San Diego’s county and city pension funds are losing ground in their pursuit of a fully funded plan, but 10 other local government pension plans are just as bad or worse off.

The Valley Center Municipal Water District, Otay Water District, city of El Cajon’s safety plan, the city of San Marcos and six other local pension plans are only 60 to 70 percent funded. That means the agencies lack 30 to 40 percent of the money ultimately needed to fulfill retirement promises for current and former employees, data from the California Public Employees’ Retirement System shows.

That gap between assets and liabilities is called the unfunded liability. Combined, the 10 worst-funded public pension plans in the county with more than 50 members are missing nearly $581 million as of fiscal year 2015, and that’s just a fraction of the region’s long-term problem.

As Voice of San Diego reported in January, San Diego’s county and city pension systems managed locally are now underfunded by $6.7 billion despite various reforms enacted in recent years.

Around 60 local government agencies are part of the state’s public employee pension system, also known as CalPERS. That doesn’t include schools, which are pooled separately.

Agencies are told how much to contribute annually, and state pension officials invest the money in hopes it will earn enough over time to pay for retirement checks guaranteed to employees until they die.


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The Great Recession caused huge asset losses in the state pension fund that haven’t been recovered, and investment earnings since then haven’t been hitting the mark. CalPERS leaders recently voted to lower annual earnings expectations from 7.5 percent to 7 percent over the next three years. The drop aims to make the fund more sustainable and inches a bit closer to market realities, though not by much. The move will greatly increase contribution costs for local government agencies. Longer life expectancies are also putting a strain on the system.

The CalPERS system as a whole was 101 percent funded in 2007 – it had more money to pay out retirees than they had accrued in benefits. Just 10 years later, it is now just 68 percent funded.

Yet there are six local pension plans in the CalPERS system with 50 employees or more that are funded below that level, data shows.

At the bottom of the heap is Valley Center Municipal Water District, funded at just 61.3 percent.

CalPERS records show the North County water agency’s total pension liabilities exceed $49 million, but with only $30 million in assets, the agency is short nearly $19 million. That’s higher than the unfunded liability the water agency faced three years prior.

Otay Water District is the second-worst funded pension plan in the county. With $115.7 million in liabilities and only $74 million in assets, Otay has a funded ratio of just 64 percent.

Coming in third is the City of El Cajon’s safety employee pension plan. With nearly $283.5 million in liabilities and less than $186 million in assets, it has a funded ratio of 65.6 percent.

In comparison, CalPERS’ schools pension pool was 77.5 percent funded as of fiscal year 2015. The city of San Diego’s local pension fund is currently 70 percent funded, and the county pension fund is 71.5 percent funded, according to newer figures reported for last fiscal year.

Given CalPERS continually lagging investment results — earning just 0.61 percent last year — pension funding ratios for local governments may drop further when 2016 agency data is released.

Gary Arant, 28-year general manager for Valley Center Municipal Water District, said having the lowest pension funding level in the region is concerning but, “It’s not my top concern. Our priority is safe, reliable water service” for 26,000 residents living across 64,000 acres.

In an interview, Arant said part of why their pension plan is coming up shorter than others has to do with the fact the district joined CalPERS not very long ago, in June 2001, replacing a 401(k)-style retirement system that “wasn’t amassing enough money.”

“At some point people need to retire. I can’t have an 80-year-old guy out there trying to dig a hole,” Arant said.

But other decisions have also strained the district’s $65 million annual budget and increased pension costs.

The 62-person workforce has received raises totaling 13.5 percent since July 2012, records show. In 2008, Valley Center sweetened retirement benefits from 2 percent of pay for each year worked at 55 years old to 2.7 percent, but also stopped paying the employee share of the pension contribution at the same time.

In 2005, the agency took advantage of CalPERS’ 30-year “fresh start” offer, which lessened payments.

Jim Pugh, Valley Center’s director of finance, said annual contributions to CalPERS are expected to rise from $1.9 million this year to $2.4 million in fiscal year 2019. The annual payment was less than $1.4 million in fiscal year 2007.

To keep up, Arant said it’s likely employees will be asked to contribute more towards their pensions when contract negotiations open again in two years.

So how does the agency plan to deal with its nearly $19 million unfunded liability?

