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WatchSonoma Watch

State, county pension problems may be getting worse

A year ago last month, Sonoma County issued $289 million in additional pension obligation bonds as a way to manage runaway retirement costs. Bonds can be a helpful tool. But they come at a risk. (It’s a little like addressing one’s personal debt by getting a new credit card. You better hope your earnings on the new money you borrow do better than the interest you owe.)

For  the Sonoma County Employee Retirement Association, it needs to hit its target of achieving an average 7.75 percent annual return on its investments – over the next 20 years.

So how did the county do during its first full calendar year? It wasn’t even close.

According to records recently released by SCERA, the association achieved a return for 2011 of 1 percent, missing its mark by 6.75 percent.

But SCERA is not alone. The California Public Employees Retirement System, the largest public employee retirement system in the state, reported on Monday that it, too, earned a return of just 1.1 percent on its investments in 2011. CalPERS also is targeting a 7.75 percent average annual return on its investments.

CalSTRS, the retirement system for state teachers and community college instructors, reported today it had earned 2.3 percent on its investments in 2011.

If these retirement funds do not achieve their targets, the state’s current pension fund liability of $240 billion will get that much worse.

The same is true of Sonoma County’s liability, which currently stands at $249 million. SCERA’s overall average return over the past 10 years? 4.9 percent.

- Paul Gullixson





31 Responses to “State, county pension problems may be getting worse”

  1. RAW says:

    From what I have read in the PD, this is not a problem. SMART is way more expensive and will require hundreds of millions in tax payer subsidies. The pension system is the same thing. More taxes for SMART is a good thing and more taxes for pensions is a good thing too. 2/3, a super majority agree with this. I don’t know where you others are coming from. There is a simple fix. Raise taxes, subsidize SMART and pensions and be done with it. Done deal. That was easy.

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  2. Lets be Reasonable says:

    @RC – CalPERS calculates its return projections based on historical returns over a long period. Required contributions are then calculated based on actuarial data. The period where the City stopped paying in was after the .COM bubble when returns far exceeded projections and the fund was superfunded. Employees still paid their portion. Some non-CalPERS agencies elect not to pay the full amount even when they are not fully funded. Some experts say that 80% funded is enough, but many agencies are not even doing that. The solution is not to get rid of defined benefit retirements though, the solution is to require by law that agencies keep their funds at least to some required level (80%?). Defined contribution puts the full risk burden on the individual. One employee invests poorly, and are eating cat food during retirement, while another does well and lives on caviar. Even if the two employees invest equally well, disbursement after retirement becomes an issue – do you plan to live to 100, or do you spend it all in 10 years? Remember, many public employees do not get social security (a defined benefit plan, by the way), and this retirement is all they will get.

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  3. Reality Check says:

    I have no difficulty with the public promising its employees a defined retirement benefit provided the costs are known upfront and fully funded during an employee’s working career.

    Trouble is, how realistic is that? Not very, based on the behavior of who we elect. As LBR has pointed out, local govts cease adding money to the pot when it is (temporarily) unnecessary based on generous return projections. When it becomes necessary is also when the economy has gone sour and govt revenue has declined.

    It’s time to transition to a defined contribution approach, in which govt is mandated to contribute a known amount each and every year. The public should understand the extent of its obligations and future generations should not be burdened with the failure of this generation to behave prudently.

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  4. Stephen hann says:

    The pension debacle has only one viable solution. Declare bankruptcy, void all public employee pensions, and start over with a system that is sustainable. I know, our police and fire people have a hard and dangerous job, but so do people who repair and install roofs. How many roofers are retiring at age 50 with 100k annual pension plus health care?

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  5. Lets be Reasonable says:

    @Tom,
    .
    I would rather remain anonymous, but I would read it if you had a link. I’m skeptical at the outset, however, since he is choosing a 4 year period to look at, which starts at the top of the real estate boom and before the market crash. He is deliberately choosing a period that will look bad, which inflates what he claims the unfunded liability is. Thus, the 50-50 calculation gets thrown off. You also need to separate out safety from non-safety, since the yearly costs are dramatically different.
    .
    When I mentioned the 50-50 cost share as a solution, I was thinking more in terms of the City of Santa Rosa. I don’t know the exact current figures, but I believe for miscellaneous employees, the annual cost to fund the CalPERS retirement is around 23% of salary, give or take. Currently, employees pay 8%, and on top of that, they gave up 8% of salary to get the 3% at 60 benefit, so they are effectively paying more than 50% already. In reality, the average cost of public retirement is not historically high, but it is rising at an unsustainable rate. If miscellaneous employees were given back their unpaid furlough, and traded that into money towards their pension, they would be at around 12%, which would be 50% even without the 8% loss of salary. Since City employees do not pay into SS, I think that this 50-50 cost share would not be too burdensome. Once there, employees would have an incentive to bargain for a lower retirement plan, rather than see their deductions increase as the cost of retirement increases. A 50-50 cost share means that employees and the City share equally in the investment risk, while still keeping professional investors doing the investing.
    .
    For safety employees, who pay a much lower percent of their retirement costs, it might be a harder sell.

