Pacific Grove will go down in history as one of the few cities to pull out of the California Public Employees’ Retirement System.

But the process of CalPERS contract termination– which will take at least until January 2010– is complicated, controversial and could cost the cash-strapped city tens of millions of dollars.

Former P.G. City Councilman Dan Davis, a mathematician whose term ended earlier this month, has been arguing for the city to quit CalPERS for years. New reports show the state retirement system has lost 31 percent of its value– more than $81 billion– since its peak in October 2007.

“You don’t really need to understand the details to know that we’re in trouble,” Davis says. “If [CalPERS] doesn’t recover those losses, we need to make up the difference. Cities don’t have the money to do that.”

It may seem logical for P.G. to jump from a sinking CalPERS ship– but the timing is terrible. If the city had terminated the retirement plan in June 2007, Davis says, CalPERS would have refunded P.G. about $10 million. In June 2008, the refund would have been about $1 million.

“Now,” he says, “the city of P.G. owes CalPERS about $20 million.”

The exact amount of P.G.’s CalPERS debt (or, to be optimistic, refund) will depend on the system’s stock portfolio at the time of termination.

Charlene Wiseman, who becomes interim city manager when Jim Colangelo departs Dec. 19, says P.G.’s termination is a test case. “We need CalPERS to give us more information about the process because nobody’s ever done this before,” she says. “Everybody is waiting and watching to see what happens.”

Shucking the state retirement plan could make it harder to attract new police officers and other employees– including permanent city manager (a post Wiseman says she is not interested in). “It creates a recruitment problem,” she admits.

But City Attorney David Laredo doesn’t see any legal issues with the city ditching CalPERS. “The process is pretty well laid out,” he says. “It’s no different than if the employee elected to leave, either to retire or to go to another employer.”

CalPERS spokesman Ed Fong isn’t so sure it’s cut-and-dry. “The process is a bit complex,” he says.

In the CalPERS “defined benefit” retirement plan, employees contribute a fixed percentage of their salaries and employers add the amount necessary to meet the guaranteed payment upon retirement. When the CalPERS portfolio performs well, employers don’t have to contribute much. But when stocks crash, taxpayers shoulder the burden.

P.G. officials may replace CalPERS with a “defined contribution” plan such as a 401(k), which shifts the risk to employees. The city would contribute a fixed salary percentage into employees’ retirement funds through the end of employment in a “pay as you go” system that leaves no lingering employer obligation.

Unions, of course, prefer CalPERS. “There is no comparable program,” says General Employees Association representative Rick Burruss. “[A defined contribution plan] doesn’t work as PERS works, where you know what you put in and what you’ll get out.”

The idea that CalPERS broke P.G.’s bank is unfair, Burruss contends. “There are ways [city leaders] could have increased revenues, and they have chosen not to,” he says. “You have a bunch of haters out there that do not like public employees. I think Councilman Davis has been way out of line.”

Davis counters that he doesn’t blame P.G. employees, but rather CalPERS managers for investing too aggressively and city officials for not acting earlier. “I’m just trying to create some financial stability,” he says. “If we don’t have that, [city employees] don’t have a job.”

In an effort to trim expenses, the cash-strapped city has cut several dozen jobs and scaled back city services. The City Council granted police an 8 percent annual raise for three years but denied general city employees a 2 percent cost-of-living adjustment.

P.G. Finance Director Jim Becklenberg says the city views CalPERS termination as an all-or-nothing deal involving both public safety and general employees. But that’s where it gets a little complicated.

Public safety employees receive better CalPERS benefits than general employees. P.G. recently merged its fire department with Monterey’s, locking in CalPERS benefits for P.G. firefighters as long as the City of Monterey remains in the system. That means the CalPERS termination only affects P.G. police and general employees, who have separate labor contracts.

State law allows P.G. to withdraw from CalPERS in July 2009– one year after the City Council announced its intent to do so. But a memorandum of understanding with the Police Officers Association requires the city to negotiate any changes in working conditions. That means the city can’t get out of CalPERS until the POA’s next contract takes effect, January 2010 at the earliest.

“PERS is the public industry standard, and if it goes away, the good employees are probably going to go away,” says POA representative David Topaz. “Frankly, if you’re going to leave PERS, anything you propose to replace it is going to be just as beneficial to employees.”

City staff will present retirement plan alternatives to the council early next year, Becklenberg says.