Amortization schedules. Defined contribution plans. Actuarial tables.
Unless you’ve got a degree in economics, the words alone are enough to make the head spin. Unfortunately, these terms and others are likely to come up a lot in the near future, as pensions for public employees continue to be the hot button issue at the county and state level.
It should come as a surprise to no one that the Santa Barbara County Employees Retirement System (SBCERS) is in dire straits. For years, officials and pundits have warned that the county can’t afford to live up to the promises it’s made to its employees.
Radio talk show host Andy Caldwell, also executive director of the Coalition of Labor, Agriculture, and Business (COLAB) in Santa Barbara County, calls the result a “doomsday scenario.”
Michael Brown, who tackled the problem as the county’s top executive officer from 1996 to 2010 and is now with COLAB, agreed: “It’s not sustainable the way it is. The Board of Supervisors is going to need to hunker down and say county government exists for the benefit of the people which it serves, not the employees or other interest groups.”
So how did Santa Barbara County get to this point?
For starters, the pension system is funded three ways: First, employees have money deducted from every paycheck. Second, the county puts in its share of money. That’s the employer’s contribution. Third, the combined money is invested in the stock market. The total is what’s in the pot at retirement.
The target for the county is for employees to receive 80 percent of their final salary if they retire at age 65 with 30 years of service. To find out if there’s going to be enough money in the pile, actuaries—economic forecasters—analyze
financial data every year and report to the county’s retirement board, members of which are responsible for making sure the fund is sound.
“If the actuaries say you’re low, they have to send a big bill to the county each year, and that’s what’s causing all the friction here,” Brown said.
The actuaries gaze into their crystal balls and calculate interest the fund will receive over long periods of time—three decades or more. To get technical, their resulting numbers are referred to as the interest assumption rate.
For years, Santa Barbara County anticipated a return of 8.16 percent on its investments—not a bad projection during the ’80s and ’90s, when it hit the mark and then some. Then the dot-com and housing bubbles burst, unleashing the “perfect storm” that sent the retirement ship off course. Suddenly, the county couldn’t expect to make the kind of long-term profits it expected.
In response, actuaries recommended the retirement board lower its expected rates to 7.25 percent. Instead, the board lowered the rate to a more optimistic 7.75 percent. The move raised the unfunded liability. That’s money the county is on the hook for, but doesn’t have, to fund the pension system. To keep the pensions funded at a reasonable level, the county has had to borrow money. Lots of money. Some estimates have the unfunded portion at more than $1 billion. Like a mortgage on a home, the county has 17 years to pay it back.
What all this means for 2011-2012 is a $21 million increase in costs to the county’s general fund, a number that will continue skyward for years to come under the current system, according to actuarial data.
“The [retirement] fund lost 40 percent or more during the stock market crash,” Caldwell summed up. “And it’s going to take decades for them to recoup those losses.”
Suffering from pension envy?
The issue at the heart of the debate involves the type of benefits public employees receive. Most counties in California, including Santa Barbara County, have what’s called a defined benefit pension plan. If public employees meet all the qualifications for retirement—age, time of service, and salary level—they’re guaranteed a percent of their highest income, no matter what, until death.
Most of the rest of society operates under defined contribution plans. Under these plans, employees still get a pension, but it’s tied primarily to stock market performance. Under this system, employees invest a certain percent of their paycheck into a 401k—made up of bonds, stocks, and mutual funds—and their employer matches the amount or contributes a set percentage to the account. Hypothetically, the investment grows over time, and hopefully, if you’ve played your cards right, there’s a fat wad of cash waiting for you when you retire.
According to former Santa Barbara County Supervisor Mike Stoker, the deal public employees are getting far exceeds the rest of the workforce, and it’s time for the county Board of Supervisors to level the playing field.
“Defined benefit plans were abolished by the private sector 40 years ago because every actuarial table showed those respective companies and corporations that if they continued to have that kind of pension plan, they’d go bankrupt,” Stoker said. “Basically [county] government is bankrupt. If this was a private corporation, they’d probably be going into court tomorrow and filing the papers.”
