The major cost drivers for the City’s General Fund are related to
personnel, e.g., compensation, retirement costs, and the costs to provide health benefits to retirees (OPEB). Other costs are the City’s debt
payments, contracts, commodities such as supplies and materials, and fixed charges. The compensation and benefits cost drivers are described in more detail below.
Compensation
El Monte’s costs for compensation have declined every year for the past seven years mainly due to the elimination of positions, mandatory furloughs, and other negotiated concessions that affect employee pay. For example, El Monte employees agreed to defer previously negotiated cost of living adjustments (COLAs) to help the City respond to the Great Recession. In addition to the deferrals, the furloughs amounted to a 10% reduction in employee take-home pay, which was later reduced to 5% when the number of furlough days was reduced. Employees have also agreed to compensation modifications to pay for certain existing benefits. Table 6 presents actual and budgeted expenditures for full-time and part- time salaries and the percentage change from one fiscal year to the next.
It shows a 19.8% increase in the City’s costs for compensation for FY 2014- 15 from the prior year. This increase is partly because estimated actual costs for FY 2013-14 included savings from vacant positions, while the budgeted costs for FY 2014-15 assume all positions are filled. In addition, costs are increased due to the end of furloughs.
Table 6. Full-Time and Part-Time Salary Trends, FY 2007-08 through FY 2015-16
Year Full-time Salaries Part-time Salaries Total Costs Percent Change
FY 08 $22,977,732 $1,755,310 $24,733,042 FY 09 $21,985,304 $1,564,392 $23,549,696 -4.8% FY 10 $16,657,398 $1,337,147 $17,994,545 -23.6% FY 11 $16,534,228 $1,296,347 $17,830,575 -0.9% FY 12 $16,168,778 $1,526,970 $17,695,748 -0.8% FY 13 $15,690,504 $1,281,419 $16,971,923 -4.1% FY 14* $15,575,680 $1,330,651 $16,906,331 -0.4% FY 15** $18,640,500 $1,618,600 $20,259,100 19.8% FY 16*** $19,299,652 $1,618,600 $20,918,252 3.3%
Source: City of El Monte CAFRs and budget documents *Estimated actual costs, including savings from vacancies
**Budgeted costs, which assume no vacancies, and the end of negotiated furloughs ***Projected salary increases due to COLAs becoming effective January 1, 2016 and merit increases for eligible employees
Beginning January 1, 2016, the City is obligated to pay the deferred COLAs. The impact of these COLAs, plus normal merit increases for eligible employees, is an increase in personnel costs by approximately 3.3%, as shown in Table 6. The deferred COLAs have implications for other personnel costs such as CalPERS retirement costs, which are a function of total payroll, and specialty pays that are based on a
percentage of salary. It is not feasible or practical to avoid paying cost of living adjustments forever because doing so would negatively affect El Monte’s ability to attract and retain quality employees. But it should be recognized that such adjustments have significant financial implications.
Retirement Benefits
benefits allocated to the current plan year, less employee contributions), and “unfunded liabilities” (the present value of benefits earned to date that are not covered by current plan assets). The unfunded liabilities are amortized over time in stages.
CalPERS has implemented a revised method for rate smoothing and amortization of unfunded costs over a fixed time period. These costs, along with a reduction in the discount rate (the projected rate of return from investments) from 7.75% to 7.5%, were built into the June 30, 2012 valuation provided to each member agency in late October 2013. CalPERS also adopted mortality improvement assumptions that will be incorporated into the June 30, 2013 valuation, along with the initial projections under the Public Employees’ Pension Reform Act (PEPRA). The net impact of all of these changes will be a significant increase in employer rates.
Management Partners has developed a model to forecast employer retirement costs over a 40-year period. The model takes into account rate smoothing, amortization and mortality improvement adjustments
approved by the CalPERS Board of Directors, and the impact of PEPRA. We used summary payroll data from the El Monte’s CAFRs and general ledger and the June 30, 2012 CalPERS valuation report to generate an employer rate forecast for El Monte. The results of the forecast are presented in Figure 13, which shows significant increases for both safety and miscellaneous plans over the next seven years. Currently, the employer rate for El Monte’s safety retirement plan is 50.8% of payroll while the rate for the miscellaneous plan is 29.0% of payroll. However, by 2021 these rates will be 34 to 44% higher than they are now.
Figure 13. CalPERS Employer Rate Forecast for El Monte through 2050
Figure 13 also shows a significant decrease in pension costs after 2022. This is because the largest portion of the City’s unfunded liabilities, equivalent to 14.9% of safety payroll and 11.6% for miscellaneous, are scheduled to be paid off at that time, resulting in a reduction in pension costs of approximately $3.4 million. These changes in retirement costs have been incorporated into the baseline forecast.
In addition to the employer share of retirement costs, El Monte has agreed to pay the employee share. Also known as Employer Paid
Member Contribution or EPMC, this practice has been common for many agencies. The effect of EPMC is to increase employee retirement pay upon retirement by the percentage being paid by the City, e.g., an $80,000 safety salary is considered to be 9% or $7,200 higher, and the City cost of the benefit is the employer rate (50.8%) plus the employee pickup rate (9%) on that additional amount. El Monte’s EPMC cost was $767,954 for FY 2013-14 (see Table 7 below).
El Monte also provides an enhanced retirement plan for miscellaneous 0% 10% 20% 30% 40% 50% 60% 70% 12 16 20 24 28 32 36 40 44 48 Safety Misc
According to a July 1, 2012 actuarial report, El Monte should be paying PARS approximately $2.1 million annually, based on an employer rate of 26.08% of covered payroll. However our analysis determined that the City has been paying a rate of only 13.15% for several years. This equates to about $1.1 million, approximately $1 million less than the amount owed to PARS. We understand PARS is preparing a new actuarial report and will incorporate the value of the City’s underpayment into new employer rates going forward. For purposes of the baseline forecast, we assumed that total City PARS costs will be 26.08% of covered payroll, or an additional $1 million in annual costs above what was budgeted for FY 2014-15.