Evaluating Total Unfunded Public Employee Retirement Liabilities in 20 California Counties

Summary:  Using officially reported figures from the most recent financial statements available, this report calculates the total unfunded employee retirement liabilities for the 20 California counties with their own independent retirement systems. This study is the first of its kind to compile for these counties not only reported pension fund assets and liabilities, but also retirement health care assets, if any, and their corresponding liabilities, as well as the outstanding balances for any pension obligation bonds.

This composite data, reported for each county both as a funding ratio and as a numerical value for the net liability, incorporates all assets and liabilities associated with retirement obligations to public employees. To-date, most reports focus on the unfunded pension liability, ignoring the amount of the unfunded healthcare liability and the outstanding balance owed on pension obligation bonds. But these other liabilities are of comparable value, and are offset with far fewer invested assets, if any. For taxpayers and policymakers to properly understand and cope with the financial challenges facing their counties, this information is vital.

As it is, these 20 counties combined have a population of 29.3 million, constituting 77% of Californians. Their total unfunded pension liability, based on their most recent financials, is $37.2 billion. Their total unfunded retirement liabilities, also based on officially reported amounts in their most recent financial statements, but also including pension obligations bonds and unfunded healthcare liabilities, is $72.3 billion. As a percentage, their total funded ratio just for pensions (assets as a percent of liabilities) is 74%. Their total retirement funding percentage, taking into account pensions, healthcare, and pension obligation bonds, is only 60%.

This total obligation, $7,369 per household vs. $3,932 if you only include pension funds, is a daunting amount. But it is based on official rates of return of 7.5%, which as explained further in this study, if not attained, will result in far higher calculations of underfunding for pensions – at a 5.5% discount rate, for example, the funded ratio for these 20 counties drops to 49%. And, of course, it only represents the costs for county workers – within these counties, taxpayers are also responsible for the unfunded pension and healthcare liabilities – and retirement related bond debt – for those working for the local cities, as well as all workers within their counties who are employed by public schools, local colleges and universities, other public agencies, and the state.

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INTRODUCTION

The concept of “total compensation” has become increasingly recognized as the only accurate way to assess whether or not public employee compensation is either affordable or equitable. Instead of just reporting base pay, total compensation calculations look at all types of direct pay including “credential pay,” “specialty pay,” “bilingual pay,” “advanced degree pay,” “tuition reimbursement,” etc., along with overtime pay, and along with the costs for all employer paid benefits including current health insurance coverage. “Total compensation” calculations also include current year contributions made by an employer towards an employee’s retirement benefits – namely, health insurance and pensions.

“Total compensation,” as it turns out, often exceeds “base pay” by a factor of 100% to 200%.

Discussions of unfunded liabilities for retirement benefits must undergo a similar examination. To-date, the primary topic of debates and discussion over the size of unfunded liabilities regards pensions, and on what discount rate to use to calculate the present value of the employer’s future retirement pension obligations.

This debate is ongoing and of critical importance – to use very rough numbers, each 1.0% drop in the projected rate-of-return for a typical pension fund can increase the required annual contribution by roughly 10% of payroll. Similarly, using very rough numbers, as documented in a February 2013 CPC study entitled “How Lower Earnings Will Impact California’s Total Unfunded Pension Liability” – using formulas provided by Moody’s Investors Services for this purpose, and data provided by the California State Controller. Bearing in mind that a relatively small change to the total liability may result in a very large change to the net unfunded liability – here is the impact of changes to the projected rate of return on the total unfunded liability for all of California’s public employee pension systems combined using annual report data from 6-30-2012:

Official total unfunded pension liability at assumed rate-of-return of 7.5% = $128 billion.

Official total unfunded pension liability at assumed rate-of-return of 6.2% = $252 billion.

Official total unfunded pension liability at assumed rate-of-return of 5.5% = $329 billion.

Official total unfunded pension liability at assumed rate-of-return of 4.5% = $450 billion.

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TOTAL UNFUNDED PUBLIC EMPLOYEE RETIREMENT LIABILITY

The purpose of this study is not to present the consequences of lower rates of return, but instead to calculate – using the officially recognized composite rate of return of 7.5% – what the total unfunded public employee retirement liability is, using information provided by independent pension systems serving select California counties. There are 20 counties that administer their own independent pension systems under the “County Employee Retirement Law;” this study draws on information provided in the Consolidated Annual Financial Reports for these counties, as well as in the County Employee Retirement Systems annual Actuarial Valuation reports.

Using official numbers has the virtue of being relatively beyond debate – when using the official projections, the only question anyone should be asking is how much higher these numbers may be using lower estimated rates-of-return. But total public unfunded employee retirement liabilities do not just include unfunded pension liabilities, they also include unfunded retirement health insurance liabilities – the so-called “OPEB” (Other Post-Employment Benefits). Total unfunded public employee retirement obligations must also include the outstanding balances on Pension Obligation Bonds – balance sheet debt, usually long-term that was entered into by cities and counties in order to raise cash to make their required employer pension contributions to their pension funds.

