Pension Reform in Poway

The City of Poway contracts with the California Public Employees' Retirement System to provide pension plans.  In 2012, the City reformed their pension plans to offset the significant financial impact of the Great Recession.




Background

The City of Poway, since incorporation, has contracted with the California Public Employees’ Retirement System (CalPERS) to provide defined-benefit retirement pension plans for the City’s Fire-Safety group and Miscellaneous (Non-Safety, Management/Confidential) group of employees. In 2001, when pension plans were extremely well funded statewide, and CalPERS was achieving high rates of return on its investments, Assembly Bill 616 was signed into law allowing CalPERS member agencies to provide employees with enhanced retirement formulas.  In San Diego County alone, every City that contracts with CalPERS approved one of the new enhanced retirement formulas for their employees.  To remain competitive with the other cities at that time, Poway approved a 3% at 50 formula for Fire-Safety employees, and a supplemental retirement benefit for Miscellaneous employees, with significant eligibility requirements focused on longevity through the Public Agency Retirement Services (PARS) program.  Currently, the PARS benefit is a closed plan that only applies to a certain number of Poway employees hired between certain dates.  Even though it is a closed plan (meaning no new enrollees), the Plan must continue to pay benefits to retirees receiving the benefit and it must have enough assets to also pay benefits to the eligible members when they retire.  Employees hired after January 9, 2012, are not eligible for the PARS benefit because of pension reform. 

While PARS and CalPERS are defined-benefit plans, there are very distinct differences between the PARS plan and the CalPERS plans. As a closed plan, PARS will not see the steep increases in contributions that are projected for CalPERS. Additionally, the City controls how PARS funds are invested.  The PARS plan is well funded due to several City Council actions. When the City Council adopted the 45% General Fund Reserve policy in 2015, there were surplus reserve funds available and the City Council chose to use $2.8 million toward paying down the PARS unfunded liability. An additional $500,000 from the Fiscal Year 2016-17 year-end surplus was used to further pay down the PARS unfunded liability.  

The impact of the Great Recession on CalPERS funds was significant. CalPERS lost more than 27% or $67 billion in value. As a result, employer rates for all CalPERS agencies began increasing significantly.  Employer rates had to make up for the losses since there was still an obligation to pay retiree benefits as well as the costs of the unfunded liability of future benefits to be paid to CalPERS participants.  Cities began the process of negotiating lower CalPERS retirement formulas and employee contributions with employee bargaining groups to work toward ensuring future sustainability of retirement benefits. Poway employees and the City Council recognized the importance of financial sustainability and agreed to a second tier of benefits that included a lower retirement formula for employees hired after January 9, 2012. Less than one year later, the State of California passed the Public Employees’ Pension Reform Act, known as PEPRA, which mandated lower retirement formulas for all CalPERS member agencies for employees entering CalPERS on or after January 1, 2013.  This established a third tier of retirement benefits with an even lower CalPERS retirement formula for City of Poway employees. An additional provision of PEPRA caps pensionable salary for employees that fall within this third tier. 


Current CalPERS Retirement Tiers in Poway

The current City of Poway retirement tiers for the Fire-Safety employee group and the Miscellaneous employee group (Non-Safety/Teamsters,  Management/ Confidential employees) are outlined in the table below.

 Group Plan Tier 1
"Classic" Employees
hired prior to 1/9/12
Tier 2
"Classic" Employees
hired after 1/9/12 *
 Tier 3
"PEPRA"
New CalPERS 
Employees hired
on 
or after 1/1/13
 Miscellaneous  2% at 55       (FAE1)** 2% at 60     (FAE3)*** 2% at 62     (FAE3)
 Fire-Safety 3% at 50        (FAE3) 3% at 55      (FAE3) 2.7% at 57   (FAE3)

* Tier 2 employees must be employees who are not new to working for a CalPERS agency or an agency with a reciprocity agreement with CalPERS and  who have not had a break in service for more than 6 months prior to being hired by Poway.

** FAE1 means the single highest year of earnings (typically final) is used to calculate the employee's salary used in the benefit formula.

*** FAE3 means the highest three years (typically final three) of average earnings is used to calculate the salary used in the benefit formula.

Employee Contributions

Funding of CalPERS pensions relies on three sources: employee contributions (fixed by statute based on formula), employer contributions, and investment returns.  In 2009, City of Poway employees began contributing 3% of salary toward pension contributions, phased in over several years until employees were paying the full employee rate.  During labor negotiations in 2017, employees of the Poway Firefighters Association and Teamsters union agreed to contribute an additional 1% toward PERS costs beyond the required employee contribution.  Currently, all employees of the City of Poway considered "classic" CalPERS employees in Tier 1 and Tier 2, including employees in the Management/Confidential group, are contributing an additional 1% of their salaries beyond the required employee rate depending on their calPERS group plan and tier.  In other words, employee are contributing 1% toward the employer cost, in addition to the 7% (Miscellaneous) or 9% (Safety) to the employee contribution.  Employees in Tier 3, who are considered PEPRA employees, are contributing what is required statutorily by PEPRA.