Local government employees serving on the boards of dozens of pension boards could face a classic conflict of interest — protect pension funds or protect the jobs of friends and co-workers, even the jobs of board members themselves.
If local governments do not get relief from pension contribution rates that are expected to soar after the historic stock market crash, they may warn that the alternative is layoffs.
Most local governments already have serious budget shortfalls as the recession shrinks tax revenue. Now there are estimates, from Los Angeles and Santa Barbara County among others, that some contribution rates could double in a few years.
Many of the pension funds have lost roughly a third of their value. So they are rethinking their investment strategy and looking at ways to avoid hitting hard-pressed local governments with a major contribution increase.
An organization representing 20 county retirement systems, the State Association of County Retirement Systems, held a symposium in Sacramento last Friday on “The Consequences of the 2008 Financial Market Collapse.”
Shawn Terris, the SACRS immediate past president, got no response when she asked for a show of hands from systems that had made “significant changes” in the past few months in their asset allocations or actuarial methods.
“Nobody? OK, so this timing is good,” Terris said of the symposium. “Because what you are faced with today — when I say today I mean this year — is going to result in you making the most significant and toughest decisions in your lifetime as a retirement board trustee. This is our 100-year flood.”
The association represents counties from lightly populated Mendocino, with its famous marijuana-fueled economy, to the large Los Angeles County Employees Retirement System with an investment portfolio once valued at $80 billion.
Nearly 80 percent of the state and local government workers in California are covered by the three largest pension funds: The California Public Employees Retirement System, the California State Teachers Retirement System, and the UC retirement system.
Most of the rest of the 4 million active and retired state and local government workers are covered by about 80 local pension funds run by 21 counties, 33 cities and 24 special districts.
The 20 county retirement systems operating under a law enacted in 1937 all have boards with nine voting members — three elected by employees, one elected by retirees, four appointed by the county supervisors, and the county treasurer.
During a panel at the SACRS symposium last week, two lawyers repeatedly emphasized that the primary duty of board members is to ensure that the retirement system can pay the benefits promised to members.
“Are you sitting there saying, ‘Oh, how are we going to help the county out?’” said David Muir, chief counsel for the Los Angeles County retirement system. “If that’s the uppermost thing in your mind, you are in trouble.”
Ashley Dunning of Manatt, Phelps & Phillips echoed Muir’s theme that the main job of the board members, “fiduciaries” entrusted with the legal responsibility of overseeing the property of others, is to keep the pension funds solvent.
“It’s not to make sure that everyone in your department keeps a job,” she said.
Muir said that when the San Diego County retirement system lowered contribution rates in May 2003 by using a pension bond and a longer period to pay off liabilities, a lawsuit contended that the board had failed its duty to maximize system funding.
He said a court decision mentioned that one benefit of the board’s action was to “stave off” a county threat to lay off 1,500 employees if the contribution rate was not lowered.
Muir said he and Dunning agree that avoiding layoffs may not be an effective “argument in a lawsuit that might arise out of the difficulties we are having today.”
Dunning said the decision in the San Diego County lawsuit may be trumped by a ruling not yet made in a San Diego city retirement system lawsuit contending that board members benefited from a pension increase linked to lower contribution rates.
“I don’t think it’s a very big stretch to look at the flip side of that, which is somebody trying to keep their job as a basis for providing some contribution relief to their employer,” she said.
Dunning said “how conflict-of-interest law will play out in this context” is still an open question.
The 20 county retirement systems covered by the 1937 law have a potential internal layoff problem. Their administrative costs, mainly labor, are capped at 18 basis points (.18 percent) of their assets, which plunged in the market crash.
“What we will be coming to you with is a request that we have a moratorium or an adjustment of that cap provision that will allow us to continue to operate,” Richard Stensrud, the SACRS legislative chairman, told a joint legislative committee this month.
The county retirement systems also would like administrative funding that is predictable and does not fluctuate with the stock market. Some have suggested that funding should be linked to liabilities, which are more stable most of the time.
But now the county systems will be meeting with their actuaries to calculate unfunded liabilities that are expected to balloon, driven up by the big drop in the value of their investment portfolios.
One attempt to ease contribution rates would lengthen the “smoothing” period for calculating investment gains and losses.
Most of the county funds are said to have a five-year period. Four years ago, the giant California Public Employees Retirement System lengthened its smoothing period from three to 15 years.
Another maneuver that might ease contribution rate increases is lengthening the period in which liabilities are to be paid off. Most of the county systems are said to have an “amortization” period of less than 30 years.
In Redding, a proposal to extend the amortization period for a supplemental pension contract from 20 to 30 years was estimated to save $600,000 a year. But the city would pay more in the long run.
After a marathon meeting last week, the Redding city council voted 3-to-2 to stick with a 20-year amortization period.
New Jersey, not known for finesse and sophistication, has a straightforward approach to reducing pension contributions that might not work in California for legal and other reasons.
It’s legislation that reduces pension contributions by the state and local governments, delaying payment until some time in the future.
“About one hour’s movement in the stock market is more than any of these changes,” New Jersey Gov. Jon Corzine was quoted as saying last week. “I would hope we would make a first priority of getting back to putting these dollars in the pension system when the revenues allow.”
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 27 Mar 09