“I’m certainly not going to consider hiking (water) rates to pay down the liability with PERS,” Arant said, adding that he’d be more concerned, “If we were still part of a private plan and funded that low.”

“We are a public agency. We aren’t going to go out of business. It’s not like we are out here on the point by ourselves,” he said.

Peter Kiernan, an attorney with Schiff Harden who specializes in public pensions and previously worked as special counsel for the city and state of New York, said even though the region’s pension funds are not currently in “desperate condition,” stakeholders should be concerned.

“Ultimately it is taxpayers or ratepayers that will make up the difference. Someone is going to pay that bill,” Kiernan said. Employers like Valley Center “probably need to increase their contributions… Money they would otherwise use for something else, so that makes for hard decisions.”

Steve Malanga, senior fellow at the Manhattan Institute for Policy Research, also said there is cause for concern.

“In particular, those funds that are below 70 percent funded are in danger of falling much further behind if we get a sharp market decline in coming years,” Malanga said in an email. “They are in danger of going below the 50 percent mark, which is a point at which many pension experts believe it’s impossible for a pension system to recover because so much money is missing and the system is taking on new debt every day that employees come to work.”

If public pensions were treated like pensions in the private sector, some local agencies would have to take extra steps to boost funding above 80 percent.

The federal Pension Protection Act of 2006 classified certain large private pensions with less than 80 percent funding “endangered,” or in the yellow zone, and deemed some of those with less than 65 percent funding “critical,” or in the red zone.

Using those funding levels, Valley Center Municipal Water District and Otay Water District would fall in the red zone. All 10 of the county’s worst-funded agencies would have been in the red zone in fiscal year 2012, CalPERS records show.

 

Even at 80 percent though, Kiernan said people assume that’s good enough.

“It’s an urban myth,” Kiernan said. “That just isn’t true.” Postponing extra payments further into the future can also cause intergenerational equity problems, which is just “bad public policy,” he said.

“In the end, there really isn’t any solution other than to put more money in, unless you can legally change the benefits that pensioners are going to get, and that’s hard to do.”

    This article relates to: Government, News, Pensions

    Written by Ashly McGlone

    Ashly is an investigative reporter for Voice of San Diego. She can be reached at ashly.mcglone@voiceofsandiego.org or 619.550.5669.

    12 comments
    sdlizlem
    sdlizlem subscribermember

    Good article. Maybe write a follow-up article to how the average individual's 401k fund is underfunded and compare it to underfunded pensions.  Government entities must pay pensions that they promised, but individuals responsible for their own retirement savings will have no one to demand money from.  One of my favorite books on the topic is "While America Aged" by Roger Lowenstein. In three sections, the last my favorite with details of the San Diego Pension scandal. 

    Glenn Younger
    Glenn Younger subscribermember

    WOW, Wow, wow  Valley Center stopped paying the employee share, yet boosted the payout from 2% per year worked to 2.7% per year worked.  That is a HUGE change.  So the payout for a 30 year employee is not 60% of their final salary (very good)  but 81%!    This is crazy.

    This is a   21%   retroactive raise in retirement pension yearly payouts.    This with out any way to fund that raise.  

    I'm wondering if the managers who advocated for this change will also get the 21% retroactive raise in their benefits as well?  

    Seems like there are 2 issues:  

    1) Conflict of interest with those making or advocating the decisions and/or  

    2) Government Agency managers who can not do math.  (2.7 does not sound like much more that 2.0...) 



    Ronald Stein
    Ronald Stein

    It’s unfortunate that future generations, unable to vote today, will bear the costs of many enacted pension programs, entitlements and boondoggle projects, requiring them to pay higher taxes and work later into their lives to pay for these promises. It’s the inmates running the pension Asylum that are loading up system with lucrative packages for themselves, to be paid for by taxpayers.

    The international business world is intelligent enough to know that DEFINED BENEFITS, neither capped nor precisely quantifiable in advance, financial disasters to any business, thus all businesses focus on the known, i.e., defined CONTRIBUTIONS alone.

    Stealing from the young who have no votes, but silently shoulder the costs and bear the burden of unfunded promises of these programs to enrich the old seems to describe the Governments expansion of entitlement benefits and other government services, along with the taxes young people will have to pay to support them, mostly to subsidize older Americans.

