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Old Mendocino County Courthouse Around 1915

California County Pension Debt

 

Stories & Evidence



Assumed Investment Profits Still Too High

Part 1 - The Good News



Stories and Evidence


Choices -

Who Done It?

'98 Retiree Healthcare - '02 Board Policy 40 - Diversion of County Contributions - Part 1

'98 Retiree Healthcare - '02 Board Policy 40 - Diversion of County Contributions - Part 2

'98 Retiree Healthcare - '02 Board Policy 40 - Diversion of County Contributions - Part 3

San Diego - IRS - Excess Earnings

Increase Pensions When Already Deep in Debt

Staffing & Compensation Chaos

Deeply Flawed Pension Fund Financial Statements - Part 1

Deeply Flawed Pension Fund Financial Statements - Part 2

Deeply Flawed Pension Fund Financial Statements - Part 3

Retiree Healthcare

Assumed Investment Profits Too High

Plans to Increase Debt

County Puts Off Bad News

The Myth of 80% Funding

Numerous Financial Errors

 

Role of Assumed Rate of Return

These and other issues about pension funding are laid out in Pension Basics.

Each year the Actuary quantifies two types of payments to the Pension Fund that must be made in the next year. The Normal Contribution is paid by both the County and its employees. The County pays more but employees make significant contributions as well. Each year's Normal Contribution is supposed to fully fund pensions over the long run.

If the assumed rate of investment profits is lowered then the yearly Normal Contribution must increase.

But if in later years the Actuary estimates there isn't enough money in the Pension Fund to pay future pensions that have been earned in the past additional payments must be made to the Pension Fund. Only the County must make these payments - employees and retirees have no such obligation.

A significant unfunded pension debt - no matter what caused it - means past Normal Contributions were too low. There is no other mathematical conclusion. And that means a big part of what employees should have paid in the past was transferred to the County as long-term interest bearing debt.

Retirement Board Lowers Assumed Rate of Return
From 7.75% to 7.25%

During most of the past 2 decades the assumed rate of return was 8%. It was lowered to 7.75% in 2011.

On October 15, 2014 the Retirement Board discussed their Actuary's (Segal Company) analysis of pension finances over the previous 3 years and recommendations for changes beginning in the fiscal year starting July 2015.

The Retirement Board then voted to accept one of the recommendations to lower the assumed rate of return to 7.25%. The Board also adopted a number of other changes to the assumptions that determine what contributions to the Pension Fund must be - but the most impactful by far was lowering the assumed rate of return.

The Retirement Board appeared willing to spread the increase over a two year "phase in" period so the County wouldn't have to pay the full increased payment immediately.

Board of Supervisors Bite a $3.4 Million Bullet

But the County Board of Supervisors decided to immediately make the full increased payments.

This was a gutsy move. I believe it results from a significant shift in the attitude of the Board of Supervisors. Unlike their predecessors this Board was willing to taie the hit now to prevent their successors having to pay even more later. That is important.

This summarizes the Actuary's (Segal) estimate of the impact of the changes that were adopted.

Payments to the Pension Fund ($Millions - Rounded)
  County Employees TOTAL
  % Payroll $ % Payroll $ % Payroll $
Previous Assumptions 26.0% $14.5 9.3% $5.2 35.3% $19.7
Changes for Fiscal Year July 2015 - June 2016 (note below)
  7.25% Rate 6.0% 3.4 0.7% 0.4 6.8% 3.8
  Other 1.9% 1.0 0.1% 0.1 2.0% 4.9
Total Change 7.9% $4.4 0.9% 0.5 8.8% 4.9
 
New Payments 33.9% $18.9 10.2% $5.7 44.1% $24.6

note: The Total Change is the number reported by the Actuary - Segal. I calculated the amount of increase resulting from droping the assumed rate to 7.25% and the "Other" line is what remained. I'm confident my calculation is at least quite close.

Also - the dollar values were calculated using the estimated total salary for the fiscal year ending June 2014. The actual payments will probably be larger because payroll in the fiscal year beginning July 2015 when these changes take effect will almost certainly be larger.

And - this doesn't include the County's payments of its Pension Obligation Bonds nor other retirement benefits including social security and medicare tax payments.

The County will pay about $4.4 million more to the Pension Fund next year. Employees will pay about a half-million more. So total payments to the Pension fund will increase from about $19.7 million to about $24.6 million. Over 3/4 of the increase was driven by lowering the assumed rate.

For ever $1 of payroll the County will pay the Pension Fund about 34 cents and employees will pay about a dime.

 
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