Some cities outsource their highest pension costs

Dozens of cities, many of them formed in recent decades, do not directly pay police and firefighter pension rates. They get their safety services though contracts with county sheriff departments and large fire districts.

An example is Lake Forest, a community in Orange County formerly known as El Toro, which incorporated in 1991 and had a population of 77,264 in the last census. It’s one of the 14 cities listed by CalPERS as having a fully funded pension plan.

The CalPERS employer contribution for Lake Forest’s non-safety or “miscellaneous” employees is not a heavy lift — 10.4 percent of pay for most employees next fiscal year and 7 percent of pay for employees hired after a cost-cutting state reform on Jan. 1, 2013.

Cities pay their highest pension rates for police and firefighters, who have a generous pension formula to allow early retirement from dangerous and physically demanding work, usually without Social Security.

For Lake Forest, the police and firefighter pension costs are included in the contract payments to the Orange County Sheriff’s Department and the Orange County Fire Authority, both members of the Orange County Employees Retirement System.

A recent OCERS actuarial valuation shows an employer rate for law enforcement of 62.8 percent of pay and a fire authority rate of 47.8 percent. For employees hired after the reform, the law enforcement rate is 16.4 percent and the fire rate 15.4 percent.

When cities band together, their pooled resources can provide equipment, facilities, training and services that a city can’t afford on its own. Some of the most expensive equipment, helicopters, made news this year because of an Orange County turf war.

“The Sheriff’s Department and the fire authority have regularly clashed, with helicopters from both agencies racing to rescue scenes on dozens of calls, at times arguing over radio and face-to-face after flying in the same airspace,” the Orange County Register reported in January.

The 13 cities that contract with the Sheriff’s Department hired a consultant late last year to study helicopters and other growing costs for police services. Matrix Consulting Group of Mountain View is being paid $269,500 to find possible cost savings for a report expected this summer.

“Over the last ten fiscal years, costs charged by the Sheriff have increased by 33 percent, with approximately 26 percent of the increase occurring in the last five years,” said a memorandum of understanding approved by the cities.

“The parties have concluded, based on facts, that the cost of the Sheriff’s Agreement is becoming a greater percentage of the Parties General Fund budgets and threatens the provision of other vital municipal services,” said the memorandum.

Because they are contract cities, the memorandum said, most cost changes are not under their control. Instead, control lies with the board of supervisors, the sheriff, OCERS, and other county agencies such as the auditor controller and risk management.

The “scope of work” for the study said: “The primary driver of increased costs over time has been increases in salaries and benefits.” Pay and pensions, part of what the contract cities do not control, are not listed in the scope of work, beyond ensuring use of post-reform rates.

Retirement costs, about 25 percent of the total contract cost for the 13 cities, have been increasing at the rate of about 5 to 10 percent a year during the last several years, said Carrie Braun, Sheriff’s Department spokeswoman.

The total retirement cost for all 13 cities is $38.2 million in fiscal 2018-19, up $2.5 million from the previous fiscal year, Braun said. The sheriff and the county executive staff support the study being done for the 13 cities.

The lead city manager for the study, Dennis Wilberg of Mission Viejo, said the contract cities already have the lowest per capita costs for police services in the county, the Register reported last November.

The Orange County Fire Authority, which serves 23 cities, faces the threat that Irvine will withdraw from the authority by a deadline of June 30, leaving a big hole in the authority’s service area and budget.

“Rapidly accelerating property values and major growth in the City of Irvine have resulted in significant inequity between Irvine’s financial contributions to OCFA compared to the value of services received,” an Orange County Grand Jury report said last month.

The fire authority is a joint powers agreement, controlled by its own board, that gets about 60 percent of its funding from the property taxes of 15 cities and the county. More funding comes from eight “cash contract cities” that pay through negotiated contracts.

Irvine has high property values and, unlike some cities, is not “built out” and has more room to grow. If Irvine leaves, said the grand jury, OCFA would lose funding, fire stations, and equipment, while Irvine would assume responsibility for fire services and possibly some of the authority’s pension debt.