    The inmates know that debt for our future generations buys votes. Over the decades, the proven “concept’ practiced by voters is to defer as much financial responsibilities as possible from our current financial responsibilities to future generations, that have no votes on the subject. Simply stated, if we cannot afford it today, pass it off to the future generations to minimize any impact on our current lifestyles.

    Another insult to the taxpayers and future generations paying their pensions is that many of those early retirements collect their guaranteed pensions, and then take a second job.


    Virtually all elected officials are heavily financed by unions which are focused on entitlements for their current members. The unions, government, and other bureaucrats have been very successful in manipulating the system to enrich themselves. Thus, no changes can be expected in the foreseeable future for elected officials to ever abandon their source of votes.

    Even before those young folks can vote our Golden State schools are on track to force substantial budgetary cutbacks on core education spending, as public schools around California are bracing for a crisis driven by skyrocketing worker pension costs that are expected to force districts to divert billions of dollars.

    Chris Wood
    Chris Wood subscriber

    Another way of looking at the situation (from a citizens viewpoint) would be to hold those that increased future pension payments 2.7/2 = 35% in 2008 the middle of the great recession (2007 to 2009) responsible (for something).


    The 61.3% funding would currently be 96.3% without that change.


    https://en.wikipedia.org/wiki/Great_Recession

    Chris Brewster
    Chris Brewster subscribermember

    This story promotes a narrative that a public pension that is 70% funded is “underfunded.” The reality is that public pension systems can, and do go on indefinitely at 70% funding, paying out all obligations, with no crisis. As a recent paper from the Haas Institute (link below) asserts, “The drive to full funding cannot be justified actuarially.”

    How can this be? The public employees in these various pension plans will not all retire at once, and even if they did, their benefits are paid over their remaining lifetimes. You don’t need 100% funding now when your payments will stretch over 30+ years. Moreover, since public governments exist indefinitely and their workforces do as well, current employees cover a significant part of the cost of the pensions of retired employees, as do investment returns. In fact, employee contributions and investment returns are the majority source of income to these systems. 

    Take an example of the California lottery. As most people know, if you win the jackpot, you have two choices. You can receive the payment over 20 years and ultimately get the total prize. Or you can get it in a lump sum now, at a heavily discounted amount. In other words, the present value of your winnings is much lower. The person receiving a pension doesn’t have a choice. They are paid over time and if they die early, they “lose” potential earnings, which helps lower overall costs. The lottery can do this because they invest the funds in the meantime.

    Another example is infrastructure bonds that governments used to pay for big ticket items, like road repairs. A standard approach is to have the taxpayers approve borrowing money to pay for infrastructure, then pay off the bond, with interest, over time. At the beginning, the bond is grossly underfunded. At some point, it becomes 25% funded, then 50% funded, and so on. But in this instance, there is an ultimate point at which the entire debt must be paid off. In the case of pension systems, the obligations are to many individuals who cycle in and out of the system (mostly, they die). Preparing to pay them all, even those who have just begun their work life and started paying into the system, would be foolish and unnecessarily expensive.

    There is also a very serious risk of the consequences of over-funding. That has been seen in many cases locally and nationally. When it appears that investment returns are going to be rosy for a long time (a bubble), politicians may reduce funding of the systems and there have been cases were unfunded benefits are provided to future retirees. 

    As an example, CalSTRS was fully funded in 1998, a time of raging market returns on investments. The State reduced payments into the system and also increased benefits (without creating a funding source). When the market returned to normal, the funding rate declined greatly, but the benefit increases didn’t go away.

    Pensions are a convenient foil for politicians. They can say that they can’t fund the things citizens want because of them. The reality is that they are just a cost of doing business, like building roads, providing public safety, and educating children. Similarly, Social Security payments and employee savings plans are costs of doing business in the private sector.

    A bigger issue we should be concerned with is retirement security generally. Not just in the public sector, but in the private sector. In a recent survey, linked below, some 88 percent of Americans agreed that the nation faces a retirement crisis and that 82 percent of Americans have a favorable view of pensions. Ironically, Republican members of Congress recently voted to curtail the right of cities to create retirement savings plans for private sector employees and the State of California’s Secure Choice plan for private sector workers is being challenged. By whom: Investment companies used to extracting large sums from 401(k) participants, who would no longer be able to charge exorbitant rates. 