By combining all three sources of liability for retirement obligations, a far more accurate picture of just how much taxpayers owe – even at the official rate-of-return projections which may turn out to be far too optimistic. By matching these liabilities against the assets on hand – pension fund assets and in some cases OPEB fund assets – the next table shows the true “unfunded” ratio for the 20 CERL counties.

Table 1 – Total Unfunded Retirement Liability per CERL Counties ($=Millions)

20140506_Churchill-Monnett_1

Showing this number adds a sobering perspective to the discussion of unfunded retirement liabilities. The counties on the above table are ranked with those counties having the worst funded ratios appearing first. As can be seen, there is a wide variation between the worst, Merced, where less than half the necessary amount to fund already earned pension and retirement healthcare benefits has actually been set aside, and Tulare, which is has a healthy 87% funded ratio.

It is important to emphasize that all these numbers reflect officially recognized liabilities. It would be instructive to provide data on just how much these unfunded liabilities will swell if any sort of projection is made based on lower rates of return. Here’s the formula that Moody’s Investor Services provided to revalue the present value of pension liabilities from the common 7.5% rate of return projection based on using a more conservative rate of 5.5%:

[ PV x ( 1 + official %i ) ^ years ] / ( 1 + adjusted %i ) ^ years  =  Adj PV

Here, plugging into the formula the official total pension liability for all 20 CERL counties of $143 billion, is how much it grows at the lower discount rate of 5.5%:

[ 143.2 x ( 1 + 7.5% ) ^ 13 ]  /  ( 1 + 5.5% ) ^ 13  =  182.8

Collectively, for the CERL counties, using this formula to apply the more conservative discount rate of 5.5%, their estimated pension liabilities grow from $143.2 billion to $182.8 billion, which means their estimated funded ratio for pensions (not including pension obligation bonds) drops from 74% to 58%. Put another way, since the unfunded pension liability is equal to the total assets less the estimated pension liabilities, by using the more conservative discount rate of 5.5%, they more than double, from $37.3 billion to $76.8 billion. The 20 CERL pension systems have had similar earnings rate during this period. The potential for surprises like this should not be lightly dismissed. In spite of recently reported good results, note that 5.5% is in fact the cumulative investment rate of return earned by CalPERS during the 13 years from 2001 to 2013.

[Note: This recent CPC study “A Method to Estimate the Pension Contribution and Pension Liability for Your City or County,” provides a tutorial, including a downloadable spreadsheet, explaining how use Moody’s pension analysis formulas to analyze any typical public sector pension fund.] 

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PAYING DOWN THE TOTAL UNFUNDED RETIREMENT LIABILITY

Another way to explain the significance of the total unfunded retirement liability would be to describe what repayments would be based on the goal to achieve 100% funded status in 20 years. The next table shows these payments as a percent of their respective county budgets, using 2012 budget data compiled from publicly available information by the website PublicSectorCredit.org.

The order of the counties on this table are ranked with the worst counties, i.e., those with the highest payments on their unfunded liability as a percent of revenue listed first. Even though Los Angeles County has only the 2nd lowest unfunded liability, at 51%, 2nd to Merced County at 47%, Los Angeles County’s unfunded liability as a percent of their annual budget is actually greater.

As shown in the 3rd column “Liability as Multiple of Revenue,” Los Angeles County’s officially recognized total retirement liability is 2.37 times their entire annual revenue. As a payment calculated to bring the county to 100% funding by 2034, they would have to make an unfunded “catch-up” payment each year equivalent to 23% of their annual revenue.

Table 2 – Unfunded Payment as Percent of Revenue per CERL Counties ($=Millions)

20140506_Churchill-Monnett_2b

As can be seen in the above table, these so-called “unfunded payments,” for which reforms to-date do not require public employees to bear any share of payment on via payroll withholding, will themselves consume a significant portion of the entire budget of many counties – if serious attempts are made to actually achieve 100% funding. And without 100% funding, the pool of invested assets is too small to prevent the unfunded liability from growing further even if rate-of-return projections are fulfilled. Here’s why:

In the projections shown on the above table, a 7.5% rate of interest is used – this rate represents the opportunity cost of not having 100% funding. For example, Ventura County has a funded ratio of nearly 80%, purportedly the threshold for a “healthy” fund. But because they are earning money on invested assets that only amount to 80% of the present value of their estimated retirement liabilities, if all they do is earn 7.5% in a given year, their unfunded liability will grow. Because to 7.5% earnings on a 100% funded plan is equivalent to 9.4% earnings on an 80% funded plan. And so it goes.

