City Faces $15 Million Increase In Dues to Public Pension Plan

Berkeley City Council to Renegotiate Contracts, Benefits for Employees After Investment Losses

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The city is facing an increase of almost $15 million in dues to the state pension fund over the next six years after the fund's investment portfolio was halved as a result of recession woes, prompting the Berkeley City Council to re-evaluate the city's options going forward.

In a Tuesday report to the council, City Auditor Ann Marie Hogan estimated the city's dues to the California Public Employees' Retirement System - a statewide agency that administers benefits for most California public employees - will jump from $25.8 million in 2010 to $40.9 million in 2016 to compensate for the substantial hit to the state's pension investment portfolio in 2008. As a result of the projected increases, Hogan said the city will most likely have to renegotiate its city employee contracts, which will expire within the next two years.

Councilmember Gordon Wozniak said he expects the next council work session on city employee benefits to be the first of a series, given the number and gravity of topics to be covered. Though the city has been aware of the impending rate increases for years, this is the first time the council has made a concerted effort to address the problem.

CalPERS sets the rate each city pays - which varies depending on its investment portfolio's performance - on behalf of its employees. Currently, the city is required to pay between 16 and 35.7 percent of salary for most city employees, but that range is expected to increase to between 25.8 and 50.8 percent by 2016, according to the report.

Hogan said the city is in relatively good shape now, with 85 percent of the pension plan funded.

"It's like a mortgage on your house," she said. "You don't buy your house with cash."

However, the current funding percentage is likely to decline if the city neglects to revise city employee contracts and benefits, she added.

The city will face the brunt of the CalPERS rate increases starting in 2012. In the next two years, rates are only expected to increase by $2.9 million, while between 2012 and 2014 the report estimates there will be a $9.7 million increase.

Berkeley is not paying those high rates now because CalPERS has implemented a "smoothing mechanism" to prevent sharp rate increases by gradually increasing rates after stock market losses and gradually decreasing rates after market gains.

City spokesperson Mary Kay Clunies-Ross said the public sector pension plan system differs from private sector systems, where employers contribute a certain annual sum to a retirement fund rather than guaranteeing employees a defined percentage of their salary upon retirement.

"In the private sector ... what you get when you retire depends on what the market does," Clunies-Ross said. "If the market tanks, you get less."

The report recommends four methods to amend employee contracts to raise the money for the dues: reducing salaries, requiring employees to contribute a larger percentage of their salary to CalPERS, raising the retirement age and capping the amount of final salary used to calculate payments received after retirement.

In order to offset the entirety of CalPERS rate increases, salary reductions would have to range from 7 to 11.6 percent, according to the report.

The report also recommends reducing the number of city employees, but notes layoffs or vacancies could further increase employee contribution rates because fewer people would be contributing to CalPERS.

Hogan said implementing all of the pension recommendations outlined in the report would require renegotiating employee contracts with each union.

The city will start renegotiations with the Berkeley Police Department in January, and it is expected to start renegotiating with all other city departments in January 2012, Clunies-Ross said.

According to the report, the city has nine benefit-related liabilities, of which the CalPERS pension plan is "by far" the most expensive.


Gianna Albaum covers city government. Contact her at [email protected]

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