    Rather that continuing to create articles like this one, which grab the low hanging fruit of pension bashing, VOSD should be considering how the looming retirement crisis in the private sector can be addressed effectively. After all, it is VOSD staffers who have the most to gain by seeing some sort of reasonable private sector retirement system. 

    http://theweek.com/articles/682082/public-pensions-are-better-shape-than-think

    http://www.nirsonline.org/index.php?option=content&task=view&id=957

    philip piel
    philip piel subscriber

    @Chris Brewster

    Chris, did you just recommend the state of California get in to the retirement game for private sector employees? Funny to see you use the term "ironic" when chastising Republicans for their unwillingness to trust the California State Legislature with people's retirement money.  

    Chris Brewster
    Chris Brewster subscribermember

    Mr. Piel: Yes, I support retirement security for the private sector as well as the public sector. In a recent survey (linked below), "Some 82 percent of Americans have a favorable view of pensions. A full 85 percent say all workers should have access to a pension plan so they can be independent and self-reliant in retirement. More than three-fourths of Americans (77 percent) say the disappearance of pensions has made it harder to achieve the American Dream." The California Secure Choice program will extend a degree of retirement security to private sector employees in California and free them from the high fees that are typically associated with 401(k)s and that employees are unable to avoid because they are negotiated by employers. The ironic aspect of the Republican vote in Congress is that Republicans have typically promoted states' rights and local control over federal control. In this case, they recently voted to prevent local governments (not states) from offering defined contribution pension plans to the private sector. They did so for two apparent reasons: 1) Wall Street makes lots of money from 401(k) fees, which would decline precipitously under the Secure Choice plan (and similar plans in other states) because the state would use low cost investments and negotiate low fees. 2) Business groups don't want to be bothered with payroll deductions (even though they would not have to pay anything into these plans. http://www.nirsonline.org/index.php?option=content&task=view&id=957

    philip piel
    philip piel subscriber

    @Chris Brewster


    Chris, there are currently individual retirement plans available at little cost. There is also a huge segment of people with access to company sponsored retirement plans that choose not to participate. Another poorly run Ca. State Government program will land a few ex-politicians  well paid board seats but does nothing to get those unwilling to save for retirement involved. Can you tell me how many of the people screaming for state run retirement currently have IRAs? How many have CDs? How many have done anything regarding retirement? 

    If you really want to help the down trodden why not have state approval needed for their day to day expenses? Maybe limit fast food purchases to twice a month? How about denying anyone with less than $25K in a retirement account the ability to buy beer & tobacco? Maybe the state should be there when people are having children they can't afford?

    Your answer to a self sustained problem is getting an entity with a horrible fiscal track record and a history of failing at virtually everything a mandate to start up and run yet another retirement plan. California owes billions in unfunded pension liability, getting Ca. involved in personal financial decisions is like hiring Richard Ramirez for a pre-school teacher position. Tell us again about low fees and by all means leave out the expanded costs associated with an even larger government bureaucracy and please inform us when the High Speed Rail gets down to being even in the neighborhood of the original cost estimates. 

    philip piel
    philip piel subscriber

    @Chris Brewster


    Very well Chris, there are a few studies out relating to gross fiscal negligence in the hallowed halls of Sacramento as well. As usual government refuses to do its current job prior to moving on to the next project although getting your medical coverage, retirement benefits, life coaching and food rations at the local DMV does sound convenient...

    philip piel
    philip piel subscriber

    @Chris Brewster


    PS, I do believe it was Mrs. Clinton caught on tape telling "wall street" that everything was going to stay the same and she had to make "those statements"  in public to the rank and file "regular folks."

    Richard Bagnell
    Richard Bagnell subscriber

    You can't promise 7-8% returns on pension funds when the risk free ten year Treasury bonds are paying 2.5%.  All the risk of this broken model is being covered by the taxpayers and citizens who don't receive the public services. The government and schools are being run for the benefit of the employees rather than for the citizens.  We must switch government retirement plans from defined benefits plans to defined contribution plans (401k or 403b).