Pension costs soar for Ventura County cities

March 09--Fewer police officers, deferred roadwork, libraries shuttered, senior luncheons canceled, higher taxes: from big to small, the impact of rapidly rising pension costs may soon become obvious in cities across Ventura County.

The steep increases will come quickly, adding more than $20 million in unfunded liability costs in Oxnard, $11 million in Ventura and more than doubling in Thousand Oaks, Port Hueneme, Camarillo, Santa Paula and Simi Valley by fiscal year 2022-23, according to the state's retirement system.

That's just to pay the retirements benefits for hours already worked, debt known as accrued unfunded liability. Present, ongoing costs will each year add millions more. For most cities, no single expense will rise faster.

In many cases, cash-strapped cities will look to the same source that for years has funded the bulk of retirement costs: taxpayers.

All 10 Ventura County cities participate in the California Public Employees' Retirement System, CalPERS, which distributes retiree checks. The annual payment includes normal costs, based on a percentage of payroll, and the annual unfunded liability. Typically, cities pay that from their general fund, a city's main checkbook for costs including salaries and benefits. Property taxes, sales taxes and user fees fill the bulk of that fund.

How much a city owes on its plan, or plans, varies from year to year, and it fluctuates based on how well investments do. CalPERS has in-house and hired traders who invest in "stocks, bonds, real estate, private equity, inflation-linked assets, and other public and private investment vehicles," according to its site.

How dire the situation is -- or isn't -- depends on who you talk to.

Related content:

* Pension law tackles Ventura County weakness

* Four cities tackle growing pension costs

* Ventura County pension board eyes new world: surplus

Public employee group representatives say a pension's unfunded accrued liability is like a home mortgage, meant to be looked at as a long-term investment. Worrying over a few down years in the market is creating a crisis that doesn't exist, they say.

Bob Schoonover, president of Service Employees International Union 721, which represents a majority of the region's non-safety public employees, said the situation was a "problem but it's not a crisis. ...This is something that gets paid out over decades. It's not due tomorrow."

Pension costs are just one of more than two dozen costs that affect a budget and to focus solely on them is unfair, he said.

Others who study the system say it is dangerously unfunded and recent changes in plans for new hires don't come anywhere near ensuring the plan's long-term sustainability.

"Unless the system is fixed now it will collapse," said Joe Nation, a former elected official and a professor of the practice of public policy at Stanford University.

"The course that we're on suggests strongly without a doubt, the system will get to a point where the public pension funds simply will not have the money to meet the promises they made."

The most recent annual financial report estimated CalPERS would be 69 percent funded in fiscal year 2015-16, the most recent year available. The fiscal year runs July 1 to June 30. Those reports are behind, so for 2014, the plan was $241.4 billion shy of being fully funded, according to the state controller's office.

Based on what he says is a more realistic return rate of 3.25 percent, Nation estimates that figure to be closer to $1 trillion. CalPERS estimates it will average 7 percent annually, having reduced its assumed rate of return from 7.5 percent in December. When the market falls short, taxpayers make up the difference.

The reduction, which will be factored in over several years, will add 20 to 25 percent to the unfunded accrued liability by the year 2022-23, according to a CalPERS circular letter detailing the change.

For Port Hueneme, that's expected to bring the debt payment to $3.2 million -- $642,000 higher than if CalPERS hadn't downgraded expectations. For Ventura, a full-service city that has police and fire departments, the change added as much as $4.6 million, bringing its debt payment to as high as $23 million by 2022-23, according to CalPERS actuarial reports.

Dave Low, chair of Californians for Retirement Security, which represents 1.6 million public employees and retirees, said CalPERS made a prudent move.

"Taking a relatively conservative approach now makes some sense. ... Getting more cash will make the system more stable," he said.

Low said the system had been in better and worse shape, and comparing a public system to the private sector wasn't fair.

"Where in the private sector do you have a position equivalent to the position of a firefighter, people being asked to put their lives on the line every day?" he said.

UNKNOWN CONSEQUENCES

History has made it difficult to predict the future of the stock market.

Returns have been all over the place, from negative 23.6 percent in fiscal year 2008-09 to a gain of 20.7 percent just two years later. For the past 10 and 20 years ending June 30, 2015, CalPERS' investment earnings have returned 6.2 percent and 7.8 percent, respectively.

That volatility, along with a review of the overall funded status, projected return rates over the next decade, prompted the board that oversees CalPERS to reduce earnings expectations. It last lowered it in 2012, when it dropped to 7.5 percent from 7.75 percent.

