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City Adopts Two-Tier Retirement For New Workers
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In response to rising employee pension costs, the City of Oakdale, in an attempt to save money, initiated a two-tier retirement system for new employees. The new lower tier retirement formula brings the benefit down to nearly the same level it was when the city joined the California Public Employees Retirement System (CalPERS) in 1970.

In the late 1990s, when the economy was solid and stock market returns were strong, state and local public employee unions were able to negotiate more generous pension packages for their workers. One of the adapted benefits was that “safety employees” — police and firefighters — were able to obtain up to 90 percent of their salary with 30 years of service.

In 2002, Oakdale modified its CalPERS retirement benefit for miscellaneous employees raising the yearly formula from two percent for every year of service to two-and-a-half percent and lowered the eligible age from 60 to 55 years. In 2005, safety employees obtained the wide-accepted formula of “3@50” that lowered their eligibility from 55-years-old to 50 and raised their formula from two to three percent for every year of service.

The method for determining a CalPERS retirement is to take the employee’s years of service and multiply it by the per-year percentage from the offered plan. That figure is the percentage of the employee’s salary he/she will receive for life in addition to cost of living adjustments.

As an example, a city police officer is eligible to retire at age 50. With 25 years of service, that officer will receive 75 percent of his or her salary (25 years times 3 percent for every year = 75 percent). An officer that made $70,000 per year their final year would receive an annual pension of $52,500.

Oakdale, like may other municipalities, does not participate in Social Security for its full-time employees. A retired public agency employee is not eligible for social security benefits unless they worked at least 10 quarters in some other job where they paid into the program and are at the established social security retirement age.

The new tier is “2 percent @ 60 for miscellaneous employees and “2 percent @ 50” for safety employees. In addition to lowering the formula for new workers, the city also added that the final calculation for benefits would be an average of the worker’s last three years of service compared to the current practice of the workers single highest year. Currently, a worker can choose which year of service’s salary to compute their retirement rate even if it’s not their last year of employment.

Currently, workers are able to “spike” their salary which not only includes base pay, but also includes sick leave buy-back, educational incentives, uniform allowances, and shift differentials. Spiking can result in a retiree’s pension being greater than the employee’s actual pay.

During past negotiations, the city entered into agreements that it would pay both the employer and employee’s portion of the CalPERS contribution. Generally the employee is required to pay seven to nine percent of their salary towards CalPERS. The city’s payment portion, which in past years had been “super funded” by CalPERS investments and had not required any funding from the city, is now as high as 29.9 percent of a base salary for safety members and 16.2 percent for miscellaneous members. The new formulas bring the employer’s costs down 50 percent to 14.8 and 8.1 percent respectively.

Last year the city started having employees pay five percent of their contribution. The new second tier will require the employee to pay their whole share.

In proposing the change, Oakdale City Manager Steve Hallam pointed out that the city couldn’t arbitrarily change the existing pension plan to current vested employees. The courts have ruled that these benefits are protected property rights and must be negotiated through collective bargaining. He added that the city’s legal staff has advised him that the employee associations have no standing for the rights of future employees and the two-tier system could be imposed.

Hallam added that the city wouldn’t see actual savings for a few years and would gradually come as new hires replaced existing employees that left city employment.

Hallam said that two of the city employee bargaining units – Miscellaneous and Police – have stated they will not accept the two-tier plan during negotiations. The firefighters unit has made concessions, but not for the modified retirement plan. Hallam repeated that it was the city’s legal opinion the groups did not have a right to bargain for future employees.

Mike Eggener, an Operating Engineers Local 3 business agent representing the miscellaneous employees disagrees with Hallam’s belief that the union does not have standing to reject the proposal.

“An existing contract with defined retirement benefits for members of the unit is in effect,” Eggener said. “Future employees, if hired, fall under that contract. Any modifications would have to go through bargaining.”

Eggener said he also expects the union to file the same grievances and unfair labor practice allegations.