While the math behind all of this may only seem obvious to those who understand financial concepts and are proficient at algebra, the point of it all should be obvious to everyone: For the CERL counties to improve their funded ratio for their total retirement obligations, which collectively – using officially reported numbers – is already only 60%, they will have to make annual unfunded payments that will by themselves consume a significant portion of their budgets, in addition to the normal funding contributions for new benefits earned in any given year.

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THE IMPACT OF THE TOTAL UNFUNDED RETIREMENT LIABILITY ON INDIVIDUAL TAXPAYERS

The next chart lists the number of households and the population of each of the 20 CERL counties, using estimated 2013 figures provided by the U.S. Census Bureau. The ranking again finds Los Angeles County at the top of the list. The officially recognized unfunded liability per household for Los Angeles County is a whopping $12,123; the payment per household to eliminate this unfunded liability by 2034 is $1,190 – one may reliably surmise that the payment per taxpaying household to be considerably higher. As noted already, this liability refers only to the county workers – every resident and taxpayer also carries the prorated burden of unfunded liabilities for the local and state government employees who work in their cities, their schools, and state agencies.

Table 3 – Unfunded Liability and Payment per Household per CERL Counties ($=Millions)

20140506_Churchill-Monnett_3

Properly calculating the entire unfunded retirement liability for California’s citizens, or performing what-if analysis based on what may happen to that liability if rate-of-return projections are lowered, was not the intention of this study, but bears a final point: As shown on Table 1, the total unfunded liability for all retirement obligations is only 60% funded using official discount rates. If the pension liability is revalued at the lower 5.5% discount rate, the estimated total retirement liability swells from $179 billion to $218 billion, the estimated unfunded liability grows from $72 billion to $112 billion, and the funded ratio drops from 60% to 49%.

The CERL counties, with their independent pension systems, provide an excellent means to distill the nature of the problem to very specific and easily documented numbers and calculations. The concept of total retirement obligations, incorporating not only unfunded pension liabilities, but also debt outstanding on pension obligation bonds, and unfunded retirement healthcare obligations, yields a far more ominous profile of financial ill health than merely focusing on pensions. But it is the only accurate way to assess the cost taxpayers truly face.

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About the Authors:

Ken Churchill is the director of New Sonoma, an organization of financial and business experts and concerned citizens dedicated to working together to solve Sonoma County’s serious financial problems. Churchill has over 40 years of business and financial management experience as founder, CEO and CFO of a solar energy company and environmental consulting firm. He sold both companies and now grows wine grapes and produces wines under his Churchill Cellars label. For the past three years, Churchill has been actively researching and studying the pension crisis and published a report titled The Sonoma County Pension Crisis – How Soaring Salaries, Retroactive Pension Increases and Poor Management Have Destroyed the County’s Finances. Churchill is currently running for supervisor, 4th district, in Sonoma County.

Bill Monnet is a board member of Citizens for Sustainable Pension Plans in Marin County.   He has an MA in Political Science from UC Davis and an MBA in Finance from UC Berkeley. Monnet was briefly an adjunct Professor of Public Administration and then spent 24 years in Silicon Valley in various management positions at IBM, Siemens and Cisco Systems. His work experience includes positions in finance, service & manufacturing operations, demand forecasting and failure analysis. He says that his varied experiences have proved surprisingly effective in understanding the counterintuitive world of public finance.

Ed Ring is the executive director for the California Policy Center. Previously, as a consultant and full-time employee primarily for start-up companies in the Silicon Valley, Ring has done financial accounting for over 20 years, and brings this expertise to his analysis and commentary on issues of public sector finance. Ring has an MBA in Finance from the University of Southern California, and a BA in Political Science from UC Davis.

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FOOTNOTES

(source data for counties listed in alphabetical order)

Alameda County

Pension Assets and Liabilities:
Alameda County CAFR 6-30-2013, Liabilities and Actuarial Value of Assets see page 64.
http://www.acgov.org/auditor/financial/cafr12-13.pdf
Alameda Employee Retirement Association Actuarial Valuation Report for 12-31-2012, Market Value of Assets see page viii.
http://www.acera.org/post/actuarial-reports

Pension Obligation Bonds (balance as of 6-30-2013):
Alameda County CAFR 6-30-2013, Outstanding Long-Term Obligations, pages 17 & 56.
http://www.acgov.org/auditor/financial/cafr12-13.pdf

Retirement Healthcare Assets and Liabilities (actuarial valuation  as of 12-31-2012):
Alameda County CAFR 6-30-2013, Outstanding Long-Term Obligations, pages 67, 70.  Alameda County has 2 separate OPEB programs:  retiree medical benefits program and a COLA + death benefit program.  The assets & liabitlies reported here are for both programs.
http://www.acgov.org/auditor/financial/cafr12-13.pdf