The grand jury recommended that “the City of Irvine, OCFA and the County of Orange immediately commence joint discussions to reach an interim agreement addressing Irvine’s inequity issue.”

Meanwhile, the fire authority’s required retirement payments have dropped recently, apparently in part because it was an early adopter of making extra payments to reduce pension debt. (see chart provided by Capt. Marc Stone)

The policy got a boost last year when Gov. Brown made an extra $6 billion to CalPERS to pay down state worker pension debt. Some think the governor’s decision was sparked by a joint presentation to a CalPERS educational forum by a Newport Beach official and a CalPERS actuary.

The fire authority adopted its strategy to speed up pension debt payment in 2013, then revised what became know as the “snowball plan” in 2015, said the fire authority annual financial report for fiscal 2015-16.

The aggressive plan uses leftover funds at the end of the fiscal year averaging $3 million a year, savings from post-reform hires, budgeting $1 million beginning in fiscal 2016-17 that increases $2 million each year until reaching $15 million a year, and $1 million annually for five years from surplus workers’ compensation funds.

“OCFA has been making additional payments toward its UAAL (pension debt) annually since Fiscal Year 2013/14, with additional payments made during Fiscal Year 2015/16 totaling $15.5 milllion,” said the fire authority annual report.

“A recent estimate received from the OCERS actuary indicated that accelerated payments have shortened the timeline to pay down the UAAL from an original twenty-nine years to twelve years.”

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 2 Apr 18

18 Responses to “Some cities outsource their highest pension costs”

  1. Tough Love Says:

    Did you catch the words ………….

    “while Irvine would assume responsibility for fire services and possibly some of the authority’s pension debt.”

    To be financially secure (and not wind up being another “sucker in the room”) contract cities should be 100% certain that THEY can NEVER EVER EVER be held liable for ANY pension shortfall.
    If you get that assurance, even though the cost of the service may not be “cheap”, you have the main benefit of a DC Plan …….. fixed annual costs, with NOTHING coming back to bite you years down the road.

  2. rstein171 Says:

    We’re constantly trying to put band aids over the wound, but the only way to heal the wound is to change Defined Benefits to Defined Contributions, like the rest of the world.

    Since the public pension system is severely underfunded, city governments need to fund the retirements of former employees by taking money from government services as the increasing pension costs will likely continue to crowd out resources that otherwise would go to public assistance, recreation, libraries, health, public works, and in some cases public safety. Benefit costs are slowly crowding out the discretionary money available for states, districts, and schools to spend on other priorities.

    “Defined retirement benefits” are creeping into budgets, especially when those benefits are underfunded. The unintended consequences are that it’s unfortunate that future generations, unable to vote today, will bear the costs of many enacted pension programs, entitlements and boondoggle projects, requiring the younger generations to pay higher taxes and work later into their lives to pay for these promises.

    The international business world is intelligent enough to know that DEFINED BENEFITS, neither capped nor precisely quantifiable in advance financial disasters to any business, thus all businesses focus on the known, i.e., defined CONTRIBUTIONS alone.

    Stealing from the young who have no votes, but silently shoulder the costs and bear the burden of unfunded promises of these programs to enrich the old seems to describe the Governments expansion of entitlement benefits and other government services, along with the taxes young people will have to pay to support them, mostly to subsidize older Americans.

    Even before those young folks can vote, our Golden State schools are on track to force substantial budgetary cutbacks on core education spending, as public schools around California are bracing for a crisis driven by skyrocketing worker pension costs that are expected to force districts to divert billions of dollars away from education and other government services.

  3. spension Says:

    The wound was corrupt executives in the private sector draining the rank-and-file DB pension funds of their companies to pay themselves $1 million-a-year pensions… all documented in Wall Street Journal reporter and Pulitzer winner Ellen Schultz’ book The Retirement Heist… http://www.retirementheist.com.

    Corrupt private sector executives have stolen from everyone, and now ideologues want to compound their crimes by destroying DB plans, which are obviously cheaper (for a given benefit in retirement) than DC plans. The reason is simple mathematics… the pooling that eliminates longevity risk. Ideologues can’t do math.

