Merced County pensions still only 51.4% funded

Merced County pensions may have the lowest funding level of any public pension system in California, a shortfall officials attribute to a big retroactive pension increase for all county employees a decade ago and faulty actuarial work.

Like most pension systems, the funding level of the giant California Public Employees Retirement System has gone up since a stock market crash in 2008 punched a big hole in investment funds, increasing from about 60 percent to 76 percent.

But the funding level of the Merced County Employees Retirement Association has continued to drop since the crash, decreasing from 70.5 percent in 2008 to 51.4 percent last year, despite nearly doubling employer payments into the pension fund.

In the latest annual public pension report from the state controller’s office, Merced County stands out with the lowest level of funding in the last reported year, 54.7 percent in 2010-11.

“If you do the math, our biggest issue has been that our liability has increased,” said David Ness, who moved from chairman to vice chairman of the Merced County pension board last week.

The 4,600-member system owes $1 billion for pensions promised in future decades, up from $692 million in 2008. The projected assets from employer-employee contributions and investment earnings only increased from $488 million to $547 million.

Merced County pension fund investments earned an annual average of 6.6 percent during the last 10 years, less than the 7.75 percent currently expected. But two other factors are said to be the main reasons the funding level continued to fall.

Ness said a new actuary, Cheiron, found that a miscalculation of growing liability had kept contributions too low. Merced changed actuaries after the previous firm, Buck, had trouble in other counties, notably a lawsuit in neighboring Stanislaus County.

“The bulk of the increased liability is the benefit increase,” said Ness.

Merced is among several of the 20 county pension systems operating under a 1937 act that gave all of their employees the “3 at 60” pension formula, the most generous in state law except for those reserved for law enforcement, firefighters and judges.

The pension increase a decade ago was retroactive to the date of hire, immediately adding to the pension system’s debt or liability. Past employer and employee contributions had been based on amounts needed to pay for lower pensions.

“They (pension board) are aware they have issues they need to take care of,” said Steven Bland, the Merced County pension plan administrator.

The board adopted a short period, 16 years, to pay off the unfunded liability, which increased annual employer contributions but does not change the funding level. A forecast that retirees will live longer also increased contributions.

Last March, the pension board approved one of the biggest rate increases. The annual employer contribution jumped from 44.1 percent of pay to 50 percent of pay, phased in over two years.

The Merced County employer contribution, which was $23.7 million in 2008, increased to about $46 million this year. The employee contribution rates are around 9 percent of pay.

The actuary, Cheiron, is projecting that rates peaked at nearly 50 percent and will stay near that level until 2028, when they drop sharply. But that assumes investment earnings will average 7.75 percent a year.

“Even relatively modest losses relative to the 7.75 percent assumed return could push the employer contribution rate over 50 percent in the next few years,” said Cheiron’s latest actuarial valuation report.

Merced County pension funding level fell as liability grew (Cheiron chart)

Merced County pension funding level fell as liability grew (Cheiron chart)

A CalPERS-sponsored bill, SB 400 in 1999, is often mentioned by critics of “unsustainable” pensions. While raising state worker pensions, the bill gave the Highway Patrol a “3 at 50” pension formula and authorized local police to bargain for the formula.

A follow-up bill, AB 616 in 2001, authorized other local government workers in CalPERS and 1937 act county systems to bargain for three higher pension formulas. The most generous was “3 at 60” (three percent of final pay for each year served at age 60).

Backers argued that while SB 400 allowed local police to bargain for a 50 percent increase in pensions, said a legislative analysis, other local government employees received no similar benefit but could, with AB616, get a 33 percent pension increase.

The “3 at 50” formula is capped at 90 percent of final pay. The range of pensions under the uncapped “3 at 60” formula goes from 10 percent of final pay at age 50 after five years of service to 120 percent of final pay at age 60 after 40 years of service.

Unlike Merced, the largest of the county systems operating under the 1937 act, the Los Angeles County Employees Retirement Association, did not join the wave of pension increases that followed SB 400.

The Los Angeles County system has more than a half dozen pension formulas adopted since the 1970s, some coordinated with 401(k)-style individual investment plans. Most are closed to new members now.

In the Milliman actuarial report as of June 30 last year, the Los Angeles County system had a 75 percent funding level. The employer contribution rate was 21.34 percent of pay, less than half of the Merced rate of 50 percent of pay.

The state controller’s annual report shows that the “3 at 60” formula adopted by Merced County also was adopted by the 1937 act systems in San Diego, Kern, San Mateo and Sonoma counties.

