City Manager

A shift to defined-contribution plans for all new employees of the City and the County be considered as a priority. RESPONSE: This recommendation requires further analysis in conjunction with other methods of containing labor costs. The City has identified containment of our labor cost as a top priority in our work plan. To accomplish this will require complex negotiations with our labor groups and development of programs that will reduce costs without impacting our ability to attract and retain quality employees. Implementation of a defined contribution program for new employees is one of many alternatives that may be considered in this effort. It should be noted that PERS does not provide a defined contribution option for member agencies at this time.

The City of Napa: a. Retirement benefit for its employees (with limited exceptions) is a defined-benefit plan. RESPONSE: The City agrees with this finding. b. Plan for its non-safety employees and the Mayor and council members is a "2.7% at 55" plan. RESPONSE: The City agrees with agrees with this finding. c. The plan for its safety employees is at "3% at 55" plan. RESPONSE: The City disagrees with this finding. The retirement plan for safety employees is "3% at 50". d. Vesting period for the City of Napa employees is 5 years and for the Mayor and Council members 8 years. ٠, RESPONSE: The City agrees in part with this finding. The vesting periods for retiree medical benefits are determined by bargaining group. The vesting ranges from 5 years for Police, Fire, and Police Mid Management; 8 years for Council Members, 10 years for the Administrative, Management, Professional, Executive, and Fire Mid Management groups, and 15 years for all other employees. e. Current annual cost to provide medical benefits to retired employees is $1,400,000, a more than six-fold increase from $227,240 in 2002. RESPONSE: The City disagrees with this finding. In Fiscal Year 2001-02, the 'pay as you go' cost for retiree medical was $227,240. In Fiscal Year 2006-07, the 'pay as you go' cost for retiree medical was $615,080, approximately 2.7 times the original cost. The $1.4 million is the annual required contribution to fund both the 'pay as you go' annual cost plus funding for the accrued liability for future medical retiree costs. f. Estimates it will spend approximately $44,000,000 over the next six years to fund pension benefits, assuming a flat salary increase of 5%. RESPONSE: The City agrees with this finding and offers updated information. The City provided the estimated CalPERS pension cost of $44 million based on the January 2007 Long Term Financial Plan. The plan was updated in June 2008 with revisions including the 29 new positions restored during Fiscal Year 2007-08 and allowed for two new positions per year in order to address increasing service demands. These revisions increased the six year CalPERS pension cost estimate to $49 million.

OPEB: a. The County of Napa also provides OPEB for its retired employees and elected officials, some for their lifetime. RESPONSE: Not applicable to the City of Napa. b. The City of Napa also provides OPEB to its retired employees and elected officials, some for their lifetime. RESPONSE: The City agrees with this finding c. The cost of OPEB, particularly health insurance has experienced double-digit percentage increases in the past 5 years. RESPONSE: The City agrees in part with this finding. Health insurance premiums for those employees who retired or will retire under the contracts in effect in the early 1980s will continue to impact the City's OPEB costs. Health insurance premiums, for the public and private sectors, have routinely experienced double digit percentage increases. However, for the majority of City retirees who left City service after 1984 and future retirees, OPEB benefits are not tied to health insurance costs but are capped at a fixed rate. This cap greatly reduces the growth rate of the retiree medical benefit. d. Early retirement of City and County employees, allowed by the pension plans, obligates the City and County to provide OPEB for a longer period of time until a retiree becomes eligible for Medicare at age 65. RESPONSE: The City agrees in part with this finding and would like to note that the obligation to provide OPEB can continue beyond the age of 65. e. The unfunded OPEB for the County of Napa is between $37 and $51 million and the City $2.8 million. RESPONSE: The City disagrees with this finding. The City's unfunded OPEB estimate ranges from $12.7 to $18.0 million. f. The County has started reducing its unfunded OPEB liability and intends to be fully funded in 14 years. RESPONSE: Not applicable to the City of Napa. Pensions: 4. a. The costs to both the City and County for pension benefits are rising so rapidly that they can adversely impact the provision of other government services. RESPONSE: The City agrees in part with this finding. The rapid increase in CalPERS rates in the early 2000's due to the drastic market decline challenged all local governments to meet pension obligations while maintaining or enhancing services. During the 5 year period prior to the economic downturn government pension costs were non-existent since funding obligations were covered by significant PERS investment returns. These radical swings in funding obligations have been corrected with a 15 year actuarial smoothing model to avoid future volatility to the pension rates governments will need to pay. This will allow stability and provide for better fiscal planning. Further, excluding Police and Fire, employees retiring from the City receive a fixed medical benefit ranging from $226 a month to $347 a month. Therefore, the City has, to a large extent, insulated itself from the high OPEB costs other entities are experiencing. b. The unfunded liability by the County of Napa for pension benefits is $52.5 million. RESPONSE: Not applicable to the City of Napa. c. The unfunded liability by the City of Napa for pension benefits is $49.3 million. RESPONSE: The City agrees with this finding. By way of clarification, the June 2007 audited financial statements reported an unfunded CalPERS liability of $31.6 million. As previously indicated, the medical retiree unfunded liability estimate ranges from $12.7 to $18.0 million for a total of $44.3 million to $49.6 million: 5. The City needs to budget more funds to more rapidly reduce its unfunded pension liability. RESPONSE: The City partially agrees with this finding. Currently, the City fully funds its' CalPERS annual pension contribution. The City will also establish a trust fund for the retiree medical obligation. The City has fully funded the OPEB contribution for this budget cycle, and intends to fully fund the annual required contribution in the future.