    Further, DC plans are corrupt devices that allow investment bankers to charge things like taking Stormy Daniels or Karen McDougal for amorous weekends to the Kentucky Derby, and write the cost off toe marketing “fees” for the DC plan. DC Plans allow incredible and unconscionable fees to be charged to the ignorant beneficiaries… read about Penn Specialty Chemical… where Shankar Iyer had to fight for years to get his money out of the DC Plan… and lost money due to the fees.

    Quoting him: ““I got most of my money but I lost quite a bit,” Mr. Iyer said. “It is interesting to note that the fees I ended up paying exceed what Penn Specialty Chemicals contributed on my account. I have learned never to trust a 401(k).”

    Yes, public DB plans in California have made benefits too large… mostly for the **MEN** who are part of the safety profession. My 6th grade teacher taught for 41 years… she makes $60K/year in retirement. Indeed CalSTRS has along history of reasonable payouts for **TEACHERS**… lately administrators have driven the payouts too high. Again, mostly from *MEN* who can’t do mathematics.

    I exclusively have my retirement money in DC plans, and mostly Fidelity. Fidelity has had the usual scandals of corrupt sales pressures, executives charging the cost of their affairs to marketing fees, etc. And Fidelity is more honest than most DC Plans.

    In public DB plans, lots of men bilk the taxpayer for $. In DC plans, lots of men bilk the beneficiaries for an even greater amount of $.

    The best solution is honest DB plans… they exist all over the world, of course… mostly in Scandinavia.

  4. CalPERSon Says:

    rstein171: We’re constantly trying to put band aids over the wound, but the only way to heal the wound is to change Defined Benefits to Defined Contributions, like the rest of the world.

    This makes no sense to me. City A has to pay $1,000/mo to CalPERS for Bob’s DB plan. City B has a contract with its union to pay $1,000/mo into Jane’s DC plan. What’s the difference?

    The only reason DC proponents prefer it over DB is they think it’s easier to slash DC benefits when they feel like it. It has nothing to do with math or fiscal soundness.

  5. Tough Love Says:

    Quoting CalPERSon……………

    “This makes no sense to me. City A has to pay $1,000/mo to CalPERS for Bob’s DB plan. City B has a contract with its union to pay $1,000/mo into Jane’s DC plan. What’s the difference?”

    Why?

    Because the $1,000 into the DC Plan is final (NOTHING will come back to BITE YOU later), while we ALL KNOW that:

    (1) the DB Plans will ALWAYS cost WAY WAY more than the DC Plan because the Monthly Benefits that the DB Plan will provide upon retirement are always WAY more generous than what the expected accumulated value of the DC Plan contributions will be able to pay out upon retirement, and

    (2) because even BEYOND the DB Plan being WAY more generous, they are INTENTIONALLY under-costed (primarily by discounting Plan liabilities using interest rates that are almost TWICE as high as the rates used for that purpose in Private Sector pension Plan valuations) to make them “look” less costly and hence more palatable to the Taxpayers who are called upon via their contributions (and the investment earnings thereon) to pay for 80% to 90% of Total DB Plan costs.
    —————————–

    And It has EVERYTHING to do with the “math” and “fiscal soundness”

  6. SeeSaw Says:

    Yes, TL, DC plans are final and that is the problem. As a public employee, I had both a DB pension and a DC 457 plan. If one wants to sustain on a DC plan for life after retirement, they must save one to two million dollars! And you would expect every one of several million workers to do that? Impossible! One of my former colleagues lost everything in her DC plan in the 2007 recession. Fortunately she still has her DB pension! I have lost and regained thousands in my 457 plan over the years–and it will keep happening until it is all gone. I saved $600 mo. in my 457 when I was active. I can buy groceries and pay some utility bills with the monthly check that I now get to supplement by DB pension–I could certainly not sustain on it alone. I guess you would rather see public retirees on welfare.

