Market plunge darkens taxpayers’ pension obligation
September 16, 2008
By DANIEL BLACKBURN
San Luis Obispo County taxpayers are looking down the black hole of a swelling, multi-million-dollar deficit of the county workers’ pension plan that poses a monumental problem with few real solutions, complicated by Monday’s record-breaking 500-point plummet of the Dow.
The county’s pension investment portfolio is in a very precarious position. Public employee pension promises may be one of the most potentially crippling fiscal disasters facing county taxpayers today, yet this remains an issue shrouded in its own complexities.
But there is nothing complicated about the reason for the looming calamity: Short-term politicians rubber-stamping long-term obligations based on a literal roll of the investment dice. County supervisors made promises during boom times based on the incorrect assumption that those boom times would last forever, and thus this unfunded liability has become SLO County’s financial nemesis.
In January 2007, county officials figured they were about $235 million short of being able to deliver on the payout to retirees that had been promised. That’s more than double the deficit reported in 2006. The county has not yet revealed the January 2008 projected shortfalls.
Tony Petruzzi, the county’s pension trust executive director, did not return repeated calls from a reporter.
Petruzzi told UncoveredSLO in March that the county’s fund will probably experience a continuing decline during the next year or two. “The last two years have not been pretty, but we have stopped the bleeding at this point,” he said.
Here in a nutshell is what is happening with the pension fund, and why it is happening: In a market that was volatile in an upward direction, county supervisors readily bought into the notion, as Petruzzi writes in his occasional newsletter, The Fiduciary, that “benefit formulas could be improved with no impact on cost.”
In reality, though, Petruzzi acknowledges that time has shown that costs of benefits provided by the county’s plan have increased considerably.
Working on the supposition that the fund was only going to prosper, supervisors voted in 2001 to authorize increased county worker pension benefits in the never-ending quest for comparable pay and benefits to ostensibly attract the highest quality employee. [This is a widespread policy used by almost all public agencies which revolves around an ongoing survey of other public agencies’ pay and benefit practices. When one agency gets generous and authorizes increases in tax-supported raises, other agencies soon follow. Hence, the term “comparable.”]
What made the 2001 benefit adjustment particularly damaging fiscally was its retroactive nature: An employees’ years of service now are counted when computing increased benefits. That resulted in an immediate financial windfall for county workers and an ever-increasing financial liability for which unsuspecting taxpayers are responsible.
But overall, the fund has been experiencing anything but a windfall. The crash of the real estate market first, and the stock market now, have created numerous circumstances which might negatively impact the fund’s stability.
An Orange County lawsuit, initiated by supervisors there, alleges that the retroactive nature of their benefit package was actually an improper use of public funds and therefore unconstitutional.
San Luis Obispo County Supervisor Bruce Gibson suggested that such talk is premature.
“We are not litigating at this point,” he said. “I want to say that we are not exposed to a similar situation [as Orange County]. It’s hard to see where this is going, though. It all depends on the performance of the market.”
Gibson and fellow supervisor Katcho Achadjian said they have not yet seen an estimate of the plan’s current unfunded liability. But Supervisor Jerry Lenthall said he has “seen a preliminary and it [the unfunded liability] appears to have flattened out; no increase. But that’s not official.”
Lenthall, who lost the last election and whose term expires in January, said the county’s focus is to put employer dollars to work in the most effective way for taxpayers.
“People tell me, we need to do more, but this is really a moving target,” Lenthall said. “And there is a need to use taxpayers’ money responsibly, and still be able to get the most qualified employees. County officials and employee representatives are working hard together to find a solution.”
SLO County is one of two California counties that have independent retirement systems for employees. A board of trustees administers the system. These trustees have no authority to negotiate for, or to advocate for or against, any benefit adjustment. Only the county board of supervisors has that power.
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