In the vocabulary of California city-speak, the term early retirement is no longer an oxymoron. It’s the solution cities hope will spare them from financial ruin or at least reduce their general fund expenditures to manageable levels.

With a selection of early retirement “enhancement packages” that includes cash incentives, contributions to California Public Employees Retirement System accounts, severance pay and cash contributions to health savings accounts, cities try to speed long-term employees off the payroll while ensuring enough skilled workers will remain to carry on essential services.

The selection of early retirement incentives is based, in part, on a city’s legal obligations under CalPERS and its contractual agreements with its unions.

Cities contract with CalPERS for certain benefit formulas and packages (such as the “2 percent and 55” formula) and are bound by those packages in any early retirement offer.

There is some flexibility in the CalPERS rules. For instance, while 55 is the minimum retirement age for non-public safety employees, it is possible for some employees with enough service credits to retire at 50 if they agree to a smaller retirement payout. Cities also must comply with California Government Code Section 31641.04 and Internal Revenue Code Section 415 when offering additional retirement service credits.

Once these requirements are met, cities can choose from a variety of options to make early retirement attractive to employees.  

On April 6, 2009, the Merced City Council approved a Golden Handshake early retirement program. The incentive of two years of additional service credit prompted 23 employees to agree to early retirement. Their number was in the ballpark of what the city expected, according to Mike Conway, public information officer for Merced. Merced also included an additional cash payment to longer-term employees.

“We did offer a cash incentive up to $25,000 to employees who were maxed out on their PERS hours,” said Conway. Each of these employees will receive $1,000 per year of service. Several employees have already chosen the cash payment, and Conway expects more may choose this incentive during an eligibility period that extends through July 18.

A surprise outcome of Merced’s Golden Handshake was the retirement of Police Chief Russ Thomas. An employee of Merced for only 3 ½ years, Chief Thomas had accumulated enough CalPERS service credits throughout his law enforcement career to be eligible for the program.

Merced amortized the costs of its Golden Handshake program over a 20-year period. It expects to save close to $2 million in payroll expenses due to early retirement.

The City of Folsom considered cost of living increases, layoffs, furloughs and early retirement programs for its workforce of nearly 500 full and part-time employees to reduce its projected $8.6 million budget deficit. When it did structure its retirement program earlier this year, it offered eligible employees a two-year service credit under CalPERS.

To date, 29 employees have accepted the retirement proposal. This number is higher than Folsom anticipated, and Folsom’s Sue Ryan, public information officer, said the city is very pleased with the outcome. She said Folsom will not offer any cash incentive in addition to the CalPERS credit.

What if employees don’t want to leave?

Perris discovered that retirement incentives are useful only if they produce the desired results. When the city offered its first early retirement option in 2008, no employees opted for the plan. At its May 26, 2009 meeting, the City Council voted to authorize two extra years of service credit to persuade 21 long-term employees to retire. (The city’s contract with CalPERS allows city employees 2.7% of their salary for each year of service.) Perris employees who opt for this year’s early retirement package must retire within a three-month period from July 10 to October 8.

Thousand Oaks faced a problem common to cash-strapped cities: how to offer early retirement without draining the city of its most skilled employees?

With its high number of employees eligible for retirement (at least 55 years of age; minimum 15 years of service), the city limited the number of early retirees to 20 on a “first come, first served” basis. Thousand Oaks based its early retirement incentive on a payment of up to $20,000 into each employee’s Retirement Health Savings Account.

“Better than giving cash,” is how Andrew Powers, public information officer for Thousand Oaks, described it. Powers said the city wanted to give retirees what they’re going to need most in retirement. To date, 17 employees have accepted the early retirement offer.

Thousand Oaks wanted to cap its early retirement costs at $400,000, and it limited the number of retirees to 20 to meet its financial goal.

Other cities offer a mix of retirement incentives.

San Juan Capistrano and Fontana both provide additional service credits, and Ventura structured a combination of severance pay (maximum 13 weeks) and 12 months medical insurance coverage to employees of retirement age with 20 or more years of service. Temecula offers two years of service credits to employees who are at least 50 and have five years of civil service with CalPERS.

It’s impossible to know how many California cities have early retirement agendas. CalPERS contracts with 2,400 employers but doesn’t keep records by city. The incentives are there, and cities will continue to use them to reduce budget deficits. It’s California creativity at work.

Margaret T. Simpson is a Southern California freelance journalist who writes on employment, business, education and healthcare.