  7. spension Says:

    Yes, Tough Love, DC plans have everything to due with investment banks men using math to take money from regular people through exorbitant fees.

    And everything to do with investment bank men’s propaganda trying to turn regular people into hypnotized chickens who don’t investigate and learn about longevity risk.

    Everyone knows that the math is simple: for a given benefit in retirement, DB plans are far, far more economical than DC plans.

    Throughout the world in honest countries, particularly Scandinavia, DB plans are the first choice of everyone.

    Where men’s propaganda dominates, like the US and Russia, all sorts of falsehoods are told to keep honest people hoodwinked into thinking DB plans are somehow expensive or wrong.

    Oh- except in the US for men in safety professions and the military. And you never hear from the likes of Tough Love, about the vast ($913.6 billion) liability of the US Military DB plan… page 22 of :
    http://comptroller.defense.gov/Portals/45/documents/cfs/fy2017/13_Military_Retirement_Fund/FY2017_MRF_AFR_Final.pdf .

    Because pension hawks only want to take DB plans away from people like my 6th grade teacher, who worked for 41 years and makes $60,000 a year… the point of pension hawks is to destroy DB plans for female teachers and transfer the funds to male private sector executives, military men, and safety employees.

  8. Tough Love Says:

    Seesaw,

    You never cease to amaze.

    While I don’t know the proportion of this Blog’s readership that are Public Sector workers, nationally only about 15% of all workers are employed in the Public Sector. And while a VERY high % of Public Sector workers get DB Pensions, only about 6% of Private Sector workers are in DB Plans that are currently earning additional accruals (i.e. not in a “frozen” status).

    So, if the Public/Private Sector split of this Blog’s readership is similar to that of America’s working population, only 85%x6% = 5% of this Blog’s readers are now earning additional accruals under a DB pension Plan. And yet, you a proclaiming to THIS (5% DB) GROUP ….. whose Public Sector pension contributions (via forced taxation) and the investment earnings thereon are responsible for 80% to 90% of the Total COST of Public Sector pensions …….just how necessary a DB Plan is for for YOUR financial survival.

    Do you think the other estimated 95% of this Blog’s readership that do NOT get DB pensions (but must pay for YOURS) are supposed to agree with you ?

    What makes YOUR financial needs so much more important (to be met via a DB Plan) than those of the other 95% that don’t get DB Plans ?

  9. SeeSaw Says:

    Its much more financially beneficial than to just the number of workers getting DB plans TL. I have extended family members who all get benefits from me for their birthdays, Christmas, college graduations, weddings, etc. via my pension. There are 14 other people in my orbit, in addition to me and my spouse. They put those gifts into the economy. Add those who benefit to every other public worker getting a pension, you have thousands of people over and above the 15% you quote, who are benefiting in some way or another. Yes, I do expect the other readers to wake up and agree with me. Just take away the pensions TL–the next thing you will be griping about is that your taxes didn’t go down anyway.

  10. Tough Love Says:

    SeeSaw

    Responding to your reply to my earlier comment………..

    Again, you never cease to amaze !
    ——————————————

    P.,S. Few expect that taxes would go DOWN if Public Sector DB Plans were rightfully frozen. But the never-ending INCREASES in taxes might might finally slow down.

  11. spension Says:

    TL says: “What makes YOUR financial needs so much more important (to be met via a DB Plan) than those of the other 95% that don’t get DB Plans ?”

    Except, as documented by Wall Street Journal Pulitzer Prize Winner Ellen E. Schultz in Retirement Heist – http://www.retirementheist.com – it was the financial needs of corrupt private sector executives that resulted in the absence of DB plans for private sector rank and file.

    It is not the public sector recipients of DB plans who absconded with the DB pensions of the private sector. The corrupt removal of private sector DB plans for rank and file was done by private sector executives.

    Again, as anyone who is mathematical understands, and who is not emotional, like Tough Love is, DB plans are more economical (for a given benefit) than DC plans are. DB plans also have lower fees than the usually charged in the corrupt DC industry.

  12. Tough Love Says:

    Quoting spension………….

