CFO: Riverside County's Pension Costs Are Going Up

Riverside County's $1 billion in unfunded pension obligations will be reduced over time, thanks in part to "tremendous improvements" to the county's retirement system that went into effect last year, but further challenges lay ahead, the county's chief financial officer told the Board of Supervisors today.

"We are well-funded," CFO Ed Corser said. "But pension costs are going to increase."

Corser ran through the main points of a 47-page report by the county's Pension Advisory Review Committee, which indicated the financial horizon had improved since defined-benefit plans were amended last year.

But the committee cautioned that ongoing efforts by the California Public Employees' Retirement System -- CalPERS -- to make up for losses absorbed during the Great Recession would increase the county's pension liabilities over the next six years.

"CalPERS has to recapture those losses," Corser said. "It ... has to collect more money from local governments to keep the system sound."

The nation's largest public pension fund, valued at $260 billion, lost close to $100 billion during the economic downturn and stock market plunge of 2008-10. According to the CalPERS Board of Administration, the pension giant has $87 billion in unfunded liabilities.

According to Corser, CalPERS has maintained a "smoothing" policy to spare local governments the full impact of filling the liability gap. But the Board of Administration recently approved changes that will require payers to increase contributions to the pension fund that, by 2019, will amount to double what they're currently paying into it.

Corser said the county will owe $20 million more a year under the revised amortization schedule, beginning in 2015. By 2019, the county's total contributions will be $100 million above the current level of contributions, he said.

CalPERS is also relying on a conservative annual rate on investment earnings of 7.25 percent, compared to 7.75 percent two years ago. Every quarter- point decline in returns leads to about $20 million more that the county has to pay into CalPERS to make up any shortfalls, officials said.

"All of this depends on where the economy goes," Corser said, noting that stock market returns, which have been on a tear lately, could exceed expectations and ease financial pressures.

According to the PARC report, though the county's pension obligations have swelled to $1.01 billion compared to five years ago -- when unfunded liabilities totaled just over $250 million -- the county's assets are valued at more than $6 billion.

"We're at a top-tier funding level," Corser said. "One billion sounds like a lot, but we can pay that off over time ... (because) of some tremendous improvements in terms of pension modifications."

Actuarial estimates show that if the county had to meet all its retirement obligations for 38,000 current and former workers today, it would be able to make good on around 85 percent of the annuities. The PARC report noted that pension plans are generally considered "sound" whenever the funded ratio is above 80 percent.

The report pointed out that the county's implementation of pension reforms will ease some of the pressure on the county treasury. In 2012, the board ratified new retirement formulas designed to save the county about $850 million over 10 years.

Under pre-2012 plans negotiated with collective bargaining units, public safety workers accrued retirement earnings according to a "3 percent at 50" formula, fixing compensation at 3 percent of the average of the three highest- paid years of an employee's career, multiplied by the number of years on the job. An employee could begin collecting full retirement at age 50.

Miscellaneous workers, including clerks, technicians and nurses, received benefits based on a "3 percent at 60" formula.

Beginning last fall, all new hires in the safety category began accruing retirement benefits under a 2 percent at 55 formula, while newly hired miscellaneous workers began accruing benefits under a 2 percent at 60 formula.

County workers hired prior to the pension reforms remain "grandfathered" into their original plans.

Some of the biggest savings netted from the board-approved pension modifications will come from the phasing out of so-called "employer-paid member contributions," or EPMC. The practice, instituted in the early 2000s, has spared workers from having to pay their own contributions into CalPERS accounts, shifting the expense instead to taxpayers.

For miscellaneous workers, the contribution amount equals 8 percent of gross earnings, and for safety workers, it's 9 percent. That's on top of the county's matching contributions.

EPMC will be completely phased out next year.

"This county would be facing a catastrophic fiscal crisis had we not been tough and asked employees to pay more of their own pension obligations," said Supervisor Jeff Stone.

"This board did take action early. We were able to negotiate with the unions, and now we're in a better position," added board Chairman John Benoit.

The county has roughly $347 million in outstanding pension obligation bonds. One of the PARC's recommendations was for the board to approve paying down the debt ahead of schedule or advancing payments to CalPERS in the next fiscal year to stay ahead of the cost curve.

—City News Service