Is Contra Costa County Paying Enough Into Its Pension System?

An analyst from Mendocino County says Contra Costa and other counties are seriously underfunding their employees retirement. County officials disagree.

Does Contra Costa County need to pay more into its employees' retirement system?

An analyst from Mendocino County says it does, along with Alameda and at least four other counties.

In fact, the analyst, John Dickerson, says these counties may have to double the amount of money they're putting into pensions.

If that happened, counties would have to decide whether to slash programs or ask voters for large tax increases.

"This is like the Exxon Valdez. It's a huge ship with such inertia, it'll take years to turn it even slightly," said Dickerson.

Dickerson's scenario is contested by county financial experts.

"Future payments could change depending on many factors," said Contra Costa County Administrator David Twa, "but at this time the county is not underfunding its portion."

Dickerson, a public sector pension expert with 30 years of financial experience, posted his online report in early January. He studied six counties, including Alameda and Contra Costa, that are not part of the California Public Employees Retirement Systems (CalPERS). A summary of his report was also posted by the California Public Policy Center.

Dickerson put together his independent report after reading about a proposal by Moody's Investor Services last summer. The credit rating agency concluded that government employee pension data was understating the credit risks caused by unfunded pensions.

Moody's does not have any authority to force government officials to make changes in their pension funding systems. However, the agency can lower credit ratings, potentially causing governments to pay more for money they borrow.

The agency hasn't announced when it'll decide whether to lower credit ratings, but Dickerson said it could be as early as next month.

Among the changes Moody's officials are recommending is that government pension systems reduce their projected rate of return on their investments from an average of 7.7 percent to 5.5 percent.

They also recommend government agencies pay more into their pension systems to amortize them over a 17-year period instead of a 20 to 30-year period.

Contra Costa County's projected rate of return right now is 7.75 percent. Twa said investments have returned 6 to 7 percent annually for the past 30 years. He noted the money is invested in more than just the stock market, so the returns can vary.

The Contra Costa County Employees' Retirement Association releases a financial report every quarter. Here are the numbers.

  • Current and future retirees are projected to collect $6.9 billion in pensions over their lifetimes.
  • The CCCERA pension fund has $5.4 billion invested. That leaves an unfunded pension liability of $1.5 billion. Contra Costa County's portion of that liability is about $1 billion.
  • Contra Costa County paid $142 million last year toward that unfunded liability. Some of that is reimbursed by federal and state agencies. Employees pay about $48 million into it every year.

Twa reiterates the pension system is being properly funded.

Dickerson disagrees. He says under Moody's calculations the CCCERA's unfunded pension liability would rise to $3.7 billion.

He added the increased payments the county would need to make to cover this increased unfunded pension liability would be equivalent to 154 percent of the county's annual property tax revenues.

"This isn't vapor. This is real money," said Dickerson.

Dickerson said local governments are handcuffed by state laws that require agencies to guarantee pension benefits to public employees. In other words, lowering benefits is not a realistic option.

"Given California law, counties can't do what they need to do," said Dickerson.

Alameda County Assistant County Administrator Donna Linton said this is all a lot of panic without solid reasoning.

She said it's quite possible Moody's will not lower credit ratings because the company grades on a curve and if every agency's pension liability increases, then nothing really changes.

She added the pension systems have been funding pensions for decades and, so far, the system hasn't gone broke.

