By COLBY FRAZIER — April 17, 2009
Ten months ago, the county of Santa Barbara’s nearly $2 billion retirement system reported a loss of $143.2 million, resulting in a total value of $1.76 billion.
While this was a staggering loss, it pales in comparison to what has transpired since.
By last December, as the economic crisis bore down on nearly every sector of the American economy, the retirement system posted an additional $421 million loss, a 24 percent decrease that left the county portfolio worth $1.34 billion, according to a county Civil Grand Jury report released yesterday.
The deep losses have left the county’s retirement system chronically under funded, and one way or another, the Grand Jury report says the county will end up paying big.
A startling trend
Over the last decade, the amount of money the county must pay each year into the retirement system, formally known as the Santa Barbara County Employees Retirement System (SBCERS), has nearly doubled from roughly 12 percent to 23 percent – a figure based on the county’s payroll.
The report shows that in 2008, the county contributed $57.7 million. However, if the system’s value remains at or below $1.34 billion, the report estimates the county’s contribution could rise sharply in 2010 by as much as $30 million per year, a figure that would put great strain on the county’s already cash-strapped situation.
“Whether that level of cost could be borne without revenue increases, or service reduction is a major concern,” the report says. “There is no certainty in what the future holds for the market conditions, but prudence demands that the county anticipate the possibility of continued financial market weakness.”
In a joint meeting last week between the Board of Supervisors and the county’s 11-member Board of Retirement, which oversees how the pot of retirement money is managed, the supervisors took a look at how dire the situation is.
County staff, in what appears could be an even stepper rise in the county’s retirement contribution than what is predicted in the Grand Jury report, says by 2010, the county’s piece of the pie could range from $93 million to $150 million.
Aside from massive losses in the stock market over the last year, the report shows that the county’s retirement portfolio has been underperforming for at least a decade.
Part of these losses appear to be tied to an expected return on investment of 8.16 percent, which the Grand Jury said is simply too high.
The report shows that the majority of public pensions in the country use a return rate of 8 percent or, in the case of the CalPERS (California Public Employees’ Retirement System), the country’s largest public pension fund, 7.75 percent.
In the 10-year period ending June 30, 2008, the county’s retirement system had a return of 5.7 percent. By the end of last year, with the market in a downward spiral, that return dropped to 2.7 percent, the report shows.
While the retirement system’s 8.16 percent expectation places it in the top 25 percent of public pension plans, it has actually performed in the bottom 25 percent, the report said.
“Based on a review of other public pension fund performance and assumed investment returns, the jury believes that the assumed actuarial interest rate of 8.16 percent is too high,” the report says.
Where to now?
In order to right the ship, the Grand Jury suggests the county hire in-house investment experts to not only provide assistance to the Board of Retirement, but to help fill a perceived gap in holding underperforming investment managers accountable.
The Grand Jury found that while there is a process that allows the board to place an investment manager on probationary status, there are no criteria for terminating their management.
Furthermore, the report says the Board of Retirement does not consist of financial experts, and it would be unreasonable to expect that it should. But this appears to be the basis for hiring expert help in dealing with the retirement system’s assets that while sharply decreasing, remain well over $1 billion.
“The role of the in-house support would be to provide increased scrutiny of the investment performance of current managers and to provide more definitive recommendations regarding investment decisions to the board,” the report says.
The report adds that part of the county’s problem could be alleviated by changing the county’s current benefit structure from a defined benefit plan to a defined contribution plan.
Under the current plan, which an estimated 86 percent of government agencies use, employees and the county pay into the fund, and upon retirement, the employee receives a guaranteed defined payment. A defined contribution plan, common in the private sector, is where the employee and employer each pay into the retirement fund, and the employee receives the results of the invested contributions with no guaranteed payment.
While this sort of change would do little to alleviate the current hemorrhaging in the county’s retirement system, the report says it could free up the county from benefit obligations during future economic downturns.
The Grand Jury also says the county, in joining with the majority of counties in the state, could allow its retirement system to be managed by CalPERS. During the same 10-year period that the county’s system received a 5.7 percent return on its investment, CalPERS’ return was 6.5 percent.
However, with deep losses tied to real estate, CalPERS posted a $73 billion loss between June 30, 2008 and March of this year – a 31 percent decline, the report shows.
As a result, switching to CalPERS at this time would be a questionable move, but the Grand Jury said it could be considered in the future.
One of the reasons the report cites for the retirement system’s current situation was a string of consistent increases to employee benefits during better days.
Some have vocally opposed the county’s retirement packages, calling for decreases that would likely require complicated and controversial contract negotiations.
One thing is clear: the county’s benefit system grew when times were good, and now, the county appears poised to pick up a tab far larger than it ever intended.
“Public pension benefits for almost all systems in California followed a strikingly similar pattern in the last 10 years,” the report says. “Decisions were made which ignored the fundamental unpredictability of the market and the potential impact of future obligations. The lesson hopefully learned is that every benefit increase has a cost.”
The Grand Jury report is available at www.sbcgj.org.
http://www.thedailysound.com/041709jury
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