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.

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

Pension Reform Comes to Ventura County

“401Ks carry no guarantee, and that’s the distinction between a defined contribution system and a defined benefit system.”  – Rick Shimmel, executive director of the Ventura County Deputy Sheriffs’ Association, February 20, 2014, Fox News Soundbite

Truer words were never spoken, Mr. Shimmel. But when the “guarantee” can’t be lowered to levels that are merely unfair and burdensome, as opposed to monstrously unfair and financially catastrophic, then replacing “guarantees” with uncertainty and risk becomes the only option.

The latest attempt at pension reform in California is the Ventura County Pension Reform Initiative, affecting an affluent and idyllic coastal region that includes cities to the north of Malibu and south of Santa Barbara. It’s hard to imagine a nicer place to serve as the latest battleground in the pension wars.

What Shimmel objects to is the provision of the pension reform that creates a 401K “defined contribution” plan for all new hires to the county. The virtue of such as system is that the only commitment the employer makes is to deposit an agreed percent of each participant’s salary into a tax-deferred retirement account. Once the employee retires, they will draw on the retirement account until it’s gone. And if they run out of money, the employer – i.e., the taxpayer – doesn’t have to replenish their account.

How could it not have come to this? Despite well-orchestrated statewide protests against reformers who threaten the “modest pensions” of “working families,” Ventura County is no exception in terms of just how out of proportion their retirement benefits are compared to private sector norms. Take a look at this “VCERA Retirement Benefit Calculator” to do some informal Ventura County pension analysis:  A public safety employee making final compensation of $100,000 with 30 years service can retire at age 55 with a pension of $78,594 per year. Many of us look at these numbers too much. Exactly what part of $78,594 for the rest of your life, starting at age 55 – “guaranteed” and including COLA adjustments – doesn’t sound rather excessive? If you wanted to save enough to pay yourself that much for 30 years using a 401K account, according to the conventional wisdom of responsible investment advisors, you would have to save between $1.97 and $2.59 million. How many 55 year old workers can save that kind of money? But wait, there’s more. While on the VCERA retirement benefit calculator webpage, take a look at their “Retirement Compensation Definition:”

“In addition to base salary, compensation earnable may include, but is not limited to:
Flexible Benefit Credit (total)

Educational Incentives
Employer-paid employee retirement contributions
Employer-paid FICA
Assignment and shift bonuses

Automobile allowance
Annual Leave or Vacation Redemption, limited to the hours you actually redeemed during the normal course of active service, and within the 12 or 36 month period to be used for the measurement of final compensation, not to exceed the number of hours actually accrued during that measurement period, reduced by the number of hours you were required to use in order to qualify to redeem annual leave or vacation.
30 year incentives
Uniform Allowances
Overtime that is scheduled as part of your normal work week”

“Employer-paid employee retirement contributions” and “employer paid FICA” count as “Retirement compensation” for the purposes of calculating a pension. Is this a joke? Automobile allowance? Uniform allowances? Vacation time? “Scheduled overtime”? Using this assortment of criteria, it must be common for full-time senior employees to break $100,000 in eligible final compensation, and many will break $200,000. Skeptical? Go to the TransparentCalifornia website and look up “Ventura County Pensions.” Too bad they didn’t provide the researchers with “years of service,” to debunk the absurdly low averages that are continuously used to mislead voters – averages that include people who only worked a few years.

Ventura’s pension reform has a good chance of being passed by voters, should it make it onto the ballot. But it represents not so much an ideal solution as the only solution that might be expected to survive court challenges. This is a shame. Here is a summary of some pension reform options:

(1) Move to a 401K plan for new hires and make marginal reforms to existing defined benefit plans. Benefits: It will probably survive a court challenge. Drawbacks: It won’t beneficially impact pension fund cash flows for decades, and it creates two very distinct tiers of public servants. An example of this is the Ventura County Pension Reform Intiative (text).

(2) Require all new employees to earn pensions according to lower benefit formulas that are financially sustainable, make marginal reforms to existing defined benefit plans.  Benefits: It will survive a court challenge. Drawbacks: It still won’t beneficially impact pension fund cash flows for decades, if ever. An example of this is CalSTRS “2% at 60” plan for participants hired after 1-1-2013.

(3) Require all active employees, new and existing, to earn pensions from now on according to lower benefit formulas that are financially sustainable.  Benefits: This program will create immediate significant reductions to required annual contributions.  Drawbacks: It still creates two tiers of employees, favoring veteran employees and retirees, because it does not retroactively reduce any formulas or benefits. Also, even though this reform only impacts future pension benefit accruals, by affecting existing employees it is an allegedly unconstitutional violation of “vested contractual rights.” An example of this reform is the state pension reform initiative “Pension Reform Act of 2014” (text) championed by San Jose Mayor Chuck Reed – and probably tabled till 2016, thanks to the power of public sector unions and their political partners, the public employee pension funds.

(4) Suspend cost-of-living adjustments for all pensions for all retirees collecting in excess of, say, $75,000 per year, and concurrently, lower pension formulas on a pro-rata basis, retroactively affecting vested pension benefits and prospectively affecting ongoing pension accruals, for all new and all existing employees, by the additional amount necessary to restore 100% solvency to the fund. Benefits: Solves the problem overnight, and spreads the sacrifice equitably among ALL public servants, rather than punishing the new employees to protect the veterans. Drawbacks: There are legal arguments supporting the position that such measures violate “vested contractual rights.” For examples of this option, look to Detroit and Rhode Island. But the sooner this option is exercised, the less onerous the sacrifices.

An aside: It’s funny how the questionable legality of retroactive pension benefit enhancements never bothered the defenders of defined benefits.

What defenders of defined benefit pensions such as Rick Shimmel should consider is this:  What options three and four accomplish – however unpleasant they may be to veterans accustomed to the current system – is preservation of the defined benefit. What option four offers is conversion to an “adjustable defined benefit” that “adjusts,” whenever necessary, in a manner that preserves solvency, protects taxpayers, and spreads the sacrifice among all participants – new hires, active veterans, and retirees – in an equitable manner, minimizing the sacrifice any single class of participants might have to experience. Social Security, by the way, is an adjustable defined benefit.

What reformers who focus on conversion to 401k plans are doing, unfortunately, is facing reality. The reality is that unions and pension funds refuse to accept meaningful compromises – leaving nothing but the nuclear option of 401K conversions to detonate amidst the palm trees and sandy beaches of Ventura County. Many of the union spokespersons can be forgiven for some of their intransigence, because they are being mislead by spokespersons and strategists representing pension funds into thinking the financial challenges these funds face are manageable without major upheaval. They are not.

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