How to Determine if Your City or County Complied with the Law When Increasing Pension Formulas

Ken Churchill

Since the millennium began, most city and county governments enacted retroactive pension benefit increases that more than doubled their pension costs with no end in sight. Cities and counties have been fighting back in court with some success. One legal challenge raised first against the County of Marin is based on California Government Code Section 7507, which prohibits adoption of retirement benefit plan increases without a statement of the future cost impacts by an actuary. Our audit of cities and counties reveals no such future cost statement in their files during the period when the most aggressive pension increases were made

We have compiled this resource to assist elected officials, candidates, and taxpayers to determine whether their city or county pension system complied with this requirement when major increases in pension formulas were made between 2000 and 2007. If neither decision makers nor the public received adequate notice of future cost impacts from the new pension formulas, you may wish to contend, as other cities and counties have done, that substantial downward adjustments in pension formulas are required.

Part One: A Primer On How To Look For Statutory Violations

Part Two: A Primer On How To Find Documents To Assist In Looking for Statutory Violations

PART ONE – A PRIMER ON HOW TO LOOK FOR STATUTORY VIOLATIONS

In 1977, the Legislature enacted California Government Code Section 7507, which provides:

“The Legislature and local legislative bodies shall secure the services of an enrolled actuary to provide a statement of the actuarial impact upon future annual costs before authorizing increases in public retirement plan benefits. An “enrolled actuary” means an actuary enrolled under subtitle C of Title III of the federal Employee Retirement Income Security Act of 1974 and “future annual costs” shall include, but not be limited to, annual dollar increases or the total dollar increases involved when available.”

“The future annual costs as determined by the actuary shall be made public at a public meeting at least two weeks prior to the adoption of any increases in public retirement plan benefits.”

Between 2000 and 2007, most cities and counties retroactively increased pension formulas, resulting in pension payments increasing from about 60% to 90% of final salary for career employees. This is a significant part of California’s pension problem. Section 7507 requires that your city or county answer a simple question: before adopting these retroactive pension increases, did they obtain from an actuary “a statement of the actuarial impact upon future annual costs?”

We have reviewed the pension increase documents for the City of Santa Rosa, City of La Palma, Marin County and Sonoma County and have not found an actuary’s statement of future annual cost for any of them.

This spreadsheet is an example of what an actuarial statement of “impact upon future actuarial costs” is supposed to look like. If you do not find a document that looks like this, your city or county probably did not obtain an actuary’s statement of future actuarial costs.

No document like this has been found in any of our audits of Santa Rosa, or anywhere else. What we have instead found in Santa Rosa and other cities is that the cost was simply presented as 10 to 13% of payroll costs, not a dollar amount which would grow as salaries and payroll grew. That is not the same thing as an actuary’s “statement of future actuarial costs.”

Notice the cost impact for the City of Santa Rosa; using CalPERS’ assumptions, the pension increase, estimated at the time to be 10 to 13%, resulted in a $663 million cost over the ensuing 35 years. It is hard to imagine that if the City Council saw the long-term impact of the increase—i.e. had the city complied with Section 7507– they would have approved it.

Over the past 4 years civil grand juries in Sonoma and Marin counties found the statutory requirements were completely ignored. Information on what the Grand Juries found and the response from the counties and their attorneys can be found here.

Citizens in the cities of Pacific Grove, Santa Rosa, and La Palma have also found lack of compliance. Information on Santa Rosa’s lack of compliance can be found here.

In fact, based upon what we have seen in all the counties and cities that have been investigated is a complete lack of compliance with the public notification and cost impact requirements. An eight minute video describing what our research has documented can be viewed here:

PART TWO – RESEARCHING DOCUMENTS TO DETERMINE IF REQUIREMENTS WERE MET

Every investigation starts with the documents. If you are a member of the city council or board of supervisors, contact the staff person who handles documents. This person works for you and the council/board, but because pensions are at stake, that person might believe his/her loyalties are more closely associated with the union, which negotiated the pension increases. For this reason, after explaining your wishes, put all of your requests in writing by email.