Even without the change, CalPERS was already projecting significant increases for every city in Ventura County. Taxpayers could foot much of that bill, in the form of tax increases and higher fees, while city services are cut, those who study the issue say.

Californians in November voted on 228 local tax measures, according to the California Taxpayers Association.

"Very often, they use it as a ruse, (saying), 'Well, we need it for public safety' or something that sounds very beneficial for the community but really what you're looking to do is reward greater and sustain work benefits," said Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, referring to increased salaries and pension payments.

Voters approved two of them in the county: a half-cent sales tax in Ventura and a full cent sales tax in Santa Paula. In both cities, the tax -- on the ballot as a way to boost public safety, roads, youth programming and homeless services, among other purposes -- goes to the general fund and can be spent on anything.

In 2011, the Little Hoover Commission studied pensions in depth. "Pension costs will crush government," the government oversight agency found.

CalPERS invests aggressively, it noted, "which leaves taxpayers facing all the risk when returns fail to meet system needs."

The average 30-year state worker who retires at 63 will get three-quarters of their highest income-earning year, the report found. That means someone who earned $52,000 would collect $39,000 annually. That doesn't include any enhancements.

In comparison, a private sector employee who worked 35 years and earned the same $52,000 will retire with roughly $21,500 in Social Security benefits, according to a sample calculation from the Social Security Administration.

"The average person is not aware of how lucrative public jobs can be," Vosburgh said.

It isn't workers who are at fault, he said, and people he talks to are supportive of public employees. It's the employers and elected officials who negotiate contracts that allow for pension spiking and early retirements and other "tricks of the trade," Vosburgh said.

Many people know not to rely on Social Security alone, and save in other ways for retirement, including through defined benefit systems, known as a 401(k) plans.

The Hoover Commission recommended public employee earnings be capped between $80,000 and $90,000 and then the use of 401(k)-style plans to save amounts beyond that.

It also recommended pension plans use five years of earnings to calculate pensions.

The California Public Employees' Pension Reform Act of 2013, known as PEPRA, incorporated some of Little Hoover's recommendations, albeit on a smaller scale.

Salary was capped at $140,424 for members hired after 2013 who don't participate in Social Security and $117,020 for those who do. Their final income is based on the highest three years of earnings.

PEPRA also banned using things such as housing stipends, uniform allowance and vacation payouts to boost a final year's earnings.

Carole D'Elia, executive director of the Little Hoover Commission, applauded PEPRA for taking into account many of the report's recommendations. "We agree those are good first steps," she said. "I think a lot of good has come from it."

D'Elia said the state provides leadership, as it did by first offering the retirement enhancements, which many cities copied. It helps when everyone is competitive, she said.

But those reforms fall short when it comes to creating a self-supporting system, critics say.

Court rulings have made clear that benefits already accrued can't be reduced, but Nation and the Hoover Commission's report said future retirement benefits for all existing workers must be reined in.

Otherwise, costs will continue to strain local governments, some to insolvency. The market isn't what it used to be, and stock market earnings of the dot-com era are unlikely to return, Nation said.

A case before the California Supreme Court could reduce future benefits for current employees. The case centers on whether some non-salaried benefits can be counted toward a final pensionable income. Employee groups argue the enhancements, also known as "spiking," were part of the formula when they were hired and that removing them from the equation equals a reduction in benefits.

A lower court disagreed. In its decision, the First District Court of Appeal ruled employees have a "vested right" to a reasonable pension, "not an immutable entitlement to the most optimal formula of calculating the pension."

The Supreme Court is expected to rule on the case later this year.

GLOSSARY

Unfunded accrued liability: What a city owes in already-promised retirement benefits.

Funded ratio: How much a plan has versus what it owes. A plan that's 80 percent funded, for example, could pay 80 cents on the $1 of a retirement benefit of all plan members.

Pensionable income: The number used to determine income. It includes around 100 items including extra pay for language, working the overnight shift, travel pay and overtime pay.

Normal employer costs: Ongoing pension costs, determined as a percentage of an entity's total payroll.

CalPERS: The California Public Employees' Retirement System.

PARS: Public Agency Retirement Services, a privately run company that manages supplemental retirement benefits.

___

(c)2017 Ventura County Star (Camarillo, Calif.)

Visit Ventura County Star (Camarillo, Calif.) at www.vcstar.com

Distributed by Tribune Content Agency, LLC.