delivered a plainly put warning to the City Council on Tuesday: Pension costs will crush the government, he said, citing a report by a state financial oversight commission.
"The political reality is we cannot afford to perpetuate the current defined benefit pension plan," Finkel cautioned as he reported findings of a study conducted by the Beverly Hills Pension Task Force. "Safety employee pension obligations are a major long-term threat to Beverly Hills."
Finkel blamed the state government, the California Public Employees' Retirement System, or , and previous city councils—not public safety employees or their unions—for the unsustainable taxpayer-funded pension deals that police and firefighters currently receive.
Key to the Pension Task Force presentation were studies on the impact of public employee pensions by Stanford University and the Little Hoover Commission, an independent state oversight board.
A Little Hoover report published in February concluded "pension costs will crush government," Finkel said. "The math doesn't work—we have retirement ages dropping, people are living longer, benefits are increasing and the expected rate of return is unreasonable."
According to Finkel, the root of the pension problem falls on CalPERS, which manages retirement funds for state and municipal employees. In the late 1990s with no end to economic growth in its managers' sights, CalPERS encouraged cities to increase employee benefits.
"In 1999, state Senate Bill 400 raised the permitted, not required, limit on safety employee retirement formulas to 3 percent per year of the final year's salary with a maximum of 90 percent beginning at age 50, called '3 percent at 50,' " Finkel said. In 2001 Beverly Hills increased public safety employee pensions from 2 percent to 3 percent at 50.
For example, an employee who works 25 years receives 75 percent of his or her highest year's salary as an annual pension.
"Overly optimistic estimates of returns led to significant underfunding and a subsequent rise in the cost to the taxpayer," Finkel said. "Last year the Stanford Institute for Economic [Policy] Research came out with a brief looking at CalPERS. Their conclusion: CalPERS' public pension liabilities are substantially understated."
The Financial Times reported in July that funding levels for CalPERS are about 70 percent of estimated liabilities.
CalPERS diverse portfolio took a beating as the global economy went into recession in the latter half of the past decade.
Finkel observed that if the pension fund had invested solely in stable 30-year U.S. Treasury bonds, the rate of return would have been 7.08 percent instead of 3.95 percent the past 10 years.
Compared with 1999, "since CalPERS said we don't have to worry about our pension obligations," Beverly Hills had a public safety pension liability of $144 million and was overfunded by $19 million, Finkel said. Ten years later the total liability jumped to $313 million with an unfunded budget gap of $56 million.
In fiscal year 2002-03, the city spent 2.5 percent of general fund revenue on pension obligations for safety employees and 6 percent of its safety employee salary budget. Last fiscal year, those totals rose to 5.6 percent of general fund money and 26 percent of the salary budget for police and firefighters.
The actual cost was $2.7 million in 2002-03 and $9.2 million in 2010-11, and is projected to increase to $15 million by 2013-14.
Finkel's presentation reported the following on average employee salaries:
- The average base salary is $93,600 for police officers, $99,800 for firefighters and $55,100 for nonsafety employees.
- Medical, dental and other benefit costs amount to $23,200 for police, $16,500 for firefighters and $13,500 for nonsafety workers.
- The city's share of pension costs is $26,500 for police, $27,000 for firefighters and $4,100 for nonsafety employees. The employee pension contribution, which the city pays as part of its salary agreements with employee associations, is $9,300 for police, $9,700 for firefighters and $4,700 for nonsafety personnel.
- "The total cost to the city for a police officer ... as of last year was $174,800; the total cost of a firefighter was $185,500," Finkel said. Nonsafety workers cost an average of $83,370.
Finkel and the Pension Task Force recommended the council implement a California League of Cities draft proposal to reduce pension-induced strain on municipal budgets:
- The city should stop covering employees' share of pension contributions and workers should pay 9 percent of the pension obligation from their paychecks.
- Pension benefits should be restricted to base salary.
- The maximum pension should be 65 percent.
- The minimum retirement age should increase to 55.
- Pension benefits should be based on the final three years of an employee's salary.
- A two-tier pension system should take effect for new employees.
- Supplement a defined pension limit with a defined contribution plan.
The task force also suggested using a 5.1 percent corporate bond return rate to calculate pension obligations rather than inflated CalPERS projections.
Council members agreed the task force should take a look at nonsafety employee pensions.
"Pensions need to be fair and sustainable," Councilman John Mirisch said, quoting what he called a "mantra" of the California League of Cities on the pension issue.
Mirisch added the council should also seek ways to ameliorate the city's costs related to post-retirement benefits such as medical coverage and employees who retire as a result of health problems that may not be entirely work-related.
Vice Mayor William Brien said pension concerns have been on council members' minds for some time and that the task force's recommendations will serve as a framework for ongoing negotiations with public safety employee associations.
Mayor Barry Brucker noted his concern over the ability of CalPERS to set an accurate rate of return.
"What is truly clear is that CalPERS was so far off the mark, yet the shortfall has to be born by the cities and off the backs of the taxpayers," Brucker said.