Double Dipping at the Public Pension Trough

On December 30, the Los Angeles Times reported that James Mussenden, the retired city manager of El Monte, raised his total annual cash pension benefit to $216,000 by using a Supplementary Retirement Plan from Public Agency Retirement Services (PARS). The PARS plan is not unique to El Monte: if the leadership of any public agency concluded that the generous retirement benefits available from CalPERS or CalSTRS was insufficient for their post-retirement lifestyle and they were able to convince their council or board to go along, taxpayers in their city, special district, school district or community college district would find themselves paying into an additional plan.

Unlike CalPERS, CalSTRS and California’s various city and county pension plans, PARS is a private company with limited disclosure obligations and without exposure to the California Public Records Act. As a result, it is more difficult to assess the impact PARS is having on the size of public employee retirement payouts and on the taxpayers who fund them. Fortunately, some PARS data can be obtained through public agencies that use its services or who receive its reports. California Policy Center is collecting data on PARS, and we can start sharing some of that information here.

First, some caveats are in order. PARS offers a variety of retirement plans including several defined contribution options. Since these DC plans do not place taxpayers on the hook for disappointing investment performance, they are less objectionable to pension reformers (but because DC plans may involve employer matching contributions, they could still be questioned from the perspective of whether total public employee compensation is appropriate – but that’s another story). Also, the California Public Employees’ Pension Reform Act (PEPRA) effectively prevented California agencies from starting new PARS defined benefit plans and adding new hires to existing ones. Still, the numerous PARS defined benefit plans around the state entitle many current employees to receive outsize pensions at significant taxpayer expense.

The State Controller’s ByTheNumbers web site reports that PARS defined benefit programs have $355 million in assets and are 49% funded. That data comes from the Public Agency Retirement Systems Trust 2015 Audited Financial Statements, which we obtained through a Public Records Act request and can be seen here. One concern about PARS is how employer contributions are invested. According to the audit, a large portion of the funds have been placed in Highmark Capital Management portfolios. As shown here, HCM invests PARS assets into mutual funds, which means that management fees are being paid both to HCM and each individual fund manager. HCM’s fee alone is 0.58%. High management fees can be expected to depress portfolio returns – keeping them well below the 7.5% actuarial projection.

The audit also lists entities that offer PARS plans. From that list, we identified 114 public agencies that had PARS defined benefit plans as of June 30, 2015 (one of these, the City of San Bernardino, is liquidating its PARS plan as part of its Chapter 9 bankruptcy process.

One California city that has been hit hard by PARS obligations is Redding in the far northern part of the state. Like many inland cities, Redding is struggling with weak revenues. According to its most recent financial audit, total city revenues remain well below their pre-recession peak of $308 million – totaling just $288 million in the 2016 fiscal year. Tax revenues peaked at over $60 million in 2008 and were just $48 million in 2016.

Meanwhile the city was required to cough up $5.8 million in PARS contributions on top of the $15.2 million it had to pay CalPERS. So a large proportion of Redding’s tax take is needed just to fund add-on pension payments.

Redding’s net PARS liability is $31 million based on an optimistic discount rate of 7.5%.  Using a more realistic discount rate, its net liability would be in excess of $50 million.

In a forthcoming article we will discuss how Redding’s PARS plan came to be and who has benefited from it (hint:  the story is not too different from that of El Monte).  Also, if readers have stories about PARS at individual agencies, please consider sharing them with us in the comments, by email or via Facebook.