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  6. Tom Lynch says:

    Hi LBR,

    Below is a quote from a letter introducing a very well researched piece of Ken Churchill’s, regarding the debacle Sonoma County’s pension system has become.

    He notes a 50-50 match would be about 30-40% each per $1.00 of salary. That’s not including retiree medical (7.5%) nor Social Security (7.65%). Would you be willing to pay 50% of your pay toward your retirement benefit? What about the shortfall for past service?

    If you send me an e-mail at tdlynch57@gmail.com I will send you a copy of Ken’s excellent report (and anyone else following these comments for that matter :).

    L.

    Tom

    From Ken Churchill:

    “Attachment 2 that shows how much the County and employees should have been contributing to the pension fund over the past decade if we were fully funding the plan each year by putting money into the fund directly each year to cover the investment shortfall . As you can see, the County contribution should be around 50-60% of payroll if the employees are contributing 12%. If both were sharing the cost, each should be putting in 30–40 % of payroll into the fund. Going forward, the contributions should be even higher to make up for the $390 million in unfunded liability we currently have.

    The big question is where is that money going to come from? I think it needs to come from benefit reductions that will take the current unfunded liability to zero.

    The big shocker is the cost of not making the assumed rate of return each year. In 2011 we fell $165 million short since the pension fund only made a 1% return on their $1.8 billion portfolio. Over the past 4 years 2008 to 2011 the investments have been off the assumed rate of return by $600 million for an average of $150 million per year.”

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  7. Lets be Rreasonable says:

    Tom, it is you that did not read mine correctly. I said that you gave the 5 year figure, which is what I was complaining about, since you cherry-picked the low value. My comment at the end was directed more at the author. Sorry that was confusing.
    .
    I believe that pensions need to be changed, but I disagree that we should abandon defined benefit plans. Defined contribution plans cost more for the same benefit:
    .
    http://www.cbpp.org/cms/index.cfm?fa=view&id=3492
    .
    The above article is an excellent one on ways to solve the public pension problem.
    .
    Personally, I think that we should move towards a 50-50 cost share for current employees. New employees should have the same sustainable plans that were the norm in the 1990s. I also think that current employees should also go to those same plans for the remainder of their tenure. That will need to be negotiated, but there would be an incentive if there was a 50-50 cost share; lower benefits equals more take home pay. And of course, anything that leads to “spiking” should be eliminated.

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  8. Tom Lynch says:

    @ LBR

    I enjoy many of your thoughtful comments; but you need to be more mindful of mine. Note I also show the five year average return of SCERA:

    “The “average return” for Sonoma County’s pension portfolio the last five years; is .9%!! ”

    And Quote SCERA head Gary Bei’s comment to my question:

    “Gary Bei, regarding the five year return; he said,”The UAAL ended December 31, 2010 at $248M (see page 64 of the CAFR at http://www.scretire.com/pdf/documents/annrpt10.pdf ). Excluding the reduction in the UAAL from the 2010 POB, the UAAL increase over the past five years was $462M.”

    LBR, if one adds the 2010 POB of $291 Million on top of the $462 Million loss…you get $750 Million loss or $150 Million/year loss for five years. That’s more than 50% the total salary cost for Sonoma County.

    The next generation of County workers and taxpayers are on the hook for this.

    I feel the more accurate measure whether or not the pension system is sustainable isn’t an average of the 20 year return; but how much the increase in unfunded liability has increased these last twelve years.

    Question to LBR, if it meant forsaking almost all the government services taxpayers received for generations, in order to honor your unfunded retirement, would you allow that to happen?

    I think you would say no…we need reforms…and to me the only solution is a generous defined contribution system.

    L.

    Tom

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  9. Union Guy says:

    Tom,
    Please remember, the $1.7 Billion is the total input from from employer and employee. Over that same 20 years, the county budget, with no increase, will cover over $22 Billion. $1.7 Billion is a lot of money, it needs to be addressed, and it is not the end of the world.

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  10. Lets be Reasonable says:

    @Tom – you can get almost any number you want to prove your point by choosing your time frame when it comes to investments. You gave the 5 year figure, but the 3 year figure is 10.7% (meaning they must have received an average of around 15% per year for the first two of those years) and the 20 year figure is 7.3%.
    .
    Yes, public pensions need to be modified, but looking at a one-year return is meaningless.

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  11. Joseph says:

    you have to laugh at this, otherwise you are`going to cry.

