For the first time in Lodi's history, the city is asking all of its employees to pay into their pensions to help offset steep increases in retirement costs.
Earlier this month, Lodi's top managers agreed to pay 7 percent of their pension costs, which is the maximum allowed by the state.
Staff is currently in negotiations with all of the city's unions, and will ask employees to pay a portion of pension costs to help offset a $1.2 million increase during the 2011 fiscal year alone, which starts July 1.
"We desperately need to provide an education effort to our employees so they understand with the rising cost of our pension program, those dollars will not be used for other things, whether it is bodies for services or capital projects," City Manager Rad Bartlam said. "The costs have tripled in the past seven years. It is just not sustainable."
One of the city's main unions, the Lodi Professional Firefighters Association, plans on paying a portion of their costs, even though they believe city leaders created the problem by mismanaging money when the economy was booming, union president Brad Doell said.
On a statewide level, pension reform advocates are concerned that even if cities do everything in their power to reduce costs, it will not be enough.
The total costs for city of Lodi pensions increased by almost $5 million in the last decade to $7.1 million for this fiscal year, which ends June 30. By 2013, that number is expected to reach $9.8 million.
Every city in the state is also seeing costs skyrocket. In Galt, pensions increased by $171,590 from 2010 to 2011 alone.
In 2010, Galt paid $1.7 million, and that number is expected to increase to $2.4 million by 2013 — a $631,274 increase.
The sudden, steep increases are because the California Public Employees' Retirement System lost 30 percent of its total fund value during the recession, Bartlam said. Cities, counties and other local agencies will have to gradually pay back those costs over the next 15 years.
In Lodi, employees have agreed for the past three years to a variety of concessions to balance the city's budget, including furloughs, pay cuts, and eliminating city contributions to an optional retirement plan separate from a pension.
But with revenues stagnating, and pension and health care costs rising, the city is now asking for employees to start contributing more.
The Lodi Police Officers Association President Paul Blandford said it is important to remember that in some cases officers received portions of their benefits package, including pension contributions, instead of a raise.
"At some point, everything is negotiated," he said.
Blandford and Doell both said the public safety unions are frustrated with the situation because they believe that officials mismanaged funds in the early 2000s, and that is why the city is struggling now.
During that time period, the pension system was "superfunded" and CalPERS did not require cities to pay full payments. Both union leaders said the city should have been putting the money it would have paid into a separate account to save for harder economic times.
"But that's the past. There's nothing we can do about it. Hopefully, it's a lesson learned and people will be better stewards of the taxpayer money in the future," Doell said.
Doell said firefighters are planning to pay part of their pension, but he is not sure what percentage. During the past six years, he said the union has offered to pay part of the employee pension costs, but city staff has declined that offer until this year.
"I just know that our bargaining group is in a position to help the city in its long-term economic health," he said.
Where are we currently doing, and what are the solutions?
City leaders like Mayor Bob Johnson say there is no question that the city of Lodi needs to look at ways to reduce pension costs.
"I don't think that anybody would disagree with me when it is said — and has been said by people smarter than I — that the pension system is unsustainable. We can't do business like we have in the past," he said.
In the city of Lodi, sworn police officers and firefighters receive 3 percent of their highest year of pay at the age of 50. All other employees receive 2 percent at 55 based on their average three highest years of pay.
So here is how it works: If a police officer has worked for the city for 30 years and reaches age 50, then the pension is calculated by multiplying 30 by 3 percent. So the retiree will receive 90 percent of their highest year of pay.
Public safety is capped at 90 percent, while miscellaneous is not capped.
Lodi adopted the retirement formulas in 2000, along with many other agencies through the state. Cities cannot decrease the percentages for current or former employees.
So local leaders really only have two ways to legally control pension costs aside from layoffs.
Future employees could be put on a two-tier system, so any new hires could possibly receive a lesser percentage at a higher age.
Bartlam said that the city plans to create a two-tier system, but it is a long-term solution because it will be years before the city will sees any savings.
Doell said he has concerns that the city will have a harder time retaining employees if there is a two-tier system.
"When you have employees doing the same job at the same classification and making a different salary or benefit packages, at the end of the day, that's not good," Doell said.
