The City of Hermosa Beach, with $14 million in unfunded pension liabilities, was one of five municipalities in Los Angeles County singled out by a civil grand jury for a cautionary analysis of high pension costs.
Hermosa was singled out for an in-depth analysis of its pension obligations, after a countywide look at cities’ pension funds, according to a grand jury report released late last week.
The grand jury has authority under state law to investigate wide ranging matters of “civil concern,” including the management of entities within the county.
“The City of Hermosa Beach pays among the highest retirement system employer contribution rates in the county and pays the highest employer contribution rate for its CalPERS [California Public Employee Retirement System] police safety plan,” the report stated.
“In addition, the city picks up the full amount of the employees’ contribution at 7 percent of salaries for miscellaneous employees and 9 percent for uniformed fire and police employees,” it stated.
The amount of the employees’ contribution to a pension fund that is “picked up” by the city is set in labor negotiations.
The report noted that the city has taken some cost-cutting measures, establishing a “two-tier” pension plan in which future employees will receive lower pensions, eliminating or freezing 25 vacant employee positions, and moving “aggressively” to “pre-fund” some of its pension liabilities. That move has “substantially” reduced some unfunded future liabilities since 2008, according to the report.
But the grand jury urged the city to try to trim or eliminate the “employee pick-up” portion of its costs.
The city’s general fund budget for the coming year is about $27 million.
City Manager Steve Burrell said Hermosa’s employee pension benefits are “comparable to other small cities in the area,” and the city is “leading the way in lowering pension costs” by instituting the two-tier system. Hermosa was the first area city to do so.
Councilman Kit Bobko, a prominent critic of the city’s pension costs for police, firefighters and other employees, said the report confirms that Hermosa has given too much in employee benefits, potentially saddling itself with significant unfunded liabilities in years to come.
“We appreciate the Grand Jury’s efforts to address pension reform. The Hermosa Beach City Council is committed to protecting public funds and moved pro-actively earlier this year to adopt pension reforms which will create substantial savings for the city. It’s also undertaken several initiatives to reduce costs and ensure continued funding for vital services amid declining tax revenues,” Burrell said in a prepared statement.
“Hermosa Beach’s employee pension benefits are comparable to other small cities in the area, with those cities also paying the employees’ contribution and providing the same level of benefits,” he said.
“The Hermosa Beach City Council is leading the way in lowering pension costs by approving a two-tiered pension system that is expected to save the city 34 cents for every $1 in payroll for each new police officer, 19 cents for every $1 in payroll for each new firefighter and 8 cents for every $1 in payroll for all other new city employees,” Burrell said.
“In addition, the city has substantially reduced its costs with early retirements, and by eliminating positions which reduced the staff by 17 [permanently eliminated] positions. It’s also cut costs by securing grants and donations from local businesses and individuals to pay for some popular community events and important public improvement projects. The city and the council will continue to seek other cost-cutting opportunities.”
Burrell added, “As a small community working together, Hermosa Beach has balanced its budget, protected the public’s health and safety and reformed its pension system.”
Bobko said he had received a copy of the grand jury’s report and had not fully digested its details.
“This just confirms my suspicions, what I intuitively understand to be true, noted Bobko, who has been pushing for an expert economic assessment of the city’s future pension liabilities. “We are one of the smallest cities, and we are paying among the highest rates [in contributions for police pensions].
“It tells me that something is going on that has attracted the attention of the grand jury.”
He stressed that here is “no criminal malfeasance or negligence. But what we are seeing is the result of years and years of purchasing labor peace with taxpayer dollars.”
Bobko has repeatedly maintained that the City Council gives too much in contract negotiations with public safety workers.
He said city officials should have already begun to address the grand jury’s concern over the “employee pick-up” portion of the pension costs. Bobko complained at a City Council meeting that the council “negotiated away” the authority to address that cost until 2013 in exchange for compliance in establishing the two-tier pension.
“This is a huge piece,” he emphasized.
The grand jury, citing a 2010 report by the Stanford Institute for Public Policy Research, also cautioned that investment returns to CalPERS could wind up amounting to only about half what many cities have expected as they make their pension plans .
If that is the case, Bobko said, cities will be forced to pay more to make up for the investment shortfalls.
