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Gary Bei
By GARY BEI
Gary Bei is administrator for the Sonoma County Employees’ Retirement Association
This is in response to the recent Close to Home column by Joe Nation (“Trying to regain control of public employee pensions,” Sunday) and a Press Democrat editorial on the same subject (“Deep red: County needs to do more with pension debt than cross its fingers,” Tuesday).
For the past 20 years, which included the worst national financial collapse since the Great Depression, the Sonoma County Employees’ Retirement Association (SCERA) has earned an average of 8 percent annually on pension fund assets. Over the past 30 years, SCERA’s annualized investment return has been 9.5 percent. These investment returns have been provided through a well-diversified investment portfolio and proven long-term investment strategy based on established expectations for returns for various asset classes.
Yet the recent guest opinion article by Joe Nation suggested that the Sonoma County Employees’ Retirement Association should use a 4 percent discount rate, utilizing a risk-free treasury return when valuing pension liabilities. Had the Sonoma County Employees’ Retirement Association done that for the past 30 years, the pension liability would have been significantly overstated, which would have resulted in misleading information for members, policymakers and the public over this same time period.
Instead, the Sonoma County Employees’ Retirement Association used a discount rate in the range of 8 percent over the years, based on standards for valuing pension liabilities set by the national Governmental Accounting Standards Board and Actuarial Standards of Practice.
This discount rate is validated based on actual experience of SCERA’s long-term investment returns.
The guest opinion article’s suggestion of a funded ratio of 43 percent and a funding shortfall of $2.3 billion is a dramatic misstatement, given that the market value of assets of the retirement trust fund is $1.75 billion as of Oct. 31, and the actuarial liability is $1.97 billion as of the most recent valuation date, utilizing calculations based on established professional standards.
The projections in the Close to Home and in The Press Democrat editorial are not based on accepted and well-established methodologies. The resulting statistics do not present a fair or accurate picture of the retirement system funding.
Public pension system funding is an important policy issue, but productive dialogue must be grounded in a balanced view of the topic and based on facts.
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It looks like the cost of doing business is going up, for everyone. My food bill is up, my gas bill is up… Soon my tax bill will go up to pay for this. Gotta love it.
@ County Worker
This isn’t a fight against our public servants, it’s about making the system systainable for not just the present generation of retirees, but the future generation.
@ Passing By
Below is a copy and link from another thread. Sonoma County is presently matching 40-50% of each dollar of salary toward retirement…please tell me where your three relatives work that you would die to get their match? I think Google and Agilent are maybe 4% with a cap.
“Without the $6 million, the city might be facing a $9 million shortfall, which would have devastating consequences for city services, he said.”
Is it possible without Measure P the city might be faced with having to implement real pension reforms for actives and retired? The second tier of benefits for new hires to save money is a myth, most of the savings is 20-30 years away…expecially while the city and county are going to be laying off hundreds of less senior workers.
Just be glad the City of Santa Rosa doesn’t hold a candle to the County of Sonoma when it comes to pension costs. The City doesn’t pay into Social Security (7.65%) nor provide retiree medical (7.5%).
The City is worried about an increase of total retirement cost for non-safety employees from 13% to 16% whereas the County of Sonoma is almost three times that.
http://www.sonoma-county.org/acttc/pdf/payroll/benerates.pdf
General Retirement Rate 29.52%
Employer Pick-up 2.25%
Social Security/Medicare 7.65%
2010 Pension Obligation Bond 6.25% (est)
Total 45.67%
(+ 4-6% 401(a) for management and elected)
Next year the County of Sonoma will begin payments on their latest $291,000,000 Pension Obligation Bond, principle and interest of $20,000,000, which is equal to Santa Rosa’s entire annual pension cost.
All this talk about benefits and pay. Some of you are missing the point. Yes, the investments need to be carefully watched or they will come up short.
all this talk about great benefits. I am not seeing it. Sure, the cops and firefighters get their Safety Retirement. They can eventually max out at 90% if they stay long enough or can retire at age 50. But not both. Does anyone even know that the Conty retirement system allows you to retire with 100% if you stay long enough? No one has fully researched this because no one has mentioned that here. Santa Rosa PD was paying Dispatchers a $10,000 signing bonus for dispatchers willing to jump ship to make $73,080.00 Annually.. Not bad pay if you can do the job. Who do you want answering your 911 call that your child is not breathing or severely ill? Bottom of the barrel or highly trained proffessionals?
Same with cops. Do you want an investigator who can solve a crime or a Barny Fife? Quality costs people. All these people are constatly being recruited and head hunted. A person who can pass a background investigation, drug test, psych test, medical test, and a lie detector test is a valuable individual to any agency. Lest than 2% of applicants are qualified.
As for the benefits, I have 3 relatives who have better retirement and nenefits thatn any of the government employees in this county. I would kill for their matching 401k’s… Sure they took a hit but have recovered like any quality investment. The rest of the junk investments got cleared out. Life goes on. Don’t knock the pay of those who do the job that you are not qualified to do or won’t do. Wow, this sounds like a illegal immigrant ad.
I can only hope they cut staff 50% so I can clean up with overtime. I have to put it aside for my retirement since I can see that some will not rest until it is drastically dimished from the deal I signed up for 15 years ago. Turn up the heat and I will provide for myself. Either way, I will survive. Don’t hate me because I will make money at it because someone has to do the work. Volunteers are not going to magically step up. Someone will have to be paid to do the work, and I will be one of them. Then I will have to move out of the area because the lack of services from the cuts will make it look like a 3rd world around here. Like many of the roads in the county where no services are provided today…
@ Tom Drumm
Apologies to you for my comment, “We don’t need union heads and county administrators poised to retire and cut a fat hog, telling us how wonderful the stock market is doing and how fully funded the pensions are.” You have represented thousands of SEIU (Service Employee International Union) members for many years and I should aspire more toward your example of a gracious, more diplomatic style of negotiation…it is a star I aspire toward.
@ Moore
I was tempted to facetiously suggest you were referring to SCERA (Sonoma County Employee Retirement Association), with respect to the comment, “They are only interested in hype and partial info that paints a picture their way.” I would suggest you spend a little bit of time looking at the links I’ve provided to discern that what Joe Nation and others are suggesting is certainly more to the truth than what SCERA is basing your pension system on.
@ Mr. Cramer
Exactly the problem with the present $600 Million of Pension Obligation Bonds the County Auditor, Administrators, and SCERA have funded, is when you fail to get the 8% return guaranteed by the taxpayers, on the County’s present $2.1 Billion Actuarial Liability, you end up with more UAAL (Unfunded Accrued Actuarial Liability) PLUS the interest.
I recently asked SCERA administrator Gary Bei how much does the UAAL increase for each point missed on the target rate of return…he said, “For each point shy of the target rate of return (8%), there is an increase in UAAL of $19 Million.”
The problem with these POB’s is when you fail to meet your target rate of 8%, and have a ten year average rate of return of 3% (current SCERA average), while paying 6% interest on a POB, you end up adding an additional 5% in UAAL on top of the POB interest…essentially one could say your paying 11% interest on the POB…6% interest and add’l 5% in UAAL.
San Mateo County is one of the few 1937 Act Counties (there are 20 including Sonoma County) that responsibly did not buy POB’s. SamCERA’s (San Mateo County Employee Retirement Association) funded ratio with a 7.75% “target” is 70%, but they proudly note in their 2010 CAFR that their funded ratio does not pay all the additional cost incurred through bond debt…
http://www.co.sanmateo.ca.us/Attachments/controller/Files/CAFR/2010CAFR.pdf (page 11)
“On the positive side, the County did not join the majority of California (and U.S.) local governmental entities in issuing Pension Obligation Bonds prior to 2008. Most of these entities experienced the same market declines in the value of their pension’s assets (after putting the proceeds of these bonds into their retirement systems) and are also seeing material increases in the amount of their annual employer contributions. In addition, they have the debt burden of their Pension Obligation Bonds that, not insignificant, are obligating additional general fund revenues for this debt
repayment rather than for programs for taxpayers. The County, through its prudent fiscal leadership, is fortunately not in this situation.”
In reality, if Sonoma County required SCERA to include a note that over 35% of their pension portfolio ($600 Million with $550 Million still owed) is from POB’s being paid through massive cuts in County jobs and essential services, the funded ratio on their $2.1 Billion Actuarial Liability would be 54%.
To me the issue of the day is how we are seeing a massive decline in public jobs and services due to a pension system that is massively underfunded, that is currently requiring funding at levels 10-15 times what private sector pensions plans are contributing, (for those lucky few that work for an employer that still provides a pension plan).
@Tom
The county believes the interest paid on POBs will be less than what they’d otherwise owe. But no one knows. The county is betting that future investment returns will exceed the interest on the bonds. If not, taxpayers made a bad bet.
As I understand it, the county must match the investment returns of SCERA on its funding gap, the difference between fund assets and its “actuarial liability.” Since SCERA projects an investment return of, I believe, 7.75% and POB interest is a little under 6%, the county will save money if all goes as planned.
But, if investment returns match the last decade, under 3%, the county loses.
Don’t bother with facts her Tom D. They are only interested in hype and partial info that paints a picture their way.
Some posters act as if debt service on pension obligation bonds is in addition to what the County pays to the retirement system, SCERA. While I am no expert on POBs, my understanding is that POBs are issued because the debt service for them costs LESS than what the County would have to pay SCERA directly. I believe SCERA gets it money upfront and the County pays a lesser rate to the bondholders.
-SCERA Administrator Gary Bei doesn’t mention that out of that $1.75 Billion pension portfolio, over $600 Million is from Pension Obligation Bonds of which $550 Million is still due…next year’s POB annual debt service principal and interest will be almost $50 Million. A staggering 35% of SCERA’s portfolio is from POB’s presently draining the County’s general fund. Ultimately we will pay over $1 Billion through major cuts of County jobs and a massive loss of essential services.
-If one includes the recent $291 Million Pension Obligation Bond, of ALL 58 Counties in the State of California, Sonoma County has by far the highest per capita bond debt (approx. $1700), most of it Pension Obligation Bonds. Most of it as Auditor Rod Dole would say “sculpted” so that most of the big hits…high payments…will be paid by the next generation after all the people who created this mess have retired.
http://www.sco.ca.gov/Files-ARD-Local/LocRep/counties_reports_0708counties.pdf
-These benefits are largely unfunded, they are being paid through a cannibalization of our County work force.
There were 4444 workers at the County in 2004, (page 62 http://www.scretire.com/pdf/documents/annrpt09.pdf)
Today there are 3763 and falling (page 15 http://www.sonoma-county.org/auditor/pdf/fy_10-11_adopted_budget_schedules.pdf).
That is a drop of almost 700 workers, yet the salaries and benefits have doubled since 2000, much of it to the upper tier, while those in the private sector have seen a decade long decline in household income. (http://www.pressdemocrat.com/article/20090104/BUSINESS/901030293).
With 4400 workers in 2004, there were 2500 retirees…today there are 3763 active workers and 3761 retirees…2011 will see more retirees than workers (http://scretire.com/pdf/news/2010/retagenda_20101118.pdf).
Not to get everyone to glaze over with all these numbers, but the issue of the day is how to avoid a meltdown similar to what my wife lived through when the Soviet Union collapsed. We don’t need union heads and county administrators poised to retire and cut a fat hog, telling us how wonderful the stock market is doing and how fully funded the pensions are.
I know hundreds of government workers, young and old, active and retired; and they know things cannot continue; they are intelligent and worried for their future employment and benefits.
We need to work together to figure out how to make these pensions and services sustainable without all the guile and subterfuge. There are massive unfunded pension obligations that must be dealt with in an honest and forthright manner.
How good to hear from someone, finally, who knows what he is talking about. Unfortunately, he told us very little. More information about the plans sustainability and the County’s potential obligations would be helpful to understanding this issue.
When are we going to hear from the BOS, or one of their staffers, explaining what pension promises they have made and why? I have to assume they can defend these decisions . . . So why aren’t they? I would like to believe that these decisions were not made recklessly or without thoughtful study. If the County pension promises are reasonable and the plan itself is sustainable, can’t someone in the County spell it out for us all?
Here we go again. Talk about negative speculation. Some of you must have gotten slammed in the 401k’s . My father in law saw his portfolio drop $160k in the big dip. With in 6 months he recovered over $140k of the loss. The bounce back never made news. It was good news. If there is positive speculation as to the future of the market, it is evil gambling. If there is doom and gloom, it is being conservatively realistic.
One mutual fund returned over 80% in the last 2 years. Put down the amatures Money Magazine and the fantasy Stanford report.
S&P returns are expected to be 12% for the next 3 years. Don’t invest and sit on it people. Look, watch and learn. if you aren’t getting these returns, even the retirement fund, then move your money to the productive funds. Especially if you invest OPM. You have a responsibility to get the highest returns possible within the confort zone. I pay taxes as well and I say go for the larger returns with in reason.
The returns from March 2009 to August 2010 were something like 65%. We can’t mention that in all the doom and gloom. Would not make headlines.
OK, so we all know Joe Nation is just jumping on the “bash sonoma county retirment plan” band wagon. He is typical of most of elected officials. They feel their retirment and medical plans are earned while the folks who are truely working for a living don’t deserve what was promised to them. Look at the fat pensions these “officals” recieve. Look at the medical plans they have and compare them to what they feel is adaquate for the rest of us. I guess it is really a case of, “some animals are more equal than others” (thank you G. Orwell.)
Mr Bei is doing what every mutual fund in America is prohibited from doing: suggesting that past performance can be relied on to predict future returns. The SEC would sanction SCERA if it was a mutual fund.
While Bei is quick to point out the poor returns of the current decade, he skips mentioning that the 90′s were a decade of spectacular returns, not likely to be soon repeated.
Mr Bei dissembles when he suggests the actuarial funding gap is “only” $250mm. One, it counts the pension bonds the county issued as assets to SCERA, which they are. But they are a liability to the county, thus the gap to taxpayers is much larger. Two, the estimated gap is based on projected returns that are optimistic given our current economic circumstances. The projected returns suggest that, in the search for higher returns, more and more pension money will need to be put at risk.
SCERA’s past returns were fueled by an expansion of credit and debt that is simply no longer sustainable.