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SR-602-003 (32)~_ . City Council Report ~ City of Santa Monica City Council Meeting: June 27, 2006 Agenda Item: 8-~ To: Mayor and City Council From: Karen Bancroft, Director of Human Resources Subject: Resolution Authorizing the City Manager to Execute a Memorandum of Understanding with the City's Miscellaneous (Non-Safety) Bargaining Units to Establish the Terms and Conditions for Amending the City's Contract with the California Public Employees' Retirement System (CaIPERS) to Provide the 2.7% @ 55 Full Formula for Active Local Miscellaneous Members Only Set Forth in Section 21354.5 of the California Government Code Recommended Action This report requests that Council adopt the attached resolution authorizing the City Manager to execute a Memorandum of Understanding (MOU) with the bargaining units that represent the City's miscellaneous (non-safety) employees to provide the 2.7% @ 55 retirement formula option made available by CaIPERS under Section 21354.5 of the California Government Code. Under the terms of the MOU, the employees will fully reimburse the City for the additional cost of this benefit. Executive Summary The City of Santa Monica contracts with CaIPERS to provide retirement plans for permanent employees. As a contracting agency, the City may amend its contract(s) to provide various optional benefits made available by CaIPERS. 1 The City's miscellaneous (non-safety) employees have requested that the City amend its contract with CaIPERS to provide Section 21354.5, 2.7% @ 55 full formula for active loca! miscellaneous members only. The employees have agreed to reimburse the City for the cost of this benefit through an after-tax payroll deduction. Discussion The City's contract with CaIPERS currently provides the 2% @ 55 full formula for active local miscellaneous members only. This retirement formula increases for employees who elect to retire at an age older than 55 and reaches a maximum of 2.412% for each year of City service once an employee reaches age 63 or older. CaIPERS offers three additional retirement formula options for miscellaneous employees, one of which is a 2.7% @ 55 retirement formula. This retirement formula provides 2.7% for each year of City service once an eligible employee reaches age 55. The retirement formula does not change if the employee elects to retire at an age older than 55. The City's miscellaneous employees have voted to reimburse the City for the additional cost of the 2.7% @ 55 retirement formula option provided by CaIPERS and have asked the City to amend its contract with CaIPERS to provide that optional benefit. 2 Based on the valuation prepared by CaIPERS, the implementation of this optional CaIPERS benefit would increase the City's CaIPERS contribution rate by 5.7% and the employees' contribution rate by 1.0%, for a total rate increase of 6.7% as of FY2007-08. The increase in the City's contribution rate includes the repayment of an unfunded liability that covers retirement costs of employees who retire prior to the increased benefit being fully funded. The payment of the unfunded liability has been amortized over 20 years by CaIPERS. The payment represents 3.586% of the 5.7% increase to the City's contribution rate. At the end of 20 years, the unfunded liability will have been paid by the City, resulting in a corresponding reduction in the City's contribution rate. The reimbursement that will be required of the City's miscellaneous employees will be 6.7% of their compensation that is subject to CaIPERS contributions. The reimbursement will be paid by employees through an after-tax payroll deduction. Due to the size of the after-tax reimbursement, the reimbursement by employees will be phased in, starting as of FY06-07. The amendment to the City's contract with CaIPERS providing the new CaIPERS retirement formula will not become effective until June 1, 2007. As of FY06-07, employees will begin pre-funding the new CaIPERS benefit through a 2.5% after-tax payroll deduction. Those monies will be held in trust by the City until the new CaIPERS benefit is implemented on June 1, 2007. As of FY07-08, the employees' after-tax payroll deduction will increase to 5.0%; and, as of FY08-09, the employees' 3 after-tax payroll deduction will increase to 6.7%. The employees' after-tax payroll deduction will remain unchanged at 6.7°lo for each subsequent fiscal year. When the new CaIPERS benefit is implemented on June 1, 2007, the City's GaIPERS contribution rate will increase by 6.7% as of FY2007-08. The monies held in trust from the FY06-07 payroll deductions plus the FY07-08 employee reimbursement contribution of 5.0% will cover the full cost of the new CaIPERS benefit for June, 2007 and all of FY07-08. As of FY08-09, the employees' after-tax payroll deduction will then increase to 6.7%, which will then cover the on-going cost of the new CaIPERS benefit for subsequent fiscal years. Budqet/Financial Impact Per the terms of the attached Memorandum of Understanding (MOU) between the City and its non-sworn bargaining units, the amendment to the City's contract with CaIPERS to provide Section 21354.5, 2.7% @ 55 full formula for active local miscellaneous members will have no net budget or financial impac# on the City. Under the terms of the MOU, the miscellaneous employees will reimburse the City for the additional 6.7% cost associated with this benefit. The chart attached to this staff report details how the phase-in of the employee contributions will cover the full cost of the new CaIPERS benefit. Prepared by: Karen Bancroft 4 Approved: Forwarded to Council: F ~ K en Ban oft P. L on well Director, Human es rces Department City ager COST ANALYSIS OF 2.7% @ 55 CALPERS OPTIONAL BENEFIT NOTE: The following analysis is based on $100M of non-sworn employee compensation; assumes 4% cost of living adjustments Cost Unspent FISCAL YEAR PERSable Employee 2.7% @ 55 = Employee Net cost to employee Compensation contributions 6.7% reimbursement City contributions (effective 6/01/07) (starting FY06-07) FY2006-2007 $100,000,000 $2,500,000 $560,333 $560,333 -0- $1,939,667 Employees receive Employees contribute Billing from CaIPERS Amount employees pay FY06-07 employee 4.0% COLA 2.5% of PERSable for 2.7% @ 55 for 2.7% @ 55 contributions still compensation held in reserve by {1 month - June 2007) City FY2007-2008 $104,000,000 $5,200,000 $6,968,000 $5,200,000 -0- $1,939,667 + $1,768,000 - $1,768,000 $6,968,000 $ 171,667 Employees receive Employees contribute Billing from CaIPERS Amount employees pay Unspent employee 4.0% COLA 5.0°!a of PERSab1e for 2.7°lo @ 55 for 2.7°l0 @ 55 contributions used compensation to cover full cost of (12 months) 2.7% @ 55; any unspent funds wifl retained by the City FY2008-2009 $108,160,000 $7,246,720 7,246,720 $7,246,720 -0- -0- Employees receive Employees contribute Billing from CaIPERS Amount employees pay 4.0% COLA 6.724% of PERSable for 2.7% @ 55 for 2.7% @ 55 compensation, covering the full cost of the benefit (12 months) ee o te . eso utlon o. m en m ent to ontract o.