Public pension bill eyes ‘excess earnings’

An Assembly committee last week approved a bill aligning the state law covering 20 county retirement systems with federal tax law, disappointing some who want to bar the use of “excess” investment earnings for retiree health care and other purposes.

The bill said to represent three years of talks mainly between the IRS and the Orange County system, the informal leader in the negotiations, moved out of the Assembly public employees retirement committee with no discussion.

At a regional county pension reform conference in San Rafael Saturday, the failure of the bill to bar the diversion of “excess” earnings was called a disappointment by Mendocino County pension reformers.

An organizer of the conference, John Dickerson, publisher of YourPublicMoney.com, and Ted Stephens, now a member of the Mendocino county retirement system board, brought public attention to the diversion of “excess” earnings.

For about 15 years, annual Mendocino pension fund investment earnings in excess of 1 percent of total assets were used to pay for the retiree health care of county employees entitled before 1996, when retiree health care was cut.

The diversion of the investment earnings, which added to the debt or “unfunded liability” of the county pension system, was criticized by a conference panelist, Willits Mayor Holly Madrigal, a candidate for the Mendocino County Board of Supervisors.

“My predecessors on the board of supervisors, they made a commitment and then did nothing to actually fund it,” Madrigal said. “They actually raided the pension funds for that. I don’t believe any of the union members I know would have supported that, if they had been aware of it. But the fact is we have all failed as far as the accountability.”

An official of the Orange County Employees Retirement System, who was not directly involved in IRS talks, said the bill, AB 2473, is part of voluntary compliance with federal law allowing deferred taxes on pension contributions and earnings.

“I can’t speak for any other system, but OCERS is not setting aside any excess earnings because we have an unfunded liability, and that has to be paid off before you even think about excess earnings,” said David Lantzer, OCERS interim chief legal officer.

The 1937 act covering the 20 county systems, ranging in size from Los Angeles to Mendocino, allows investment earnings in excess of 1 percent of total assets to be used for retiree health care, retiree pension bonuses or lower employer contributions.

How Alameda County used excess earnings to fund retiree health care was described in a governor’s retirement commission report in 2008 (p. 75). Excess earnings are said to be seldom diverted now because pension fund reserves are depleted.

The excess earnings option, unique to counties, dates back to when all pension investments were in bonds, and a 1 percent reserve was a significant cushion, Robert Palmer of the State Association of County Retirement Systems said two years ago.

The move away from bonds, with their predictable but lower-yielding returns, began in 1966 with Proposition 1, which allowed public pension funds to invest up to 25 percent of their money in blue-chip stocks.

The lid came all the way off when Proposition 21 in 1984 allowed any “prudent” investment. Now many retirement systems expect investments to yield two-thirds of the money needed for pensions, with the rest coming from employer-employee contributions.

Critics say pension fund earnings forecast, often about 7.5 percent a year, are too optimistic, concealing massive debt and encouraging riskier investments to get higher yields.

When a booming stock market around 2000 created a temporary surplus, the two large state pension systems, CalPERS and CalSTRS, cut contributions and increased pension benefits, part of the reason they currently have massive funding shortfalls.

A study issued by the California Policy Center last week said the 20 county pension systems have a total unfunded liability (pensions, retiree health care and pension obligation bonds) of $72.3 billion.

The conservative group said the county systems have 60 percent of the projected assets needed to pay for their total future retirement obligations. The study used official county reports, including their 7.5 percent investment earnings forecast.

If a lower earnings forecast is used to discount debt, 5.5 percent, the funding level for the 20 county systems drops to 49 percent,said the study by Bill Monnet, Ken Churchill and Ed Ring.

Helping the county systems move into the spotlight, and possibly inspiring reformers, is a Ventura County pension reform initiative expected to be on the November ballot.

Initiative backers said they submitted petitions with the signatures of 40,500 voters last month, well above the 26,000 valid Ventura County voter signatures needed to place the initiative on the ballot.

The Ventura initiative is similar to an initiative approved by 66 percent of San Diego city voters two years ago. New hires would be switched to 401(k)-style individual investment plans, and pay used to calculate pensions would be frozen for five years.

But there is an important difference. The San Diego initiative exempted police, allowing new officers to continue receiving pensions. The Ventura initiative ends pensions for all new hires, including police.

An initiative website says pension costs, now 17 percent of the Ventura County budget, increased from $45 million in 2004 to $162 million last year and are projected to reach $220 million in 2018.

Ventura has led county systems in another way. A 1997 state Supreme Court decision in a suit filed by Ventura deputy sheriffs allowed a long list of items, including unused vacation, to be part of the final pay used to determine pensions.

Under the Ventura decision the county systems became known for pension “spiking,” notably in a Contra Costa Times report in 2009 about two Contra Costa fire chiefs retiring with pensions well above their salaries.

A cleanup bill to Gov. Brown’s pension reform in 2012, closing a spiking loophole revealed by the Times, was challenged in court by public employee unions in Contra Costa, Alameda and Merced counties.

Contra Costa Superior Court Judge David Flinn ruled against the unions last month. He said workers do not have a “vested” right to pension increases that violate the 1937 act covering the county systems.

Last week, the Assembly committee approved another bill, AB 2474, that aligns the 1937 act covering county systems with Brown’s pension reform, the Public Employees Pension Reform Act.

The bill allows a temporarily promoted worker to earn the same pension amount as a permanent worker in the job. The CalPERSboard approved a similar draft regulation last month on a split vote. Opponents argued a door might be opened for spiking.
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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 Calpensions.com.