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  12. Tom Lynch says:

    @ Juvenile

    “What is it about “average” that Gullixson doesn’t get?”

    Juvenile, you obviously are one of those who created and continue to try to justify the debacle we’re in with respect to massive unfunded pension obligations.

    The “average return” for Sonoma County’s pension portfolio the last five years; is .9%!! And the taxpayers of Sonoma County AND younger cops, firemen and County workers are on the hook to make up the remaining 6.85% “target” rate of return.

    In an e-mail response yesterday from a couple questions I asked the most honorable and honest head of SCERA, Gary Bei, regarding the five year return; he said,”The UAAL ended December 31, 2010 at $248M (see page 64 of the CAFR at http://www.scretire.com/pdf/documents/annrpt10.pdf ). Excluding the reduction in the UAAL from the 2010 POB, the UAAL increase over the past five years was $462M. The largest single factor in that increase is the 2008 market downturn. The change in the UAAL for 2011 is not computed yet, but one component of the change is the recognition of the MSR reserve for 2011 estimated at $112M. ”

    What this means is if you add the $291 Million of Aug,2010 Pension Obligation Bond, and the five year $462 Million Unfunded Liability, and the $112 Million addition to the UL…you’re looking at over $850 Million increase in unfunded pension liability over the last five years.

    Good news…we don’t have to pay for this today…our kids can pay for it over the next 20 years at the SCERA target rate of return of 7.75%…$1.7 Billion principle and interest!!!

    Imagine the social consequences Juvenile, the loss of jobs for young cops, firefighters, infrastructure, mental health, social services, education…essential services local government used to be able to provide for generations.

    To raise these issues is not against unions or retirees or public servants; I want more of all of the above. This is about math…and much of the increased cost is to the upper tier; not the rank and file line workers.

    What’s the solution?

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  13. John says:

    @ reality check – you link a good article but I think this one is clearer and very well written. Important to note is the 1.1% is only a partial year report number. The full year number doesn’t come out until June. It’s the difference between the fiscal year and the calendar year. Enjoy some complete news:

    http://www.sacbee.com/2012/01/24/4209607/calpers-reports-just-small-gain.html

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  14. Dead Fish says:

    Here comes the financial freight train. We need to prepare for a catastrophic wreck on main street or have a glass of wine as the train passes.

    Regardless of the past politicians and union leaders who got us into this mess it now the responsibility of the current Board of Supervisors. This is a serious problem that has realistic practical solutions. However to fix the problem the taxpayers need leadership which is what we don’t have. The issue is not how to bring about a technical correction but to bring about a correction in the political will of the politicians. If the politicians follow their past brothers and sisters they will BS until it the sky is falling and the tsunami has landed and will say they is no alternative but to raise sales taxes, parcel taxes and any tax or fee they can create. This is what the unions want. We will suffer all the ramifications of the lack of leadership and decision-making…crime increases, infrastructure deteriorates further, empty business buildings, no charitable funding, a further decline in education, poor public and safety services, and a depressive quality of life. A suggestion to the supervisors is to truly face the reality and use their intelligence to find the root causes of the financial problem and solve it. The quality of northcoast life defends on their shoulders. The reason why they don’t want to venture into solving the problem is because they are afraid of their image and political career.

    My suggestion is tell the illegal immigration crowd the party is over and start heading home. This will open more jobs and lodging for tax payers, elevate education, reduce crime and traffic accidents, lower insurance rates, open for healthcare services to taxpayers and so on. This would save hundreds of millions dollars a year. A second suggestion would be to offer the public safety unions(fire,police, emergency) the opportunity to self correct the unfunded liabilities issue. This will be a radical change for this group of people but critical to welfare of the entire county not just 4-5% of the population. If not its the supervisors duty to bring down the hammer. 95% of the taxpaying public should have to suffer through over taxation so the union can live fat. A third suggestion is the terminate all service employee union contracts and let the county hire and fire as needed. These three logical decisions will help retain and advance the quality of life in Sonoma County and balance the budget. It will furthermore bring back a sense of trust of the taxpayers instead of the sense of mistrust and corruption that exists today. Should the unions go the attack the sups should move to bankruptcy .

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  15. Iron Lady says:

    So if my math is correct, we borrowed $289m with a goal of making 7.75% return and came in 6.65% below target, thereby adding $19.5 million in interest payments on the bonds to the already unsustainable pension obligations?

    Who makes this money on the bond? Are we going to blame the “greedy” bondholders for this mess, or are we going to finally hold the delusional politicians and unions accountable for their unsustainable practices?

    Its just your financial future and all government services that are at stake.

    First step, eliminate public pensions from those negotiating public pensions – clear conflict of interest.

