The Financial Impact of Pension Obligations on Ventura County

“The rare problem of high pensions going to top public executives was solved last year by state legislation. Pensions will now be based on the salary cap for Social Security taxes: $117,000…  The highly exaggerated “unfunded liability” problem is resolving as the stock market and tax revenues recover from the recession. The Ventura County Taxpayer Association’s “reform” scheme was hatched as a Wall Street scam to convert well-managed public pension portfolios into thousands of individual IRA’s. These are more dependent on mutual funds and lose more of their value to broker’s fees…”
– Excerpt from recent comment on UnionWatch Editorial “Pension Reform Comes to Ventura County.”

Using Ventura County as an example, it would be instructive to respond in detail to this comment. Because Ventura County’s pension system is, relatively speaking, one of the more financially stable systems in California, and because the benefits they pay their retirees are fairly typical of what local government workers may expect throughout California.

“The rare problem of high pensions…”

This really depends on how you define “rare,” and how you define “high.”

Here are some figures, and readers may decide for themselves:

In Ventura County, during 2013, there were 28 retirees collecting pensions over $200,000 per year; and there were 425 retirees collecting over $100,000 per year. None of the figures cited here include benefits, which the Ventura County Employee Retirement System refused to provide to the researchers at Transparent California. Would a $100,000 per year pension be considered “high?” Would 425 people constitute “rare cases?”

Continuing, since to normal people, a “high” retirement income might be, say, twice the maximum Social Security benefit of $31,000 per year – how many retirees in Ventura County collect pensions in excess of $62,000 per year? Only a few. Only 977 people. Over $50,000 per year? Only 1,360 people.

Before moving on, let’s debunk the canard, repeated incessantly and everywhere, that “average” pensions are very low, unlike these “isolated” and “rare” cases of “high” pensions. But let’s not use an average that includes every employee who ever worked for the County of Ventura – let’s restrict this average to people who retired after 30 years or more in government service – that is, they started work, for example, at age 25, after a lingering trek through college or youthful employment, then retired at the ripe old age of 55 – twelve years before people in the real world get to collect – at most – their $31,000 Social Security benefit.

Ventura County retirees with 30+ years of experience had an average pension in 2013 of $92,948 – not including benefits. And it gets better: If they retired in 2000 or afterwards, i.e., after the “negotiated” benefit formulas were enhanced, their average pensions in 2012 were $97,667 – not including benefits. Skeptical readers may refer to Transparent California’s 2013 Ventura County Pension data. Download the spreadsheet. Do the math.

Let’s recap. The average pension plus benefits for anyone retiring after 30 years working for Ventura County is almost certainly over $100,000. Not “rare.” Very “high.”

To move on…

The highly exaggerated “unfunded liability” problem is resolving as the stock market and tax revenues recover from the recession.”

Ventura County’s pension system is 79% funded, putting it well ahead of CalPERS and CalSTRS, and within spitting distance of the supposedly secure 80% threshold that supposedly signifies financial stability. But there are clouds on this horizon, hovering over the pristine Channel Islands offshore, dark clouds that may even enshroud Ventura County’s supposedly stable pension system. Here’s why:

According to the Segal Consulting’s Actuarial Valuation and Review as of June 30, 2013 for the Ventura County Employees’ Retirement Association, the rate of return they assume they can earn on their $3.6 billion of invested assets is 7.75% (ref. page ii “Significant Issues”). But their rate of return earned over the past ten years – using the “valuation value,” i.e., the more accurate “smoothed” rate of return – was only 6.21%, and over the past five years it was only 3.90% (ref. page 10, chart 12, “Investment Return”).

The Ventura County Employee’s Retirement System is not hitting their numbers, and that’s no “exaggeration.” What does this mean?

If you further review Segal Consulting’s Actuarial Report, on page v, “Contribution Rates,” you will see that during fiscal year 2013 the county contributed $185.4 million, and the employees contributed $54.0 million, for a total contribution of $239.4 million. This total was how much they determined needed to go into the fund to cover the “normal contribution,” i.e., how much new future pension benefits were earned by active employees during 2013, plus the “unfunded contribution,” i.e., a payment against their unfunded liability of $953.4 million – assuming they are going to earn 7.75% per year on average, from now on.

But they only averaged 6.21% over the past ten years, and only 3.90% over the past five. How much more would their pension system be underfunded at those rates of return?

According to Segal’s report, page 50, exhibit III “Statement of Funding Progress,” as of 6-30-2013 Ventura County’s pension system had assets of 3.62 billion, liabilities of $4.58, and an unfunded liability of $953 million. Note this unfunded liability has increased from $290 million to $953 million in just five years.

Using formulas provided by Moody’s Investor Services, as summarized in a California Policy Center study and tutorial entitled “A Method to Estimate the Pension Contribution and Pension Liability for Your City or County,” at a rate of return of 6.21%, Ventura County’s unfunded pension liability explodes, from $953 million to $1.89 billion! Exaggeration? That’s what they’ve been earning for the last ten years. Using their most recent five year average of 3.9% as an indicator of future performance recalculates the unfunded liability to an unimaginable $3.7 billion.