Actuarial reports show San Diego with a 79 percent funding level and 36 percent of pay employer contribution, Kern with a 61 percent funding level and 42 percent contribution and San Mateo with 73 percent funding and a 37.5 percent contribution.

The Sonoma County actuarial report shows a market value funding level of 90 percent and an employer contribution rate of 21 percent. But a series of pension bonds and other factors may add to the cost.

Sonoma County has been a hotspot for pension activists. Last January the California Public Policy Center published “Sonoma County’s Pension Crisis by Ken Churchill and New Sonoma, a volunteer group.

One of the study’s findings: “The key driver of the pension problem was the retroactive increases which took effect in 2003 and 2006 for Safety and 2004 for General employees. The increases lead to higher pensions, accelerated retirement rates and reduced the average retirement age by 5 years.”

Another group, Save our Sonoma Roads led by Craig Harrison, urged the federal judge in the Stockton bankruptcy to require the city to cut its pension debt, setting a precedent for reducing the pension costs of other local governments.

Harrison told the court the Sonoma County roads are in disrepair because surging pension costs are eating up maintenance funds. U.S. Bankruptcy Judge Christopher Klein rejected the Sonoma group’s filing.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 18 Aug 14

22 Responses to “Merced County pensions still only 51.4% funded”

  1. Mike Genest Says:

    One lesson from this post springs to mind. I’ve seen folks here question why a pension reform that would tie electeds’ hands is needed. Here, a relatively poor county probably attracted workers with higher pension benefits to offset the relatively lower wage scales it could afford. In other words, we can’t really afford to pay you, but we can afford to promise you pensions that will have to be paid for by the next generation. This is the fundamental political problem with pensions. Future costs are easily concealed, ignored or minimized, while current expenditures are right out there in the open, unambiguous, for all to see. If as some on this blog would say, we need more money flowing into public coffers to cover necessary services, then make electeds address that right away. Don’t let them pretend to solve the problems by shunting costs unto future generations.

  2. jskdn Says:

    Mike- Politicians will always be inclined to spend and promise largess for current voters and interest groups while not requiring current taxpayers to pick up the costs. That includes compensation for what has become the most powerful constituency of government: its employees. Only defined contribution retirement benefits assure the necessary political tension between interests of those wanting money from the government and the interests of the people whose money is taken to pay for it. Defined contribution retirement benefits force compensation to be paid, and taxing to pay for it, concurrently with the employment that creates it. Indenturing the future with unpaid compensation for government employees is a form of taxation without representation. We had a revolution over that and we need another.

  3. SDouglas47 Says:

    Good point, Mr. Genest. How does this relate to the previous column, ” Ventura pension vote blocked, summit this fall?” ?

    I would like to see a summit fairly and openly address true pension reform. Its better to make sensible changes now than to wait till the stuff REALLY hits the fan, then take a meataxe approach.

    The Ventura vote was not so much pension reform as pension reduction. Which may be called for in SOME cases, but not necessarily across the board.

    It doesn’t appear, in your statement, that you are claiming Merced Co employees are overpaid (although that WILL be asserted here soon). The problem is not overcompensation specifically, but deferred compensation that wasn’t funded.

    There should be some way to keep the advantages of Defined Benefits and control the costs.
    …………..
    I couldn’t help myself, I have used your quote several times: 

    “We could have made a lot more money in the private sector. We are making more money.”

    If that bothers you, say the word and I’ll not use it again.

    Although………..

    That statement seems to have been corroborated by Biggs and Richwine, in that PhD s and other professionals are paid as much as 38% less in cash pay than their private sector counterparts, and as much as 17% less in total compensation.

    That holds true even in Merced County, presumably. So be careful where and how you “reform”.

  4. Pete Says:

    Hey Mike,

    Care to share with us what you did as Finance Director to increase state contributions to CALSTRS, when it became abundantly clear that the contribution rate was too low but CALSTRS could not increase the rate without state legislation.

  5. John Moore Says:

    It is important that the CERL(county) deficits are not confused with PERL deficits. In PERL most cities are in a large pool of cities. Criteria are assigned that are fairly standard, e.g. salary growth etc. But if a City terminates, its excesses over the criteria and part of the criteria, e.g. “smoothing” are eliminated. The result is a much larger termination liability because the terminating city has exceeded the allowable limits. Of course the main reason for the larger size of the termination liability is because PERS uses a lower assumed discount rate(presently about 150% in addition to the unfunded deficit, plus a termination fee)
    My point is that because of the “pool” most unfunded deficits in PERL cities are understated. Here IN PG, we asked for and received termination estimates from PERS. The size of the termination deficit was much larger than anticipated even before applying the additional 150% derived from a lower discount rate.

