California Police Chief- Fall 2013 CPCA_2017_Winter Magazine Final | Page 39

taxpayer groups on the other. Both sides have engaged in
some Machiavellian behavior since things starting get-
ting ugly toward the latter part of the recession. The one
attempt at compromise, if it can be called that, was the
California Public Employees' Pension Reform Act (PEPRA).
Unfortunately, significant reductions to the benefits of some
employees, and the absence of immediate savings, left both
sides unsatisfied. It is time for a better path forward, one
that embodies what our founders finally saw as necessary –
constructive compromise.
Cal Chief’s and our allied law enforcement part-
ners have an opportunity to lead the way toward a more
sustainable and attractive pension system. Justifying such
action is easy. If you are a Chief, chances are you were
summoned to at least one meeting within the past year
that went something like this: a Finance Director convened
department heads to explain the devastating impacts in-
creased CalPERS contributions were going to have on your
city’s finances. A menu of unpleasant choices followed.
Given contribution rates are set to continue increasing for
years to come, anyone ignoring these conversations does
so at their peril. CalPERS report titled 2016 Annual Review
of Funding Levels and Risks provided the basis for this un-
surprising surprise-CalPERS Public Employees' Retire-
ment Fund remains woefully underfunded at only 68%
and it’s time to pay up (the current bull market should
propel this figure solidly into the 70’s by 2018). Fiscally
sound cities have a few options, like using surplus funds
to pay down a portion of the PERS liability or setting up
irrevocable trusts to pay down liability in future years
as needed. Municipalities without surpluses are facing
more immediate cuts to services as increased contribu-
tion rates eat into general funds.
For the past decade, pension critics have made some
outrageous doom and gloom claims. Most never came to
pass but their underlying arguments have been proven
correct. Many benefits (like spiking) were overly generous,
and assumed return rates have been too optimistic. Two
additional underreported factors are also at play. The first
is the maturing nature of pension funds like CalPERS. Not
unlike Social Security, our pension systems have fewer
young workers to pay for the benefits of a larger and lon-
ger-living, retiree pool.
The second factor involves legislation that compels
CalPERS fund managers to divest from various industries
and causes. The bills that make it to law have had a sig-
nificant impact on revenue for CalPERS - to the tune of
eight billion dollars by some estimates. In a news release
last year, CalPERS Board Vice President and Investment
Committee Chair Henry Jones said "Divestment as an
investment strategy presents a challenging conflict for
CalPERS, as it often pits social responsibility against our
fiduciary duty as outlined in the California Constitution".
Cal Chief’s, labor groups and taxpayer organizations have
been skeptical of these often well intentioned efforts.
So why shouldn’t the status quo continue? For start-
ers, recruiting is more challenging than ever. Anecdotal
evidence points to waning interest in law enforcement as
a career choice. For many agencies, the short term fix is
hiring lateral officers. After PEPRA, officers are less like-
ly to apply to new departments if the retirement formula
is disadvantageous. This has dried up pools of lateral
“classic formula” officers. We now compete against agen-
cies with identical or inferior retirement formulas for a
shrinking pool of lateral applicants.
Second, we have a different entry-level employee to-
day. Without resorting to the overused cliché of millennials
lacking loyalty, let’s simply say we can no longer count on
new officers to remain at one organization for 30 years. De-
fined benefit pensions remain attractive but the number of
factors at play for new officers has become a game changer.
A multitude of pension formulas, the financial health of
individual cities, case law, legislation, and changing public
attitudes have created a level of uncertainly unheard of
until now. Vastly underfunded pension systems in places
like Illinois are viewed as dying canaries in the coalmine
by younger workers. Put yourself in the shoes of a new
PEPRA officer. Can you, or any financial advisor, tell them
what the pension system is going to look like in 2047? The
attraction of a portable 401k type plan is understandable.
Being highly mobile appeals to younger officers, and they
may want a retirement fund they can take with them if they
switch careers.
A set of reforms and legislation leading to a hybrid
pension system could have many benefits. Three retirement
options should be considered for new, and possibly exist-
ing, employees. They are:
1. The current defined benefit pension system such as
CalPERS formulas 3@50, 3@55 or 2.7@57
2. A risk managed defined contribution plan where
employers contribute to employee accounts man-
aged by CalPERS
3. A hybrid plan of both defined contributions by the
employer and a lower defined benefit
This is not the first time a defined benefit/defined
contribution hybrid plan has been proposed in California.
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