The new system would reduce the maximum pension payment to new non-police employees from 81 percent of the highest annual salary to 60 percent of the average of the three highest consecutive salaries, and would increase retirement age from 55 to 60. It would go into effect in 2011 at the earliest, assuming that another union, representing middle-management employees, agrees to the system, or that the city imposes it on that other union.
The new pension formula would apply only to new hires.
Public agencies can impose terms only after declaring negotiations to be at an impasse, and after working with a mediator to reach an agreement. Several efforts to reach an agreement failed, leaving line-level workers represented by the SEIU without a contract for six months and counting.
In explaining their votes, council members said they were chastened by bleak revenue projections, and concerned about the city's long-term commitments to the state pension fund. The council in 2007 voted to increase pension payments from a maximum of 60 percent to 81 percent of highest salary; the new benefit applied retroactively to all non-police employees.
Though the pension system the council voted to impose is similar to the terms in a citizen-led initiative petition filed May 3, council members said that they were not responding to that initiative drive.
The city's costs for pension benefits have risen from about $1.75 million in the 2004-05 fiscal year to about $4.25 million in the current fiscal year, a figure that represents nearly 13 percent of the city's annual operating budget.
Pension costs are projected to rise to about $5.75 million in the 2014-15 fiscal year, though that estimate is based on several assumptions about city salaries and investment returns on the state fund that might not hold true, according to city Personnel Director Glen Kramer.
Currently, about 75 percent of public pensions for state employees are funded by returns on investment, Mr. Kramer said, with municipalities and employees sharing the rest. The state fund, run by the California Public Employees System, or CalPERS, has traditionally enjoyed a high rate of return, but took a 23 percent hit during the recession, according to Mr. Kramer.
"I don't have much faith in the CalPERS system, as it stands; it's too volatile for me," Mayor Rich Cline said in an interview, adding the system leaves the city and taxpayers with all the risk if the fund's investments don't pan out. "I haven't seen the formula fixed, to a point that I feel confident" that the city's share of the cost won't increase again, he said, maintaining that the council is doing what it can to mitigate that risk.
Mr. Cline also defended the council's 2007 decision to increase benefits, saying that low employee morale and a competitive hiring market, along with strong revenue projections, informed his vote.
City workers and union representatives turned out en masse to the May 4 council meeting, holding yellow signs throughout and urging council members not to impose terms.
While some argued that their retirement benefits should not decrease because municipal workers didn't cause the recession, the more general feeling was that the city was turning its lowest-paid workers into scapegoats for residents seeking an outlet for populist, recession-related anger. Speakers said the city had rejected proposals that would save more money now, in favor of ill-defined long-term benefits.
"How do you justify making front-line workers suffer sooner than middle managers?" asked Renee Morales, a liaison between city workers and the SEIU. "Workers have stepped up many times — we get it! And to claim that we don't see a need to curb costs is just plain wrong."
Mr. Morales and other union representatives have also expressed confidence that the CalPERS fund will continue its historical high rate of return, saying the recent downturn in the fund is only temporary.
Even with rising pension costs, it remains to be seen how the two-tier system would affect the city's bottom line, should it implement it in 2011 or 2012. City Manager Glen Rojas acknowledged that reducing pension benefits could force the city to increase salaries, but noted that the city has more control over salary costs, whereas it is locked in to pension payments.
Regardless, the two-tier system won't change those payments for 10 or 15 years, because of the way the state allocates them, according to city officials.
Mr. Rojas complimented city workers for their civil tone at the May 4 meeting.
"They were probably pretty hot and angry, but they did a really good job of presenting themselves in a professional manner," he said. "I was proud of it."
In last week's Almanac, a story cited Menlo Park Councilwoman Kelly Fergusson as saying that moving to a two-tier pension system may not save the city money. But the story did not note that her remarks were made in the context of a discussion about a voter initiative aimed at scaling back pension costs, rather than the City Council's action.
It's the initiative process that she thinks would cost the city money, she said — not the concept of a two-tier pension system in general — because the initiative could entail legal and other processing-related costs for the city.
At the May 4 council meeting, Ms. Fergusson said she supported the city's move to a two-tier pension system because it would control long-term costs, and would allow the city more flexibility in budgeting.