A large rate increase approved by the retirement board Thursday could mean Merced County has to cough up more than $3 million to fund its retirement system starting next year.
A 5.9 percent increase to the county’s employer contribution rate passed by a majority vote, with three of the 10 board members voting against it – Michael Rhodes, Mark Bodley and Ron Kinchloe. The increase will bump the county’s contribution rate from 44.10 percent to 50 percent over two years.
The hike in the county’s contribution rate also increases its future retirement liability, which will amount to more than $1 billion over the next 16 years.
Some employees will also see a jump in their contribution costs, but the amount was not available Thursday. Officials said those calculations will be presented at a retirement board meeting in April. Current rates for employees are 8.74 percent for general members and 9.50 percent for safety.
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County leaders said Thursday the rate increase is one of the largest they’ve seen – almost double those of recent years, which ranged from 2.5 percent to 4 percent. Initially, county officials estimated the rate increase would be about 4 percent, but a study of retirement factors showed more money would have to be set aside for the retirement system.
Members of the Merced County Employees’ Retirement Association board acknowledged the hardship of raising the county’s rate by almost 6 percent at once, and voted to phase in the increase over a two-year period. That means the county’s rate will increase to 47.6 percent by July 1, then to 50 percent the following year.
Overall, the county will have to pay an estimated $6 million into the retirement system over the next two years.
County Executive Officer Jim Brown said the county appreciates the board’s decision to “phase in” the increases because it allows county finance officials the opportunity to adjust and plan ahead.
“We now have a number, so we can start planning for it,” Brown said. “Now that we know, we will be able to build it into our planning for next year’s budget. We now have a two- to three-year period to try to build into this change.”
Brown said it’s unclear where the additional money will come from, but it’s a major factor in developing next year’s budget.
“We were not anticipating this large of an increase,” Brown said. “At this point, we are starting our budget process for next year. It’s too early to tell specifically how that will be made up.”
The rate increases were caused by changes in demographic and economic predictions. An “experience study” conducted every three years looks at predictions such as wage growth, the number of county retirements or terminations, inflation rates, cost of living and mortality rates.
Investment performance also impacts rates, officials said. This year, the county exceeded its goal of 7.75 percent by earning about 11 percent on its investments, according to the study.
However, the study showed the biggest factor was a change in mortality rates, with retirees living longer.
Board Chairman David Ness said there’s no way the county could have predicted that changes in mortality rates would spark such a hefty increase in retirement contributions.
“How is the county supposed to know the mortality table would change?” Ness said. “My understanding is, they did anticipate an increase, but they did not anticipate it to increase this much. I understand the pressure the county is under.”
Others said the county was given notice about the increasing rates and should have planned accordingly.
“This higher rate should be no surprise,” Maria Arevalo, plan administrator for the Merced County Employees’ Retirement Association, said during the meeting. “I think the county has had notice about this. We’ve asked them to give us a plan every year.”
Assistant County Executive Officer Scott De Moss said Thursday that the county has contributed more money to retirement than the “requested rate” in the past. The county has seen retirement contributions grow from $27 million five years ago to about a $46 million estimated expense this year, he said.
Merced County District 4 Supervisor Deidre Kelsey said at the meeting that she’s concerned where the additional money will come from – and whether other county departments and programs could suffer as a result.
“You’ve got a lot of stuff pulling at you,” Kelsey said. “We’ve had more murders in Merced County, we have 30 less deputies. I don’t know if it will mean more layoffs or it will mean we’ll have more murders. I’m concerned about that.”
Kelsey said after the meeting she was glad to see the board reach a “compromise” by spreading the increases over two years.
“It was a compromise, but it was also a heads-up to everybody involved that the county has to meet their obligations of the pension liability,” Kelsey said. “We have so many budgetary requests and needs for our general fund, so I think the two-year compromise was about as good as it could get.”
The rates approved by the retirement board Thursday will be taken to the Merced County Board of Supervisors. The next county retirement board meeting will be held March 27.