Contra Costa County

Pension Assets and Liabilities:
Contra Costa County CAFR 6-30-2013, Actuarial Value of assets & liabilities page 95.
http://www.co.contra-costa.ca.us/DocumentCenter/View/28970
Contra Costa County Employee Retirement Association Actuarial Valuation 12-31-2012, Actuarial & Market value of assets page 5.
http://www.cccera.org/actuarial/Actuarial Val Report 2012.pdf

Pension Obligation Bonds (actuarial valuation as of 6-30-2013):
Contra Costa County CAFR 6-30-2013, 10. Long-Term Obligations, “Pension Bonds Payable,” page 80
http://www.co.contra-costa.ca.us/DocumentCenter/View/28970

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 01-01-2012):
Contra Costa County CAFR 6-30-2013, Schedule of Funding Progress, Other Postemployment benefits “Actuarial Accrued Liability,” pages 98 and 106. Note the CAFR reports the value of OPEB Assets as $114,599 as of 06-30-2013 but does not report the corresponding liability on that date. In order to have a fair matching of assets with liabilities at the same point in time I have reported the 01-01-2012 numbers.
http://www.co.contra-costa.ca.us/DocumentCenter/View/28970 

Fresno County

Pension Assets and Liabilities:
Fresno County Employees Retirement Association Actuarial Valuation 6-30-2013 [actuary = Segal], page vi.
http://www2.co.fresno.ca.us/9200/Attachments/Agendas/2014/011514/Item 27 011514 Actuarial Valuation Report as of June 30 2013.pdf 

Pension Obligation Bonds (balance as of 6-30-2013):
Fresno County CAFR 6-30-2012, POBs outstanding page 117.
http://www2.co.fresno.ca.us/0410/CAFR/CAFR2013.pdf 

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
No OPEB liabilities, assets or program is reported in the CAFR.

Imperial County

Pension Assets and Liabilities:
Imperial County Employees Retirement System Actuarial Valuation 6-30-2013, page v.

Pension Obligation Bonds (balance as of 6-30-2013):
Imperial County CAFR 6-30-2012, Note 8: Long Term Debt, page 41.
http://www.co.imperial.ca.us/Budget/GeneralPurposeFinancialStatements/2013Financials.pdf

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
Imperial County CAFR 6-30-2012, Note 11: OPEB, page 46.
http://www.co.imperial.ca.us/Budget/GeneralPurposeFinancialStatements/2013Financials.pdf

Kern County
Pension Assets and Liabilities:
Kern County Employees Retirement Association Actuarial Valuation 6-30-2012, page vi.
http://www.kcera.org/pdf/Actuary/2012_valuation_report.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Kern County CAFR 6-30-2013, page 61.
http://www.co.kern.ca.us/auditor/cafr/13cafr.PDF

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2012):
Kern County CAFR 6-30-2013, page 107. This includes the liabilities for both the Retiree Health Premium Supplement Program and the Retiree Health Stipend.
http://www.co.kern.ca.us/auditor/cafr/13cafr.PDF 

Los Angeles County

Pension Assets and Liabilities:
Los Angeles County Employee Retirement Association Actuarial Valuation 6-30-13 [actuary = Milliman], page 11.
http://www.lacera.com/investments/inv_pdf/actuarial_valuation.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Los Angeles County CAFR 6-30-2013. No POBs are reported in the CAFR.

Retirement Healthcare Assets and Liabilities (balance as of 7-1-2012):
Los Angeles County CAFR 6-30-2013, Other Postemployment Benefits, Retiree Health Care, page 122
http://file.lacounty.gov/auditor/portal/cms1_208825.pdf  

Marin County

Pension Assets and Liabilities:
Marin County Employees Retirement Association Actuarial Valuation 6-30-13, page 5.
http://egovwebprod.marincounty.org/depts/RT/main/reports/valuations/actuarialvaluationreport2013-06-30.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Marin County CAFR 6-30-2013, Note 8, Long-Term Obligations, Pension Obligation Bonds, page 54
http://www.marincounty.org/depts/df/~/media/Files/Departments/DF/2013_Marin%20CAFR.pdf

Retirement Healthcare Assets and Liabilities (balance as of 7-1-2013):
Marin County CAFR 6-30-2013, Schedule of Funding Progress Postemployment Healthcare, “AVA,” “AAL,” page 64
http://www.marincounty.org/depts/df/~/media/Files/Departments/DF/2013_Marin%20CAFR.pdf

Mendocino County

Pension Assets and Liabilities:
Mendocino County Employees Retirement Association Actuarial Valuation 6-30-2013, page vi.
http://www.co.mendocino.ca.us/retirement/pdf/063013Valuation.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Mendocino County CAFR 6-30-2013, Note 8: Long Term Liabilities, page 41.
http://www.co.mendocino.ca.us/auditor/pdf/2013_Mendocino_afs_-_FINAL.pdf

