The city of Modesto is taking a hard look at controlling employee retirement costs, including the soaring expense of providing health insurance after employees retire.
The city paid $17.3 million last fiscal year to the California Public Employees Retirement System, which administers pensions for almost 1,100 Modesto employees and more than 1,250 retirees and beneficiaries.
CalPERS has said it will raise Modesto's contribution rate by up to 4.5 percent next year. Based on Modesto's payroll, that could represent a $2.7 million hike as the city struggles to cut spending and keep its budget balanced amid the recession.
The city also faces a growing liability for retiree health benefits. The cost of covering retirees and current employees who could claim benefits is $81.7 million. And if no changes are made, the health care liability could grow to $273 million over 30 years, city officials said.
"It is a significant issue," City Councilman Garrad Marsh said last week. "We are not in dire straits, but it needs to be fixed."
The city has begun talks with employee unions in an effort to reduce the city's retirement liabilities.
Among the proposals are a two-tier pension program, which would give lesser benefits to newly hired employees. The city also wants to amend a policy that allows employees to convert unused sick leave to retirement health coverage.
There is no talk of amending the basic pension benefits for existing workers, but the city could seek to change the retirement health care options for most employees.
Modesto's police officers and firefighters have some of the most lucrative pension benefits. They are able to retire at age 50 with up to 90 percent of their salaries, which became the standard benefit for agencies in California after a bill was signed into law in 1999.
Other employees who work 30 to 35 years for Modesto can retire at age 55 with 60 percent to 70 percent of their salaries.
In addition, most employees are able to convert unused sick leave to retirement health benefits. Employees preparing to retire can convert up to 2,000 hours of sick leave, at a rate of eight hours for one month of coverage.
It allows some employees to retire with almost 20 years of health insurance, with the city paying most of the premium. The benefit can cost up to $250,000 per employee.
During the budget process this year, certain unions agreed to contract changes creating a different health benefit for employees hired after Jan. 1, 2011. For new hires, the city will deposit $100 per month in an employee account for buying health coverage after retirement.
Unions agreed to discuss retirement benefits in talks that began last month. As the negotiations proceed, officials may consider changes to the minimum retirement age or an increase in employee contributions to CalPERS, said Dee Williams-Ridley, human resources director and interim deputy city manager.
Modesto is expected to share the pain of CalPERS' investment losses during the stock market collapse of 2008 and early 2009. The city and its employees contribute millions of dollars into the system each year, and CalPERS invests the money to cover the costs of monthly pension payments.
When the investments take a beating, it results in high- er contributions from the city and other agencies in CalPERS.
CalPERS has told the city its contribution rate next year could increase from 2 per- cent to 4.5 percent for mis- cellaneous and public safety employees, respectively.
Part of the 4.5 percent jump for those in public safety is based on recent changes to assumptions about life expectancy and other factors that increase pension costs, Williams-Ridley said.
Officials are not sure how the benefit reductions would affect the city's contributions to CalPERS in future years.
According to the most recent CalPERS valuation, which is two years old, the pensions promised to Modesto public safety employees were 90 percent funded, and retirements for other city employees were 95.6 percent funded.
By comparison, the pension system for Stanislaus County employees is little more than 70 percent funded.
Agencies that simply give lesser benefits to new hires usually don't see results for 15 years or more, officials said, whereas the effects are more immediate when employees contribute more to the system.
Ronnie Flood, president of the Modesto City Employees Association, said the pensions are not extravagant for the public works, parks and maintenance employees in his union.
Their pension formula is 2 percent of top annual salary multiplied by years of serv- ice. Overtime is not included in the formula.
Their counterparts in other California cities have benefit factors of 2.5 percent or 2.7 per- cent, giving them fatter monthly pension checks, Flood said. Modesto doesn't pay into the Social Security system, he added, so some employees will retire without a Social Security check.
During upcoming negotiations, Flood expects the city will try to extend the minimum retirement age for new employees from 55 to 60.
"At the end of the day, our guys don't live high on the hog. They live within their means," Flood said.
Cecil Ridge, president of the Modesto City Firefighters Association, said firefighters are not covered by city health plans, so the sick leave conversion does not apply to them.
Ridge said the city may no longer wish to offer the 3 percent-at-50 benefit for newly hired firefighters. Tiered benefits are usually not popular with unions, but the association is willing to discuss that and other options, Ridge said.
"In these economic times I know the city is looking at it. We are going to want to see some of the financial data from CalPERS," he said.
The sick leave conversions are an issue for police officers. "Any benefit that we currently have is important to us," said Tony Arguelles, president of the Modesto Police Officers Association.
Other public agencies across California are negotiating with employee unions to rein in retirement costs.
For example, the union representing California Highway Patrol officers recently agreed to benefit changes pushing the minimum retirement age from 50 to 55 for new officers and basing pensions on the average of their highest three years of pay. In addition, current CHP officers agreed to increase their contributions to the system.
As other agencies win concessions from employees, it puts less pressure on Modesto to provide top benefits to its work force.
"I am encouraged with the willingness of our employee groups to make changes," Councilman Marsh said.
Bee staff writer Ken Carlson can be reached at email@example.com or 578-2321.