The State Employees International Union (SEIU) 721 and the County of Ventura have agreed to a three-year contract that includes reform to public employee pensions. The SEIU 721 represents over half of all public employees in Ventura County, approximately 4,600 of 8,100 public employees. Agreed upon reforms include a phasing out of pension pick-ups and thus having public employees represented by the SEIU pay more into their pensions.
Ventura County is one of 20 counties in California that operates its own retirement system through the Ventura County Employees’ Retirement Association (VCERA). Under an assumed 30-year investment return of 7.75%, the VCERA currently faces a $1 billion unfunded liability and as of June 2012 the pension system was 73-77% funded.
The County has experienced rising pension costs, taking up increasing portions of the county budget. According to the Stanford Institute for Economic Policy Research (SIEPR), Ventura County spending on pensions has sharply increased in the last decade. Through 2004, Ventura County devoted less than 1% of its annual budgets towards pension contributions. By 2011, Ventura County contributions to the pension system took up 16.9 percent of the budget. The latest figures from June 2012 indicate that Ventura County spent $140 million on “employer contributions.” Money that could have gone towards services or, better yet, saved, increasingly goes towards funding public pensions.
One significant change in the SEIU agreement is the phasing out of pension pickups in July 2014. Like other pension systems, the VCERA is funded through employer and employee contributions. An actuary sets the contribution rates as a percentage of an employees’ income. On average, Ventura County employees are supposed to contribute 8.53% of their salaries towards their pensions.
Among SEIU-represented employees, those hired before June 27, 2010 have had 1% of their required 8.41% of salary pension contribution “picked up” by the County. In other words, taxpayers made the payments on their behalf. Most public employees in Ventura County have received pension pickups, with safety employees historically receiving the most generous pickups through labor negotiations.
Between 2011 and 2012, for all public employees in Ventura County, taxpayers spent $11.3 million making pension contributions on behalf of public employees. The SEIU agreement is likely to save taxpayers at least a portion of that when the pickups for the 4,600 represented employees are terminated in 2014.
While the agreement to have the pension pickup eliminated is a significant step, the SEIU contract has a number of not-so-good concessions. All public employees represented by the SEIU, for example, will receive a $750 one-time payment later this month. In addition, over the next two years, public employees will receive a 3% across the board pay increase in addition to a 1% pay increase to “offset” the eliminated 1% pension pickup.
Simple changes such as eliminating pension pickups aside, several costly issues remain to be addressed by Ventura County.
Firstly, the rising unfunded liability needs to be directly addressed. Until last year, the VCERA assumed an 8% investment return over 30-years, an expectation that exceeded private sector assumptions and the VCERAs own investment experience. According to SIEPR, using a “risk-free” discount rate of 5% instead of 8%, VCERA’s unfunded liability grows to nearly $3 billion, and the funded ratio drops to 50%. VCERA’s actual investment returns, between 2003 and 2012, averaged less than 6%. In light of these realities, the Board of Supervisors reduced the 30-year investment return assumptions to 7.75% just last year, a step that has subsequently led to higher County contributions to the pension system and an increase in the unfunded liability.
There has also been a problem with employees approaching retirement engaging in “pension spiking” in order to boost their final salary in order to receive a bigger pension. Cashing in unused vacation and sick pay, for example, artificially boosts the “final average salary” used to calculate the pensions public employees will receive for life.
Of the 148 public employees who retired between December 31, 2005 and June 20, 2011 with the largest pensions, 124 retirees played the system to receive pensions larger than their final year base pay. The highest earning pensioner, a former fire department employee, earned $86,711 in their final year working before retirement. Absurdly, that employee now draws an annual pension of $159,598. Nearly all of the 148 highest paid pensioners were “safety employees,” working either in law enforcement or in the fire department. Ventura County still allows for pay in addition to the base pay of an employee to be used in pension calculations.
Contract negotiations between Ventura County and other unions are ongoing. Tackling the unfunded liability is a necessity, both for taxpayers who are paying the bills and public employees who are basing their life plans on the assumption that the promises made to them will be fulfilled. At some point, Ventura County will need to do more than short-term measures that fail to address the long-term sustainability of the pension program.