The Sonoma County Retroactive Pension Increase: Gross Incompetence or Billion Dollar Scam?

In 2002, the Sonoma County Board of Supervisors agreed to essentially increase pension benefits by 50% back to the date people were hired. However, County records show that the deal cut between the employees and the Supervisors stated that General employees would pay for the entire cost of the increase and Safety employees would pay for half the cost of the increase. This is the story of how the employees ended up paying for 6-10% of the cost and how the current Board of Supervisors seem willing to let them get away with it.

Background

Sonoma County is one of the 20 counties governed by the County Employee Retirement Law (CERL). The county has its own plan administrators, the Sonoma County Employee Retirement Association (SCERA). Their job is to collect pension contributions from the County and the employees, perform an annual actuarial valuation each year to determine if changes in contribution rates are necessary, to manage the investment of the funds, and to distribute funds to the retirees.

When benefit levels are increased, there are specific requirements that need to be followed. They are outlined in CERL in Sections 31515.5 and 31516. Section 31515.5 requires SCERA to have an enrolled actuary prepare an estimate of the annual actuarial impact of the benefit increase on the pension fund. The actuarial data is required to be reported to the Board of Supervisors. Section 31516 requires the Board of Supervisors to secure the services of their own enrolled actuary to provide a statement of the actuarial impact upon future annual costs before authorizing increases in benefits. It also requires that the future annual costs as determined by the actuary be made public at a Board meeting at least two weeks prior to the adoption of any increase in benefits following Brown Act Requirement. An actuary is also required to attend the board meeting to answer the Public’s questions.

However, a review of County documents indicates that none of these requirements were followed. In 2002, SCERA asked their actuary Rick Roeder of Gabriel, Roeder & Smith (GRS), to provide cost estimates for the enhanced benefits for Safety and General employees.

Mr. Roeder estimated the cost impact of a 3% at 50 benefit formula for Safety employees with and without Accelerated Retirements (AR) and with AR advocated by another actuary John Bartel (JB). The analysis was also based upon only the CURRENT employees paying for the increased benefit. The estimated costs outlined in the letter were as follows:

Based on 2001 Actuary Report:  Liability Increase, Net Contribution Increase

3% at 50, no Accelerated Retirement:  $18,542,937, 6.96%

3% at 50, with Accelerated Retirement:  $22,578,745, 8.51%

3% at 50, with AR advocated by JB:  $25,182,565, 9.48%

According to the analysis, if current Safety employees paid for their retroactive benefit increase, they would have had their contribution increased by 9.48%, from 7.31% to 16.79% of payroll to cover the increased benefit cost. Later, SCERA asked Rick Roeder what the cost would be if all CURRENT and FUTURE Safety employees had their contributions increased and his estimated cost dropped to just 3.71% of payroll.

The 3.71% number appears to be what was presented by SCERA to the Board of Supervisors as the actuary’s cost estimate to cover the benefit enhancement for Safety Employees. No annual cost was provided by the actuary, as required by CERL, only the total cost of the increase which was estimated to be about $25 million.

When the benefit increase was passed for Safety employees in 2002, it included a 3% at 55 formula from 2004 to 2005, and then it became a 3% at 50 formula in 2006. According to agreements between the employee union and the County, the Safety employees would pay for half the cost of the increase with a 1% increase in employee contributions in 2003, a 1% increase in 2004 and a 1% increase in 2005.

A review of the 2002-2008 contract with the Safety unions shows that though the employees were required to contribute an additional 3% of salary to their pensions, in the same agreement, the County agreed to pick up an additional 2% of the employees previous contribution to the pension fund. So the net contribution from the Safety employees to cover a 50% retroactive benefit increase was 1% of their pay, not nearly enough to cover 50% of the cost, which was what was approved by the Board of Supervisors in 2002.

General Employee Actuarial Benefit Enhancement Study

In the actuary’s letters for the General employee cost for the benefit increase there was a lot less information provided by Rick Roeder and John Bartel, was not retained to assist with estimating the cost for accelerated retirements, as he had for the Safety employees.

The first document estimating the total cost for the increased General employee benefits is a letter dated March 20, 2002 from Rick Roeder of GRS to Robert Nissen, Plan Administrator and Gary Bei, Assistant Plan Administrator of SCERA. The letter said the cost was based upon the year 2000 Annual Actuarial Valuation. It estimated the 3% at 60 benefit enhancement cost was $60,016,104 for a 5.43% contribution increase from CURRENT employees. At the end of the letter Rick Roeder states “If you like, we can perform additional analysis to reflect the fact that increased benefits may trigger earlier retirement.”

The second and only other document estimating the cost is a letter dated June 5, 2002 that updates the benefit enhancement to 3% at 60 based upon the 2001 valuation indicating the cost is $68,614,650 for a net contribution increase of 5.78%. At the end of the letter, Rick Roeder states that “It is IMPORTANT to consider that the combination of increased benefits and earlier ages at which multipliers hit a ceiling may trigger earlier retirements, especially for the 2.7% at 55 proposal. This in turn, would have some cost increase impact. Please let us know if you wish to do additional analysis in this regard (as we did for safety 3% at 50 analyses).”

