The Ventura County Employees’ Retirement Association (VCERA) is poorly positioned to stay properly funded in the coming years, and local taxpayers may be forced to pick up a hefty tab of unfunded liabilities if substantive changes are not made in the near future. An initiative by county residents would address the risk of long-term liabilities by putting new hires into a 401(k)-style defined-contribution system and phasing out the defined-benefit system over time.
A Reason Foundation analysis of the proposed reform finds that, if adopted, the initiative would save Ventura County $5.4 million in cash flow over the first two years, $51.6 million in cumulative savings over five years of reform, and $460 million in total savings over 15 years-all while separately eliminating $1.8 billion in pension debt. In the long run, moving to a new defined-contribution system would protect taxpayers from unfunded liabilities and investment return risks in public retirement systems.
Importantly, the proposed initiative requires zero additional costs for Ventura County taxpayers. The County could make separate policy choices that mean costs increase beyond the status quo, such as setting the defined-contribution rate high, or increasing the debt payments for VCERA. But any costs related to these policy choices would be unrelated to transitioning from defined-benefit to defined-contribution.
There are two components to pension funding: the annual cost to pre-fund pension liabilities (known as “normal cost”), and the cost to pay off unfunded pension debt. There is no legal reason that VCERA would have to change its defined-benefit debt payment plan due to the transition towards a defined-contribution system. It is important to clarify that employee contributions never subsidize debt payments. So there are no transition costs related to debt repayment.
[Note: A new, fully-formatted PDF version of this analysis was uploaded on June 5, 2014. Its content is identical to the original version, which is still available here.]