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Sonoma County cities face new pension squeeze

CalPERS investment change to force bigger contributions from local governments

By KEVIN McCALLUM
THE PRESS DEMOCRAT

California’s pension system lowered a key estimate of future investment returns Wednesday, a move that will drive up pension costs for cities across Sonoma County and further squeeze public services.

The board of the California Public Employees Retirement System voted 9-1 to reduce its investment return rate from 7.75 percent to 7.5 percent.

The decision will mean yet another hit to beleaguered local budgets as CalPERS jacks up pension contributions by public agencies to make up for lower investment returns.

The change will cost the state an estimated $303 million, and untold millions more for the municipalities and other local governments whose workers are covered by CalPERS retirement plans.

“This was a difficult, but important, decision for the board to make,” Rob Feckner, board president, said in a statement. “We understand the impact this will have on our employers in meeting contribution requirements.”

CalPERS is the nation’s largest public pension fund, with $233 billion in assets. It provides retirement benefits to 1.6 million public employees and their families. Teachers and some county employees, including Sonoma County, have separate pension systems.

It was the first time in a decade the fund reduced the key interest assumption, known as the discount rate. The last time it was lowered from 8.25 percent to the current 7.75 percent, where it remained throughout the recession that decimated its investments.

To soften the blow on local governments, the board directed staff to come up with a plan to spread the costs over two years.

Local officials told the board that they already are laboring under falling revenues and tight budgets.

The threat of such increases has been one of the reasons Santa Rosa has pressed for long-term pension solutions, said City Manager Kathy Millison.

“I’ve been warning about this since I arrived,” said Millison, whose city faces a $112 million unfunded liability. “We knew they were coming. We just didn’t know how much.”

Others argued that the board wasn’t going far enough.

John Bartel, Santa Rosa’s pension actuary, said he thought it would have been wiser for the board to reduce its assumption to 7.25 percent as recommended by its actuary.

“Even though that would have been painful, it would position the plans to be better funded down the road,” Bartel said.

The board’s move represents a continued pattern of refusing to face up to ballooning pension costs, said Joe Nation, a former state assemblyman representing Marin and Sonoma counties and current professor of public policy at Stanford University.

“I think it’s a step in the right direction, I just think it’s too small a step,” Nation said.

The direction to spread the increases out over two years struck Nation as “absolutely the wrong move.”

“Everything is about delay, defer and pushing costs in the future,” Nation said. “You know and I know and everyone knows that when you do that you pay more in the long run.”

He likened spreading out the increase to choosing not to make the minimum payment on a credit card, leaving the unpaid balance to accrue at a higher interest rate.

One upside for local governments is that the rate won’t take effect until July 2013, giving officials time to brace for the impact.

The board rejected a similar proposal last year, citing concern about impacts on local governments, but promised to revisit it this year.

According to CalPERS, the change will mean an increase of 1 to 2 percent of the payroll for regular employees, and 2 to 3 percent for public safety employees, who receive more generous benefits.

For Santa Rosa, based on 2010 payroll figures, that would mean a $1.3 million to $1.7 million budget hit. This year the city’s total pension costs were $26.4 million.

“That will set us back a bit, which means we’ll just have to make deeper cuts,” Millison said.

She noted, however, that the city has struck several agreements with its employee groups aimed at reining in pension costs, including establishing lower benefits for new workers and having employees pick up a greater share of the costs.

“It’s an incremental process. We’re not done yet,” she said.

City officials around Sonoma County had varying views of how significant the impact would be.

Petaluma Finance Director Bill Mushallo estimates Petaluma’s total increase at about $736,000 beginning in the 2013-14 fiscal year.

“It’s a pretty significant hit, especially to the general fund, where we’ve got tax revenues that are down,” Mushallo said. “It is a big deal.”

Sonoma City Manager Linda Kelly said the increase that could range from $80,000 to $130,000 would probably be offset by a variety of efforts the city has made to reduce its pension obligations, including outsourcing fire and emergency service to the Valley of the Moon Fire District.

