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Cash-strapped San Carlos may cut pensions for future workers

By Paul Jones | 28 Nov 2010

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The financially challenged city of San Carlos has outsourced services, including law enforcement, to save money. Now it's negotiating reduced pension benefits for future employees. (Photo: Paul Jones)

How would you feel if you found out a co-worker had a better retirement plan for doing the same job?

The city of San Carlos is asking the unions representing its non-safety personnel to agree to a reduced pension plan for future employees. The city negotiated slimmer pensions for some new hires in 2008, but is now trying to create yet another “tier” for future workers.

Tiers are pension plans established by California’s Public Employees Retirement System (CalPERS). Many of the city’s longtime employees are locked into the Tier 1 plan. They will receive 2.7 percent of their highest annual salary multiplied by the number of years they worked for the city, with a minimum retirement age of 55.

In 2008, the city negotiated Tier 2 with bargaining units for miscellaneous employees (those not in management or public safety). The plan is similar, except workers will get only 2.5 percent of their highest annual salary.

For future employees, “we’re negotiating Tier 3 right now,” Interim City Manager Jeff Maltbie said. “When Tier 3 goes into effect, we’ll have gone back to 2 percent of highest annual salary, and that will go into effect at the beginning of 2012.”

San Carlos has struggled with budget problems for more than a decade. It has outsourced park maintenance to save money and recently made headlines by eliminating the city police force and having the San Mateo County Sheriff’s Department take over law enforcement. The attempt to cut back new employees’ retirement comes at the same time the city is attempting to cut costs by dissolving the fire department it jointly operates with Belmont.

While paying less for retirement is an attractive prospect for cities confronting dwindling coffers, there are risks. For one, the best-credentialed employees might look elsewhere for jobs.

Maltbie said younger workers tend to focus more on their salaries than pensions, but San Carlos is also at a competitive disadvantage with regard to its employees’ take-home pay. It doesn’t pay its employees’ contributions to CalPERS, as many cities do, meaning workers bring home less money than if the city made the contributions for them.

In addition, San Carlos employees are part of the Social Security system, so an additional deduction is regularly taken from their paychecks.

“All told, 14 percent of miscellaneous employees’ paychecks are going off to fund these retirement systems,” Maltbie said. “Sometimes you have to bring [a new employee] in at a higher salary” to offset the loss in take-home pay.

San Carlos Mayor Randy Royce said San Carlos said cities throughout California are evaluating how to reduce future public employee pension obligations, seen by many as excessively expensive to taxpayers. He cited two successful Nov. 2 ballot measures — Menlo Park’s Measure L and San Jose’s Measure W – both designed to reign in pensions.

“We were pretty aggressive early on,” Royce said. “Other cities have been doing it over the past year or two.”

The move by cities is unfair to new employees, said Sharon McAleavey, business agent for the American Federation of State, County and Municipal Employees. She is participating in Tier 3 negotiations with San Carlos, representing the Mid-Management and Clerical groups, both part of the “miscellaneous” category.

McAleavy said she understands San Carlos has budget problems and credits the city’s management for accepting similar reductions in their retirement benefits as a gesture of good faith to lower-level employees. But she said San Carlos needs to focus on getting more revenue from taxpayers.

“I don’t believe the residents understand what it costs to provide good services. … They wouldn’t pass Measure U (a half-cent sales tax) in 2009,” McAleavy said. “When economy is down, revenues aren’t there, and yet residents expect the same level of service. I think the council needs to be more upfront about that.”

McAleavy said a multiple-tier retirement system hurts morale and unfairly shifts the burden of the city’s financial problems on new employees. Royce, the mayor, said he believes employees would accept different pension benefits, especially with other cities moving in that direction.

“I think most employees understand you start when you start,” he said, “even if you work shoulder-to-shoulder with someone with a different plan.”

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