Guest Commentary: Pension reform is simple

The solution to the county’s pension problem is simple, it’s just not easy to implement. Implementation will require political courage, a commodity often in short supply. The fact there is a serious problem with the county’s pension cost was acknowledged by the Board of Supervisors in 2011. The recent report by the Independent Citizen Advisory Committee on Pension Matters further documented that the problem is far from being solved five years after reforms had begun. More importantly, as a result of the committee’s work, we now fully understand why pension costs are so high, and we know a way to fix that problem.
First let’s briefly revisit what is at stake. In 2011 the county determined employee pension costs had become unsustainable after increasing from $21 million to $97 million over the preceding decade. It adopted a reform plan that was to bring those costs under control within 10 years.
The main reforms so far have been to implement features of the statewide reform legislation which called for a second tier of lower benefits for newly hired employees and to implement some anti-spiking measures. Those reform measures will not be enough. Furthermore, those measures still fail to adequately address the main causes of the pension cost problem.
The citizens’ committee concluded that there were two main causes that were driving county costs. The benefits are still exceedingly generous. Consider that employees who work a full career at the county can retire with more income in retirement than when they were working. This is because the county’s pension can provide 100 percent of final earnings. When social security benefits are added in retirement income will be over 100 percent. This is compared to the general norm for retirement income plans, which is to replace 75 to 85 percent of final earnings in retirement income.
The county’s reform plan even acknowledges this level as the appropriate target. The current high level of retirement benefits applies to both tier 1 and tier 2 employees.
One feature of the county’s current plan that is most responsible for the county’s cost explosion is the fact the county bears virtually all the risk related to investment returns. In effect the county funds a large part of the retirement benefit and guarantees the investment outcome.
In the county’s reform plan, they set a goal of sharing investment risk. So far no progress has been made, and no plans exist to accomplish this critical goal. It’s this risk exposure which has led to the current level of county pension liabilities totaling $831 million. That’s $1,600 for everyone man, woman and child in Sonoma County. Paying off this debt now makes up two-thirds of the annual pension cost the county must pay.
To summarize, any permanent solution to this cost problem must do two things. It must realign total benefits with accepted norms equal to 75 to 85 percent of final earnings, and it must share risk equitably. The committee recommended a hybrid plan that does just that. The recommended plan combines a defined benefit plan, including social security, plus a defined contribution (401K type) and seeks to provide retirement income equal to 75 to 85 percent of final earnings for career employees.
Many in the community understand there is a pension problem, but few really appreciate how that problem affects them in their everyday lives. Because excessive pension costs divert funds away from basic government services, the community pays the price in reduced road and park maintenance, fewer sheriff’s deputies and reductions in all the services the county provides. At present time, excess pension costs are running about $50 million a year. Excess cost is the amount of costs above a sustainable level. Using the county’s own most recent projections, the total of excess costs that will be incurred before the problem is projected to be resolved in 2031 will be over $1 billion. It’s easy to see that this problem deserves the full attention and the highest priority of the Board of Supervisors.
If there is good news, it’s that both the county and its employees are motivated to reduce costs. Although the county bears the greater burden, employees are also chafing under the weight of the amount they contribute for their pensions. That creates an opportunity for a new reform plan that serves everyone’s interests. Employee cooperation will be required to implement the plan recommended by the citizen’s committee. In the absence of cooperation from employee groups, the county must use the only tool currently available to it to reduce its pension costs, which is to bargain for higher employee contributions.
It will take political courage by elected officials who are willing to put the interests of the community before the interests of campaign contributors and employee unions. Sadly, since the committee presented its report in July, there has been little sign the supervisors are treating this problem with any sense of urgency.