Windsor finance chief Jim McAdler wasn’t terribly concerned. He estimated the town will have to contribute $138,000 more annually toward pensions as a result of the revised formula.

“CalPERS has been thinking of changing the rate for some time,” he said. “It’s something we’ve been expecting. It shouldn’t be too much of a hit, fortunately.”

City officials in Healdsburg and Rohnert Park declined to estimate the impacts. But a 2 percent figure applied to their payrolls would suggest a $275,000 increase for Rohnert Park and $190,000 increase for Healdsburg.

The change does not directly affect Sonoma County’s pension system, which is a separate entity that could choose to follow CalPERS’ lead.

Last year the county fund lowered its assumption rate from 8 percent — in existence since 2003 — to 7.75 percent. Unlike CalPERS, county employees share in the cost of changes to investment assumptions.

Starting in July, the change will require an additional yearly contribution of $7.1 million, $5.8 million of which will come from taxpayers and $1.3 million from employees.

Gary Bei, the county pension fund administrator, said the fund’s rate would be up for review this year.

Staff Writers Derek Moore, Clark Mason, Jeremy Hay and Lori A. Carter contributed to this report.

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum @pressdemocrat.com.





25 Responses to “Sonoma County cities face new pension squeeze”

  1. Tracy says:

    @Stbblebine,your following statement is false:

    “@ Retired Cop & Tracy: You’re both right. The Orange County case confirmed the 3%@50 plan and retiree medical for those who already have it.”

    The Orange County case confirmed no such thing. With only specific exceptions, retiree medical is NOT a vested right, even for retiree’s.

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  2. David Stubblebine says:

    @ Retired Cop & Tracy: You’re both right. The Orange County case confirmed the 3%@50 plan and retiree medical for those who already have it. Through contract negotiations, either can be taken away from future workers going forward.

    Thumb up 5 Thumb down 2

  3. Tracy says:

    “You really need to keep up on the current legal decisions. Orange county Sheriff’s won a decision that their 3%@50 is protected as well as their retiree medical.”

    The 3@50 is yet to be challenged and the retiree medical can be taken away at anytime. You’re not very bright or informed.

    And Tom Lynch knows what he’s talking about!

    BTW, both the PD editorial staff and the SR city manager haven’t a clue. The unfunded pension liability is 250 million!

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  4. Mr. PepperSpray PIKE says:

    RETIRED COP = “BEAR”

    Just in case you all did not notice. And speaking of that, did you see that the Sheriff of San Francisco was just sentenced to three years of probation for false imprisonment of his battered wife?

    Got anything to say about that “Bear.” Uh, I mean, “Retired Cop.”

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  5. Money Grubber says:

    And we see, once again, that “Tom Lynch” is chanting about “essential services” .. the standard LIE of government employees.

    “”As a consequence we have lost 25% of our work force through retirement without rehiring, and huge loss of essential services with dire social consequences.”"

    With a California Highway Patrol Helicopter making a recent rescue in Pt Reyes and only minutes away from Sonoma County for other rescues, why must we pay a million dollars a year for “air support” of Henry 1.. the Sonoma County Sheriff’s Helicopter?

    The roads need paving in the county far more than the local sheriff’s office needs their cherished, idolized “Henry 1.”

    Time to put “Henry 1″ out to pasture, lay off its un-necessary support crew, and use that money where it really needs to be spent.

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  6. Money Grubber says:

    Note that “Retired Cop” essentially admits that the public employee retirement pension scam is so good that his son followed in his footsteps.

    Put them all, cops included, on social security like the rest of us.

    If they don’t like it, they can go drive a truck or whatever other job they might qualify for.

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  7. Retired cop says:

    You really need to keep up on the current legal decisions. Orange county Sheriff’s won a decision that their 3%@50 is protected as well as their retiree medical. I saw this coming. My son in law will be graduating from the police academy in 2 months. He has applied to 10 agencies in the bay area hiring. He is not stupid. He sees the writing on the wall. If he gets hired before the reforms kick in, he will be set with the 3%@50 formula. If he doesnt, he will still be making about $160k a year working overtime and my investment guy will get him 14% on his defered comp and my daughters IRA. You can go after their pensions, so they will move their contributions to the private side. Most idiots leave their money in funds until they hit bottom and cry about it. With some effort, a good investment adviser will keep you in the green. I know, it isn’t what you want to hear. I know my daughter’s future security is set.