    “Again, as anyone who is mathematical understands, and who is not emotional, like Tough Love is, DB plans are more economical (for a given benefit) than DC plans are.”

    Many non-Safety pensions now require annual taxpayer pension contributions of over 30% of pay (and over 50% for safety) even while using assumptions & methodology that materially UNDERSTATE the true expected cost of the promised benefits.

    With Private Sector taxpayers rarely getting an employer match of more than 3% to 4% of pay into a DC Plan, the ROOT CAUSE of the pension mess is VERY clearly ludicrously excessive Public Sector pensions “generosity”, and the often-cited “lack-of-full-funding” is not the CAUSE of the pension mess, but a CONSEQUENCE of the true ROOT CAUSE …. ludicrously excessive pension “generosity”.
    —————————————————
    Give Public Sector DB pension with a Taxpayer contribution NO GREATER THAN what the Private Sector taxpayer typically gets in %-of-pay employer contributions to his/her 401K and I’m all for it.

  13. S Moderation Honestly Says:

    Stop me if you’ve heard this before…

    It is invalid to compare pensions outside the context of total compensation.

    Don’t be invalid.

  14. Tough Love Says:

    SA Moderation Douglas,

    Stop me if you’ve heard this before ………

    In BOTH your & my home States of CA and NJ (for all workers taken together as one group ………. which IS what financially impacts the Taxpayers) the Public Sector Pension/benefit ADVANTAGE is MUCH MUCH greater than the Private Sector “wage” ADVANTAGE.

    The net impact being a VERY large Public Sector “Total Compensation” (wages + pensions + benefits) ADVANTAGE. In fact the AEI Study has measured that Public Sector “Total Compensation” ADVANTAGE to be equal to a level annual 23% of pay …….. rising to 33% of pay if the value of the much greater Public Sector job security is included. And, had Safety workers (with far higher than average wages, and the richest pensions) not been EXCLUDED from the AEI Study, the 23% and the 33% would assuredly be materially greater.

    Even using the lowest of the AEI Study-reported Public Sector Total Compensation ADVANTAGE figures, the 23%, how much MORE would the typical Private Sector worker have for THEIR retirement needs if THEY had an ADDITIONAL 23% of pay to save and invest in every year of their working career……… $500K, $1, Million, even $2 Million for some ?

    Well THAT is a valid estimate of how much Taxpayers are unnecessarily OVERCOMPENSATING each and every full career CA and NJ Public Sector worker.

    It’s patently outrageous.

  15. spension Says:

    TL says… “Give Public Sector DB pension with a Taxpayer contribution NO GREATER THAN what the Private Sector taxpayer typically gets…”

    So here is a “Private Sector taxpayer… United Healthcare’s William McGuire” (actually, a huge fraction of his income came from Medicare and other public taxpayer revenue)… who got a $1.6 billion payout…. http://content.time.com/time/specials/packages/article/0,28804,1848501_1848500_1848464,00.html. I guess TL favors that kind of payout.

    TL is completely emotional, and can never either acknowledge or condemn the fact that it was corrupt private sector executives (like McGuire) who found a plethora of legal loopholes to drain the DB pension funds of the private sector rank-and-file, as documented by Wall Street Journal Pulitzer Winner Ellen Schultz… http://www.retirementheist.com.

    Any comparison with the current practices of the private sector is invalid, because of the vast executive corruption that has bankrupted the US private sector DB system. In great Soviet-style propaganda, those who drained the DB system want to deflect attention from their dastardly deed by destroying the public DB system with falsehoods.

    DC Plans like 401(k)’s were *NEVER* supposed to be the principal retirement savings vehicle… according to Ted Benna, the “Father of the 401(k)”: https://www.csmonitor.com/Business/2017/0104/Why-Father-of-the-401-k-says-he-regrets-pushing-the-retirement-plan .

    “”I helped open the door for Wall Street to make even more money than they were already making,” Benna told The Wall Street Journal. “That is one thing I do regret.””