When I talked with Gary Bei of SCERA, he confirmed that SCERA never performed an actuarial study with accelerated retirements per Rick Roeder’s recommendation and the estimate did not include annual costs as required by CERL. In addition, it appears that the Board of Supervisors failed to hire their own actuary, to provide a cost estimate of the increase in benefits, also a violation of the CERL. The failure of SCERA to follow the actuary’s advice to include accelerated retirements, and to represent to the Board of Supervisors an inaccurate cost for the benefit increase is a serious issue that deserves further investigation by the current Board of Supervisors and possibly the Sonoma County Civil Grand Jury.

The County Documents and Board Resolutions

The following language was found in County documents that confirms the employees were required to pay for the increase:

• Board Resolution No. 02-1305 Dated December 10, 2002: WHEREAS, 3% @ 60 retirement program will be effective 6/22/04 and employees are paying for prospective normal cost and past service, primarily through increased retirement contributions.

• Agenda Item Board Date 12/10/02: Exhibit A, Summary of Salary Resolution Revisions: 3% at 60 retirement program effective 6/22/04. All unrepresented employees will be paying for costs of prospective and past service through increased retirement contributions and other offsets similar to the arrangements with represented employee groups.

• In the resolution between the County and SEIU Local 707 (2002-2008 MOU) board date July 23, 2002: “Retirement: 3% at 60 retirement program effective in the 3rd year. Employees paying for prospective normal cost and past service, primarily through increased retirement contributions.”

• In the Agenda Item Summary Report for the 2003 Pension Obligation Bonds on April 29, 2003: “It should be noted that the additional cost of these negotiated benefits are to be fully paid for by employees starting in July 2004.”

• On the financial summary of SEIU MOU from Board Minutes for May 4, 2005: “The County Board of Supervisors established direction to staff that the marginal increase in costs associated with the “3% at 60” plan be borne by the employees.”

For Safety Employees

• Agenda Item Board Date 12/17/02: Retirement: 3% at 55 retirement program effective in July 2003, and 3% at 50 retirement program effective in February, 2006 with employees paying approximately one-half of the anticipated total cost primarily through increased retirement contributions.

Retirement Pick-up: The County will pay 1% of the employees’ retirement contribution beginning in February, 2006 and another 1% in February, 2007.

The Cost of Accelerated Retirements

It became clear to SCERA a year after the new benefits took effect that accelerated retirements (that were not included in the original cost analysis) had became a problem which dramatically increased the number of retirees and the average pension.

The minutes for the Employee Retirement Association Special Meeting May 4, 2005 state, “In 2003 there were 38 General members retiring with an average annual pension of $22,468. In 2004, due to increased benefits there were 217 general members retiring with an average annual pension of $37,715. A long-term structural question needs to be explored – to what extent are people retiring earlier due to increased benefits and consequently should the actuarial assumptions be adjusted? The Retirement Board may want to look at adjusting the assumptions after the next experience study is performed.”

The True Cost of the Pension Increase

The chart below shows what each employee contributed towards the increase, 3rd column, and the value of the increase, last column, if the employee retires at 60 and lives to 80. As the chart also indicates, the employee contribution per year only covers about 1% of the additional cost to the county over their 20-years in retirement. The costs do not include cost of living adjustments (COLA) for retirees which would add as much as 50% to the County’s costs. COLA’s are optional under the current plan.

The chart below shows that since the increase and up until 2016, the employees who have or will retire contributed $55 million towards the increase and the County has ended up with an additional $805 million pension obligation. These costs will continue well beyond 2016 unless changes are made to the pension formula.

Calculation of Employers Increased Pension Obligation Due to Pension Increa

Assumptions for both Charts: Average employee retires at the average salary, worked 23 years, retired at 60 and lives to 80. It uses the actual number of retirees from 2004 to 2010 with 50% of the current work force retiring from 2011 to 2016, as estimated by the County. Average actual salaries from 2004 to 2010, with an estimated 4% annual increase from 2011 to 2016.

Conclusion

As described in this document, the County and SCERA violated the CERL requirements when it increased benefits and the actuary’s estimated 3% additional employee contribution, which was suppose to cover the entire cost for General and 50% of the cost for Safety employees covered less than 10% of the cost. The bottom line is that if the proper actuarial numbers were provided to the Board of Supervisors and the they were told that the costs in excess of the estimate would be borne by the County, they probably would not have approved the increase.

Unfortunately, there is no easy fix for this problem because already 1300 people have retired with the increased benefits, and by 2016, 3000 employees will have retired with benefit levels that were improperly granted. It is a mess, but it is a mess the current Board of Supervisors cannot ignore since taking money from the General fund to pay for the pension increase is not something that was ever approved by the Board of Supervisors in 2002. As a result, they either have to find a way for the employees to pay for the increase or void the benefit increase all together.

Currently the employees are telling the Board of Supervisors that the 3% was just intended to pay for the increase and they are not required to contribute anymore towards the cost.

Ken Churchill is a retired business executive and member of a small group of financial experts in Sonoma County who are working to reform the County’s pension system. Earlier this month, he published an introduction to the Sonoma County pension challenge entitled “How Retroactive Pension Increases and Lower Investment Returns Have Blown Up Sonoma County’s Pension System.” He has written a comprehensive report on the County’s pension problem that documents how the crisis has occurred and what can be done to fix it. It is titled The Sonoma County Pension Crisis – How Retroactive Benefit Increases, Overly Generous Salaries, and Poor Financial Management Have Destroyed the County’s Finances.