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  8. Tom Lynch says:

    @ LBR comment “@RC – I agree that current employees’ retirements should be paid for while they are working, and not by future generations.”

    That’s exactly the problem LBR, instead of the retirement benefits paid for entirely, for the year of service, like most employers (including trade union), with government we have an unsustainable system that allows unfunded retirement obligations for the year given, to be paid by the next generation with up to 30 years of principal and interest.

    For example last year with an approximate payroll of $300 Million, Sonoma County paid in about $150 Million toward retirement benefits (Social Security, Retiree medical, Pensions, Pension Obligation Bonds, 401a’s for management and elected, etc.). But in addition to the amount paid in by the County last year; Sonoma County’s retirement portfolio (managed by SCERA)only received a return of 1% on investment (that we guarantee a 7.75% return). What this means is we incurred another $150 Million in unfunded liability, with SCERA policy that we have to pay it back over twenty years at 7.75 % interest of another $150 Million.

    Last years $300 Million in salaries incurred an equal amount in debt toward unfunded pension liability of $300 Million principal and interest paid back over 20 years, on top of what was paid in approximately $150 Million toward retirement benefits, with a total of $450 Million toward retirement on $300 Million in salaries. Compare that to the average employer contribution in the private sector of 7.65% and last year the County paid in almost 20 times that of what many private sector employees receive for their retirement.

    SCERA will average this loss over a five year period (Calpers over 15 years), but for the last five years SCERA’s average rate of return is less than 1% with SCERA head Gary Bei telling me they have incurred approximately $700 Million unfunded liability in the last five years…which we have to pay back over twenty years to the tune of $1.4 Billion.

    As a consequence we have lost 25% of our work force through retirement without rehiring, and huge loss of essential services with dire social consequences. This is a debacle, a disaster, and we are doomed without solution.

    To speak of this is not anti-union, public servant or retiree…this is about math…what is the solution?

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  9. Tracy says:

    “@RC – I agree that current employees’ retirements should be paid for while they are working, and not by future generations. CalPERS has a long history in the pension business, and I trust their expertise…”.

    That is your first mistake. CalPERS is already passing the buck to the next generations by smoothing gains and losses over 15 years (industry standard is 5), and amortizing plan change costs (20 years) and large portions of the 2007-2009 market losses over 30 years.

    This is all happening in an effort to hide the true cost of the plan by maintaining artificially low contribution rates, not that they‘re low. The CalPERS board, mostly union members and union friendly democrats, is a big part of the problem.

    The CalPERS Board is more than willing to delay the recommended rate hikes because they know higher payments shrink budgets which adversely impact local unions bargaining position, hence the CalPERS Board choosing ignoring management suggestion to lower the discount rate to 7.25%, and there own consultants that are telling CalPERS they’ll be lucky to earn 6% over the next decade.

    The CalPERS Board can care less if their rate is realistic as long as the taxpayers are guaranteeing to cover the loss. So far this year (FY 2011-12, ending June 30) CalPERS is negative 2%, hasn’t earned a penny toward paying their management fees (the current 7.75% is net of administrative expenses), and hasn’t earned any of the 7.75% rate assumption. So they’re down about 10%. CalPERS will spread the loss over 15 years and increase the contribution rate, July 1 2014, to reflect the need for even more taxpayer money.

    The cost for the 3@50 plan is about 16% of payroll. Everyting else being charged in the form of contribution rates is to cover increased optional benefit costs, retroactive pension benefit costs, increased longevity, and market losses.

    Instead of the planned switch from 3@50 to 3@55, which only saves 2% of payroll, we should be looking at the 2@55 plan for new hires.