For county employees, the advantage of the defined benefit lies in building up a retirement fund with less risk. With its financial expertise, the Retirement Board invests large sums of employees’ money on their behalf, saving investors money on fees.
According to Joe Armendariz, executive director of the Santa Barbara County Taxpayers Association, there’s risk with any investment, and mitigating that risk shouldn’t be the taxpayers’ responsibility. He’s advocating for a transition to a defined contribution plan for all public employees.
“That contribution should be split between employee and the employer,” Armendariz said. “Then you empower the employee to work with their benefits director to direct those funds into a retirement plan or investment plan that makes sense for them. That’s how people in the private sector do it every day.”
According to Caldwell, average career county employees can expect a pension fund worth about $1 to $2 million at retirement. Other critics of SBCERS have alleged that some county employees actually receive more annual pay after their retirement than they ever did while working. Members of the Taxpayers Association like to point out the average cost of a county employee, which has risen from $91,000 in 2007 to $129,000 in 2011.
But hold on just a second there, Charlie.
According to Darryl Scheck, a county retirement board trustee who represents the county’s general workers (rank and file county employees and service personnel), the reported cost is a misconception. It includes management, he said, who make a lot more money and receive more generous benefits than most county workers.
In fact, Scheck said, the average general member’s pension is less than $25,000 a year.
“It’s unfair that particular general member employees have been painted as scapegoats in this funding crisis,” Scheck said. “The reality is there’s a lot of players here who are at fault, and the whole financial system had its issues, probably from the top down.”
While Scheck admitted there are abuses to the system, the playing field is already level for most employees, he said.
“Unfortunately, there’s a certain degree of pension envy,” Scheck said. “I can’t blame people for being somewhat envious, particularly if they’ve had their retirement stripped away from them in the private sector, but it doesn’t mean that what the private sector did was necessarily the right thing.”
Reform’s the word
Regardless of what numbers are used, it’s safe to say a major portion of the county budget is tied up in paying its pensions. For 2011-12, the county is expected to spend a third of its general fund on retirement benefits alone.
According to the County’s Executive Office, $105 million will be spent in total pensions this year—not including Social Security. That’s up from $90 million last year.
What that means to those of us who aren’t public employees is there’s less money for the things government was created to do. The average person can expect fee increases for services and cutbacks to county programs.
“Taxpayers in this county have to understand when they call 9-1-1, they may not get the same response they’ve gotten in the past, and that’s everybody’s problem,” said Tobe Plough, vice president of the Santa Barbara County Taxpayers Association. “I don’t care what your political stripe is or what your interest is. We’re all in this together.”
Former County CEO Brown—who, it should be noted here, receives a hefty pension from the county himself—painted a grimmer picture of what can be expected.
“When you call a sheriff, it’s going to take longer to get there,” Brown said. “You’re going to have less streets paved, you’re going to have more mentally ill people on the street without treatment, you’re going to have less people to prosecute criminals. It’s a serious thing.”
A cut to the general fund budget would mostly impact public safety departments, Caldwell said, including probation, the county jail, and the district attorney and public defender’s offices.
While most players agree that some degree of pension reform is necessary to maintain service levels, there’s little the county can do with its current workforce. Once employees are “vested” in the system—when they’ve met all of the requirements to receive a pension—their retirement benefits can’t be changed. That’s the law.
Santa Barbara County is also a ’37 Act County, meaning its system is outlined by specific formulas put forth in the County Employees Retirement Law of 1937.
Currently, general members have a 2 percent benefit beginning at age 57, maxing out at 2.62 percent at age 62. The percentage is multiplied by the number of years of service. In other words, an employee with 30 years of service at age 57 would receive 60 percent of his or her salary, and so on.
Safety workers, those who typically carry a gun to work or otherwise face peril on the job, have different levels of benefits. Fire and probation workers get 3 percent at age 55, while Sheriff’s Department employees get 3 percent beginning at age 50.
