Pension Reform: Council Plans to Implement New Cost Reducing Policy

Pension costs and post employment benefits will rise significantly for new city employees as part of a policy change expected to save Mill Valley about 40 percent in pension related expenses for new hires.

“It’s going up for a lot for employees,” said City Manager Jim McCann.

The City Council plans to adopt a resolution based on recommendations from a subcommittee that has been studying pension reform. More than 77 percent of the city’s operating budget is attributable to labor costs – which includes salary, pension, health insurance and other benefits – and this policy change will reduce what the city spends in pension costs from about 12.4 percent of the operating budget, to about 10.5 percent in five years, McCann said.

“This is not fluff,” Mayor Andy Berman said at Monday’s meeting. “In fact, what this is, is the culmination of nearly three years of work by the council.”

Pension Costs: The 411

As part of the state's adoption of the Public Employees’ Pension Reform Act (PEPRA) which became effective on January 1, 2013, the brunt of the financial burden will fall on employees who are entering the city’s system for the first time, and will not affect Prior Existing Employees (PERS).

The policy establishes a higher retirement age with a "not as generous" pension formula for new employees.

For the majority of city employees, the pension formula will change from being calculated at 2.5 percent at age 55 to 2 percent at age 62. The pension formula for safety personnel employees - including police and firefighters -  will change from 3 percent at age 55 to 2.7 percent at age 57. 

McCann said the city has hired two new employees under this formula, and can already see significant savings. Compared to the old system, those hired under this new policy cost the city about 40 percent less in pension costs, McCann said.

New employees will also pay 50 percent of the city’s “normal cost” which ends up equaling 100 percent of employee contributions, plus additional costs – which results in more than 100 percent of the employee portion. Essentially, they’ll be paying between 10 – 12 percent in pension costs under the new policy.

For prior existing employees, (PERS) the new policy requires they pay 100 percent of employee costs, which equals about 7 – 8 percent. They’ll also receive a one-time salary increase to offset the cost, essentially neutralizing the expense when it’s first implemented. Existing employees currently pay between zero – 4 percent of employee costs.

The one-time cost, however, raised a red flag for some of the council members.

“I’m concerned about increasing salaries in order to justify asking the employees to pay more of their employee pension costs,” said Council Member Ken Wachtel. “We don’t have a savings if we give them the money. I’m not exactly sure how much in favor I am of that.”

Council Member Stephanie Moulton-Peters, however, was supportive of the measure.

“It’s a one-time thing, and it’s very possible the normal costs will go up and employees will be responsible for that,” she said, “so it levels the playing field.”

Other Post Employment Benefits (OPEB): The 411

The city currently provides health insurance benefits for employees that retire after 15 years of service, and department heads that retire after 7 ½ years of service. This will remain the same for existing employees, but new hires will need to dedicate 20 years to the city before becoming eligible, and department heads will need to dedicate 10 years. The new policy also limits benefits to the employee only – not spouses – and the city will pay for two-thirds of the premiums instead of 100 percent.

The city also plans to explore the options of additional pension tiers, establishing a reserve pension fund and pre-funding other post employment benefits (OPEB).

“In all of this business we’re trying to be as upfront and as transparent as possible,” McCann said.

Good Financial Health

Over the past two decades, Mill Valley has done a lot to keep labor costs and pension costs in check, and these policy changes continue that effort, McCann said

“The city has taken steps over the years to be in a financially responsible spot,” he said.

In 2008 Mill Valley took a conservative approach by taking out a $6.7 million bond to establish a side fund for pensions “that was a very positive cash flow and longer cost reduction step,” McCann said. The city also implemented pension tiers for different employee bargaining contracts, and “never went with the most generous formula” – avoiding layoffs or furlough days and reducing the staff budget through attrition.

“We want to get to that fine line where we’re saving money but still getting the top notch employees,” Wachtel said.

Mill Valley currently has 146 permanent full-time employees in the system, and has four organized employee bargaining groups. The City Council is fine tuning some of the language in the new policies, and plans to adopt them as part of a consent agenda item at an upcoming meeting. The changes will be implemented as the city negotiates contracts with the unions.

McCann said city employees have been supportive of the changes.

“Our employees really understand what’s going on,” McCann said. “With the economy going into the take over the past six years or so, our employees have been very aware of our city’s finances.”

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