By Nels Johnson
Marin Independent Journal
Posted: 06/11/2011 06:26:00 PM PDT
Marin County's pension program is unsustainable, underfunded, imperils taxpayers and requires reform, especially in San Rafael, where the City Council ran up an $18.5 million tab by approving retroactive employee benefits and failed to fund them, the civil grand jury reported.
In the latest probe of the county's costly pension program — the fourth such investigation juries have conducted in six years — the 2011 civil grand jury called for a host of changes, including "prohibiting any retroactive pension benefit increases that create an unfunded pension liability" like the San Rafael City Council did in 2004.
The jury, noting the city, Novato Fire District and several other agencies are part of the county system, said the City Council boosted benefits by allowing police to retire at age 55, with pensions amounting to 3 percent of salary for every year of service, rather than 2 percent at age 50. Most miscellaneous employees were allowed to retire at age 55 at 2.7 percent of salary for every year of service, rather than 2 percent at 58.5 years. An age 55 and 2 percent calculation applies to most miscellaneous employees at the Marin Civic Center, where county supervisors have set benefits lower.
In explaining the retroactive nature of the council's action, the jury noted that "pension plans are designed to accumulate sufficient funds during an employee's working career to pay the employee's pension during retirement," but that when benefits for all are increased, including those nearing retirement, "it is not possible to accumulate the needed funds during the remaining career."
San Rafael City Manager Nancy Mackle said Friday she had just received the jury report and would study it before recommending a response to the City Council.
The problem with San Rafael's retroactive benefit increase, the jury said, is that officials did not fund it, shifting the $18.5 million cost to future generations of taxpayers and creating "a generational equity issue." The panel said the city, which had no unfunded pension liability in 2002, had $34 million in unfunded liability a year later, when calculated in light of the benefit increase and investment losses.
Today, San Rafael taxpayers face an unfunded pension liability alone of anywhere from $146 million to $479 million, depending on assumptions used — and not including the city's unfunded cost of retiree health benefits. In San Rafael, pension costs amount to 50 percent of payroll, essentially meaning that for every dollar in employee pay, taxpayers chip in another 50 cents to cover the pension. San Rafael employees contribute at a rate of about 11 percent of payroll. At the Civic Center, taxpayer costs are 24 percent of payroll, and employee costs, 10 percent.
The grand jury issued a number of other recommendations, but was more circumspect in its criticism of the system than a jury was in 2005, when the panel concluded the program was "bloated" and called the situation a "financial time bomb."
The 2011 jury asked officials to turn talk of reform into legislative action, explore "hybrid" plans in which employers share investment risks with employees, improve documentation of investment performance and public access to pension information, and eliminate the ability of pension trustees to award extra cost-of-living payments to retirees that are not spelled out in contracts approved by elected officials.
The jury did not seem to mind the county pension board's assumption that investments will earn 7.75 percent, as they have over the past 30 years. Critics contend that because taxpayer money is at stake, a "no risk" bond assumption of 4 percent should be used to unmask future liabilities that are three or four times higher than estimates based on 7.75 percent. Civic Center's unfunded pension and retiree liability, for example, ranges from $700 million to more than $2.4 billion, depending on the investment assumption used.
While noting local agencies do not fully fund the pension benefits they have promised employees, the jury warned that "over-funding" pension programs also poses problems when officials suspend contributions or use pension funds for unrelated expenses. No such over-funding exists in Marin, where the jury noted that the county program is 72 percent funded; San Rafael's, 63 percent; and Novato fire, 77 percent — based on optimistic projections of investment earnings.
In other observations, the jury noted that net assets held in trust by the county pension fund plummeted $387 million during the market meltdown, a 25 percent drop, leading to increased funding burdens for local agencies that were forced to cut other services to make ends meet.
The panel noted that despite its importance, few citizens attend pension board meetings, and those who do are confronted by a board that does not make public interaction a priority. Board meetings break after the first hour so that pension trustees can hold closed sessions on disability matters, a procedure in which other "meeting attendees are left waiting," the panel noted, adding more must be done to encourage public participation.
The jury also raised eyebrows about pension investment allocations, saying 70 percent of the portfolio was invested in the stock market on the eve of the market meltdown in 2007.
County pension chief Jeff Wickman said pension trustees "appreciate the thorough approach" taken by the jury and will issue a response later this summer.
He added that although the pension system had invested 69 percent of its portfolio in the stock market in 2007, the "allocation was within the board's allowable range as defined in the investment policy guidelines, and given the prevailing market conditions, appropriate at the time."
He noted the report does not mention that the pension board rebalanced the portfolio and that in June 2008, before the worst of the market meltdown unfolded, the allocation to equities was 59 percent. "The board protected the portfolio from more significant losses while maintaining investments that allowed the fund to recover from those losses," he said.
He added that since the bottom of the market in 2009, investment returns have rebounded the fund balance to $1.4 billion, "just short of its all-time high."
Even though the market has improved, taxpayer costs remain high because only 20 percent of losses are figured into annual payments each year in light of a five-year "smoothing" program that spreads out costs.
Contact Nels Johnson via email at ij.civiccenter@gmail.com
http://www.marinij.com/sanrafael/ci_18257453
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