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
Mendocino County CAFR 6-30-2013, Note 12: OPEB, page 48.
http://www.co.mendocino.ca.us/auditor/pdf/2013_Mendocino_afs_-_FINAL.pdf

Merced County

Pension Assets and Liabilities:
Merced County Employees Retirement Association Actuarial Valuation 6-30-2013, pages 2 & 5. http://www.co.merced.ca.us/documents/Retirement/Annual Reports/Valuation 2013 6 30.PDF

Pension Obligation Bonds (balance as of 6-30-2013):
Merced County CAFR 6-30-2013, Outstanding Long-Term Debt, Pension Obligation Bonds, page 14

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
Merced County CAFR 6-30-2013, page 68.
http://www.co.merced.ca.us/ArchiveCenter/ViewFile/Item/456

Orange County

Pension Assets and Liabilities:
Orange County sponsors a defined benefit pension through OCERS. The OCERS plans are multi-employer plans which include sponsors not related to Orange County (e.g. City of San Juan Capistrano.) Neither the Orange County CAFR nor the OCERS Acturial Valuation separately report pension assets & liabilities by employer. However, Orange County does report that it is the largest employer in OCERS and pays 88% of sponsor payments into the plan. So, Orange County’s pension assets & liabilities are estimated as 88% of total OCERS assets & liabilities.
Orange County CAFR 6-30-2013, pages 145-146.
http://ac.ocgov.com/civicax/filebank/blobdload.aspx?BlobID=33067 
Orange County Employee Retirement Association Actuarial Valuation 12-31-12. Assets & liabilities page viii.
http://www.ocers.org/pdf/finance/actuarial/valuation/2012actuarialvaluation.pdf 

Pension Obligation Bonds (balance as of 6-30-2013):
Orange County CAFR 6-30-2013, short term POBs pages 110-111, long term POBs page 117.
http://ac.ocgov.com/civicax/filebank/blobdload.aspx?BlobID=33067 

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2011):
Orange County CAFR 6-30-2013, OPEB liability pages 155 & 159.
http://ac.ocgov.com/civicax/filebank/blobdload.aspx?BlobID=33067 

Sacramento County

Pension Assets and Liabilities:
Sacramento County CAFR 6-30-2013, Actuarial value of assets & liabilities page 100.
http://www.finance.saccounty.net/AuditorController/Documents/CAFR2013.pdf 
Sacramento County Employees Retirement Association Actuarial Valuation 6-30-2013, Actuarial & Market value of assets pages viii & 6.
http://www.retirement.saccounty.net/Documents/ActualInfo/Actuarial Valuation 2013.pdf

Pension Obligation Bonds (balance as of 6-30-2013 including accreted interest):
Sacramento County CAFR 6-30-2013, Note 9 – Long-Term Obligations, page 74
http://www.finance.saccounty.net/AuditorController/Documents/CAFR2013.pdf 

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2011):
Sacramento County CAFR 6-30-2013, OPEB assets and unfunded liabilities page 102.
http://www.finance.saccounty.net/AuditorController/Documents/CAFR2013.pdf  

San Bernardino County

Pension Assets and Liabilities:

San Bernardino County Employees Retirement Association Actuarial Valuation 6-30-2013, Market value of assets page 5, Actuarial Value of assets & liabilities page 70.
http://www.sbcera.org/Portals/0/PDFs/Actuarial Valuation and Review/2013/13_Actuarial_Valuation_Review.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
San Bernardino County CAFR 6-30-2013, Direct and Overlapping General Fund Obligation Debt, pages 84 & 192.
http://www.sbcounty.gov/atc/pdf/Documents/0000_00_00_178_2012-2013%20CAFR.pdf

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):

San Diego County

Pension Assets and Liabilities:
San Diego County Employees Retirement Association CAFR 6-30-2013. SDCERA is a multi-employer plan. There are 5 participating employers. Separate pension and OPEB results are not reported for each employer. However, it is reported that San Diego County employees represent 95.5% and the Superior Court employees represent anothyer 4.3% of SDCERA members. So, the County owns practically all of SDCERA assets & liabilities and all are attributed here to the County. Pension liabilities and Actuarial Value of Assets page 48. Market Value of Assets page 77.
http://www.sdcera.org/investments_report.htm 
These numbers are also reported in the SDCERA Actuarial Valuation 6-30-13 on page v.
http://www.sdcera.org/PDF/June_2013_valuation.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
San Diego County CAFR 6-30-2013, Taxable Pension Obligation Bonds, page 82, Table 27
http://www.sdcounty.ca.gov/auditor/annual_report13/pdf/cafr1213.pdf 

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2012):
San Diego County Employees Retirement Association CAFR 6-30-2013, page 49.
http://www.sdcera.org/investments_report.htm 

San Joaquin County

Pension Assets and Liabilities:
San Joaquin County Employees Retirement Association Actuarial Valuation 01-01-2013, pages 3 & 16.
http://www.sjcera.org/Pages/index.htm

Pension Obligation Bonds (balance as of 6-30-2013):
No POBs are reported in the CAFR.

