Wednesday, June 20, 2007 | With a contentious audience of gray-haired former employees watching, the county Board of Supervisors unanimously agreed to a compromise to help pay down the government’s $1.2 billion pension debt while still providing health care benefits to its retirees.
The county’s retirement board agreed to stop siphoning off investment earnings for health care benefits, while supervisors agreed to continue paying those benefits to employees who retired before 2002.
At its heart, the agreement ensures that investment earnings will remain in the pension system to pay down the pension defecit supervisors created when they boosted retiree pensions in 2002. The decision then created a shortfall in the county’s pension system, leaving too few assets to cover the pensions supervisors promised. The county pension board has continued to use its excess investments earnings, any gains above 8.25 percent per year, to add to retirees’ benefits instead of reinvesting those earnings to reduce the debt.
But under the compromise approved Tuesday, the county’s retirement board agreed to use those extra earnings to pay down its pension deficit — until the pension is 90 percent funded. It is currently 83 percent funded. As long as the deficit exists, a set amount of excess earnings will be funneled to eliminating it. The county estimates that the new system could fully fund the county’s pension system by 2013.
In return, the county agreed to accept responsibility for funding the tax-free health benefits of all 6,500 employees who retired before the pension boost was granted — an estimated $26 million annual responsibility that will be paid from the county’s operating budget.
The 3,300 employees who’ve retired with the 2002 benefits will instead receive an extra $400 monthly check, drawing down on an existing $165 million reserve. That’s less than they received before, because taxes will be removed depending on the retiree’s tax bracket.
Unless a new source is found, those 3,300 retirees — and all future retirees — would lose the extra check once the reserve is expended. It is expected to last 10 years. The county retirement board could begin boosting that reserve once the pension deficit is reduced.
In approving the compromise, supervisors said they wanted to ensure they were protecting the health benefits of the county’s most vulnerable retirees, while properly stewarding taxpayer money.
“I’m not happy when we have excess earnings for a pension fund that isn’t fully funded,” board Chairman Ron Roberts said. “The system is flawed.”
While Supervisor Bill Horn said the compromise “solves our problem,” the proof will come after a massive regulatory change takes effect this year. The Government Accounting Standards Board, which establishes financial accounting rules for state and local governments, is requiring the disclosure of long-term health care benefits like those paid by the county.
Instead of a pay-as-you-go, year-by-year approach, government agencies must begin reporting the health care benefits as long-term liabilities and present plans for how to pay them over the long term. The change takes effect for San Diego County on July 1.
The stricter reporting requirements are viewed as a way to more completely and publicly detail each institution’s obligations to its retirees. Just as the county must report its long-term pension debt, it will now similarly be required to report its long-term financial commitments for health care.
The new requirements are a challenge that local governments face across the nation. Employees are retiring earlier and living longer. Standard & Poor’s, a bond rating agency, called the increasing liabilities caused by those two phenomenon, and compounded by rising health care costs, a “major global concern.”
“Not dealing with the liability, you do that at your own peril,” said Don Steuer, the county’s chief financial officer. “And the peril is that the credit rating agencies will view it as the county failing to deal with its liabilities. With the action taken today, we are effectively dealing with the liabilities.”
Had the county not reached a compromise, it would have faced not only the $1.2 billion pension debt but a $670 million long-term health care debt. The compromise cut the health care deficit by $400 million.
Though the county had at one point threatened to stop all health care funding for former employees — it is not a guaranteed benefit — supervisors backed off their threat. Several recent retirees who spoke chided supervisors for refusing to pay health care benefits to those who earned the 2002 pension increase. Those retirees, who in 2002 received pension increases worth between 35 percent and 60 percent, will still receive the extra $400 monthly check.
“You’re affecting real people who worked real hard for the county,” said Maria Prokop, who spent 10 years working as a juvenile court referee. She urged supervisors to preserve the benefits.
Before the county’s 2002 benefits increase, the pension had carried a surplus for several years. Within four months of the benefits’ approval, more than 800 employees retired. Within a year, a $238 million pension surplus had evaporated and become a $1.2 billion deficit.
Supervisor Dianne Jacob urged her colleagues to ask the county’s retirement board to reconsider eliminating the extra check payments that will come from the $165 million reserve. They demurred, however, saying the approved compromise was acceptable.