers(taxpayers). 4. Be portable across all public agencies to sustain a competent cadre of California public servants. STAGES OF A SOLUTION Many of the steps below can, are, and should be taken locally and immediately, as part of the collective bargaining process to move local pension costs in a more sustainable direction. Further, State action is necessary to return the PERS (or other state-authorized pension systems) to a more sustainable framework. Many of the actions below are and will be presented to the State Legislature for enactment. We believe the League of California Cities should engage the unions, Legislature, and Governor in the legislative process to formally change the structure of 1