Local pension funds: The layoff scenario

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

11 Responses to “Local pension funds: The layoff scenario”

  1. Bull Says:

    The REAL answer to the pension (funding) crisis (while it does need to include getting more money into the system) is HOW TO LIMIT THE GROWTH IN THE ALREADY OVERGENEROUS BENEFITS.

    Pensions of Civil Sevants are in the order of 2 to 5 TIMES more costly than Private Sector Pensions (and thats for people at the SAME salary level). Ther is NO JUSTIFICATION for this, especially since studies currently show that salaries of Public Servants now exceed those of Private Sector workers (in comparable position).

    It is universally accepted that pension benefit accruals FOR PAST YEARS OF SERVICE cannot be reduced. However, with respect to FUTURE YEARS OF SERVICE there is a VAST difference in approach to plan changes in the Public vs Private Sector. In the Private Sector, to be protected (meaning “grandfathered” to stay under the current benefit formula) you generally need to meet significant attained age and/or years of service requirements. In one recent plan change, to be “grandfathered”, you needed to EITHER have 25 years of prior service OR be age 50 WITH 10+ years of service. If not, you will be shifted to the new (less generous) plan. Yes, it is often considered a violation of ethical/moral “promises”, but it IS legal. Some companies do this to (think steel, airlines) to stay out of bankruptcy, while other (think IBM, Verizon) do it because “they can”, they’re greedy, and while helping shareholders it often trickles down to increased executive compensation (executive self-interest).

    In the public sector plan changes rarely impact current employees. The problem with changes ONLY for NEW employees is that while reducing the growdth in plan liabilities, the savings are VERY far off. Savings in 20-30 years do not address address the more near-term cash flow & funding ratio concerns. To address these concerns future year benefit accruals for CURRENT employees need to be reduced. However, in the Public sector, this is RARELY addressed. The ability do make such changes varies from state to state with guidance either in state regulations, in the state Constitution, or not being addressed at all. The unions (of course) cry foul (understandably) and the legislators (being part of the SAME plans and therby impacting THEIR OWN pensions) are reluctant to change benefits for current employees. I’ll grant that in many respects it isn’t “fair”, BUT what justifies the differing treatment of Public vs Private sector workers when (via their taxes) Private sector workers PAY FOR the vast majority of the Public Sector workers’ pensions?

    TO make ANY progress on this crisis, we MUST reduce benefits for CURRENT wokers for future years of service. This DOES NOT seem unreasonable given the MUCH MUCH more generous (and costly) benefits in the Public Sector.

    Separate from pensions is the crisis associate with unfunded retiree healthcare for Public Sector workers. This is MUCH MORE clear cut. Any perported “guarantees” are MUCH less secure and when considering that ANY retiree healthcare subsidy in the Private Sector is rare (and becomming rarer daily), justification for the Private sector’s continued funding of this benefit (again, via their taxes) is COMPLETELY lacking.

    The retiree healthcare benefit should immediately END for new employees (with introduction od a modest HSA) and for CURRENT employees not ALREADY within 5 years of the earliest retirement date. And, any subsidy should be capped at 50% of the plan cost, with a lesser (proportunate) subsidy for those retiring with less than 30 years of service.

  2. marcia Says:

    I now see why CalPERS and other pension funds sponsored legislation to provide retroactive pension benefit increases to government workers in 1999–the more assets they controlled, the higher revenues they received for administration.

    Administrative fees should be set based on # of participants, not on asset value. The current menthod creates a conflict of interest which is why the government has over promised pension benefits that are unsustainable.

  3. Jim Reilley Says:

    Bull is an apt name; you are full of it. Reduce workforce, cut programs but you LEGALLY cannot reduce benefits for vested current employees and even proposing it wastes time on valid solutions. “Kill all the govt employees” is a childish and impractical solution. Finally, yes pensions are 2-5 times more costly because govt employees get an equally reduced salary. If you want to increase their salary 5 times I’m sure most would gladly trade. Basically, you just want to either get rid of govt or you want govt workers to work for free. SEIU will literally burn Sacramento down before they would even let pensions for current/past employees be touched. You’d be better off exploring realistic and achievable solutions. Arnold tried to “blow up the boxes” and look how successful he’s been.

  4. Bull Says:

    Quoting Jim Reilley …Bull is an apt name; you are full of it. Reduce workforce, cut programs but you LEGALLY cannot reduce benefits for vested current employees and even proposing it wastes time on valid solutions. “Kill all the govt employees” is a childish and impractical solution. Finally, yes pensions are 2-5 times more costly because govt employees get an equally reduced salary. If you want to increase their salary 5 times I’m sure most would gladly trade. Basically, you just want to either get rid of govt or you want govt workers to work for free. SEIU will literally burn Sacramento down before they would even let pensions for current/past employees be touched. You’d be better off exploring realistic and achievable solutions. Arnold tried to “blow up the boxes” and look how successful he’s been.”

    Ah, I struck a nurve (of an obvious Civil Servant and recipiant of this lagress). (1) the Courts should decide whether and what benfits can be reduced, not OTHER Civil Servant who benefit for the status quo (2) You agree that you pensions & benefits are 2-5 times more costly. Thank you !
    However, check it out, Civil Servants NOW make MORE , not less than their Private Sector counterparts (3) Go BURN & then Go to Jail (4) My suggestions are good ones, needed ones, and quite appropriate to counteract the greed perpetuated by Civil Servant and their unions and the enabling politicians

  5. upthecreek Says:

    the govt. pensions in this state will kill this State..Not enoughTAXPAYERS to support the amount of Civil Servants in this State..Wait till the new revenue numbers come in later this summer..
    Bye Bye California.

    We are screwed….