The other option is to make workers pay part or the entire portion of their pension costs. Currently, the city pays the employer and employee share of pension costs for all workers.
That is a common trend in cities, but with the recent pension concerns, cities are increasingly asking employees to pick up part of the tab.
The executive managers and employees appointed by the council — including the city manager, city attorney and city clerk — agreed to pay 7 percent of their pension costs in the hope it would set the tone for future negotiations.
State law caps how much cities and counties can make their employees pay toward their pensions. Sworn firefighters and police officers can contribute a maximum of 9 percent while all other employees are capped at 7 percent.
The city is currently negotiating concessions with all the unions to balance the budget for the next fiscal year, which starts July 1. Then, the city will be start another round of negotiations because all of the union contracts except two, will expire in December.
What if those changes are not enough?
Even if the city creates a two-tier system and employees pay their full share, Bartlam has concerns that in the future the city could still come up short.
"Like so many things, us poor people at the local level are really going to be dependent on the state legislature to change the law," he said.
In February, the Little Hoover Commission, an independent state oversight agency, released a report stating that enhanced retirements — such as 3 percent at 50 for public safety — that were put in place in the early 2000s are unsustainable. It recommended that the state replace the pensions with a new hybrid system.
Marcia Fritz, president of the California Foundation for Fiscal Responsibility, agrees that the pension system needs to be completely overhauled.
"Cities are going to run out of options. I think we are going to see some bankruptcy because of these burdensome contracts," she said.
The goal of Fritz's nonprofit organization is to educate the public and state leaders about pensions, as well as to look at possible solutions.
Fritz said there are a variety of models, but they focus on three main sources for retirement. Employees would still have a pension, but in addition they would draw from Social Security as well as another retirement account set up similar to a 401(k).
A statewide change to a hybrid system is the only way to significantly reduce costs, Fritz said. Even with the options cities have, she said it is hard for them to implement them because unions have so much power.
This becomes apparent when cities negotiate for a second tier and only decrease public safety to 2 percent at 50, instead of going for 2 percent at 60.
"The fact that they aren't going for most efficient savings tells me they are not working hard enough. ... You are in a crisis; why not go for the most cost-savings possible?" Fritz said.
But in order for the Legislature to pass any type of pension reform, it needs to be supported by the unions.
"If they do not take responsibility, it's not going to happen, and their members are going to suffer the most because taxpayers will not vote for tax increases while this pension problem continues," she said.
Johnson said it is important for the state Legislature to find a solution, because they passed the law creating enhanced retirements in 2000, which created this mess.
"We are the ones stuck between a rock and a hard place while the Legislature throws kitty litter at each other while coming up with a budget," Johnson said.
As a public employee, Doell said he is frustrated when people talk about pension costs being an unfunded liability.
He believes the city has made a commitment to employees, and it should stick with the agreement, especially because employees made pay and benefit concessions during negotiations to receive these pension benefits.
He compared it to buying a home. When someone takes out a loan, it's because they cannot afford to pay $250,000 all at once. But they are making a commitment to the lien holder — the bank — to make that payment regardless of what is happening in the market.
"Public employees are the lien holder, and the city had not been making good on their pension," he said.
Blandford said that one of the other problems with the pension system is that it is hard to measure what is actually happening with the retirement accounts.
"On the PERS website, they paint a different picture than politicians paint. PERS says it's recovering and sustainable, while politicians are saying it's going to implode in a couple of years. I guess time will tell," he said.
The private sector went through these changes in benefits about 10 years ago, and there was still some resistance then, said Dean Gualco, manager of human resources for the city of Lodi.
He said the city has to work with employees and understand that this is the first time some of the workers who have been with the city for decades have been asked to contribute to retirement.
"When someone is raised in a culture, and then you change the culture, you can't expect them to flip on a dime," Gualco said.
But he said there are basically two options: Have fewer people, which results in reduced services; or keep the same number of employees to maintain service, and pay them less.
Bartlam also said the city doesn't have many options.
"Our fiscal necessities are in fact real, not make-believe. Our job is to provide services to the community. Some of them we will ultimately do without, and some of those services we don't think we can do without, (which) means paying employees less than we did previously," Bartlam said.