By Nels Johnson - Marin Independent Journal
An escalating Civic Center pension pricetag that has left Marin County taxpayers facing debt of at least $700 million is rooted in what a grand jury 34 years ago called a "scandalous record" of deception by top officials.
Jurors said key county officials waged a disinformation campaign aimed at replacing Social Security with an "enriched" or enhanced local pension system that benefited top brass while costing taxpayers a bundle.
The full cost of the new program was understated and never funded, with debt estimated at $36 million in 1978 ballooning for years.
Officials at the time, like a number of those who followed, sought to maximize employee benefits while minimizing current costs, shifting the day of financial reckoning far into the future if assumptions proved faulty.
The 1977-78 civil grand jury, in an unusually fiery assessment, excoriated the 1978 Board of Supervisors and top county financial officials who orchestrated the move to drop Social Security benefits in return for enriching the existing county pension program — then already one of the richest in the state.
The action was taken without a financial study after what the jury said was a concerted effort that "borders on fraud" by cheerleading officials who covered up the facts and twisted the truth. Outside experts who warned the new program would benefit those at the top of the pay scale while hurting those at the bottom were ignored.
Workers get stiffed
At the time, employees benefited from both Social Security and a local pension program. But the local system, set up in 1950 under a 1937 state law, "is fundamentally inequitable to the lower-paid worker," Contra Costa County's pension chief said in a 1976 Civic Center forum, adding, "If you want to balance a system you should maintain your Social Security."
Social Security officials also noted then that the Marin system favored higher-paid workers at the expense of the rank and file because its funding formula hinged in large part on pay. Today, about half the cost of the county pension program is generated by several hundred former officials, with 150 retirees getting $100,000 or more a year, and more than 200 others getting annual pensions that exceed the county's average annual pay of $87,500.
But county supervisors were convinced they were doing the right thing; some walked out of or refused to attend board pension sessions led by Supervisor Denis T. Rice. Rice, who won election in 1976 after warning Marin's program was "running in arrears," eventually won concessions that have saved taxpayers $2 million a year since 1980, when he returned to private practice as a lawyer.
At the time, thanks to a 1974 benefit boost by supervisors, employees with 10 years of service could retire at 50, and county Treasurer-Tax Collector Stanley Fontez, head of the pension system, regarded the program as "rich, better than most" in the state, and headed efforts to make it even richer.
The $22 million gap
Auditor-Controller Michael Mitchell, an outspoken elected official, was also sold on the merits of dumping Social Security, contending that over six years it could save employees $9.8 million in take-home pay, while saving taxpayers $2.3 million. But Rice said Mitchell's calculations were based on faulty assumptions, and asserted the move would cost employees and taxpayers "more than $10 million" over six years.
After a bitter, chaotic campaign of conflicting assertions, including tense meetings in which officials sometimes traded angry, insulting commentary, employees in 1977 voted to remain in the Social Security system by a vote of 614 to 599. Supervisors tossed out the vote, saying 138 ballots had been improperly punched, and employees in a second vote bailed out of the system on a tally of 799 to 573.
Employees, whose pay envelopes included leaflets advising them to dump the federal system, agreed to do so in a second vote. Supervisors Robert A. Roumiguiere, Arnold Baptiste and Gary Giacomini voted to withdraw from the federal system and beef up benefits of the local program, despite heated protests from Rice and Barbara Boxer, who noted no financial study had been done.
Rice said that county contributions to the system were artificially low, based on assumptions that kept county costs to a minimum despite big benefits. Although pay is a key factor in determining a pension, county funding was based on an assumption no pay raises would be given. At the same time, the calculations counted on an inflationary environment in which pension investments would earn 6 percent annually.
'This is cataclysmic'
By June 1978, a report by new actuaries concluded that, based on the enriched pension plan and an increase in county salaries of 4.5 percent a year, the program had an unfunded liability of $36 million that could triple, requiring the county to pay $2.3 million to $4.6 million more a year on top of the $3.5 million it already was paying. "This is horrendous. This is bad. This is cataclysmic. Stanley Fontez is guilty of gross ineptitude," Rice exclaimed after the actuary underscored his criticisms. "Fontez should resign."
Fontez stepped down the next month, returning to his home in Grass Valley, but the county never caught up with its pension payments, preferring to boost contributions $328,000 the next year under a "phase in" plan.
The 1977-78 grand jury said the Social Security, enriched local pension saga was reprehensible. "The county, the county employees and the taxpayers have been taken for an expensive ride" by officials more interested in political expediency than fiscal integrity, the panel concluded. "The past conduct of some county officials ... borders on fraud ... the present conduct of other officials ... has been ambiguous at best and irresponsible at worst," the jury declared, saying officials tried to "cover up deception on a large scale."
"The general public should review this scandalous record," the grand jury said, calling for further scrutiny of the "shenanigans" of officials.
Finance officials and county supervisors drew the jury's fire, with Fontez, chief architect of the move to bail from the federal system, singled out for special barbs. Jurors noted he was in line for both an "enriched" county pension and a Social Security check for which he was fully vested.
The report lauded Rice for his "unflagging leadership" in pursuing reform, and although benefits for new hires were cut back in 1980, funding the system continued to be anemic. An independent auditing firm refused to give the system a clean bill of health because it called an assumption regarding minimal inflation too risky.
More than three decades later, the liability Rice warned about had grown to at least $700 million when including retiree health care, under optimistic assumptions that count on a 7.5 percent annual growth in investments — eclipsing the 6 percent that experts including Warren Buffet and bond guru Bill Gross contend is prudent.
Ex-supervisors reflect
Former Supervisor Giacomini, who along with Rice is among the few key players of the 1970s saga still alive, noted that hindsight is always 20-20, and added that the problem with the pension system was not withdrawing from Social Security, but the lack of funding provided by the county over the years.
"It looked really good then," Giacomini recalled of enriching the local program, noting he followed the advice of the county's financial professionals, especially Mitchell, known as a taxpayer advocate, and Roumiguiere, a savvy real estate and business professional.
"The problem is not with us leaving Social Security," Giacomini reflected. "It's that we didn't fund the pension that was approved."
Former Supervisor Rice, who continues 32 years after leaving public office to argue for pension reform in Marin County, said that while a new funding plan was in place when he left office, officials later "returned to their old ways," promising employee benefits but not paying for them.
Today, Rice said, the Marin County Board of Supervisors presides over a pension program that is based on risky assumptions, doesn't have enough money to pay for the benefits it promises and requires future generations of Marin taxpayers to pick up the tab.
"It's just totally unrealistic," Rice said.
Contact Nels Johnson via email at ij.civiccenter@gmail.com
No comments:
Post a Comment