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  10. Lets be Rreasonable says:

    @RC – I agree that current employees’ retirements should be paid for while they are working, and not by future generations. CalPERS has a long history in the pension business, and I trust their expertise when it comes to estimating expected rate of return. They have made an adjustment. If returns continue to be less than expected, they will make further adjustments. Pensions are a long term liability, and a 1/4% will not make a huge difference if it is done now or a couple of years from now. The real issue here is the need to adjust the overly generous pension plans to lower the cost. Santa Rosa has made some good steps to roll back the pension plans to 1999 levels for new hires. Brown’s plan would be a good step by requiring current employees to pay half of any defined benefit pensions; it will mean that employees would take half the investment risk, and it would encourage current employees to opt for a less generous pension.

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  11. bear says:

    Has anyone ever been to Texas?

    Hideous weather and development anywhere you want it. See an office complex? Drive another two miles and see a regional shopping center. Drive another two miles and see a warehouse complex.

    Yes, let’s do this to Sonoma County and cut taxes too! Good luck with that.

    It really is not possible.

    But whine away, or move to Texas.

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  12. Reality Check says:

    LBR,

    I think predicting the future based on the past is a risky business. More so when the price of over confidence will be paid by the next generation. If anyone should pay the tab for current employee benefits it’s the current generation.

    And since actuaries for CalPers and other PERS have all been saying pretty much the same thing–it’s time to lower the return rate–I think my view is on solid ground.

    Any future projection of investment returns should include the likely inputs into a nation’s GDP. Ours are not as favorable as they once were.

    Thumb up 15 Thumb down 7

  13. Lets be Reasonable says:

    @RC – “Who among us would predict housing prices for the next 20 years based on the last 20?”
    .
    You make my point. If I wanted to guess what my house would be worth 20 years from now, I’m not going to just take one or two years worth of data; rather I would take the average over a similarly long period. 20 years ago, the median price was $233,000 in Sonoma County, and now it is $325,000, or around 2% annually.

    Thumb up 9 Thumb down 4

  14. Living in Paradise says:

    The interesting thing here is the slow almost indiscernible action by the city councils aimed at addressing this rouge wave that was seen off the financial coast 4 or 5 years ago.

    And this will not be the last wave to hit the beach of city hall. Will they be ready? Probably not, just muddle through, like always. But we can hear the sirens sounding the alarm now.

    Thumb up 20 Thumb down 6

  15. Canthisbe says:

    “Taxpayers have one ace in the hole.We can move and take our wallets with us”.

    Spectrum Locations Consultants recorded 254 California companies moved some or all of their work and jobs out of state in 2011, 26% more than in 2010 and five times as many as in 2009. According SLC President, Joe Vranich: the “top ten reasons companies are leaving California: 1) Poor rankings in surveys 2) More adversarial toward business 3) Uncontrollable public spending 4) Unfriendly business climate 5) Provable savings elsewhere 6) Most expensive business locations 7) Unfriendly legal environment for business 8) Worst regulatory burden 9) Severe tax treatment 10) Unprecedented energy costs.
    Vranich considers California the worst state in the nation to locate a business and Los Angeles is considered the worst city to start a business. Leaving Los Angeles for another surrounding county can save businesses 20% of costs. Leaving the state for Texas can save up to 40% of costs. This probably explains why California lost 120,000 jobs last year and Texas gained 130,000 jobs.

    http://www.breitbart.com/Big-Government/2012/03/13/exodus-california-tax-revenue-plunges-by-22

    Thumb up 18 Thumb down 5

  16. Mr. Pepperpray Pike says:

    I had to laugh with Grapevines on his suggestion to continue all available efforts and to expend all available funds in the never ending political charade of unifying court house square. Gotta look busy to the electorate !!! Gotta keep their minds off of the every day waste of their money.

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  17. GAJ says:

    Sorry Bear, you can’t blame Wall Street for CalPers’ underperformance.

    If I managed to miss the “crash” and my IRA has grown 50% since 2009, why can’t CalPers or similar Pension Plans do it?

    Because they have NO SKIN IN THE GAME.

    No matter how badly they read the tea leaves, the Taxpayer will make up the difference.

