Are county pensions ballooning beyond control?

County pays $300,000 a day in pension costs
While the Sonoma County Board of Supervisors (BOS) is uncertain how to tackle the county’s pension crisis, one thing is for sure: time is not the answer.
“I fully recognize more needs to be done,” Chair Efren Carillo said Tuesday, July 12 during the BOS meeting. “There are variables not in our immediate control, but we cannot ignore them and because of that, time alone will not solve the issue.”
The issue at hand is the ballooning cost of the county’s pension obligation. According to a report issued last week by the Independent Citizens Advisory Committee on Pension Matters, annual employee pension costs have grown from $19 million to more than $97 million since 2011. The total unfunded pension obligations — the money owed in the future not accounted for in county coffers — increased by 841 percent to a total of $831 million. Total annual pension costs for the county have grown from $20 million in 2000 to about $113 million in 2015, more than $300,000 a day.
“Normal pension costs are not the problem,” said Bob Likins, chair of the committee. “The pension-related liabilities are the issue.”
Likins refers to county actions in the early 2000s when benefits were increased for all employees and, in addition, retroactive benefits were provided. At the time of the approval, the county assumed the unfunded liabilities would increase by about $200 million. However, state lawsuits and court decisions, coupled with the economic downturn of 2008/09 compounded costs. The economic downturn alone reduced the market value of the pension investment gains by more than $533 million, forcing the county to make up for a lost stream of income.
Likins reported that a cost control goal of reducing pension costs to approximately 18 percent of total compensation, established by the January 2015 Pension Update Report, cannot be obtained until the unfunded liabilities are paid off. The committee assumes this measure won’t be reached until 2030 at the current rate and projections, six years later than planned.
How county pension works
To fully understand the issue, it’s important to know how the county’s pension plan works. Sonoma County offers a defined benefit pension plan, providing a specific retirement benefit based on an employee’s salary and years of service. Upon retirement, a county employee will receive a predictable stream of income for life, guaranteed by the county. Employees who work for lower wages or for short periods of time get less; high wage and long-tenure employees receive considerably more, especially as medical advances lengthen lifespans.
The sources of this guaranteed income come from employer contributions, employee contributions and investment gains on the assets already in the fund. Should the assets underperform, as they did during the recession of 2008/09, the county must increase its contribution to make up the difference. When investment returns are better than expected, the county pays less into the fund.
“The county bears almost all the risk related to pension plans,” Likins said.
The annual cost of employee pensions is about 36 percent of total employee payroll. That is, 36 cents of every dollar paid to county employees is used to cover current and future pension costs, according to the committee’s report. About 10 percent of a county employee’s paycheck goes toward pension. Additionally, employees contribute an extra 3 percent to cover the cost of increased benefits that were retroactively applied to employees at the time. That 3 percent extra contribution sunsets in 2024.
A misconception, according to committee member Martin Jones, is that pension liabilities are like mortgages, where as payments are made or changed, the balance changes accordingly.
“That’s an extremely bad analogy and grossly misrepresents the reality of a defined pension plan,” Martin said. “There’s no certainty with unfunded liabilities.”
Potential solutions and drawbacks
The independent review committee, spearheaded by Likins, a retired actuary, retired business owner Jack Atkin, retired banker Larry Heiges, Jones, a management consultant, retired accountant Rebecca Jones, Santa Rosa’s chief financial officer Deborah Lauchner and management consultant Richard Tracy, believes the most effective way to reel in the pension costs is to aggressively pursue cost sharing with employees, requiring them to contribute more from their paychecks into their retirement funds.
In the long term, the committee suggested adding an additional benefit tier into the plan, comprised half of defined benefit contributions (including social security) and half defined contribution. A defined contribution plan provides a steady stream of contributions from employees and employers into a retirement account. The defined amount is not guaranteed by the employer and depends on contributions and investment earnings, according to the committee’s report.
During Tuesday’s BOS meeting, representatives from the Service Employees International Union (SEIU) and the Sonoma County Sheriff’s Department spoke against the committee’s recommendation to require more employee contribution.
“Thirteen and a half percent of a sheriff deputy’s paycheck go to retirement,” said John Noble, negotiator with the Deputy Sheriff’s Association. “They cannot afford to pay any more toward retirement costs.”
According to Transparent California, the base salary for Sonoma county deputy sheriff averages between approximately $61,000 to $86,000, with overtime pay ranging from $42,000 up to $100,000. The median household income for Sonoma County is about $65,500, according to the North Bay Organizing Project.
Rick Walker, President of the Sonoma County Law Enforcement Agency said any change in the pension plan would have detrimental effects on an already strapped peace officer force.
“This isn’t a math problem,” Walker said. “It’s about people.”
Lisa Maldonado, field director for SEIU, Local 1021,which represents many of the county’s employees focused on the people, believing the report unfairly puts the onus on county employees. She said the report made an “artificial nexus between pay and lack of county services.”
“It’s completely false,” she added.
In the report the committee suggested that if the county had maintained pension costs at a more sustainable level, approximately $269 million in resources would have been available to provide critical services to the county over the past decade.
“It could be 40 miles a year or roads being paved or 44 additional sheriff deputies on the street,” Likins said. “The cost in lost services is massive.”
Next known step
While the independent committee was disbanded, the BOS are in favor of creating an ad hoc committee to continue diving into the issue.
“We should not be afraid of analysis,” Fourth District Supervisor James Gore said. “We need to shine more light about this issue so we can make better decisions.”
Carrillo said the board needs to be ready to tackle the issue for the health of the county. “We need financial security and stability to ensure services,” Carrillo said. “We need to be able to do the best with what we’ve got.”
The BOS accepted the committee’s report and thanked the seven members for their work. The full report can be found on the Sonoma County website by searching “Independent Citizens Advisory Committee on Pension Matters.”