    Everyone unemotional and driven by logic and math (like most female financial analysts) understands: longevity risk makes DC plans extremely expensive. DB plans are inherently more economical.

    People like TL: don’t want to account for the public debts that they like, like bonds, in the same way as DB plans are accounted. DB plans are accounted for in a unique way that demands a fund be on hand to cover the future costs, discounted to the present. That is a good way to account, IMO.

    However, people like TL don’t insist on the same type of accounting for bonds, building maintenance, education, etc. DB debt gets singled out for special accounting. I don’t oppose accounting for DB debt that way, but… DO THAT FOR ALL DEBTS OF ALL INSTITUTIONS.

    Add to that the way the corrupt men’s club of investment bankers robs (through fees) customer’s 401(k)s to finance their immoral activities, and frankly, DC plans should be made illegal.

    Meanwhile, no anti-DB plan hawk every comments on the vast ($913.6 billion) liability of the US Military DB plan… page 22 of :
    http://comptroller.defense.gov/Portals/45/documents/cfs/fy2017/13_Military_Retirement_Fund/FY2017_MRF_AFR_Final.pdf

    That is most likely because either (1)they get military DB benefits, which are available at age 37; (2)they support military DB benefits for men but oppose them for female school teachers; or (3)they are cowards who are afraid to stand up to the US military.

  16. Tough Love Says:

    Spension,

    McGuire’s payout was form the exercise of Stock Options, NOT a pensaion ………. but you knew that, didn’t you ?
    ————————————————
    And even more foolish ………. quoting Spension:

    “Any comparison with the current practices of the private sector is invalid”

    Why is that ? With the PRIVATE Sector pension contributions (and the investment earnings thereon) now responsible for 80% to 90% of the total cost of PUBLIC Sector pensions, why SHOULDN’T the MUCH MUCH smaller generosity of Private Sector pensions be relevant?

    ——————————————-

    Quoting spension (3 times) ………….:

    “Everyone unemotional and driven by logic and math (like most female financial analysts) …………….. ”

    and

    “Add to that the way the corrupt men’s club of investment bankers robs (through fees) customer’s 401(k)s to finance their immoral activities,”

    and

    “they support military DB benefits for men but oppose them for female school teachers”

    It seems that almost every one of your comments rails against “men” at some point. Some man (or men) must have messed you up royally to make you so pointedly angry at them.

  17. spension Says:

    Yes, men royally messed up the public DB pension system and (mostly female) school teachers like my 6th grade teacher, who worked for 41 years and now gets $60K/year (no Social Security) get savaged by people like you.

    That the men like you mess up royally when they let emotion, not logic and mathematics, drive their retirement decisions.

    TL, you fail to acknowledge what Pulitzer-Prize winning Wall Street Journal reporter Ellen E. Schultz documented… http://www.retirementheist.com… that the demise of the private sector DB system was committed with corrupt and malicious intent by the private sector executives.

    TL, you fail to acknowledge that the “father of the 401(k)”, Ted Benna, says that DC plans were *never* intended to replace the more economical DB system.

    Both of those are royal mess-ups on your part.

  18. spension Says:

    Nice to hear that unlike DB pensions… mining interests in many states need not keep a dime in their clean-up funds… they just get a note on a cocktail napkin from somebody that their company assets are eventually sufficient to clean up their concerns… but it isn’t working….

    https://www.nrdc.org/experts/amanda-jahshan/bankruptcies-coal-country-put-self-bonding-spotlight

    DB pensions must keep $ on hand in a pension fund to over future debts, discounted to the present. All sorts of institutional debt instruments… bonds, buildings that must be maintained, road systems that must be maintained, mining cleanup etc… are not held to that standard.

    All future debt should be held to the same standard…. if any institution has promised future payments, they should all have cash on hand to cover the present value of those payments. That is the standard that DB are held to… well, admittedly, the 200-year returns of securities are allowed to be used in computing the DB present value; not the risk-free bond return.

    But at least there is some kind of fund. All other government and corporate future debt should be held to the same standard as DB debt.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


%d bloggers like this: