By BRETT WILKISON
THE PRESS DEMOCRAT
Sonoma County government’s pension system has passed a historic threshold.
For the first time in decades, and likely in its entire 65-year past, the fund’s retirees now outnumber its active workers. Retirements last month pushed the number of pensioners to 3,792, while current employees affiliated with the Sonoma County Employees’ Retirement Association total 3,754.
The system now enters an era that experts say brings increased investment risk and the likelihood of higher pension contributions for taxpayers and smaller gains from pension overhaul.
The tipping point, spurred in recent years by large reductions in the county work force, is common for pension systems that have been around for 50 years or more, pension officials said.
The shift was noted at the top of the SCERA’s February meeting agenda, but drew no comments from retirement board members at their Feb. 17 meeting.
“It’s not a significant issue,” SCERA Administrator Gary Bei said later.
The first consequence of the shift, however, likely will be an increase in county payments to the pension fund.
Bei said the increase would be “nominal,” or “a fraction of a percent” on the county’s roughly $300 million payroll. He said he could not provide an exact number until an actuarial study is released in May.
But a 0.5 percent increase on the county’s payroll would equate to a first-year hike of $1.5 million. That would be in addition to the millions more the county expects to pay over the next several years to recoup pension-fund stock market losses from 2008, and an additional estimated $3.6 million, starting in 2012, related to a lowering of the fund’s earnings assumption rate.
Employee contributions, which are based solely on changes to salary and benefits, mortality rates and earnings assumption rates, will not change because of the demographic shift.
Most pension experts agree the shift itself does not portend the same fallout for pensions as for Social Security, which relies on a proportionally smaller pool of current workers to pay a larger number of retiree benefits.
Instead, pensions work, ideally, by requiring enough contributions from employers and, in many cases, from each worker, along with investment earnings, to pay for the worker’s benefits upon retirement. In pension parlance, the practice is known as “pre-funding.”
Because pension systems with more retirees than active workers have more of their funds tied up in payouts, they are less immune to the problems that can throw that equation off-balance, experts said.
“The risk is so much greater that you can get in a position of insolvency, especially in a stock market drop,” said Marcia Fritz, a pension overhaul advocate who leads the California Foundation for Fiscal Responsibility.
Investment underperformance and long-term underfunding by employers and employees are more chronic problems for mature pension systems, experts said.
Examples of the effect on both public and private sector pension systems abound. State systems in Illinois and New Jersey are struggling to pay their retirees because of past underfunding. Contributions for current employees may have to rise to correct those problems, experts said.
And aging pension systems were a big factor in the financial distress of large American industrial employers last decade, including General Motors and other automakers. When it went bankrupt in 2003, Bethlehem Steel Corporation, the 146-year-old shipbuilder and metal producer, had nine retirees on its books for every worker, pension records show.
“When something goes wrong in a mature plan, it’s harder to recover,” said Joe Nichols, a Kansas City-based actuary who works with public and private sector pension plans across the country.
Private firms can close their doors or declare bankruptcy — and hand their pension obligations off to the federal government — but such options are generally not available to public employers.
“In the public sector, there’s a belief that governments don’t go bankrupt. They can weather any storm,” said Ethan Kra, chief actuary for Mercer, the global consulting company.
Governments shed jobs and services to meet rising retirement costs and taxpayers fill in the pension shortfall.
“Until they revolt,” Kra said, in a nod toward current events in Wisconsin and elsewhere. “You can reach the point where taxpayers say they won’t vote for more taxes.”
Among the 20 county-run pension systems in California, Sonoma County’s is the first to have its number of retirees surpass active workers, according to Bob Palmer, executive director of the State Association of County Retirement Systems.
“At some point, it happens to all pension plans,” Palmer said. “It’s all planned. It’s part of the process.”
The number of active employees covered by SCERA has declined since its recent peak at 4,444 in 2002.
In the past three years especially, county work force reductions, including layoffs and regular and incentive-driven retirements, have sped the growth of retirees.
Last year, SCERA’s retired ranks swelled by a record 282 former workers — most of them from the county and a share from several smaller agencies participating in the system.
Bei, SCERA’s administrator, said a high number of retirements also is expected this year with the county’s plans for further layoffs and separation incentives.
Similar patterns are common nationwide, pension experts said.
And for systems that have reached the tipping point on retirees, there is almost no going back.
“You’d have to see incredible growth rates in your work force,” said Nichols, the Kansas City actuary. “I don’t think we’ll see an economy that would allow that to happen.”
County pension and government officials insist they are prepared to deal with financing and funding issues that will arise with an aging pension system.
SCERA has long seen its annual payouts to retirees surpass its annual contributions from employers and employees. In the past decade, those payout deficits have ranged from $2.3 million to $12.6 million annually.
The deficits may rise as retirees make up a larger pool of SCERA’s overall membership, Bei said.
But investment earnings, except in years of market loss, have more than made up the difference, he said. In 2009, SCERA took in a total of $84.9 million in employer and employee contributions and paid out $91.7 million in benefits. The same year, the fund’s investments earned $226.6 million.
“What’s a $7 million dollar difference on a base of $1.85 billion in assets?” he said, referring to the 2009 payout deficit and the current worth of the pension fund.
As a ratio, it equates to a 0.3 percent payout deficit. Mature pension systems considered to be in trouble commonly see a 10 percent annual payout deficit.
“It’s a small impact,” Bei said.
And unlike other pension systems that have run into underfunding problems, state law governing county pensions systems ensures that employers pay what is required to keep the systems well-funded, Bei said.
“When we set the rates as a pension fund, the county has the requirement to make the necessary contribution,” he said.
The county’s annual contribution to the pension fund has more than tripled in the past decade, to about $45 million. Including payments on roughly $550 million in pension bond debt, the total annual payment is about $90 million and rising.
The latest available study in mid-2010 on the pension system’s unfunded liability — the difference between its assets and what it will owe retirees — showed roughly $400 million remaining after the county’s issuance of a $290 pension obligation bond in August.
Recent market gains have eliminated some of that shortfall, most of which was from 2008 stock market losses, with a smaller share due to changes in salary and benefits, mortality rates and other actuarial changes.
The higher number of retirees will put additional upward pressure on the system’s unfunded liability, resulting in the likely increase in the county’s contribution rate.
Sonoma County Administrator Veronica Ferguson declined to comment on how much of an increase she expects, saying she would wait to see the results of the actuarial report in May.
“We’ve been tracking the pattern of retirees and actives over time,” she said. “We’re prepared, given where we are with a contracting work force, to look at those numbers. This was not a surprise to us.”