    Per the latest PERS Actuarial report, it now values assets at 118% of market value for smoothing purposes.

  6. SeeSaw Says:

    Its simple enough–carry the size workforce you can afford and make sure their compensation includes the required contributions to the Pension Plan. If that is done, there is no such thing as putting it off on future generations, because retirement is the payout of deferred compensation, coupled with the earnings on the investments. The Plan itself has the responsibility of always being upfront with the members on what is needed to keep sustainable.

    JSKDN–I’m so glad that the changeover from DB plans to DC plans will never happen in CA. Your idea that DC plans are the panacea for unfunded DB plans is not good. Shared risk like that with DB plans is cheaper and more efficient for everyone. I pity people who feel that as long as they are wrapped up in their own cocoon, others don’t matter.

  7. SDouglas47 Says:

    Very well stated, SeeSaw.

  8. SDouglas47 Says:

    https://www.soa.org/blueribbonpanel/

  9. Berryessa Chillin' Says:

    “The Plan itself has the responsibility of always being upfront with the members on what is needed to keep sustainable.” Therein lies the rub. CalPERS has NOT been responsible, indeed it has made things greatly worse by irresponsibly promoting pension increases in the late ’90s, and continues to do so by absurd smoothing timelines and butting into the affairs of bankrupt cities. Local pensions funds (such as San Jose’s) and school districts in CalSTERS have been whistling past the graveyard for related causes. In the face of such widespread abject corruption and incompetence all across California, the efficiency of DB over DC pales in comparison to the extreme risk offered by DB plans.

    “I’m so glad that the changeover from DB plans to DC plans will never happen in CA.” Look at San Jose and elsewhere: new hires are getting DC.

  10. Mike Says:

    I just love the people who feel they have a right to future income, they don t wan t to fund themselves. Class, humility, charity. NOT. They will pay whether in this life or the next.

  11. SeeSaw Says:

    BC, CalPERS has every right to “butt into” the affairs of bankrupt cities that are members of CalPERS–that is because it has a judiciary responsibility to the CalPERS covered employees and retirees, in those cities that are in bankruptcy.

    CalPERS can only present the options that are available above and beyond base salary–it does not require, respective, cities to take the options. It is each entity’s responsibility to choose the plan it wants. Its just like buying a car–the more options available, the higher the price. The pensions in my former entity were calculated on base salary only-that was good enough for me.

    Some plans may be going to DC only for new hires–but once those hires realize what is being done to them vs how workers are being treated in other entities, the DC only cities will not have those workers for long. You are not going to wipe out pension plans that have existed for a hundred years.

  12. SeeSaw Says:

    Are you covered by Social Security, Mike? Do you think you have a right to that income when you reach the magic age? I was not covered by SS during the 40 years I was employed in the public sector. I was covered by a DB plan just like you might be covered SS and it was funded as part of my total compensation. Don’t you threaten me! I have done nothing in this life that is going to trigger any requirement that I “pay” in the hereafter. What a jerk!

  13. Tough Love Says:

    Quoting …

    “Merced is among several of the 20 county pension systems operating under a 1937 act that gave all of their employees the “3 at 60” pension formula, the most generous in state law except for those reserved for law enforcement, firefighters and judges.

    The pension increase a decade ago was retroactive to the date of hire, immediately adding to the pension system’s debt or liability. Past employer and employee contributions had been based on amounts needed to pay for lower pensions.”
    ————————————————————————-

    Dear Taxpayers …. STOP being the sucker in the equation and REFUSE any further funding of the absurd and GROSSLY EXCESSIVE pensions.

  14. Mike Says:

    The law of the farm. Reap what you sow.

  15. SeeSaw Says:

    @Mike–My thoughts, exactly. When you pre-judge others, especially those you have never met, you will pay, whether in this life or the next.

  16. SDouglas47 Says:

    Dear taxpayer,

    “absurd and GROSSLY EXCESSIVE pensions.”

    Is an OPINION.

    There are several studies that show public employee total compensation (which INCLUDES the cost of pensions) is “roughly equal to private sector compensation.

  17. Mike Says:

    Greed, Lust, Gluttony, Anger,Envy, Pride,Sloth.
    The seven pillars to those who demand.

  18. SDouglas47 Says:

    Motherhood and apple pie.

    And employees who work for less cash pay while contributing more to their retirement accounts than private sector workers.

    A recipe for secure retirement.

  19. Mike Says:

    Pride and sloth.

  20. SDouglas47 Says:

    Envy

  21. SeeSaw Says:

    Jealousy

  22. SDouglas47 Says:

    Ennui?

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