Those levels were negotiated during happier times, financially speaking, and there’s no going back—at least for current employees. According to Stoker, if there’s any silver lining to the recession, it’s that it’s put the issue of pension reform on the table. He doesn’t blame unions for trying to get the most for their members. But he did say that county workers, like the rest of society, are going to have to tighten their belts.
“Public employees, when you take the salary, the benefits, and the pensions, should really get no more or less than their counterparts in the private sector,” Stoker said. “Unless we start moving in that direction, I guarantee there is no equation that provides for the long-term solvency of government to exist as we know it.”
Legally, the county has few options when it comes to existing workers. It can eliminate employer offsets (money for benefits paid by the county that would have been paid by the employee), performance-based lump sum payments, and the ability for employees to convert vacation time into wages.
Those are all recommendations put forth by the Santa Barbara County Retirement Program Alternatives Advisory Commission (try saying that three times fast), tasked by the Board of Supervisors in 2010 with finding other benefit options.
After almost a year of study, the commission unveiled its findings to the board on Feb. 15. Among the recommendations was a two-tier system for newer county employees, with scaled back benefits and higher age requirements.
(For numbers geeks, the board will be looking at reducing rates to 1.62 percent at age 65 or 2 percent at age 61 for general members, and 2 percent at age 50 for all safety members.)
The recommendations include a 2.5 percent defined contribution. However, who will pay the defined contribution hasn’t been defined yet.
How much difference does it make?
Many of the proposed changes will have to go through the collective bargaining process with unions. As could be expected, such groups are lining up against a reduction in benefits.
According to Scheck, however, unions could be open to switching over to a defined contribution plan, once an employee reaches a certain salary level, or moving back to a full-rate system, contributing more to investments with each paycheck.
“People need to be flexible on all sides of the equation,” Scheck said. “I think it’s going to come down to everybody doing their best to figure out what’s going to work for the entire system.”
Realistically, even if pension reform does happen this year, it won’t make much of a difference for about 20 years, until current employees are gradually replaced. According to actuarial projections, even if the cheapest options are adopted, the cost of pensions will continue rising until 2014, hitting a peak at 43 percent of payroll.
Plus, Brown recalled, the county has had a two-tiered system before, in the 1990s.
“It was horrible,” he said. “As more and more people are hired into the second tier, what happens? Huge irritations, complaining, morale issues, jealousy, hurt feelings. The longer it goes on, the worse it gets.”
Years down the road, Brown said, when a majority of workers are in the second tier and become politically significant, they’ll ultimately undo any changes.
“What’s going to be their key issue?” Brown asked. “It’s going to be eliminating tier two. It’s already happened once.”
Layoffs are seemingly the last thing anyone wants, with the potential of dire consequences for unions, who would lose membership, and taxpayers, who could lose services. So the dilemma for the retirement board is deciding how far to cut benefits, if at all, while still staying competitive with other counties.
Retirement board trustee Scheck, who concedes some benefits are probably too high and difficult to maintain, said a cap on benefits should be on the table, as should be eliminating last-minute bonuses or raises—known as “pension spiking.”
Scheck said investment returns have improved 17 percent from 2010, and he hopes the recovery will continue. The critical determination on layoffs, he said, will occur when the county’s contracts with the Service Employees International Union expire in June.
“I think everybody recognizes that times are tough and there may be certain sacrifices that people have to make,” Scheck said. “But it’s a little premature because we don’t know what organized labor’s going to do with regards to working with the county on their contracts.”
If unions don’t agree to sit down talks, layoffs are a sure thing, Armendariz warned—as many as 800 to 1,000 of them. A disproportionate number, he said, would come from public safety, where 60 percent of the county’s general fund money is invested. But if pension benefits are reduced, Armendariz said he’s not worried about an exodus of county employees.
“In this economy, with 12.4 percent unemployment, I don’t know where they’re going to go,” he said. “Working for the government is still pretty good job security.”
Contact Staff Writer Jeremy Thomas at jthomas@santamariasun.com.
This article appears in Feb 24 – Mar 3, 2011.