One of California’s 80 local pension funds, Santa Barbara County, is among the first to have an outside expert look at how the stock market crash will drive up retirement costs.
It’s grim news.
Annual pension costs that were 6.3 percent of the county budget five years ago are estimated to be 9.1 percent next fiscal year. Two years from now the pension cost could take somewhere between 10.9 and 17.6 percent of the budget.
The big increases in pension costs are forecast as the county, hit by sagging tax revenue during the recession, prepares to make an overall reduction of 10 percent in spending on other programs.
“Future budgets are severely constrained by rising retirement costs, even if the recession ends and the economy bounces back,” said a memo to the Santa Barbara County Board of supervisors from Michael Brown, the county executive officer.
Officials in Santa Barbara and elsewhere are looking at big holes punched in investment portfolios by the stock market crash. Now they must make difficult decisions about whether to use rate “smoothing” to push pension contributions into the future.
A troubling question is whether the recession will end soon, bringing a stock market recovery that pumps up pension portfolios, or continue for a decade like the aftermath of a real estate bubble that burst in Japan around 1990.
“Predictions of future investment returns range from bounce-back scenarios to a long period of poor returns similar to what Japan experienced,” Bill Hallmark of Mercer said in a report to the Santa Barbara supervisors last week.
Most of the state and local government workers in California are covered by the three big pension systems, according to a report done for the governor’s Public Employee Post-Employment Benefits Commission using data from fiscal 2003-04.
The giant California Public Employees Retirement System, CalPERS, had half the workers. The California State Teachers Retirement System, CalSTRS, had 22 percent. And the UC retirement system had 6 percent.
Most of the rest of the active and retired state and local government workers ( a total of nearly 4 million in all systems at the time) were scattered among roughly 80 local pension funds run by 21 counties, 33 cities and 24 special districts.
The local pension systems are a hodgepodge, operating with various kinds of oversight and rate-setting powers. Twenty of the county pension systems operate under the same law enacted in 1937.
“We all have our own interpretations,” said Robert Palmer, interim executive director of the State Association of County Retirement Systems, a group formed by the 20 county systems. “We have all done different things.”
Palmer said he has seen no hard data. But what he is hearing is that many county portfolios lost about 30 percent of their value and are now unlikely to meet their annual target growth rate of 7.5 to 8 percent, bringing the total to 38 percent.
The California Association of Public Retirement Systems, which includes 40 of the largest public employee pension funds, offers training and education for pension staff and trustees and forums for exchanging information and ideas.
Rich Goss, the CALAPRS administrator, said the association has held recent round tables for administrators and investment officers. He said there is concern about raising contribution rates at a time when government agencies are short of funds.
“My guess is that the well-funded funds will be just about even,” Goss said of the impact of the stock market crash on pension investment portfolios, “and everybody else will be pretty upside down.”
State oversight of the local pension systems is limited and outdated. The pension systems are required to file annual reports with the state controller, but the most recent reports available are for the fiscal year that ended on June 30, 2006.
Following a recommendation from the governor’s commission, legislation last year, AB 1844 by Assemblyman Ed Hernandez, D-West Covina, requires the pension reports to be published 12 to 18 months after the end of the fiscal year.
The first reports covered by the new law were filed for the fiscal year that ended last June. Will the office of state Controller John Chiang, in the midst of managing a state cash crisis, be able to meet the December deadline for publishing the pension reports?
“The first review of those reports is currently being completed,” said Hallye Jordan, a Chiang spokeswoman. “However, two of the retirement staff will be going on maternity leave this year, leaving only one person to complete the reviews. We will do the best we can to complete the publication.”
San Diego has the leading example of what can go wrong with a local pension system. Officials cut contributions to the city retirement system and increased benefits, then did not properly report the unfunded pension obligations while issuing city bonds.
A federal grand jury indicted four San Diego pension officials and their lawyer for mail and wire fraud three years ago. The unfunded liability of the San Diego pension system, once estimated at $1.4 billion, is now said to be more than $2 billion.
Last week, San Diego City Councilman Carl DeMaio issued a report about big payments made under a program that allows city employees, during their last five years on the job, to simultaneously collect their full pensions as they work.
In addition, the pension payments during the last five years on the job go into a special fund guaranteed to pay 7.75 percent annual interest. DeMaio wants to lower the interest payments.
Putting the local pension systems into the giant CalPERS might provide some outside oversight. But the power to set employer contribution rates, in other words spend tax money, would be shifted from local officials to CalPERS.
Voters in the 15,000-resident city of Pacific Grove on the Monterey peninsula approved an advisory measure last fall, 56 to 44 percent, authorizing officials to explore leaving CalPERS and switch new city employees to a 401(k)-style retirement plan.
City officials blamed CalPERS for an annual pension payment that took 15 percent of the general fund in 2006. A CalPERS board member, Charles Valdes, said CalPERS was used as a “scapegoat” for costly labor contracts negotiated by city officials.
Now there are estimates that leaving CalPERS could cost Pacific Grove $8 million to $25 million to pay for future pension obligations. Some city officials also are said to be arguing that a CalPERS pension is an excellent recruiting tool.
CalPERS adopted a “smoothing” policy in 2005 to avoid sudden large contribution rate increases. A three-year period for calculating investment gains and losses was changed to 15 years, well beyond the industry average.
But after the historic stock market crash last fall, CalPERS warned its 1,500 local government agencies that it could impose a contribution rate increase of 2 to 5 percent of payroll in July 2011, if the stock market does not recover by this July.
It was a clear demonstration that CalPERS, unlike the San Diego officials, does not intend to tolerate a ballooning pension deficit.
In Santa Barbara County, the employer contribution in the new fiscal year that begins in July is expected to be 23 percent of payroll or $76 million, a slight increase from this year.
Employee contributions range from 2.4 percent for some miscellaneous employees to 16.2 percent of payroll for police and firemen, who can retire at age 50 with pensions of up to 90 percent of their final salary if they have enough years of service.
The Mercer report gives the Santa Barbara supervisors five options for “smoothing” an employer contribution rate increase in July 2010, with a range of $40 million.
The most expensive option, following the current formula, would require a $117 million payment, a big increase from the $76 million contribution next fiscal year. A “CalPERS method” option costs $87 million. The cheapest option is $77 million.
“If the market doesn’t recover, higher contributions are effectively pushed to the future,” the Mercer report said of the lower contribution rates.
But in the Santa Barbara County retirement system, employer
contribution rates must be approved by an 11-member retirement board, which has six members elected by labor groups.
The retirement system has its own actuary, Milliman, which is not expected to make a rate forecast until after the current fiscal year ends.
“We are certainly looking at all sorts of different things at the moment, including options,” said Lilla Deeds, the Santa Barbara County assistant retirement administrator. “There will be another actuarial study after June 30.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 16 Feb 09