    Second step: convert all pensions to defined contribution, not defined benefit. Then we are all working together and no one group is shouldering all the risk.

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  16. Juvenal says:

    What is it about “average” that Gullixson doesn’t get?

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  17. Reality Check says:

    LA Times:

    “CalPERS earns 1.1% on investments in 2011″

    http://www.latimes.com/business/la-fi-calpers-returns-20120124,0,3437821.story

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  18. Bob Sacomanno says:

    “The fact is they will wake up when they file bankruptcy”

    You, sir are brilliant. Filing bankruptcy to correct bad financial decisions? That’s what wrong with this country.

    It’s amazing that people only recently caught on to the public pension issue. Do we have more financial geniuses today than we did a decade ago, or does going broke just make people smarter with money? All of a sudden, everyone has a clear idea of the sustainability of pensions? Well, I don’t trust the morons who claim pensions are unsustainable any more than those who struck the pension deals in the first place. It seems that since everyone’s nice little home-equity funded retirement was hijacked by Wall St, everyone’s a bit envious of the public employees. If home values come back to their original values, you probably won’t hear that cute little buzzword “sustainability” anymore.

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  19. Folloer says:

    @Fed Up
    When we end the corrupt practice of Unions staffing & bankrolling the re-election campaigns of the very people responsible for negotiating Union contracts on OUR behalf.
    BAN PUBLIC EMPLOYEE UNIONS!
    Government workers DO NOT NEED Union protection.
    The never did & never will.

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  20. John says:

    @ Paul – Where are you getting your information? I’ve only been able to find these from the CalPERS site:

    http://www.calpers.ca.gov/eip-docs/about/board-cal-agenda/agendas/invest/201106/item08a-01.pdf

    http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2011/july/fy-2010-11-returns.xml

    Neither of these is a 1.1% return. Even if your claim is true the second link shows a return far greater than 7.75% for the previous period which is why they use “Long term” averages.

    Please provide a link to the information you use in your “inside opinion” for clarification. Thanks

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  21. GAJ says:

    Where are all the “everything is just fine and the pensions are sustainable” folks?

    If it looks like a duck, walks like a duck, quacks like a duck it is NOT a golden goose!

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  22. Fed Up says:

    First, elected public officials must be removed from public pension eligibility. That would bring some objectivity to the decision making. Now many of them have a vested interest in the system because they will receive pension benefits.

    Public pensions in California have become unaffordable. When will the public agencies wake up and end these pensions and high salaries paid to public employees?

    The fact is they will wake up when they file bankruptcy and end the gravy train.

    Politicans are slow learners.

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  23. Reality Check says:

    Well said. How this plays out if investment returns don’t repeat the go-go years of the 90s is not in doubt. And I’ve yet to hear a coherent argument why county officials believe they will, other than a version of history repeats.

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  24. Follower says:

    This is like being mugged by a little kid.
    We know we can push the little _ _ _ aside & go on our merry way but instead we recoil in fear and hand over our wallets.

    BAN PUBLIC EMPLOYEE UNIONS!

    STOP THE MUGGING!

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  25. jsakowicz says:

    Excellent editorial. Up here in Mendocino County, I’ll be following many of the same issues more closely than ever before as a member of our Retirement Board.

    Link:http://www.ukiahdailyjournal.com/ci_19804903?source=most_viewed

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  26. truth in news says:

    Maybe instead of placing blame on these people doing their jobs, we should look at the people using the public funds in other areas. Like the guy who uses police and judicial services to have a place to stay by being arrested every weekend. Or the people who “just can’t get a job” and are living on public assistance. These folks bring nothing to the table yet demand a full plate. Our police and fire deserve their retirements. These others deserve a boot in the keester.

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  27. John Bly says:

    I don’t think the fox guarding the hen house works too well. We need to immediately cut guaranteed benefits to guaranteed contributions for existing workers receiving public pensions and medical benefits. Otherwise, we will go broke.

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  28. Cranky says:

    Planning based upon any projected long-term real return rate greater than around 4.3%, amounts to wishful thinking.

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  29. Money Grubber says:

    Every government bureaucrat who had any connection to contractually obligating the taxpayers to this mess should be prosecuted for financial fraud.

    It is financial fraud.

    They knew that government could not afford those public pensions. The proof ? THEY ENSURED THAT IF THE INVESTMENT RATES OF RETURN FAILED… THAT THE TAXPAYERS WERE REQUIRED TO PAY.

    The government criminals knew what they were doing.

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  30. Money Grubber says:

    FACT: The taxpayers will be coerced into funding all those public pensions.

    And you notice that you have NOT heard a single apology from the local or state government for dragging the taxpayers into the liability? NOT one apology.

    The latest study said the various public pensions are UNDER funded by $ 500 BILLION dollars.

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