  6. Rocky Says:

    One of these years, a Federal constitutional amendment will be passed giving state and local governments the same flexibility to modify employee pension plans that private employers have. But maybe some cities, counties or states will have to become insolvent first. That seems to be the American way. Wait for the crisis to hit and then try to do damage control. In the meantime, the Democrats are too beholden to public employee unions and the Republicans are too busy trying to stop gay marriages. We get the government we deserve.

  7. Hanrod Says:

    I have just discovered this, excellent and apparently relatively unbiased, website, operated by this very “seasoned and reasonable” California journalist.

    I am encouraged by a couple of the constructive, though perhaps only temporary, solutions discussed in this article, i.e. lengthening “smoothing periods”, etc.; but I would also like to discuss a couple of fundamental issues that are not often sufficiently covered in disucssions of current public employee pension issues in California, but that are piqued by this article and the comments here.

    First, is the extremely interesting and challenging “conflict of interest” issues that exist for almost all decision makers in many of the decisons they must make, and only in this case retirement board members. Conflicts of interest are inherent in our society and our institutions — for one extremely important example, in our Federal lobbying and campaign finance processes — but we are not wrong in our attempts to minimze them to the greatest possible degree.

    ALL of the retirement board members OBVIOUSLY represent particular constituencies, with specific, and often directly conflicting, potential gains and losses from their votes. In California even our judiciary is, at least nominally, politically partisan, and often “idealogical” as well. We could not possibly create a retirement board membership that did not have some (practical, economic or idealogical) “ax to grind”, i.e. some direct or indirect potential conflict of interest.

    Second, I think that we need to remember that the California retirement systems would not be in nearly the funding situation in which they now find themselves, IF the sponsoring entity had been required to continue, without reduction, all contributions to the systems, in the many past years of peak system investment performance. These continued and unreduced contributions were, generally, required of the employee members! Here too, the votes of the retirement board members to permit this, demonstrates “interest conflicts”.

    Lastly, we need to address the “bull factor” debated in the comments above. What has been permitted to be done to private sector employees in the last thirty or more years, by those “idealogicals” and “bullish self-servers” whose interest conflicts were always obvious, has and is continuing to destroy the middle class of our Country, which may eventually destroy our democracy itself.

    In addition to expanded Social Security and MediCare, the fair and honorable answer is NOT to attack public employee salaries, pensions and other benefits, it is to INCREASE our efforts to bring private sector employees BACK into an appropriate share of the greatly increased productivity of this, once great, land!

  8. Bull Says:

    Quotinf “Hanrod” … In addition to expanded Social Security and MediCare, the fair and honorable answer is NOT to attack public employee salaries, pensions and other benefits, it is to INCREASE our efforts to bring private sector employees BACK into an appropriate share of the greatly increased productivity of this, once great, land!”

    This certainly WOULD be nice and “FAIR” … (and yes, I’d stop complaining), but Private Sector pensions & Benefits will NEVER revert to the levels that they once were let alone the always richer level of Civil Servant pensions & benefits they STILL enjoy today.

    PENSIONS cannot because of (a) the increased life expectancy makes them too expensive (b) the funding risk and associated volitility of earnings.

    Retiree Healthcare cannot because it is WAY WAY too expensive.

    This ideal world you desire WILL NOT HAPPEN … thats reality. But the TAXPAYERS in the Private sector who have had to (and will CONTINUE to have to) deal wth this new reality are FORCED (via their taxes) to continue to pay for MUCH MUCH MUCH higher pensions & benefits of the Civil Servants.

    Change is need so that ALL get similar pensions & benefits. This can ONLY be accomplished by REDUCING the pensions & benefits of Civil Servants because the pensions & benefits of Private Sector workers will never be riased to the level that Civil Servants currently enjoy.

  9. Hanrod Says:

    Response to “Bull”.

    I am reminded that those who are always saying “it cannot be done” are often also those who, probably like Bull, always say “whoever said that life was fair”. These are often also either the extremely injured and bitter about their own experience of the unfairness of life, who do not want others to avoid the same unhappy experience; or, more often, the ones who think that they might have benefited from the unfairness, AND WHO DO NOT WANT FAIRNESS INCREASED, at what they are afraid might be their own expense.

    The “there is just not enough money for fairness” folks, are either not aware of the immense amounts of money our productive nation has produced (for some), or those who wish to deny it and to preserve this corrupt “social Darwinian” system. Well, we have a new world now, and this system will simply not be preserved as it has been for the last thirty years. The people will no longer allow it. Try to have a nice day, anyway, Bull.

  10. Bull Says:

    Dear Hanrod, If you REALLY believe the Private Sector will INCREASE pensions & retiree healthcare, you are clearly in a dream world (or perhaps work in the ivory tower of academia).

    I work for a HUGE Private Sector company. Trust me …. It ain’t gonna happen !

  11. Hanrod Says:

    Bull:

    Of course the private sector will not WANT to do it, but they can (and I believe will) be “incentived” and even forced to improve private employee pension guarantees and healthcare. This is in the interest of the political and economic stability of the Country, after all.

    There are many ways available to government to do this, and many tools, not least the tax system. It could also simply take the entire problem of employee pensions and health care away from the private sector employers (who have clearly violated their trust), and simply expand and enhance MediCare and Social Security, with the cost to be borne (through payroll and other taxes) by both employers and employee contributions.

    Not a dream world at all. Note the government’s “pension benefit guarantee fund”, which has had the increasing problem of addressing the private pensions that private firms have, or are attempting to, walk away from. If government (i.e. the taxpayers, generally) are going to have to take care of the private sector failures, as that sector “privatizes the gains while socializing the losses”, the government will need to make sure that those failures cannot occur.

    New World I say – “think Scandanavia”.

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