If you are not an elected official but are instead either a potential candidate or an ordinary citizen, such as a member of a taxpayer group, you should use a Public Records Act request, discussed below. Either way, the documents you need are the same. Here they are:

PART TWO – LIST OF DOCUMENTS TO REQUEST TO DETERMINE IF REQUIREMENTS WERE MET

The first step to conduct an investigation is to contact the individual working for your city or county who handles documents and records and send them an email. That email should include:

For cities and counties with CalPERS, a request for the following documents:

  1. A copy of the letter of intent regarding the increase from the City to CalPERS.
  1. The actuarial study performed by the CalPERS actuary, or any other actuary, to determine the future annual cost in dollars, and increased actuarial liability (past cost) due to the increase.
  1. The agenda and board package for the meeting where the increase was enacted. (Note: Review for the following, (a) If the board agenda did not mention that pension formulas were being changed so that citizens and local newspapers would be informed and could attend the meeting to discuss why retroactively increasing pensions might not be a good idea, (b) if there was not an estimate of the future annual dollar cost.)
  1. A copy of the CalPERS addendum to the agency’s contract for the new formulas (Note: Review this document to (a) determine the new formulas, (b) when they were to become effective, (c) whether they were to be applied to past and future years of service or forward from the date of the increase – often we have found they were retroactive for safety personnel but not for miscellaneous, yet retroactive enhancements were then granted to all employees in conflict with the terms of the addendum.)
  1. Any documentation regarding who was going to pay for the increase. (Note: CalPERS often instructed agencies to pay for the increase through a freezing of salaries for 3 years, or an increase in employee contributions to offset the cost. It is important to verify the agreements are being adhered to.)
  1. A copy of the Memorandum of Understandings (MOU) for the Safety and Miscellaneous employees before and after the increase was enacted. (Note: The retirement section provides the information on (a) what the new formulas are, (b) the date the new formulas apply, and (c) how they are to be paid for.)
  1. All additional correspondence between CalPERS and the agency concerning the increase. Be aware that CalPERS estimates that have been reviewed for other cities indicate that CalPERS’ standard procedure was to provide the future cost as a percentage of payroll, not a future dollar cost, as required by Section 7507.
  1. Finally, ask specifically for any document prepared by an actuary at or near the time the pension increase was approved in which the actuary states the actuarial impact upon future annual costs of the increase. Although the broad questions asked above should get this information, it is important to ask for this material specifically for a variety of reasons.

For a County with an independent pension system, request the following documents:

  1. The board resolution adopting the increased formulas. The resolution will disclose the formulas adopted, whether they were to be treated as retroactive or prospective, when they were to commence and how the increase was to be funded.
  1. The board meeting agenda and the attachment providing details of the proposed benefit increases. If the public was informed of the estimated cost impact as required by law, this is how it would have been done.
  1. The actuarial study performed by an enrolled actuary to determine the future annual cost of the increase along with any other information or communications provided by the actuary regarding the increase.
  1. The MOU or employment contracts before and after the increase, which will also provide information on who was going to pay for the increase. In many cases the employees were to pay for part or even all of the increase, but the actuarial study was flawed so the agreement is not being met. Employee contributions may need to be adjusted accordingly.
  1. Finally, ask specifically for any document prepared by an actuary at or near the time the pension increase was approved in which the actuary states the actuarial impact upon future annual costs of the increase. Although the broad questions asked above should get this information, it is important to ask for this material specifically for a variety of reasons.

California Public Records Act

The California’s Public Records Act provides a reliable means for ordinary citizens to access public records. See generally, Cal. Gov Code Sections 6250 et seq. (http://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=6250.&lawCode=GOV).  Several websites provide guidance on how to submit a public records request (PRA).  See, e.g. www.dbo.ca.gov/Codes/PRA/adm500166.pdf   Most public agencies will assist you by explaining what they want from you to make the process easier.  Occasionally, public agencies will resist requests, and lawyers need to get involved.  While CPC cannot give legal advice or represent you, if that happens in one of these cases, contact CPC, and we will attempt to refer you to an attorney who practices in this area of the law.

Conclusion

As documented in these pages, the pension formula increases that occurred from 2000 to 2007, combined with the failure of CalPERS and county retirement associations to meet their assumed rate of investment returns have led to a huge 500% to 1,000% growth in pension costs.  As a result, California cities and counties are facing unfunded liabilities of at least $245 billion statewide.  They threaten the financial viability of our local governments and cause local officials to eliminate needed projects such as road repair, programs for the needy, park maintenance and the like.

This primer provides a practical and fair way to bring these costs under control.  The pension formulas that cities and counties have been struggling under were never fair, and now we are learning that many of them may have been illegal because the public and some local government officials were not warned about the massive future costs that would be generated by new pension formulas.

Before the new formulas, which have been so devastating on local government, could be legally adopted, Government Code Section 7507 required that (1) an actuary study the effects of the pension increase; (2) the actuary must then make a statement about future actuarial effects; (3) the actuary’s statement must be examined by the council or board; and (4) the actuary’s statement must also be seen by the public.  This primer provides you with the tools to determine whether these steps were taken in your city or county.  If they were not, you and your unions need to walk back those pension increases because they are unfair and illegal.  If the union won’t agree, it’s time to see your lawyer because the future of California is riding on this.

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