Many years ago, the City of Novato contracted for the “single highest year” method for determining the retirement benefit. The City Council amended Novato’s contract so that we will now use the average of the highest 36 consecutive months for new employees hired after the effective date of the amendment. The practical effect of the amendment is to lower the retirement benefit for future employees.
Another important pension topic is the concept of employee and employer contributions. CalPERS gets money to pay for retirement benefits from three sources: employer contributions, employee contributions and investment earnings on the contributions. By far, most of the money CalPERS uses to pay benefits comes from investment earnings.
Employee contributions are constant. They are 7% for basic and standard Miscellaneous plans, 8% for Miscellaneous enhanced plans and 9% for Safety plans. Employer rates, however, can vary from year to year. When CalPERS’s investment earnings are good, employer rates can be relatively low; when investments earnings are poor, employer rates go up. CalPERS does not pass on the investment gains and losses immediately because it could result in wild fluctuations in Employer contribution rates, which makes budgeting difficult at best. Instead, they use a method that smoothes out the gains and losses over many years so that there is some degree of stability in rates.
Employers can agree to pay on behalf of employees the employees’ contribution. This is known as Employer Paid Member Contribution (EPMC). It was commonly negotiated 10 to 15 years ago, typically in lieu of salary and other benefit increases. For example, until last year, Novato paid the Miscellaneous employees’ 7% contribution and Safety employees’ 9% contribution. The employer could also elect to report the value of EPMC, which means that CalPERS recognizes the EPMC as salary for purposes of calculating the retirement benefit. Part of the logic for doing this is that had the employee taken it as actual salary, the retirement benefit would have been that much higher anyway. As another step in pension reform, Novato changed its PERS contract and stopped reporting the value of EPMC for new employees. Last year, the City also started shifting the employee contribution back to employees. All employees now pay 2% of the employee contribution.
EPMC and reporting the value of EPMC are a couple of the more complicated aspects of pension benefits. In spite of the length of this information, this is really just a base overview of the subject. Pensions are a complicated and sometimes dizzying topic, both in terms of the mechanics of the retirement system and the issues surrounding pension reform.
The cap on Miscellaneous employee benefits using the 36 month average, shifting the employee contribution back to employees, and no longer reporting the value of EPMC are all part of the City’s pension reform efforts intended to control our pension costs.