Update From the Sonoma County Pension Advisory Committee

Commentary

Update From the Sonoma County Pension Advisory Committee

The Sonoma County Independent Citizens Advisory Committee on Pension Matters released a report last month detailing how the County’s pension liability has grown so rapidly in the past 15 years. The Committee was formed last year to address the County’s growing unfunded pension liability. Their report also makes policy recommendations for reversing this trend.

The policies of the previous ten years have put the Sonoma County Employee’s Retirement Association (SCERA) plan in a precarious financial situation. Annual pension costs have increased from $19 million a decade ago to $97 million today. Reforms included in the 2012 California Public Employees’ Pension Reform Act (PEPRA) and those made by the Sonoma County Committee are projected to save about $178 million over the next 10 years. While this is certainly good news, these changes, particularly those included in PEPRA, are dwarfed by the County’s remaining unfunded liability; the pension costs for SCERA will still be $544 million over the County’s cost containment goals for the next decade, defined as costs in excess of 18% of pensionable payroll. The combined liability, which includes both the unfunded accrued liability and payments for Pension Obligation Bonds (POBs) was $831 million as of December 2015.

How did SCERA find itself in such a position? In 2002, the Sonoma County Board of Supervisors retroactively increased the pension benefits to 3% of salary per year of service for Safety and General employees at ages 50 and 60, respectively. According to the Committee, the benefit increase combined with an increase in the number of pensionable income pay items brought about by the 1997 Ventura Decision, had the predictable consequences of reduced retirement ages, from 62 to 57 for General employees and 56 to 51 for Safety employees, and a massively increased average pension costs, from $35,803 in 2002 to $60,697 in 2006.

The Committee points to a number of other policies that also contributed to this crisis. Pension spiking, when employees’ salaries are increased just before retirement, increased the pension payouts to retiring employees. In the past, Sonoma County had also paid a portion of the employee’s pension contribution, further increasing the taxpayer’s share of the pension costs.

Additionally, previous accounting practices undervalued the total liability of the pension system. To help refinance some of the unfunded liability and decrease interest costs, the County has issued Pension Obligation Bonds (POBs). However, Sonoma County did not include the POB liability when calculating the funded ratio. When this figure is included, the December 2015 funded ratio drops from 84.9% to 73.1%.

The mistakes of policymakers do not only imperil the future of SCERA. Pension expenses have seriously diminished the ability of the County to provide basic services. According to the report, “if the County had maintained pension costs at the County-defined sustainable level of 10%, over $269 million in resources would have been available to fund critical public services over the past 10 years.” The report states that only $10 million per year (less than 40% of the total funds used to cover the excess costs during this period) could have paid for 44 new sheriff’s deputies or 40 miles of road improvements per year.

The report recognizes that achieving these policy objectives will be difficult. Even if its models are correct, policymakers will have to contend with entrenched public-sector union interests opposing reform. For this, they may have to turn to state law rather than reform at the County level. Sonoma County has already partially reduced its unfunded liability thanks to the Committee’s recommendations and PEPRA, but more aggressive policy measures will be necessary to restore fiscal health to SCERA.

Daniel Takash is a policy analyst for Reason Foundation's Pension Reform Project.