News Column

O.C. Grand jury finds $3.3 billion retirement hole

July 6, 2014

By Teri Sforza, The Orange County Register

July 06--So let's start with the bracing news: Orange County cities have promised their workers more than $3.3 billion in retirement benefits that they do not have.

But smile in the face of danger: Thanks to unpleasant prodding from CalPERS, they'll be painfully paying down that debt in coming years. It will hurt -- likely impacting programs for Joe Citizen -- but it should not cripple any bergs in O.C. (though the same obviously can't be said for the likes of Stockton, San Bernardino or Vallejo, which are either in or teetering on the edge of bankruptcy, thanks largely to retirement obligations).

This latest in local public pension number-crunching comes courtesy of the Orange County grand jury, which examined unfunded liabilities and urged greater transparency in a recent report.

"The 2013-2014 Grand Jury is aware that there is a political element to any discussion of unfunded pension liabilities," it said up front. "Unions may view the problem as being exaggerated as a means to weaken the power of public employee unions and strip hard-won benefits and influence future negotiations. Others are concerned with the affordability of pensions that many people describe as 'generous.'" (We at The Watchdog cop to that last part).

"The public commitment to addressing the issues in a timely manner and accepting some pain now and not pushing the issues off to the future must be in place," the grand jury continued in a slightly-scolding tone. "If unfunded pension liabilities are not addressed, cities could reach a crisis where outcomes are painful enough that they affect the quality of life in Orange County."

Big picture:

--Orange County cities have promised workers $10.45 billion in retirement benefits.

--They have set aside $7.13 billion to pay these benefits.

--That, unfortunately, leaves them the aforementioned $3.32 billion short.

--On average, O.C. cities have just 68.2 percent of the money they'll need stashed away -- far less than the 80 percent figure many strive for (though some experts say even 80 percent isn't good enough).

--The most underfunded city is Costa Mesa, at just 61.9 percent, followed closely by Newport Beach (62.2 percent), Garden Grove (65.8 percent) and Huntington Beach (66 percent).

--The most well-funded cities are Laguna Niguel, Laguna Woods, Dana Point, Lake Forest and Aliso Viejo, all at 77.2 percent.

--For a great many, what they owe exceeds what they spend in an entire year; for some, it exceeds what they spend in two years.

Why should you care? These retirement benefits are guaranteed. If there's not enough money in the pot, California taxpayers must make up the difference.

"Money spent by OC cities to deal with unfunded pension obligations necessarily comes at the expense of other services cities provide to their residents," the grand jury wrote. "Catch up contributions to amortize these unfunded liabilities can be a significant expenditure in a city's budget, and the growth and unpredictability of these unfunded liabilities make it difficult to budget for future years.

"Orange County cities made painful cuts in services to their residents in response to the 2008 Great Recession and would like to restore these services as the economy recovers," it continued. "However, restoration of services will be delayed or even further reduced in many cities until unfunded liabilities are dealt with."

FUN WITH MATH

Now, measuring the depth of pension holes is as much art as science. How to compute the value of current investments -- by fair market value, or by egghead actuarial value? And how much interest do you expect to earn on those investments each year -- as much as 7.5 percent, as little as 5 percent? How long do you expect people to live?

The answers to those questions grow or shrink the hole. So it's a bit like gazing into a crystal ball.

Of course, what counts right now is how the California Public Employees Retirement System answers these questions. It is Pension Czar for 33 of O.C.'s 34 cities, and after some extremely optimistic assumptions more than a decade ago (Everything's going great and always will! Give better retirement benefits to your workers -- it'll cost nearly nothing!) CalPERS has gone all Grinch.

It lowered the expected rate of return on investments (which deepens the hole). It's going to increase expected lifespans for retirees (which deepens the hole). It's using market rather than actuarial value for investments (which deepens the hole).

If you just use actuarial (rather than market) value for investments, the hole for O.C. cities instantly shrinks $1.4 billion! the grand jury noted. Down to $1.9 billion, from the aforementioned $3.3 billion!

But enough daydreaming. The economic recovery has indeed translated into revenue increases for cities -- but those increases will likely be consumed playing catch-up on unfunded pension liabilities. "For example, one city's internal budget shows pension contributions ramping up from 8 percent to 12 percent of their General Fund and remaining there for several years and then ramping back down to 8 percent," the grand jury wrote.

BEWARE

Public workers are in no way insulated from this pain. They're kicking in more for their retirements, just as cities are, but one popular move may backfire on Joe Public.

To ease the blow, many public agencies are offsetting newly-required worker contributions with salary hikes. Which can make the picture worse.

"(T)he city of Garden Grove decided to offset an increase of 3 percent in public safety employee pension contributions with a 3 percent increase in salary," the grand jury noted. "In some ways this looks like a very tempting zero-sum game; the new rules are followed, and the city's budget and employee's take home pay are essentially unaffected.

"The catch is that the employee will now have a base salary at retirement 3 percent higher than the pension system had been assuming in predicting its pension payout to that employee. This increased pension payment will be made for the remainder of that employee's life, i.e., a new unfunded pension liability has been created," it warned.

ACTION

None of this is news to public agencies, which are doing all sorts of hat dances to make things work. One of the most interesting might be in Irvine.

A year ago, Irvine adopted an "unprecedented plan to aggressively pay down" almost all of its unfunded liability in 10 years. To wit: It's borrowing from a special fund set aside for infrastructure rehabilitation, and has already kicked in $13 million toward a $141.5 million unfunded liability.

This results in a virtuous cycle of savings. The early payoff will save Irvine some $33 million, which will be put back into the community, Mayor Steven S. Choi said in a prepared statement.

Of course, Irvine is one of the more fiscally comfortable cities in California, known for jealously guarding its infrastructure (and thus having an infrastructure fund of $51 million in cash); many cities can only dream about that sort of cushion.

Anaheim, O.C.'s largest city (not coincidentally with its largest unfunded liability at $612 million), is already making way on the transparency thing. Beginning with the 2014-15 budget, Anaheim's five-year plan for its general fund calls out expected increases for salaries and benefits, including CalPERS increases due to assumption changes and expected medical cost increases, officials said.

The grand jury admittedly didn't address the other elephant in the room -- promises to pay for retiree medical care, "an issue which deserves attention similar to that needed for pension funding," it said. Agencies are at least stashing money aside to pay for pensions; almost nothing has been set aside for health care. But that's another story.

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Contact the writer: tsforza@ocregister.comTwitter:@ocwatchdog

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(c)2014 The Orange County Register (Santa Ana, Calif.)

Visit The Orange County Register (Santa Ana, Calif.) at www.ocregister.com

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Source: Orange County Register (CA)


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