How will this affect Ventura County’s financial health? According to their June 30th 2013 Financial Statements, Ventura County incurred $1.54 billion of “total primary government” expenses during their most recent fiscal year. Of that, we know $185.4 million, or 12%, were employer contributions to pay for pensions. Of that, using Transparent California’s 2013 Ventura County payroll data, we know $827 million went towards pay and benefits (including pensions), or 54% of total spending. And a mere 3,155 of Ventura County’s approximately 7,000 full time employees collected pay and benefits in excess of $100,000.

And as for average regular pay and benefits for full time employees of Ventura County? That data can be crunched using State Controller information that includes data fields to facilitate extraction of full time records. The average full time employee in 2012 (the most recent State Controller data) in Ventura County collected total pay and benefits of $103,159. Note the SCO information page for Ventura County provides much lower “averages,” because they don’t separate out the part-timers. Download the raw data by extracting Ventura County records from the SCO’s all-county spreadsheet, available here.

Take a look. No exaggeration. Very high.

To wrap up – one more comment bears examination:

“The Ventura County Taxpayer Association’s “reform” scheme was hatched as a Wall Street scam to convert well-managed public pension portfolios into thousands of individual IRA’s.” 

Good try. Because public finance is already saturated with Wall Street greed and Wall Street corruption, from the pension funds who pour taxpayer’s money into Wall Street’s global investment casino, to bond underwriters who salivate every time another union negotiated labor agreement throws cities and counties into deficits that require financing. Wall Street has made trillions off America’s public sector, and doesn’t need 401K plans to enhance their take. It is true that the optimism with which starry eyed libertarians seem to view the financial security offered by 401K accounts is as naive as the optimism that drives those 7.75% annual return projections of the pension funds. But taxpayers cannot be held responsible for pension funds that miss their mark. If defenders of defined benefits want to keep them, they will have to accept retiree pension payout structures that adjust downwards when returns drop, sparing taxpayers. Otherwise, 401K plans will win by default – pun intended.

*   *   *

Ed Ring is the executive director of the California Policy Center.

4 replies
  1. Tough Love says:

    Ed, It’s not just Taxpayers being on the hook for actual investment earnings coming in lees than the assumed rate.

    As a matter of fairness to Taxpayers, “Total Compensation” (cash pay + pensions + benefits) in reasonably comparable Public & Private Sector jobs should be very close.

    While various studies show some winners and losers with respect to “cash pay” alone, in total, (for all comparable occupations taken together) “cash pay” in the Public and Private Sectors is very close.

    However, it is EASILY shown (as both you and I have demonstrated on many occasions) that the Taxpayer paid-for share of Public Sector pensions and benefits is ALWAYS multiples greater in value at retirement (TYPICALLY 3x-4x greater) than those of comparable Private Sector workers.

    The flaw in your only suggesting that asset earnings shortfalls should not be covered by the Taxpayers is that it completely ignores Plan generosity (the ROOT CAUSE of the financial mess we are in today).

    With Public Sector workers earning no less in cash pay, and EQUAL “Total Compensation” the appropriate goal, there is simply no justification for ANY greater Public Sector pensions or benefits, lets alone the CURRENT promises that are always MULTIPLES greater in value at retirement.

  2. SDouglas47 says:

    You funny, Ed.

    jjohnjj is correct.

    Surely your hyped examples will rile up the masses, but wait, as the late Paul Harvey said, for the rest of the story.

    First, PEPRA …..WILL reduce this spiking for new employees. Converting to a DC plan will not effect spiking for existing employees. Whether or not the initiative passes, all current employees will still benefit from the current laws.

    ” Would 425 people constitute “rare cases?”

    Actually, yes. That’s about ten percent of VC retirees. But you’ve already said these pensions are as high as they are due to spiking. Those numbers will come down (relatively) as present workers quit or retire and new workers come in under PEPRA. Statewide, $100,000 retirements are fewer than two percent. Even without spiking, one would expect a higher percentage of $100k pensions in a county with one of the highest median incomes in the state. (“an affluent and idyllic coastal region that includes cities to the north of Malibu and south of Santa Barbara.”)

    No doubt any California voter (taxpayer) with an “average” income will be shocked by and envious of these pensions.

    BUT….

    As surely as the

    ” canard, repeated incessantly and everywhere, that “average” pensions are very low,”

    1) Comparing “average” wages in the private sector to “average” public sector wages, is by now well recognized as comparing apples to oranges.

    2) Comparing pensions outside the context of “total compensation” is worse than meaningless. It is misleading.

    3) Studies of total compensation of equivalent public and private workers range from “roughly equal” to (in California) a twenty to thirty percent “advantage” for public sector workers……….ON AVERAGE!

    4) ALL reputable studies agree that, as a general rule, lower level government workers earn more “total compensation” than their private sector peers, and higher level, professional and degreed public workers earn MUCH less than equivalent private sector counterparts. This “total compensation” INCLUDES the current cost of retiree healthcare and pensions, using the riskless discount.

    The question is not WHETHER some public workers earn less. The disagreement is, how many, and how much, less these workers earn than they might in the private sector.

    “Nevertheless, a significant total compensation penalty remains for both professional and doctoral degree holders. It is worth considering how government may continue to attract better-educated employees despite a seeming compensation penalty.”

    (American Enterprise Institute, 2014)

    Ironically, some of the proposed changes will reduce EVEN FURTHER the compensation of those who are MOST under compensated already.

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published.