Pension problems: Stanislaus County trails piper it can't pay

Eight years after giving a major boost in pension benefits to employees, Stanislaus County is trying to keep from getting buried in retirement costs.

The pension system for the county and several smaller agencies is only 71 percent funded, creating an unfunded liability of $482 million. That is coupled with nearly $48 million in bond debt -- a collective shortfall more than twice the size of the county's general fund budget.

The pension costs are a huge strain on county government as officials deal with budget deficits tied to the recession.

It's unlikely that pension-fund investments can support the lucrative benefits given to public service employees or that the county can keep pouring taxpayer funding into the system. So officials are looking to control pension costs.

The current benefits allow sworn law enforcement employees to retire with up to 90 percent of salary at age 50 and other county employees to retire at 55 with more than 75 percent of pay.

By claiming vacation cashouts, unused sick leave, bonuses and additional pay, retirees can spike their pensions even higher. And they receive cost-of-living increases compounded annually which continue to drive up retirement costs.

The Stanislaus County Employees' Retirement Association is paying between $100,000 and $241,000 a year to 50 top retirees; 32 of them are paid more in retirement than when they worked.

According to an evaluation in January, StanCERA's investment portfolio has $1.17 billion to cover $1.65 billion in pension promises to 8,200 employees and retirees of the county, Ceres, the Superior Court and five special districts.

The county's pension troubles are only partly tied to the stock market collapse, which took down the value of the Stanislaus County Employees' Retirement Association portfolio by more than $400 million between early 2008 and mid-2009.

StanCERA's previous actuarial firm made glaring mistakes in predicting how many employees would draw pension benefits; as a result, the county and other agencies did not properly fund the system.

In addition, officials relied too heavily on expected investment returns to fund the system after more lucrative benefits went into effect in 2002.

Investment success shared

To understand how the county got into this mess requires going back to the dot-com stock market bonanza of the late 1990s.

During that time, StanCERA's annual returns on investments ranged from 12 to 25 percent. The county and StanCERA enjoyed wild success investing a $108 million county-issued pension bond on the market. The proceeds helped fund the system and the deal called for StanCERA to give the county a percentage of the earnings, which helped pay for county projects such as the Ag Center and Public Safety Center.

In fall 1999, Gov. Gray Davis signed a bill authorizing the 3-percent-at-50 benefit for police officers and firefighters in California. The Modesto City Council approved the benefit for police officers in May 2000, within six months of it becoming available.

As other cities and counties granted the benefits to bargaining groups, it put pressure on Stanislaus County to follow suit.

County supervisors granted the pensions in a wage and benefit package for law enforcement approved in June 2001, three months before the Sept. 11 attacks sent stocks into a dive. The vote was 3-2, with supervisors Nick Blom and the late Tom Mayfield opposed to the contract over the pension issue.

Blom, who served on the retirement board before retiring in 2002, said he knew there would be ramifications. "I said, 'People are living longer and, if you let them retire at 50, you are asking for major problems,' " he said.

The argument for giving the benefit was the fear of losing law enforcement veterans to San Joaquin County and Bay Area counties.

Former Supervisor Paul Caruso, who joined Ray Simon and Pat Paul in supporting the contract, said there were genuine concerns that losing people who supervise investigations and train deputies would weaken the Sheriff's Department.

Caruso said staff reports indicated the retirement system could pay for the pensions.

Prior to the vote, Paul said the county would become a training ground if it did not offer the 3-percent-at-50 pensions, echoing a statement by Adam Christianson, then a detective and president of the Deputy Sheriffs Association. Christianson is now the county sheriff.

"Agencies are scrambling to find bodies to work the streets," Christianson said at the June 5, 2001, meeting. "There are agencies in the Bay Area that are offering signing bonuses."

After vastly improving the pensions for law enforcement, supervisors felt obligated to improve pensions for the rest of the county work force, Blom said. Most county employees were allowed to move into the new benefit tiers, which lowered the minimum retirement age to 55 and paid a higher percentage of salary times years of service.

