As the fallout from several years of budget crises continues to filter down and through state government, local government and special districts, elected boards and district managers are left only with the hard choices – cut jobs, essential services, or valuable benefits. Assuming that less critical services and employees who could reasonably be cut were addressed years ago, we are talking about the elimination of mission-critical employees or some of the benefit costs associated with current employees or retirees. In addition, many districts are coming to the difficult realization that they cannot, in the long run, afford the levels of CalPERS retirement benefits to which they, along with many other public employers, have seemingly agreed.
District management cannot adequately deal with this situation unless it understands all of its options. If you are laboring under the impression that your district simply cannot make (or cannot negotiate) changes in various employee benefit programs because all public employees' benefits are constitutionally protected, think again. Yes, there is a significant body of California case law that protects the rights and expectations of public employees with respect to their participation in pension programs and similar benefits. However, the law is not as broad as many assume and there are a number of options – strategies and techniques – that public agencies, particularly financially strapped districts, should consider as they struggle to survive in these difficult times.
Step One: Inventory Your Commitments
The first step in evaluating your options is to perform a thorough inventory of your various benefit commitments and the basis for each such commitment. This consists of identifying all your retirement, welfare and fringe benefits, and gathering the relevant plan documents, authorizing resolutions, amendments, collective bargaining agreements, and plan summaries, as well as any other descriptions that are provided to employees.
Typically we find that as a result of this fundamental process, many of our clients discover that they currently are providing levels of benefits (such as employer contributions towards health insurance) that are far greater than what they are legally obligated to provide. There are a number of helpful judicial decisions that limit a public agency's benefit commitments to the levels of benefits that have been expressly authorized by the agency's governing body – not the levels of benefits that it may have provided in the past or is currently providing.
Of course, a significant number of CSDA's members participate in the CalPERS retirement and health insurance programs. Although these programs often are less flexible than stand-alone benefits programs, many districts fail to fully investigate their options for modifying their benefits just because it's CalPERS with which they are dealing.
Step Two: Evaluate Your Opportunities
The second step is to evaluate these commitments with employee benefits consultants or legal advisers who appreciate not only what the law is, but where it is going. Currently, there are several important cases on appeal, and several new benefits strategies being utilized, that are likely to be relevant to what your district may want to do.
Unless your advisers are familiar with these evolving issues, you may miss out on opportunities that other districts are taking advantage of. For example, if your district participates in the CalPERS health insurance program, you are familiar with the "equal contribution rule" that generally requires the same employer contribution towards health insurance be made for annuitants as is made for employees. Many districts have lowered their equal contribution amount to the statutory minimum (currently $105 per month) while at the same time implementing a cafeteria plan to provide an offsetting health insurance benefit for active employees. Many other districts have refrained from lowering their employer contribution rate over concerns of how it will affect current or future retirees. There now may be ways to lower the required contribution amount, fully or partially subsidize employees through a cafeteria plan, and at the same time provide offsetting benefits to various groups of retirees or near-retirees.
Step Three: Educate Your Stakeholders
If your benefits must be negotiated with one or more bargaining units, it is essential for your managers, your bargaining team and your governing board to be on the same page with regard to short- and long-term negotiating objectives and strategies. More importantly, districts and their collective bargaining teams have to allow for more time and contact with bargaining partners to make sure that union representatives and members understand the critical nature of your district's finances and that the choices really may have come down to trimming benefit costs or trimming positions.
As unions and their bargaining representatives become more in tune with the district's fiscal realities, you are likely to see much more cooperation and creativity when it comes to making short-term and long-term benefits changes in order to achieve a sustainable level of benefits. For example, one of our district clients recently was able to agree with its principal union upon a sustainable level of annual contribution that the district could afford. The union and the district agreed that, to the extent the required annual contribution for pension benefits exceeded this level, the union's members would automatically reduce their salaries to pay the excess amount. In the event that the annual required contribution drops below the agreed upon level, union members will receive an automatic salary increase equal to the difference.
Along the same lines, we have previously written about the ability of public agencies and their union employees to "convert" accumulated vacation or PTO into non-taxable post-retirement health benefits.
Step Four: Keep An Open Mind
Of course, during this process of education and collaboration, the parties may come to realize that the continued provision of existing pension benefits and retiree health benefits is simply not something that can be sustained over the long haul.
If the parties get to that point, it should be possible to discuss and analyze the pros and cons of more drastic, long-term changes. We have seen a number of public agencies begin the process of evaluating the potential short-term and long-term impacts of leaving the CalPERS health program, the CalPERS retirement system, or both.
Although it may seem somewhat costly for an agency to make installment payments to CalPERS (to cover its unfunded liability) while at the same time trying to provide a current new plan benefit to its employees, once the CalPERS obligation has been liquidated, the agency will have dramatically more flexibility and freedom to fashion ongoing benefits programs that it can afford regardless of future budgetary crises. For many districts, the ultimate decision will be to stick it out as part of the CalPERS system. However, for a number of districts the correct decision will be to obtain greater control over the structure and costs of their benefits programs by leaving the "one-size-fits-all" approach for which CalPERS is famous.
This article was originally published in "California Special District," Volume 5, Issue 5, September-October 2010. It was reprinted with permission from the California Special Districts Association.