The consequences of the failure to manage these unfunded liabilities can result in tax increases, reduced services and impaired borrowing ability. RESPONSE: The City agrees with this finding. Failure to manage these costs can result in serious consequences. Because the growth rate of benefit costs, particularly pension contributions, increased drastically a few years ago the City Council has established a high priority on identifying ways to contain the growth of labor cost. The City has been proactive in managing the medical retiree liability by achieving negotiated contracts with caps on medical retiree benefits for most of its bargaining groups and continues negotiations with the other groups in order to achieve Council's priority of fiscal stability and sustainability while providing competitive compensation in order to attract quality personnel.

GASB 45 government agencies providing retiree health care and other non-pension retirement benefits must disclose the future and accrued cost of those benefits to the public within the next four years RESPONSE: The City agrees with this finding. The City will be reporting its full cost and liability of retiree benefits in the June 2008 audited financial reports.

Government agencies pay more of their compensation in the form of benefits than in the private business sector. RESPONSE: The City agrees with this finding. However, it is important to note that as recently as five years ago, the City was paying much less to fund pensions than the private sector. This was the result of the 'super-funded' status of the CalPERS pension system which generated more investment income than necessary to fully fund retirement costs. When PERS investment income declined following the market collapse it became the responsibility of PERS member agencies to fund the gap required to maintain annual program requirements. This cyclical fluctuation, which has subsequently been addressed, has been the driving force behind the recent uncharacteristic growth of costs of public sector compensation.

Government entities do not need to provide these high levels of pension benefits to attract and retain employees. RESPONSE: The City agrees in part with this finding. The conclusion of the Grand Jury, while understandable is the result of a generalization which fails to recognize differences in the marketplace. It is a mistake to compare the labor pool and market for many private sector jobs with the public sector. The majority of most city budgets are dedicated to public safety personnel costs. These are not employees that can be selected from the market-place and put to work without a huge investment of training, time and resources. Competition for these individuals is extreme given the shrinking labor pool and high retirement rates in recent years. One need only look at the competition underway by all major cities for qualified police officer candidates. Many agencies have been forced to offer considerable bonuses in addition to rich pension and benefit programs to attract qualified and interested police officer candidates. Nonetheless, thousands of public safety jobs remain unfilled. Perhaps local government entities could attract and retain qualified new employees with reduced pension benefits, if the government labor market was subject to the same benefit caps established by state law. Absent a statewide limit on pension benefits to regulate this issue, competition for quality employees will make significant change for individual local government entities problematic.

Having the Board of Supervisors and the City Council negotiate or approve wages and benefits on behalf of themselves, although legally permissible, is a classic conflict of interest. RESPONSE: The City disagrees with this finding. As the Grand Jury suggests, the practice employed by the Council to adjust wages, pension and OPEB benefits for Council members is specifically authorized by State law, and represents the same method used by the majority of public jurisdictions in the state. The State law that authorizes such increases to compensation includes safeguards against potential conflicts of interest. The Council must review and approve any increase in compensation at a public meeting after considering public input, the amount of any annual increase is statutorily capped to not exceed 5 percent per calendar year, the Council is not authorized to approve any automatic future increases in compensation, and most importantly the Council may not approve an increase in compensation that applies to a Councilmember during his or her term in office. In other words, any increase in Council salary does not go into effect until after an election for a new term of Council.

Private sector defined-benefit pensions are a thing of the past, retiree health care is virtually non-existent and wages, on average, are no greater than their public sector counter-parts. RESPONSE: The City partially agrees with this finding. It is true that the trend in the private sector has moved away from defined benefit pension programs and toward a defined contribution programs. The finding that retiree health programs are virtually non-existent and the conclusions that private sector wages are no greater than their public sector counter-parts represents a gross generalization that cannot accurately be applied across the many job categories and compensation plans in place through out the market place.

The average age at which current City of Napa employees retire is 57 years for miscellaneous employees and 52 for safety employees. RESPONSE: The City agrees with this finding.

The average age at which current Napa County employees retire is 62 for miscellaneous employees and 57 for safety employees. RESPONSE: Not applicable to the City of Napa.

A defined-contribution plan allows the plan to define the level of contribution the employer and the employee will make. RESPONSE: The City agrees with this finding.

A defined-contribution plan provides advantages to the employees and reduces the cost of retirement benefits over time. RESPONSE: The City partially agrees with this finding. A defined contribution plan has some advantages; for example, increased portability and more individual control over investments. It also has the potential to reduce costs for the City over time, although just a few years ago the annual costs would have been much higher to cities with defined contribution programs. Certainly the defined contribution approach provides entities with a fixed cost that makes fiscal planning easier and provides increased stability. On the other hand, as correctly indicated by the Grand Jury, with the defined contribution plan the risk lies squarely on the shoulders of the employee. Tens of thousands of workers on defined contribution programs lost a significant amount of their retirement savings as a result of the market downturn that also impacted PERS. The public policy implications resulting from people facing retirement age that are forced to keep working or the public implications of having large numbers of people entering retirement that can no longer afford their cost of living based on their new retirement income have yet to be determined.