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
San Joaquin County CAFR 6-30-2013, pages 73 & 81.
http://www.sjgov.org/uploadedFiles/SJC/Departments/Auditor/Services/2012-13 SJC Financial Statements Final.pdf

San Mateo County

Pension Assets and Liabilities:
San Mateo County CAFR 6-30-2013, Actuarial Value of assets & liabilities pages 69 & 80. Balances as of 6-30-2013.
http://www.co.sanmateo.ca.us/Attachments/controller/Files/CAFR/2013CAFR.pdf
San Mateo County Employee Retirement Association Actuarial Valuation 6-30-2013 [actuary = Milliman], Market Value of assets page 11. Balance as of 6-30-2013.
http://www.samcera.org/pdf/2013valuation.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
No outstanding POBs are reported in the San Mateo County CAFR.

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
San Mateo County CAFR 6-30-2013, Funded Status and Funding Progress, “AAL” and “UAAL.” page 71
http://www.co.sanmateo.ca.us/Attachments/controller/Files/CAFR/2013CAFR.pdf

Santa Barbara County

Pension Assets and Liabilities:
Santa Barbara County Employees Retirement Association Actuarial Valuation 6-30-13, page 5.
http://www.countyofsb.org/uploadedFiles/sbcers/benefits/2013 Valuation.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
No POBs are reported in the CAFR.

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2012):
Santa Barbara County CAFR 6-30-2013, OPEb Schedule of Funding Progress, “Actuarial Value of Assets,” “AAL,” page 106
http://countyofsb.org/uploadedFiles/auditor/Publications/1213%20CAFR.pdf

Sonoma County

Pension Assets and Liabilities:
Sonoma County Employees Retirement Association Actuarial Valuation 12-31-2012, pave viii.
http://scretire.org/uploadedFiles/SCERA/Resource_Center/News_and_Updates/2013/ActuarialValuationAsOf12-31-12.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Sonoma County CAFR 6-30-2013, Long-Term Liabilities, Pension Obligation Bonds, page 20
http://www.sonoma-county.org/auditor/financial_reports.htm
(Click on “2012-2013 Comprehensive Annual Financial Report”)

Retirement Healthcare Assets and Liabilities (balance as of 6-30-2013):
Sonoma County CAFR 6-30-2013, Schedule of Funding Progress, “AVA,” “AAL,” page 111
http://www.sonoma-county.org/auditor/financial_reports.htm
(Click on “2012-2013 Comprehensive Annual Financial Report”)

Stanislaus County

Pension Assets and Liabilities:
Stanislaus County Employees Retirement Association Actuarial Valuation 6-30-2013, page 5.
http://www.stancera.org/sites/default/files/Financials/20130630_Actuarial_Report.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Stanislaus County CAFR 6-30-2013, Note 11: Summary of Long Term Debt page 74.
http://www.stancounty.com/auditor/pdf/AFR2013.PDF

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 7-1-2012):
Stanislaus County CAFR 6-30-2013, Note 19: OPEB page 91
http://www.stancounty.com/auditor/pdf/AFR2013.PDF

Tulare County

Pension Assets and Liabilities:
Tulare County Employees Retirement Association Actuarial Valuation 6-30-2013, page 1.
http://www.tcera.org/Publications.php

Pension Obligation Bonds (balance as of 6-30-2013):
Tulare County CAFR 6-30-2013. There was no balance due on any POB as of 6-30-2013.
http://tularecounty.ca.gov/auditorcontroller/index.cfm/auditor-controller/financial-reports1/comprehensive-annual-financial-report-cafr/cafr-2012-2013/

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2012):
Tulare County CAFR 6-30-2013, pages 71 & 78.
http://tularecounty.ca.gov/auditorcontroller/index.cfm/auditor-controller/financial-reports1/comprehensive-annual-financial-report-cafr/cafr-2012-2013/ 

Ventura County

Pension Assets and Liabilities:
Ventura County Employees Retirement Association Actuarial Valuation 6-30-13, page vi
http://vcportal.ventura.org/VCERA/docs/publications/Actuarial_Valuation_as_of_June_30_2013.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
No POBs are reported in the CAFR.

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
Ventura County CAFR 6-30-2013, page 100
http://www.ventura.org/auditor-controller/comprehensive-annual-financial-report-2013

15 replies
  1. Jody Morales says:

    This in depth study should be a must read for every elected official in California. It is sad commentary to note that most supervisors in all 20 counties covered in this invaluable report would not understand – and probably will not accept – the conclusions of the study.

