What changes does the League advocate to the retirement benefits for Los Angeles City Employees?

What you should know

The League advocates changes that continue to offer employees a secure retirement, but make the pension systems more affordable for taxpayers. These changes could include:

• Raising the age at which employees can receive full benefits - for example, from 55 to 67 for civilian employees. Read why.
• Splitting the cost of retirement benefits more evenly between the City and its employees. Read why.
• Reducing the rate at which pension benefits accumulate - for example, to 2% per year of service for civilian and 2.25% for sworn employees. Read why.
• Reducing the possibility of "salary spiking" by making the pension a percentage of the highest three years salary instead of the final year of salary. Read why.
• Removing the subsidy that helps civilian employees increase their pensions based on non-city work (Government Service Buyback). Read why.

Under the California State Constitution, changes in pension benefits can be made only for new employees. The legal status of modifying retiree health care benefits for current employees is unresolved.

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Raising the Retirement Age

Why raise the retirement age?

Currently sworn officers (Fire Fighters and Police Officers) can retire at age 50 if they have 20 or more years of service. Civilian employees can retire at 55 with 30 or more years of service.

In contrast, the current age for full retirement under Social Security is 66, and this is scheduled to increase to 67.

Increasing the retirement age reduces costs in the long run because

• Employees and the City will be making contributions to the retirement system over a longer period of time
• There will also be a longer time for the invested contributions to grow
• A retiree will receive benefits for a shorter period of time

Under the current system, it is not unusual for a retiree to collect a pension for longer than he or she worked for the City. It makes sense to bring the retirement age for civilian employees in line with that for Social Security. As with Social Security, employees should have the option of retiring sooner with reduced benefits. Because of the special demands on sworn employees, the normal retirement age should be raised, but not necessarily to the same age as for civilian employees.

Retiree health care benefits are a significant portion of retirement costs, and the costs are greater for employees who have not reached Medicare age. Increasing the normal retirement age would reduce health care costs.

Splitting Retirement Costs Between the City and Its Employees

Why split the cost of retirement benefits more evenly between the City and its employees?

Increasing employee contributions is an equitable way to reduce the cost to the City of providing retirement benefits.

The cost now for employees:

• Sworn officers (Fire Fighters and Police Officers) pay 8% or 9% of their salaries into the pension system.
• Civilian employees pay 6% of their salaries into the pension system (will increase temporarily to pay for the cost of the Early Retirement Incentive Program)

The "normal" cost for the City is more than double the cost for the employees - 22.65% of payroll for sworn employees and 14.21% for civilian employees

In addition, the City must make up for investment losses and other unforeseen events that increase costs. This is called amortizing the Unfunded Actuarially Accrued Liability (UAAL). The chart below shows employee and city contribution rates for the period July 1, 2010-June 30, 2011.

Reduce Rate of Accumulation of Pension Benefits

Why reduce the rate at which pension benefits accumulate?

The situation now:

A retiree's pension is computed as the employee's highest year's salary times the pension percentage. The pension percentage increases for each year of employment.

• Fire Fighters and Police Officers must work 20 years before receiving a pension and can then retire with a pension equaling 50% of their highest salary. This is 2.5% per year of service. After twenty years employment their pension percentage increases by 3% for each additional years of service and, 4% in year 30, up to a maximum of 90%.
• Civilian employees accumulate pensions at the rate of 2.16% per year of service. For example, an employee who had worked 30 years would receive a pension amounting to 30 x 2.16% = 64.8% of his highest year's salary.

Reducing the rate of accumulation of benefits translates directly to cost savings.

• For example, if the rate of accumulation of benefits were reduced to 2.25% per year of service for sworn employees, an employee with 33 years of service would have a pension benefit of 74% of his/her final salary. The contributions necessary to provide this benefit (city and employee) would be about 17% less than current contributions.
• Reducing the rate of accumulation of benefits for civilian employees from 2.16% to 2% would result in similar savings.

Reduce Salary Spiking

Why reduce the possibility of "salary spiking"?

Salary spiking adds to the unfunded liabilities of the pension systems.

Salary spiking happens when an employee who is near retirement is given a promotion and receives a large raise. Since the retiree's pension is based on his highest year's salary, this increases his pension. But this increase has not been planned for, and so usually will increase the unfunded liability of the system.

Basing pensions on the average salary for the three highest paid years of service is a fair way to reduce the possibility of salary spiking

Social Security averages social security wages over thirty-five years as part of the benefit computation.

Eliminiate GBS Study

Why eliminate the subsidy for government service buyback for civilian employees?

Because every employee purchase of service credit increases the unfunded liability of LACERS.

Currently, employees covered by LACERS who have worked full time for another governmental agency can purchase service credit for retirement from the City of Los Angeles. For example, an employee who worked one year for the federal government could purchase one year of service credit for LACERS. This would increase his or her pension.

The cost to the employee is the amount he would have contributed to LACERS for the years of service with the other agency based on his current salary. In other words, an employee making $50,000 year would pay $3000 (6% of $50,000) to buy one year of service credit.

He can do this immediately before he retires, and his $3,000 investment will increase his starting pension by $1,080 per year

The true cost of providing this benefit is not $3,000, but tens of thousands of dollars. Every employee purchase of service credit increases the unfunded liabilities of LACERS.

It is more financially responsible to require employees to pay the full cost of any government service buyback. Fire and Police Pensions and many other governmental agencies already have this requirement.