The Merced County retirement board will consider increasing the county’s contribution rate to the retirement system by at least 4 percent during its board meeting today.
The employer contribution rate for Merced County is about 44 percent, but the funding level could hike up to nearly 50 percent based on changes in demographic and economic trends.
Maria Arevalo, plan administrator for the Merced County Employees’ Retirement Association, said the county is responsible for two costs: paying retirees for benefits in any given year and paying off the county’s future retirement liability, which amounts to $900 million over the next 16 years.
Employer contribution rates are affected by demographic and economic changes, including wage growth, the number of county retirements or terminations, inflation rates, cost of living and mortality rates.
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“The liability will be higher because we had a lot of people retiring in the last couple (of) years,” Arevalo said, adding that mortality rates account for the 4 percent increase to the county’s contribution rate. “Our members are living longer, and based on those predictions, we look at how much money we need to put into the system.”
Arevalo said rates are also affected by the county’s investment earnings. This year, the county earned 12.4 percent, exceeding its assumption of 7.75 percent. However, the gains will be wiped out because retirees are living longer and mortality rates are changing, she said.
Despite spikes in the employer contribution rates, Arevalo said she doesn’t worry about the Merced County retirement system becoming unsustainable.
“As long as the county stays in business and people work for the county, there will be contributions to the system,” Arevalo said. “We’re beginning to control costs, and benefits are no longer as generous as they were in the past.”
For example, Arevalo said only one group of retirees – those in “tier 1” – are eligible for cost-of-living increases in their pensions, which means pension payments go up with cost of living. The other three tiers of retirees do not qualify for this option.
Merced County Treasurer-Tax Collector Karen Adams said Merced County’s retirement system is conservative compared with other systems. She said the retirement board reviews contribution rates on an annual basis.
“I don’t have an ongoing concern with the system because we have a very conservative approach and our funding is at 16 years,” said Adams, who is a retirement board member and trustee. “Clearly, we’re going to be able to pay off our debt quicker.”
Layoffs of county employees also affect contribution rates because that means fewer people are contributing to the system, Adams added.
Another potential drain to the county’s retirement system is pension “spiking,” which occurs when employees inflate their compensation before retirement in an effort to receive larger pensions.
Last week, a Superior Court judge upheld part of a state law that curbs spiking in county retirement systems. Some counties, including Merced, allow employees’ unused vacation and sick hours to be counted as the final pay on which pensions are based.
Merced County caps the number of hours an employee can use toward his or her pension to 80 hours of vacation and 50 hours of sick leave.
“Higher pension costs are obviously a liability on the system, so we try to keep an eye on that,” said retirement board member James Pacheco. “We are always looking at those figures and making sure we’re keeping everything in perspective.”
Merced County District 4 Supervisor Deidre Kelsey, also a retirement board member, said so-called pension spiking is a concern. “It does hurt the system, but we had no control over some of those laws that were enacted by the state,” Kelsey said. “Any benefit that hasn’t received adequate contributions to pay for it has to be paid out of the retirement system as a whole.”
If the county’s contribution rate changes are approved today, Kelsey said, the increase is so high that it could be tough for the county to continue paying it in the future.
“We’re going to probably be looking at different options, and we need to do that through the negotiation process with our employees,” Kelsey said.
If approved by a majority vote from the 11 retirement board members, the rate increase would not go into effect until 2015.
The Merced County Employees’ Retirement Association retirement board meeting will be held 8:15 a.m. today at 3199 M St. in Merced. The meeting is open to the public.