Fresno County pension costs could squeeze services Payouts expected to hit $184m.
By Kurtis Alexander - The Fresno Bee Wednesday, Dec. 28, 2011 | 11:00 PM
Fresno County's retirement costs are expected to hit $184 million next year. After debt payments are factored in, that could account for as much as a record 14% of the county government's annual budget.
County leaders had anticipated that retirement expenses would grow.
Amid the lagging economy, the pension fund's investments simply have not kept pace with payout promises. But the county has yet to figure out how it will cover the growing liability.
The county already is stretched thin -- jail floors have been closed, parks go without maintenance and library operations have been scaled back. With no clear recovery in sight, financing the retirement system next year all but guarantees more cuts to public programs and possibly cuts to positions, too.
"It means people won't receive the direct services they're paying for," county Supervisor Judy Case said, adding that retirement expenses could hamper public safety, tax collection and other core services. "This is a problem. It's just not reasonable that so much of the total expenditures of government are being used to pay pensions."
The county's retirement costs next fiscal year are laid out in an actuarial report released this month by Segal Co. of San Francisco.
The expense, which will come due between July 2012 and July 2013, is based on how much is needed to make sure future pension obligations are met.
Next year's projected $184 million tab, which comes alongside $36 million the county will owe on pension debt, represents a $10 million increase over last year's costs. It's more than double what the county paid for retirement six years ago.
And, the costs aren't likely to let up soon. According to a Virginia-based financial consultant contracted by the county, the retirement expense will peak between 2014 and 2020 and won't drop below the current level until 2024.
"It's a big chunk going to their retirement plan," said Joe Nation, a former state Assembly member and public policy professor at Stanford University who has criticized the expense of California's many pension programs.
How much a public agency should spend on retirement is relative, say government experts like Nation. But recent comparisons of local government show Fresno County's pension system, as a percentage of payroll, is among the state's most costly.
"At some point, people are going to wake up and understand the connection between pensions and social services, education and so forth," Nation said.
According to the Segal report, the county's pension fund has 73.5% of the money it needs to meet future pension obligations, as of June 30.
Most policy experts consider a fund financially healthy if it's at least 80% funded.
Becky Van Wyk, acting administrator of the county's retirement program, said despite the low funding ratio, the fund's stability is improving.
The recent investment losses that are largely responsible for the fund's shortfalls are beginning to be offset not only by the county's larger retirement contributions but by better investment returns.
Last fiscal year, the pension fund earned 23% on its investments, higher than most funds in the state, according to a recent survey by Portland, Ore.-based financial consultant R.V. Kuhns & Associates. As a result, the county's retirement system had nearly 1 percentage point more of the money it needs to meet its future obligations than the prior year.
While Van Wyk manages the county's pension fund, the major costs associated with the fund are determined by the Board of Supervisors, which establishes benefit levels.
While the Board of Supervisors is in the unenviable position of addressing growing retirement expenses, it's the board's policies that are partly to blame for the cost.
Little more than a decade ago, with a pension fund flush with investment returns, county supervisors, including Case, agreed to bump up retirement perks to settle a legal dispute with labor groups. Supervisors were already providing among the most generous benefits allowed under state law.
Under the county's pension program, most employees are eligible for retirement at age 50 or 55, and for every year worked, they receive 2.5% or more of their highest annual pay.
The formula makes for high costs.
While employees are required to put about 9% of their salary toward their retirement, the deduction covers only a fraction of the expense.
The county's contributions, combined with returns the county makes on its investments, are responsible for the rest.
The recent troubles for the county came when the stock market took a dive in 2008. That left a big gap in the pension fund that the county is still working to fill.
Meanwhile, the county made bigger pension payouts as employees live longer and make more money.
County supervisors have long discussed ways to reduce retirement costs by scaling back benefits. But their hands are tied by past commitments to employees.
The board this year put in place a new, less-expensive tier of retirement benefits.
The new tier, however, applies only to new hires who aren't likely to retire for years, meaning little financial reprieve in the short term.
"The take-home message is we can't afford our retirement program. ... We have to start reducing costs somewhere, and this is the only way we can do it," said county Supervisor Phil Larson, who also sits on the county's retirement board.
The Board of Supervisors is expected to approve the retirement contribution recommended in the Segal report in January.
The county's total budget this fiscal year is projected to be $1.64 billion. Next year's budget has not been set.
County labor groups acknowledge that retirement is eating into the budget. But they say the retirement benefits are hard-earned by employees and often came only by sacrificing higher pay.
Tom Abshere, director of the county chapter of Service Employees International Union, blames county supervisors for mismanaging the finances of the pension system, adding that employees have been wrongly scapegoated for the problems.
He said, for example, the county should have socked away more money for retirement during the booming '90s to avoid the shortfall it has today; instead, the county cut its retirement contributions then.
"It's like not paying your housing mortgage for a year," Abshere said. "You're going to have to catch up for the next 29 years."