Chris Nicholson February 14, 2013 at 04:05 PM
A refreshing dose of reality/sanity. It has never made sense for pension plans to be able to use returns assumptions that were discounted from market data. If 7.75% is the right long term return rate for them to bank on, why not let me and others invest at those rates of returns (guaranteed by the State). Actual results will be above or below ~7%. But, no worry, tails = taxpayers lose and will make up the shortfall with more taxes. Heads = public employees win via early retirements plans, improved benefits, etc.
c5 February 14, 2013 at 05:25 PM
The 7.75% assumed return is the biggest scam being forced onto taxpayer's backs in history. Taxpayers are always on the hook, and yet we are fed totally biased and inaccurate data on how bad things really are. Maybe if we had real information we wouldn't be so stupid to pass things like Prop 30 which will not do anything to lessen the burden we have placed on our kids.
John Onoda February 14, 2013 at 05:53 PM
This is a local version of a tragic catastrophe being created at the state and federal level as well. I do what I can by voting for politicans willing to tackle the issue (when I can identify them -- they're as scarce as jackalopes) but they never win. What bothers me the most about all this is that future generations that are going to bear the consequences of our current irresponsibility; and the elected officials who let this happen will never be held accountable.
Dive Turn Work February 14, 2013 at 06:15 PM
People simply refuse to acknowledge that Social Security and these government retirement programs are simply unsustainable. Is it sad or perhaps somewhat immoral to break the promise made to the affected people? Yes. But, reality is what it is. We have to acknowledge this and slash all of these taxpayer funded benefits.
Steve Cohn February 15, 2013 at 02:16 AM
One of the biggest problem with the public pension systems is that the way they are reported lulls the politicians into a sense of complacency. (1) The statement above "Current and future retirees are projected to collect $6.9 billion in pensions over their lifetimes" is a lie. That is the discounted present value. The actual amount due, over their lifetimes, is three to four times that: $20 to $30 billion. (2) The accountants then net out the assets, $5.4 billion, and all that shows up, in a footnote no less, is the $1.5 billion net. A big number but it doesn't grab your eye like $20 billion might. If a balance sheet showed a $20 billion liability with a $13 billion discounting credit, and a $5.4 billion asset on the other side, instead of a $1.5 billion footnote, people would sit up and take notice. Especially when those numbers might be ten times the size as anything else on the balance sheet.
Carol Penskar February 15, 2013 at 05:35 AM
The MOFD pension is in CCERA, the County Plan. The magnitude of the deficiency in the County Plan is very ominous for our fire service. MOFD firefighters have been out of contract since 12/31/2010/ The current path is not sustainable. When will the MOFD Board address this impending replay of the Con Fire mess?
c5 February 15, 2013 at 04:38 PM
Steve, even that isn't the entire picture as the unfunded future liability should really be calculated using a more realistic return assumption, more like 4-5% IMO given where interest rates are.
c5 February 15, 2013 at 04:39 PM
Ummm, maybe when h*ll freezes over?
Steve Cohn February 15, 2013 at 05:51 PM
My point is that changing the way that pension liabilities and assets are reported allows the community and the decision makers to see the entire picture. In my example, let's say that the undiscounted liabilities are $20 billion; the discount, using a 7.75% discount rate, is $13 billion; thus the discounted present value of the liabilities are $7 billion. Then, because the assets are worth $5.5 billion, the net liability is $1.5 billion (meaning you would need $1.5 billion more in assets today if you wanted your assets, earning at 7.75% interest, to fully pay for your liabilities). But you want to assume that "the assets will only earn 4%, or that is the only risk the community should take." If (and this is the big "if" which is not currently in place) we know what the undiscounted liabilities are, we can then easily calculate that when they are discounted at 4% the discount drops to $9 billion, the present value of discounted liabilities is $11 billion, and the net liability (subtracting the $5.5 billion in assets) is now $5.5 billion. The amount you need to add to the assets to fully fund the liabilities has increased from $1.5 billion to $5.5 billion when you reduce the assumed asset earning rate from 7.75% to 4%. I did that on my hand held calculator with very little information. Currently, with just one crucial piece of information (the undiscounted liabilities) missing, only a small handful of people, "the actuaries", can perform this calculation.
Regular Guy February 28, 2013 at 09:45 PM
Maybe CCC can determine whether it's paying enough while their employees are attending the annual pension conference in Hawaii, as described in online.wsj.com/article/SB10001424127887323478304578332352488713198.html
Steve Cohn February 28, 2013 at 10:01 PM
CCCERA decided yesterday, since its assets have only earned about 5% over the past decade, that it should lower its official long term projected earning rate from 7.75 percent to 7.25 percent . What this will mean to the County and other agencies that use CCCERA to manage their pension plans is that their discounted present value of benefit liabilities (the amount they should have in assets to be considered "fully funded") will increase about eight percent. Since most plans are already 20-25 percent underfunded, this means their underfunding is going to increase to 30-40 percent. For MOFD, its unfunded amount, using the Market Value of its assets as opposed to the more "optimistic" Valuation Value, will increase from $33 million to $44 million.
Steve Cohn February 28, 2013 at 10:03 PM
Typo: "increase to 30-40 percent" should have been "increase by 30-40 percent"


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