Public agencies brace for pension reform

Harsh economic realities may force Tuolumne County and the city of Sonora — as well as other jurisdictions statewide — to change the way they deal with their employee pensions.

“I think pension reform is in the air,” said Sonora City Administrator Greg Applegate. “The way we did business a couple of years ago isn’t necessarily how we’re going to do business in the future.”
 

Welcome to what Tuolumne County Administrator Craig Pedro calls “the new normal,” a time of tight budgets and austerity for local governments.   

It all comes courtesy of the down economy.

Around one year ago, the California Public Employees Retirement System — the nation’s largest pension fund, which manages retirement benefits for around 1.6 million government employees, including City of Sonora and Tuolumne County workers — was put to the test. The trouble started in September 2008, when long-time investment bank Lehman Brothers went under, an event that led to a stock market crash, bursting of a housing bubble and credit freeze. In a matter of months, the Dow Jones Industrial Average — a measure of the health of the top U.S. companies — lost around half of its value, going from from just over 14,000 points to less than 7,000.

And PERS lost a lot of money in the process. By October 2008, the fund had $193 billion in assets, down from $260 billion the year before.

Things were looking so bleak at that time that outgoing Tuolumne County Supervisor Mark Thornton told his colleagues that PERS in its current form “is not going to last,” just as the board approved upgrading retirement benefits for probation department employees.

“I don’t think the state can maintain the system for another 10 years,” Thornton said at the time.

But Thornton’s warning was futile, as supervisors were already committed to the move due to employee deals that had been reached prior to the stock market crash that brought PERS’ viability into question.

But now, with the stock market around 10,000, things are looking up for the investment giant and criticism has leveled off.

Even so, Thornton’s worry has since been echoed in public recently by county Supervisor Dick Pland, who says county government leaders across the state are fretting about the retirement program. Pland said he has spoken to many of them personally at various governmental conferences in recent weeks.

The pensions offered by PERS are top-notch and, according to Pedro and Applegate, they are key to attracting quality workers away from the usually higher-paying private sector. But, with the state’s unemployment rate around 12 percent, some leaders are now questioning that view.

PERS deals can be pretty good for employees, who can get nearly all — or all, in some instances — of their salary in retirement after a few decades of work.

Cities’ and counties’ public safety employees — largely firefighters and law enforcement officers — have one of the better packages: After working for 30 years they can retire at age 50 with 90 percent of their highest-attained salary. And they’re free to re-enter the workforce elsewhere and still collect their pensions, a situation called “double-dipping,” which has drawn criticism over the years.

The logic behind the lucrative packages is firefighters and police officers have dangerous jobs that could cut their lives short.

But it’s not just public safety employees who stand to do well after they retire. According to PERS watchdog group The California Foundation for Fiscal Responsibility, 6,000-plus former government employees statewide are paid more than $100,000 per year in retirement. They include two former Tuolumne County department heads and a former general manager for Tuolumne Utilities District.

In addition, several former local school administrators are pulling in well over $100,000 thanks to a pension program similar to PERS run by the California State Teachers’ Retirement System, known as CalSTRS.    

Applegate and Pedro agree that something must be done locally to keep their PERS deals sustainable.

“Sustainability is the big issue,” Applegate said. “That’s what we have to look at as we go through this very slow recovery.”

Like Pedro, Applegate sees the economy making a comeback, but very slowly — nothing like the boom times brought on first by the dot.com bubble and then by the 2002-2007 housing market, which sent PERS profits skyrocketing.

Unlike a handful of California jurisdictions that talk about dropping out of PERS, that’s not an option for the city or county, which are bound by compensation contracts with their employees.

“You can’t just pop in and out of this program,” Pedro said, “or you would see, over time, people abandoning ship.”

There are other ways of bringing down costs. Pedro thinks it may soon be time for county employees to start paying some of their own way when it comes to PERS. The county now covers not only the employer’s share of the pension cost, but also the employees’ share, which averages around 10 cents for every dollar of an employee’s salary.  The county is paying, in all, 19 cents to PERS for every dollar of salary general employees earn and 36 cents on the dollar for public safety employees. The City of Sonora, which also covers its employees’ share, has a slightly higher contribution rate.

The pennies add up. Tuolumne County spent around $7.8 million on PERS last fiscal year for roughly 850 employees. That nearly matches the $8.5 million the county was forced to cut out of its budget in August because of the down economy and shrinking revenues. Pedro pointed out that without pay cuts and benefit cuts county employees agreed to this summer, the hit to the budget would have been even bigger.

Applegate, meanwhile, sees downsizing in the city’s future if it is to cover retirement costs.

"The way things are going, we’re probably going to have fewer full-time benefited employees and more seasonal employees. We just can’t afford it,” he said.

Sonora is expected to spend around $959,000 this fiscal year on PERS retirement accounts for 48 employees, roughly the same amount it spent last year.

Adding to the bleak financial outlook is the fact that when PERS’ massive investment fund goes down, employers must make up the difference. And in light of the recent stock market downturn, an increase in the employer’s contribution rate is coming.

“It’s gone up and up, and it’s going to go up again,” said county Human Resources Director Eric Larson.

But the situation isn’t as bad as it sounds, according to Larson.

He stressed that though the rate will increase, it likely won’t do so until next fiscal year. That’s because PERS uses a “smoothing” method to distribute rate increases by small increments over a period of time. Also, he said, there’s usually a two-year lag between what happens in the stock market and how it affects PERS’ rates.

Employer contribution costs could actually decrease in the future. But that’s assuming the U.S. claws its way back from the recent recession and the stock market trends upward. Larson thinks that will happen.

“I think if you have faith in the American economy, if you invest in the long-term, people come out ahead,” Larson said. “I think right now everybody is panicking.”

PERS spokesman Ed Fong isn’t worried. That’s because, he said, PERS is no fly-by-night investor. In addition, the fund is huge and diverse. It’s so huge, in fact, that it can singlehandedly affect the stock market — up or down — if it makes a big trade.
 

“We’re long-term investors,” Fong said. “We’re looking 20 to 30 years out.”
 

Furthermore, Fong said, though the stock market fluctuates, its trend is always upward.

“That’s kind of the nature of investments,” he said. “All you have to do is look at the stock market. It goes up and down — but over the long-term it goes up.”  

Larson pointed out an irony in the controversy surrounding PERS: In the days before the 401k, such plans were common even in the private sector.

“It used to be that all the big commercial companies had plans like that, and then they got rid of them,” Larson said.

Perhaps the new normal is already old news.