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Without a major overhaul of its retirement system, Sonoma County government faces "untenable consequences," including the continued skyrocketing of pension costs and the further erosion of funding for public services.

That is the message being delivered Tuesday to the Board of Supervisors in a 135-page report by two of its members.

"We cannot have a commitment to one generation cost us the ability to serve the needs of all generations," said Supervisors Shirlee Zane and David Rabbitt.

"We must change course," they said.

It is strongest call yet for pension changes out of county headquarters, and presents a set of daunting political and legal challenges for leaders trying to forge a path out of financial crisis for the county.

The message also reflects how a growing number of local and state governments, including California, are turning their focus on pensions, citing the increasing pressure retirement costs are putting on their recession-wracked budgets.

Recommendations made by Zane and Rabbitt include benefit and contribution changes affecting current workers and future hires, moves to scale back spiking of pensions through extra pay and perks, and a makeover of pension board governance.

Already, Supervisors Efren Carrillo and Mike McGuire say they also support the mix of proposals, and back what is likely to be a contentious debate over changes for existing workers.

Taxpayer-paid retirement costs for county employees are up 360 percent since 2000 and would more than double in the next decade without any action, cutting deeper into dollars for government programs and undermining public trust, according to the study prepared over nine months.

Its recommendations are aimed to save the county $115 million to $150 million over a 10-year period and reshape a sharply escalating retirement cost curve.

Labor and management still are huddling over their own proposal due out later this month, and supervisors could take months before making any key decisions.

Public policy experts say such broad efforts face monumental obstacles, any number or combination of which can forestall change and push off savings. The hurdles include provisions of state and federal law, possible court challenges, legislative stalemates and labor opposition.

Until recently, overhaul efforts have sought ways around those roadblocks by focusing on less contentious changes, including reduced benefits for future hires, who enjoy few if any of the legal protections afforded current workers and retirees.

But those measures, which tend to produce more long-term than immediate savings, are now seen as insufficient by cash-strapped governments and others pushing pension changes.

Instead, the latest wave of overhauls feature rollbacks and cost shifts affecting current workers, and in some cases retirees.

"The big bucks are in the current employees," San Jose Mayor Chuck Reed said last week.

Reed is pushing his city to consider a ballot measure that includes provisions that would affect current workers and retirees.

Future hires would be shifted into a lower-cost plan combining a taxpayer-guaranteed pension with a 401(k)-type account where employees bear the investment risk. A similar idea was proposed by Gov. Jerry Brown last month in his pension overhaul proposal and Rabbitt suggested Sonoma County could do the same for future hires.

But Reed called those changes for future hires "small pieces" that "won't save us and won't save Sonoma."

"You need to make some really big changes to make differences in the cost," he said.

<b>Issue for many cities</b>

In a recent study by the National League of Cities, more than 80 percent of government fiscal officers said pensions, along with health care costs, were the two largest pressures on their balance sheets.

Anger over the six-figure payouts going to top retirees is also driving calls for change. In Sonoma County, 98 former workers, representing about 2.5percent of retirees, get annual pensions of $100,000 or more. The average benefit among all 3,900-plus retirees and beneficiaries is $29,761; among recent retirees it is near $49,000.

Scrutiny of practices used to boost public retirement benefits and what some call "pension envy" among private-sector workers, most of whom no longer get a guaranteed pension, are also driving calls for reform.

Rabbitt and Zane say their mix of proposals constitutes the type of broad change needed to produce immediate and long-term savings.

Supervisor Valerie Brown, the board veteran who plans to retire at the end of next year, called Zane's and Rabbitt's study a "good starting point."

But she stressed that any action should be carefully vetted for its impact on workers, especially current employees.

"If we take away the very thing that provides some security for our workers, then I think there's no question that counties will be taking care of them in the future," Brown said.

<b>Current workers</b>

Under the mix of proposals Zane and Rabbitt recommended, nearly all of the near-term savings, including $8 million in the first year, would come from changes affecting the current workforce.

They would entail moves to eliminate pension spiking and measures to bring annual employee contributions in line with those made by taxpayers.

County employees pay among the highest rates into their retirement among their government colleagues, with about 12 percent of their paychecks going to pensions, equating to just over $37.3 million in the calendar year 2010, according to county pension system records.

But taxpayers still pay far more. Separate county estimates for the 2010-2011 fiscal year show the regular county-paid contribution was $51.7 million, not including payments on $515 million in pension bond debt, which pushed the overall taxpayer obligation to $97 million.

Without changes, that cost figure — representing 19 percent of the county's total yearly salary and benefit expenses of $504 million — could climb to $209 million, or 28 percent of total compensation, by the budget year 2020-2021, the report showed.

"You watch that number going up. It's not a sustainable system," Zane said.

By the 10th year of the supervisors' proposed overhaul, in 2021, the savings trend would flip, with at least half of the projected $16 million to $20 million annual reduction coming from lower benefits for new hires.

Some critics questioned that assumption, which held that at least 60 percent of the county workforce, now around 3,400, would be in the lower benefit tier by that date.

But Zane and Rabbitt defended the projection, saying it was based on the county's annual workforce attrition of 6 percent.

"It's possible to get those type of (savings) numbers," Rabbitt said.

He also defended the report's overall cost-containment goal, which would return county pension costs to 10 percent of total compensation, where they were in 2000.

The goal raised eyebrows with both labor leaders and fiscal watchdogs last week, with one county critic calling it "unrealistic," especially given the projected rise in payments on pension bond debt. Now at more than $45 million, the payments are set to peak at $57 million in 2023, county records show.