    It is time for Californians to elected representatives that do understand the crisis we are facing with these staggering unfunded public employee retirement liabilities and who will act – immediately – to assure that litigation is put in place that will allow counties to regain and maintain fiscal sustainability. Citizens for Sustainable Pension Plans http://www.marincountypensions.com

  2. Kerry Worgan says:

    Using your formula and logic with the 3 year rate of return for CalPERS (2011-2013) of 11.3% produces an estimated pension liability of $129B and a funded ratio of 82%, while using the 30 year rate of return for CalPERS (1983-2013) of 9.3% produces an estimated pension liability of $87B and a funded ratio of 122%, a fully funded system!!
    So while your comparisons by County are interesting, there are definitely some major flaws with your methodology.

    The old saying is that “figures will not lie,” but a new saying is “liars will figure.” It is our duty, as practical statisticians, to prevent the liar from figuring; in other words, to prevent him from perverting the truth, in the interest of some theory he wishes to establish.
    Carroll D. Wright – 1889

  3. Tough Love says:

    Editors, With respect to Moody’s formula … [ PV x ( 1 + official %i ) ^ years ] / ( 1 + adjusted %i ) ^ years = Adj PV

    What is the definition of “Years”…. and why did you use “years”=13 in applying that formula ?

    I did notice your sentence …”In spite of recently reported good results, note that 5.5% is in fact the cumulative investment rate of return earned by CalPERS during the 13 years from 2001 to 2013.”, but that just appeared to be a side comment not relevant to the definition of “years” in the Moody’s formula.

  4. JM says:

    Ed,
    Just one thought. The POBs for Orange County have been defeased.
    This means that although they were issued, there is an equal amount of funds in an escrow that pays the bonds as they mature.
    John

  5. Ed Ring says:

    John,
    Thank you for that clarification. Readers take note – the liability Orange County faces is not $14,162 million (14.15 billion), it is $306 million ($0.3 billion) less. Seriously, we have taken great pains to get these numbers right and if there are any other errors, we’d like to know about them.
    Ed

  6. Tough Love says:

    Editors,

    Being a “math guy” the adjustment formula that Moody’s uses to estimate the Present Value of liabilities using 5.5% to discount Plan liabilities from a known Present Value that uses the official Plan rate of 7.5% (specifically … [ PV x ( 1 + official %i ) ^ years ] / ( 1 + adjusted %i ) ^ years = Adj PV) got me to thinking …..

    In that formula, Moody’s uses 13 for “Years”, that being the time-weighted MIDPOINT DURATION of all of the very many possible future payments streams from both those currently retired and those still active. It includes at one extreme the recent hire who may not retire for 30 years and then collect benefits for 25 years, and at the other extreme, workers already retired for 20+ years. It occurred to me that while the AVERAGE change in the Present Value (that being 182.8/143.2=1.2765 or a 27.65% increase in PV when going from 7.5% to 5.5%) for ALL such Plan participants combined is interesting, individual Plan participants would have wildly different contributions to that average, and an understanding of those difference is important in policy-making, and especially important when considering the effectiveness of pension reform alternatives.

    Using basis interest calculation principles, I determined the specific point in one’s career a worker would need to be for a decrease in the liability discount rate from 7.5% to 5.5% to result in that average 27.65% increase the present value of future pension payouts. In doing this (and in my other calculations that follow) I assumed that all retirees survive for 25 years in retirement, retirement starts at $1 and is COLA-increased annually by 2% (compounded). It turns out that a participant would need to be “active” and between 3 and 4 years before retiring. This can be seen in the table below.

    I then calculated the percentage change in the PV of liabilities (when the liability discount rate is decreases from 7.5% to 5.5%) for ACTIVE participants 30, 20, 10 and 0 years from retirement, and for RETIRED participants 5, 10, 15, and 20 years into retirement. All of these are also shown in the Table below …….. (hopefully, the table will keep it’s column/row format once posted).

    PV of Future Payout*
    Years Pre Years ————————————-
    Retirement Retired @ 0.075 @ 0.055 Ratio

    Active 30 1.6319 3.4460 2.1116
    20 3.3634 5.8863 1.7501
    10 6.9321 10.0546 1.4504
    4 10.6983 13.8637 1.2959
    3 11.5007 14.6262 1.2718
    0 14.2872 17.1747 1.2021
    Retired 5 14.0309 16.3313 1.1640
    10 12.9884 14.5925 1.1235
    15 10.7472 11.6173 1.0810
    20 6.7074 6.9529 1.0366

    * Assumptions:
    (1) Retiree lives for 25 years in retirement
    (2) Retirement starts with $1 in year 1 with 2% compound
    annual COLA increases

