If you've done your homework, you'll remember that last week we talked about how the chickens of CalPERS' (California Public Employees' Retirement System) bad investments flew in to roost in Santa Clara's budget. This week's lesson is on how payout amounts are calculated.
Santa Clara's pensions – like those of most states and cities – are defined benefit plans, and payouts are based on a formula, regardless of contributions and the pension fund's value.
Once city employees are vested – in CalPERS, that's five years – they're entitled to receive a percent – a "multiplier" or "contribution factor" – of their highest pay for each year of employment. Years of Service x Benefit Factor = Percentage of Final Compensation. The monthly pension amount is that result divided by 12. Public safety pensions are capped at 90%.
So far, it's fifth grade arithmetic. But, as they say, the devil is in the details. In this case, it's in the values assigned to these variables, the definition of "high salary," and the magic of multiplication.
Multipliers are, quite simply, any number that the municipality and its bargaining units agree to. They're not tied to anything – say, like the cost of living. Multipliers can be different for different employee groups and contract periods. The current plans date from the flush years of the late 1990s, when the City had a budget surplus. They don't change simply because the City now has a deficit. The terms can only be changed if unions agree to renegotiate the contracts.
In Santa Clara there are two employee groups for the purpose of pension calculations: "safety" employees (police and fire) and "miscellaneous" (everyone else). The benefit factor for public safety employees is 3%, and 2.7% for miscellaneous employees. After five years of employment, public safety employees can retire at 50 with full benefits, while corresponding age is 55 for other City employees.
For the last two years, the average retirement age for Miscellaneous employees was 59½, and for Public Safety employees, just shy of 51, according to Deputy City Manager Carol McCarthy.
The definition of "high salary" is another negotiable item. In Santa Clara', "high salary" is the highest consecutive 12 months' pay. This makes it somewhat harder to game the pension system by simply ratcheting up income the year before retirement with overtime and unused sick and vacation days. Twelve Santa Clara retirees receive pensions that top $150,000, and 122 have pensions over $100,000, according to CalPERS data reported by CaliforniaPensionReform.com. The City's highest pension is $186,343.
While public safety employees are not covered by Social Security – they don't pay into it and are ineligible to receive benefits from it – miscellaneous employees do pay into Social Security and are eligible for benefits when they retire.
However, public employees in the Social Security system are subject to the so-called windfall elimination provision (WEP), which, in its simplest terms, reduces SSA benefits for those with public sector pensions by 10 to 50 percent.* In addition, their CalPERS pensions are also reduced by $133 a month.
*One of the clearest explanations of this taxation arcana can be found atwww.fedsmith.com. For more information, City budgets, financial reports, and Memorandums of Understanding (union contracts) are available online at www.santaclaraca.gov. Visit www.calpers.ca.gov to get information about CalPERS.
Caption: Figures 1 and 2 illustrate some results of the pension arithmetic for both of Santa Clara's employee groups. These numbers are estimates, because actual pension amounts are ultimately determined by CalPERS, and can include other CalPERS offers and choices and made by employees.
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