"There's no way," Tom Lynch, a county planning commissioner and Guerneville resident, said about the county reaching the proposed cost benchmark in the 10-year time frame.

Rabbitt fired back, saying the goal was needed and could be achieved.

"It's not enough to say we want (pension benefits) to be less expensive," he said. "It's important to have a goal, just like we do with greenhouse gas reductions."

<b>Labor concerns</b>

Several labor leaders voiced concerns about some of the overhaul options. But they were not ready to discuss those details, saying they would wait to have their say at the bargaining table next year.

Contract talks in 2012 will involve all but two of the county's 11 bargaining units, and County Administrator Veronica Ferguson has said officials will seek deals to rein in retirement costs.

"Overall, public pensions are small potatoes compared to what's affecting our economy," said Bill Robotka of the Engineers and Scientists of California Local 20 IFPTE, which represents about 200 county workers. "That said, labor is very cognizant of the budget challenges facing local and state government and we know we need to work with our elected officials and management. We've shown we're willing to tighten our belts."

At least one fiscal watchdog, John Dickerson, a Redwood Valley financial analyst who closely monitors retirement spending by local governments, praised the report, calling it "a very good, serious effort."

He said it erred on several fronts, however, adding that it "vastly understated the problems caused by flawed financial management" in the past.

The study explained briefly the role stock market drops in the past two decades, court rulings and state and county decisions granting enhanced retirement benefits played in the system's underfunded status, pegged at $249 million at the end of 2010.

But Dickerson said it did not sufficiently unravel key decisions that led the county to pay off unfunded pension obligations through three rounds of borrowing since 1993. Administrators at the time, including Rod Dole, the county's longtime financial chief who is now receiving the county's top pension of $254,625 a year, argued that the moves have saved the county tens of millions of dollars by refinancing debt at a lower rate than the pension fund's assumed rate of return on its assets, now at 7.75 percent.

That may still be the case, county officials said. But pension debt now accounts for more than 60 percent of the county's overall debt of $1.25 billion, the report showed. And pension bonds are now in critics' crosshairs, likely making them a thing of the past, officials said.

"Politically, we can't go down that road again," Rabbitt said. He and Zane also called for policies to establish limits on county debt.

<b>Battles on two fronts</b>

The broader changes that Sonoma County and many other governments now are considering are likely to cause a wave of legislative and legal battles, public policy experts say.

Some county critics are pushing for unilateral changes in employee contributions, moves that experts said could hasten those fights.

"Why negotiate the cost sharing through collective bargaining? That never works," Ken Churchill, a Santa Rosa winemaker who has criticized pension system oversight wrote, in an email about the supervisors' report.

He called on the Board of Supervisors and the pension board to unilaterally adjust the contributions upward.

County officials said state law limits the increases that can be made to employee contributions and requires those increases to be negotiated.

Any change to the contribution limit would require a change of state law, one of several that would be required to carry out the supervisors' recommendations, said Jim Leddy, a county spokesman.

At least one option proposed by Zane and Rabbitt — the proposed cap on pensions, limiting them to 100 percent of base salary for all employees — could run afoul of court rulings on retirement benefits for current workers, experts said.

Marty Morgenstern, California's labor secretary and a key adviser to Gov. Brown, said a pension cap for current workers wasn't included in the governor's plan for that very reason.

"We think that would be one of the things that would fall outside of the scope of what's legal," Morgenstern said. "It's changing the rules."

The governor's proposal, which would affect local governments including Sonoma County, seeks rule changes of its own, and parts of it could wind up as one of several pension measures put before voters statewide next year.

But generally, Morgenstern said, "we did what we thought was doable. We put in the programs that we felt confident we could implement."

<b>Broad input</b>

Zane and Rabbitt said they took the same approach, seeking input from other public-sector employers, as well as from private industry.

"We want to be very clear. The goal is to have a pension system that is fair and equitable to employees and sustainable for the community," Zane said.

Getting to that point will not be an easy or quick process, officials acknowledged.

"There is going to be a dance here," said Carrillo, chairman of the Board of Supervisors. "The dance is going to be what we can do through the bargaining process and in looking for legislative solutions.

"My hope and my desire is that we're going to be fair in that approach," Carrillo said. "On the other hand, we have to prepare and be prepared to head in that direction (litigation). There is always that chance."

San Jose's overhaul bid, meanwhile, may lead the way among local governments girding for a fight.

Chris Platten, a San Jose attorney who represents public-sector labor groups, has called Mayor Reed's proposed overhaul "dead on arrival," saying it would prompt a "cyclone of litigation" and would not hold up in court.

Reed and Jon Holtzman, a San Francisco attorney representing San Jose in pension negotiations, both said they thought the city had a good legal argument.

Holtzman, whose firm represented Sonoma County in its controversial 2008 rollback of retiree medical benefits, said some of the legal standards guiding courts on retirement benefits are dated and ripe for reinterpretation in favor of public employers looking to rein in pension costs.

Reed also said that putting the issue before voters was the best way he saw for San Jose to deal with labor resistance and avoid future legislative moves that could undermine pension changes.

No ballot-driven campaign is under way in Sonoma County yet.

If that came to pass, it too would face an uphill battle, Reed suggested.

"There's no solution to the problem that doesn't involve legal risk," he said. "It's California. It's just one of the facts of life."

You can reach Staff Writer Brett Wilkison at 521-5295 or brett.wilkison@pressdemocrat.com.

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