A little-known private firm that has sold customized supplemental pensions to dozens of California cities, including bankrupt Stockton and San Bernardino, is prohibited from selling more by a pension reform bill that took effect this year.
Public Agency Retirement Services or PARS, sounding close to the “PERS” in CalPERS, can continue to offer other types of retirement plans, including 401(k)-style individual investment retirement plans and pre-funding retiree health care.
An audited financial statement shows that as of June 30, 2011, PARS had $621 million held in trust for 467 local government plans — $242 million for “defined benefit” pensions and $379 million for 401(k)-style “defined contribution” plans.
“Since 1984, the PARS team has designed and delivered over 1,100 individually customized solutions that have cumulatively saved over 600 public agency clients hundreds of millions of dollars,” says the website of the firm in Newport Beach.
Pension reform pushed through the Legislature by Gov. Brown last year, AB 340, gives new state and local government employees much lower pensions and specifically prohibits new supplemental pensions.
The reform’s single statewide pension formula for new hires is intended to end market-like competition that ratcheted up benefits and employer costs. During labor bargaining, employers were urged to match pensions offered by other employers.
A leading example: A major pension increase for the Highway Patrol, enacted by CalPERS-sponsored SB 400 in 1999, was matched by many local police and firefighters, resulting in what critics say are excessive benefits and “unsustainable” employer costs.
But the menu of pension formulas available through the California Public Employees Retirement System is limited and set by legislation. Unions for most workers could bargain for a half dozen pension formulas, ranging from modest to very generous.
PARS gives employers the flexibility to customize pension formulas, target specific groups, set eligibility and vesting requirements, offer payment through insurance-run annuities or lump sums and direct some investments.
At a legislative hearing on pension reform last year, the nonpartisan Legislative Analyst’s Office raised the issue of whether local governments can use PARS to skirt legislative intent.
A two decade-old bill, SB 53 in 1993, made some types of elected or appointed officials, such as board members of school districts and special districts, ineligible for CalPERS pensions.
Some special districts give board members PARS pensions. Among them are the Water Replenishment District of Southern California and the West Basin Municipal Water District.
“There are a few cases where water districts have figured out a way around that law,” Jason Sisney of the analyst’s office told the hearing. “I think they have the right to do it under the law. But I am not sure that is what the Legislature intended back in ‘93.”
PARS has competed with CalPERS for early retirement incentives that boost pensions. The “golden handshake” is a way to cut staff without layoffs and save money, if the position is left unfilled or the replacement has a much lower salary.
An argument for choosing the PARS incentive rather than CalPERS was made in a San Bernardino staff report last July, well before the pension reform surfaced.
“The PARS early retirement program goes far beyond the limitations of the PERS option and it is far more flexible,” said the San Bernardino “budgetary analysis” issued last July 9.
The CalPERS incentive is said to be limited to additional years of service credit, required to be available to large groups and enacted after a lengthy contract amendment process with waiting periods and delayed effective dates to allow public review.
The report said the PARS incentive can be available sooner, limited to target groups, offer service or age credits, allow several methods for payments to retirees and has been used by the city in the past for public safety employees.
“The cost for the PARS retirement option program is calculated based upon the number of early retirements offered plus an administrative fee of 6 percent based upon cost of the retirements,” said the staff report.
“It is considered a fee-for-service plan. Rather than paying for the cost within the first two years, costs are paid as expended.”
PARS declined to comment on its San Bernardino contracts, citing client confidentiality. San Bernardino officials, presumably preparing for a bankruptcy court hearing yesterday, did not return several calls this week or respond to e-mailed questions.
Judge Meredith Jury tentatively set a hearing Aug. 28 on whether the city is eligible for bankruptcy, the San Bernardino Sun reportedlate yesterday. The judge questioned the relevance of information sought by CalPERS, which opposes eligibility.
San Bernardino filed for bankruptcy Aug. 1, staying debt collection. The city stopped making payments to CalPERS. After skipping more than $13 million in payments, the city plans to resume payments next month.
But the city does not plan to resume payments to PARS, owed about $500,000 this fiscal year. One of the unanswered questions: Are PARS pensions regarded as vested rights with the same legal protection as CalPERS pensions?
If payments to PARS retirees are reduced or stopped during the bankruptcy, there won’t be widespread pain. A city bankruptcy filing lists two dozen PARS creditors with claims totaling $24,983, ranging from a low of $53.76 to a high of $1,778.
The high amount is owed to Jeffrey Breiten, a former police captain who receives a CalPERS pension of $122,964 a year, according to the “$100,000 Club” list of pensions posted by a pension reform group.
The PARS financial statement as of June 30, 2011, lists three San Bernardino plans and one Stockton plan. A union agreement approved by the Stockton city council in 2008 gave 100 water department employees a PARS plan.
Former employees of a private contractor running the water department, OMI, were converted to city employees. Many of the employees, rejoining the city, received a small PARS supplement to their existing CalPERS contracts.
The annual cost of the PARS contract, which also gave new city employees their primary pension, was expected to be $640,000 in 2008. The water department uses restricted funds that are not part of the bankrupt city’s deficit-ridden general fund.
After Gov. Brown signed the pension reform last September, a PARS newsletter said schools and community colleges can still use new 401(k)-style PARS early retirement plans.
“As of Dec. 13, 2012, cities, counties and special districts will lose a valuable tool to prevent layoffs and reduce labor costs,” said the newsletter. “Supplemental defined benefit plans, such as locally controlled early retirement incentive programs, will be prohibited after that date under the Public Employees Pension Reform Act (PEPRA-AB 340) enacted into law last week.”
Ed’s Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/