CPC Study Finds Orange County Pension Plan Contributions Grossly Inadequate
FOR IMMEDIATE RELEASE
Sacramento, California, September 13, 2013
Saddled with a massive debt on what is needed to meet its pension obligations to County workers and other participants, the Orange County Employee Retirement System (OCERS) added more than $100 million to that debt in 2012 because it chose to underfund its so-called “catch-up” payment. That is the conclusion reached by a study released this week by the California Policy Center. Using data from publicly disclosed financial reports – the most recent OCERS annual report as well as their most recent actuarial valuation and review – the study evaluated how much cash was actually contributed to the plan in 2012, including how much was contributed to pay down their unfunded liability.
During 2012 OCERS collected $628 million from employees and employers to invest in their pension fund. Of this $628 million, $410 million was the so-called “normal contribution,” which was a payment to cover the present value of future pensions earned during 2012 by actively employed participants. The other $218 million that was collected and invested in the fund was a “catch-up” payment to reduce the unfunded liability, which at the end of 2012 was officially estimated to be $5.6 billion.
Using pension evaluation formulas and unfunded liability payback terms formally recommended by Moody’s Investor Services in April 2013, this study shows that if the “catch-up” payment is calculated based on a level payment, 20 year amortization of the $5.6 billion unfunded liability – still assuming a 7.25% rate-of-return projection – the 2012 catch-up payment should have been $546 million per year, more than twice what was actually paid. The study also shows that if the OCERS pension fund rate-of-return projection drops to 6.20% (the average return for OCERS since 2004) the unfunded liability recalculates to $7.74 billion and the catch-up payment increases to $685 million per year. At a rate-of-return projection of 4.81% (recommended by Moody’s), the unfunded liability recalculates to $10.95 billion and the catch-up payment increases to $865 million per year.
The inescapable conclusion of this study is that OCERS has relied on optimistic long-term earnings projections and adopted very aggressive unfunded liability repayment schedules in order to pay the absolute minimum into their pension fund in 2012. As a result, their officially recognized unfunded liability actually increased during 2012 by over $100 million. If OCERS is required to even incrementally lower their rate-of-return projections – something that market conditions may eventually dictate – their funded ratio which is already only 62.52% will fall precipitously.
To read the entire study, click on “Are Annual Contributions Into Orange County’s Employee Pension Plan Adequate.”
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The California Policy Center is a non-partisan public policy think tank that aspires to provide information that will elevate and enlighten the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at www.CaliforniaPolicyCenter.org.