    From the above Table, we can see that ACTIVES with 3 and 4 years to go before retirement have a PV of Liabilities (i.e., their future payouts) that increases by 27.18% and 29.59% respectively, hence bordering the average increase for all participants in all plans of 27.65% (from 182.8/143.2) in your article. But importantly, note the very wide range in the ratio of PV@5.5% to PV@7.5%. At the extremes, for the retiree already 20 years into retirement with an assumed 5 years before death, the increase in the PV is only 3.66%, while at the other extreme, that being a new hire with 30 years before retiring, the increase in the PV is 111.16%. and that ratio is still well above the overall average for the the first 20 “active” years. Clearly the “risk” of actual rates coming in below the official Plan rate rises as age gets younger and service years get lower … as would be expected due to the “compounding” impact of the interest differential over longer periods of time.

    Consider the important financial implication for new hires …….. total Plan costs, if 5.5% turns out to be what we really earn while the Plan assumes it will earn 7.5% (and uses that 7.5% in discounting Plan liabilities and hence for funding contribution calculations), are MORE THAN DOUBLE (actually 111.18%) what was anticipated at the time the employee was hired. Clearly, responsible elected officials would never have granted such a generous pension had they known the very high ultimate cost….. and good judgement would suggest more conservative Plan formulas and provisions based on the greater risk and higher cost of interest rates coming in lower than assumed.

    Also, due to the wide range of ratios, Plans using Moody’s adjustment formula would be wise to analyze how their own plans stack-up against that theoretical “average Plan well represented by Moody’s formula, For example, a very mature Plan with a large retire population and a declining active population would likely find a much SMALLER impact (that the 27.65% overall average increase) from earnings coming in at 5.5% (vs the official 7.5%), than would a Plan started with the past few decades and with a low ratio of retirees to actives.

  7. Tough Love says:

    Here’s another shot at that Table …… hopefully formatting will hold this time.

    PV of Future Payout*
    Years Pre Years ————————————-
    Retirement Retired @ 0.075 @ 0.055 Ratio

    Active 30 1.6319 3.4460 2.1116
    20 3.3634 5.8863 1.7501
    10 6.9321 10.0546 1.4504
    4 10.6983 13.8637 1.2959
    3 11.5007 14.6262 1.2718
    0 14.2872 17.1747 1.2021
    Retired 5 14.0309 16.3313 1.1640
    10 12.9884 14.5925 1.1235
    15 10.7472 11.6173 1.0810
    20 6.7074 6.9529 1.0366

  8. Ed Ring says:

    This is very interesting. Thank you. Your point about the MUCH higher sensitivity for the liability PV calculation for new hires is well taken.

  9. Mike DeBord says:

    For Sacramento County, your chart shows a $100 million figure for Healthcare Liabilities when the County has no long term liability. The County no longer pays a health or dental subsidy to its retirees. 2013 was the final phase-out year and only for only those retirees making less than $2,000 a month and still enrolled in a County-sponsored health plan. Clearly there is no long term liability. The only other remaining retiree subsidy is one that relates to a legal matter as a result of a PERB ruling issued after the County eliminated the retiree subsidy in 2007 without negotiating that change with the unions. The only retiree subsidy being paid in 2014 is for some retirees who were previously represented by the Deputy Sheriff’s Association and those payments are in accordance with the current labor contract. No long term liability here either. You should remove the $100 million liability from your chart and calculations as you are overstating the Total Retirement Liabilities and understating the Total Funded Ratio.

  10. Ken Churchill says:

    Kerry according to the http://www.pensiontracker.org website most CalPERS run pension plans are 75% funded as of the end of 2013. http://www.pensiontracker.org

    But the article is not about CalPERS. These are the CERL counties with their own pension systems that they run and we are just using their numbers and estimating what the liabilities would be at different discount rates for informational purposes. So calling us liars is not appropriate.

    You should also be made aware that CalPERS themselves have decided to lower their discount rate from 7.5% to 6.5%.

  11. Susanne Coria says:

    Valuable post , I am thankful for the points ! Does someone know if my business would be able to grab a blank a form version to edit ?

Trackbacks & Pingbacks

  1. […] Evaluating Total Unfunded Public Employee Retirement Liabilities in 20 California Counties, May 6, 2014 […]

  2. […] 2014 study of the 20 independent county pension systems by the California Public Policy Center, “Evaluating Total Unfunded Public Employee Retirement Liabilities in 20 California Counties,” indicates when bond debt and unfunded retiree healthcare benefits were added to the county […]

  3. […] study of the 20 independent county pension systems by the California Public Policy Center, “Evaluating Total Unfunded Public Employee Retirement Liabilities in 20 California Counties,” indicates when bond debt and unfunded retiree healthcare benefits were added to the county […]

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