County wages, benefits better

Blom said the county has always offered better pay and benefits than most private industries in the area, so there was no need to cave in to the unions. "I was always getting complaints from private industry that they were losing people to us," he said.

County officials felt burned when the pension benefits triggered an exodus of veterans from the Sheriff's Department. Three assistant sheriffs retired within three years of the benefit being granted. By 2006, another assistant sheriff and three lieutenants started drawing pensions before the age of 55.

The county's cost of funding pensions shot up, from $22.1 million in 2001-02, the year the benefits went into effect, to $36 million in 2006-07. Even though StanCERA's investment returns ranged from 5.6 percent to 16.8 percent for five years, the pension costs escalated for the county.

As StanCERA's investments sank in 2008 and 2009, the county was expected to contribute more, $34.76 million in 2009-10 and $42.2 million in the fiscal year that starts July 1. The costs would have well exceeded $50 million each of those years, resulting in layoffs and public service cuts, but StanCERA agreed to pull $80 million from supplemental benefit reserves to help offset the county's contribution.

Without the extra pension costs, the county would have millions more to plug holes in a $23.5 million general fund budget projected for 2010-11. The proposals for closing the budget gap have included laying off 45 of the county's 178 patrol deputies, closing barracks at the Honor Farm, furloughs, reducing library hours, cutting animal services and reducing hours at county offices.

County moves to curb costs

County Chief Executive Officer Rick Robinson says the current level of pension benefits can't be sustained.

To rein in long-term pension costs, the county moved Tuesday to create new tiers giving lesser retirement benefits to newly hired employees. The proposed benefits would raise the minimum retirement age to 61 for general employees, pay 2 percent of salary for every year of service and base pensions on a three-year averaging of salary.

The law enforcement benefit would allow deputies to retire at 50 with 2 percent of salary per years of service. The changes are subject to negotiations with unions.

A county-hired actuarial firm will calculate the cost of funding the pensions for every current employee and retiree. A report is due in four to six months.

In 2014, the county will have retired its pension bond issued in 1995, freeing up $11.4 million a year to whittle away at the pension system's unfunded liability. The county's contribution is more than 18 percent of payroll and is expected to rise to 23 or 25 percent in the next few years.

Robinson said the county is not able to reduce pension benefits for current employees, because the pensions were part of negotiated contracts.

"I don't think it is even an option," the CEO said. "The courts have ruled that, once pension benefits are granted, they can't be rescinded. The only way is if all employees agree to give up vested benefits."

The county won't get immediate relief from the plan to give reduced benefits to new hires, but "you should start seeing major relief in 10 to 15 years," Robinson said.

Modesto awaits the impact

The city of Modesto still awaits the impact of the huge investment losses in the California Public Employees' Retirement System.

Modesto paid $12.76 million into CalPERS last fiscal year, about $8.2 million to fund the pension plan for police officers and firefighters.

Former City Manager George Britton said the city has fared better than the county for a couple of reasons.

Under CalPERS' rules, employees don't have as much latitude for boosting pensions with vacation cashouts and other compensation. Also, cities have more staff turnover and CalPERS benefits are less portable when people leave to work for other agencies, so municipal employees don't amass so many pension credits.

Still, CalPERS has informed Modesto that its contribution rate could shoot up in the next three years to pay for investment losses. The cost could go from 9.5 to 13 percent of payroll for most city workers and from 23.6 to 29 percent of payroll for public safety, said Jim Miguel, acting deputy city manager.

The bottom line is a $4 million contribution increase.

For a city struggling with declining revenue, it will mean less funding for services such as law enforcement, tree trimming and parks maintenance.

"In this economic climate, $4 million would cause a problem," Miguel said.

Bee staff writer Ken Carlson can be reached at or 578-2321.

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