    The problem with the gross underfunding, primarily to the ridiculous giveaways started in California in 1999 by Governor Davis, and continued to this very day, is that it puts SUSTAINABLE pensions such as the one you have (based on your statements), in peril as well.

    In the end, the sustainable pensioners will be asked to sacrifice so support the unsustainable pensioners…mark my words.

    Taxpayers have one ace in the hole.

    We can move and take our wallets with us.

    Thumb up 27 Thumb down 15

  18. bear says:

    Let’s think about this.

    Pension funds were making the expected rate of return until deregulatory policies set loose the greedheads who gave us a deep recession.

    Nobody is prosecuting anybody for the fraud and financial BS that hurt us all. Nobody is in jail, with all their assets confiscated. But a lot of people are being foreclosed, often without proper procedure being followed.

    Say what you want about regulations, but they are there to protect the 99%. If they’re changed or removed, or if enforcement is underfunded, I hope you smell a dead rat.

    Public employees are pawns in a bigger game. The problem is not with how the pension funds were set up, but with how the 1% have scammed the economy and screwed investment returns for their own profit. Remember, they can make money both ways – market up or market down.

    The logical response is to seize the fraudulant profits of institutions and individuals who are responsible for these crimes.

    Wake up, Obama administration!

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  19. Grapevines says:

    And even though we are looking at a higher liability than before, lets ignore it and concentrate on unifying Courthouse Square so we can really foul up traffic even more.

    Thumb up 20 Thumb down 7

  20. Reality Check says:

    Who among us would predict housing prices for the next 20 years based on the last 20? I think most of us realize that the 90s and first half of the last decade were likely unrealistic, and ended in a disastrous parabolic bubble.

    But, have no fear, CalPers’ past returns are a reliable guide to the future. Never mind that the 90s saw the S&P 500 index grow at 15% per year, or that America is getting older. Fewer people will be working, and we have a huge debt that will eventually curtail government spending.

    All this points to slower growth and good reason to reduce expected returns below 7.5%, as the actuary suggested. But what does he know!

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  21. Money Grubber says:

    Most financial experts quoted in the news are in agreement that the cut in expected investment return was not large enough to reflect reality.

    Hopefully, the voters will recognize the routinely uttered LIE that public employees fully support their public pension systems via contributions.

    The taxpayers support the public pensions.

    TIME TO PUT THEM ON SOCIAL SECURITY.

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  22. Jim says:

    I’m glad to see that many of my clients will eventually pay higher taxes to fund the retirement of state workers who worked in a job that should never have existed in a department that was completely unnecessary. All while they can’t afford to save for their own retirement. Those who may be able to save a little for themselves have NO guarantee of any income stream like the unnecessary government workers.

    And if the Calpers returns over the last 20 years were so wonderful, why is there a $500 BILLION unfunded pension liability? Maybe benefits were OVER PROMISED.

    Thumb up 32 Thumb down 13

  23. Lets be Reasonable says:

    Since Pensions are long-term liabilities, it makes sense to look at long-term rate of returns. 7.5% seems reasonable considering what they have achieved over the last 20 years…
    .
    “Over the past 20 years through June 30, 2011, CalPERS has earned an average annual investment return of 8.4 percent in excess of the pension fund’s actuarial rate of return assumption of 7.75 percent needed to pay long-term benefits. The Fund has achieved this rate by investing in a diversified portfolio with an acceptable level of risk. This historical average includes steep losses experienced in 2008-09.”
    .
    http://www.calpersresponds.com/issues.php/stanford-pension-study

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  24. John Lennon says:

    Its a Ponzi scheme and it will fail. Its not if but, when.

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  25. GAJ says:

    This whole thing is a slow motion train wreck.

    At least in Sonoma County the employees are carrying their fair share of increases…(shhhh, not really, but don’t wake up the brain dead taxpayer).

    Unlike CalPERS, county employees share in the cost of changes to investment assumptions.

    “Starting in July, the change will require an additional yearly contribution of $7.1 million, $5.8 million of which will come from taxpayers and $1.3 million from employees.”

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