Are “Pension Pickups” Saving Money?

By Noel Smith – Noel@cyber-times.com

Recently the issue of “Pension Pickups” has come under scrutiny. A pension pick up is when a public entity such as a school district, a city or a county picks up a portion or all of the employees’ contribution to their retirement fund. The fear is that this can lead to higher costs to the taxpayer both while the employee is working in the form of pay and after he or she retires in the for of a pension.

The City of Scotts Valley is one of those local governments who pay their employees’ share of the PERS (Public Employees Retirement System) contribution, BUT, according to city officials, properly managed this “Pension Pickup” policy can actually save the city money both short term and long term.

According to SV Councilman Jim Reed, this is how it works for Scotts Valley:

PERS requires that 16 percent of each employee’s pay be paid into its fund. The city must pay 8 percent of that and the employee pays the other 8 percent. (For public safety employees — police and fire – the figures are 18 percent and 9 percent). However, the city can choose to also pay a part of or all of the employee’s contribution.

Scotts Valley pays all of its employees that portion of PERS and has for about the last 10 years. The justification is that Scotts Valley employees are (on the average) paid about 10 percent less than the equivalent local government employees in other jurisdictions because of the added benefit. This has been negotiated with the employees’ unions and is understood and accepted by both parties.

In addition to a cost saving to the city for lower employees pay, the employee saves by not having to pay taxes on the 9 percent of their base pay the city contributes to their pension fund. This tax saving includes US income tax, California income tax and FICA (Social Security and Medicare), which is currently 7.65% of all city wages. The city also saves the same percentage (7.65%) for the portion of FICA they would have to pay if the 9 percent contribution were employee wages.

According to City Manager Steve Ando, “In the very beginning, the City of Scotts Valley opted to be in social security. Once you have opted in, you cannot change that election. So our employees do have FICA deducted from their paychecks and the City matches it just like all other businesses.”

Another savings to the city is that when the employee draws his or her pension after retirement, the pension is based on the wage of the employee. By paying employees less, the liability of the city for employee pensions is less because the wages were not as high.

To test the statement that Scotts Valley pays its employees less thereby saving the Scotts Valley taxpayer money on the wage side of the budget, Ando supplied us with the links to the wage scales of the five local governments in Santa Cruz County. We took three common employee positions from the five governments and compared the top rate for these three positions. The percentage shown is the difference between the other government’s wages for that position and Scotts Valley’s.

Here are the results in dollars and percentages. (SV=Scotts Valley, SC=Santa Cruz, W=Watsonville, C=Capitola, SCC=Santa Cruz County)

Accountant II • SV 6282 – SC 6843 (+8.9%) – W 6824 (+10.2%) – C 6329 (+0.7%) (– CSC 6228 (-0.01%)

Building Insp. • SV 5445 – SC 6206 (+13.9%) – W 5950 (+9.3%) – C 5665 (+4%) – CSC 6637 (+21.9%)

Police Officer • SV 6123 – SC 8369 (+36.7%) – W 7732 (+26.3%) – C 6993 (+14.2%) – SCC 7873 (Sheriff Deputy) (+28.5%)

By comparison, it seems that Scotts Valley’s “Pension Pickup” policy has been able to provide city services for a reasonable cost to its citizens.