ENCINITAS —— Retirement pensions at City Hall, for everyone from clerks to supervisors to computer technicians, will be vastly improved after a City Council action last week.

The council Wednesday approved what appears to be a modest adjustment to the formula used to compute yearly pensions for workers who retire at age 55 or thereafter.

The increase, however, translates into a 35-percent bump in annual pensions that city employees can collect from the California Public Employee Retirement System.

The pensions, which keep pace with inflation, are good for an employee's lifetime —— state law prohibits revoking the benefit.

City Manager Kerry Miller has defended the pension increases and says the city can afford to pay for them.

"We're going into this fully aware of what the cost increases will be," Miller said last week.

Recently, city councils in Escondido, Carlsbad and Vista have approved up to 50 percent hikes in pension benefits for city workers.

Competition cited

Encinitas needs to sweeten its pay and perks so that it doesn't lose good workers to other municipalities, as it has already, Miller said. He cited two Encinitas planners who left to take jobs in Carlsbad, and a housing administrator who now works for San Diego County. He said they left to earn better pay and benefits.

In addition to the enhanced retirement benefits, 230 employees last week also received 3.2 percent raises and added city contributions of $75 per month to their health plans.

Officials say the city can afford these costs even though the state raided $1.1 million from Encinitas this fiscal year and is expected to do the same in fiscal year 2005-06.

Also, big-ticket items on the city's list of projects —— a new library and 43-acre park are among them —— can proceed uninterrupted, and over the next 10 years, the city can leave its $6.2 million in reserves untouched, Miller said.

Next month, the City Council will begin deliberations on a two-year budget that would begin July 1.

In 2004, personnel costs comprised $16 million, or 43.8 percent, of the city's $36.5 million in operating costs.

According to the city's 10-year financial forecast, those costs in 2009-10 are pegged at $21 million. That's 42 percent of $50 million in anticipated revenue.

Workers help pay

Today, expanded retirement benefits are affordable because workers are willing to help pay for them, Miller said.

Contract proposals approved last week have employees covering most of the cost to enrich the benefit.

In good economic years, that cost is relatively low. The city saw a steep hike in retirement premiums, however, after the stock market crash of 2000.

Members of the pension system, such as Encinitas, experience a two-year lag before their premiums reflect fluctuations in the system's enormous portfolio.

The swings were especially bold beginning in 2001-02, according a city record detailing retirement costs.

During that fiscal year, Encinitas paid $572,000 toward pensions. Costs then climbed steadily, to $638,000 in 2002-03, $1.1 million in 2003-04 and $1.5 million in 2004-05.

According to state investment records, Encinitas retirement payments in 2004-05 represented 8.5 percent of payroll costs for general employees.

More generous retirements

For public safety employees, such as firefighters, records show the spike in retirement costs is sharper still: $300,000 in 2001-02 mushroomed to $1.5 million in 2004-05. That payment totaled 26 percent of payroll costs for public safety employees that year.

Public safety employees are in the final year of a three-year contract that expires in December. Their retirement costs are higher than general employees because, like public safety workers across the state, the formula for computing their pension benefits is more generous.

Under the formula approved by Encinitas last week, general employees can, starting July 2, draw pensions equaling 2.7 percent of their salary for each year of their service once they turn 55. The existing formula pays 2 percent of salaries for each year an employee has served the city.

Pensions for public safety employees equal 3 percent of their salary for each year of service, provided they keep working until they are 55.

For general employees, last week's raise in retirement benefits translates into a 35 percent increase in take-home pay they will receive once they begin drawing pensions.

How it works

Here's how the numbers work for a 15-year employee earning the city's average salary of $51,000 annually. Under the existing "2 percent at 55" formula, the worker would draw 30 percent of his salary, or $15,300, upon retirement.

If the formula increases to 2.7 percent, the 15-year worker would draw an annual pension equaling 40.5 percent of his or her salary, bumping the pension to $20,655. That's an increase of $5,355, or 35 percent.

Financial markets determine the extent to which cities must pay into the retirement system. When the system's $182.8 billion portfolio loses value, the premiums of public agencies increase.

Investments must grow by an average of 7.75 percent annually for the system to stay in the black, a spokesman said.

The retirement system's portfolio contains stocks and bonds, California strip malls and real estate in Japan. The system owns vineyards and forests, and during the last decade its investments helped finance construction of nearly 40,000 homes in the state.

In addition to its investment returns, the system takes in revenue from future pensioners and the public agencies that employ them.

Employees pay a fixed rate of 6 percent to 8 percent of their salaries each year. As do most cities in San Diego County, Encinitas covers that cost for its employees.

Tough labor talks

Pension increases were a critical sticking point during the labor negotiations, Miller said.

Those talks played out in 28 sessions over eight months. Last week's 4-1 vote by the City Council to approve the compensation packages culminated the bargaining.

The dissenting vote came from Councilman James Bond, who warned his colleagues that future councils would be forced to "wrassle" with the obligations brought on by the pension increases.

Increases to the pension formula would make the city's retirement benefits far more generous than those of the private sector, Bond said.

"I think we're creating two classes of people," Bond said.

In Sacramento, Gov. Arnold Schwarzenegger has promised to introduce a ballot initiative that would mandate 401(k) retirement plans instead of pensions for new public workers.

In Encinitas, Councilman Jerome Stocks stumped for Schwarzenegger during the 2002 recall campaign.

Stocks made no mention of private sector-type retirement accounts when voicing his support for Encinitas' labor plans.

"I do appreciate the employees saying they want an enhanced benefit," Stocks said, "and their willingness to pay the costs."

Pension costs through the years in Encinitas

General employees

2001-02 2002-03 2003-04 2004-05

$572,446 $638,032 $1,086,924 $1,526,924

Public safety employees

2001-02 2002-03 2003-04 2004-05

$300,732 $403,691 $890,871 $1,486,971

Source: city of Encinitas

Contact staff writer Adam Kaye at (760) 943-2312 or akaye@nctimes.com.