Sonoma County pension panel sounds alarm over rising taxpayer costs

Taxpayer costs for Sonoma County employee pensions are set to continue climbing for at least the next seven years, stripping away funds for public services and limiting the county’s ability to fund new initiatives, according to a citizen-led review of the county’s retirement spending.

By 2023, pension costs are projected to hit $146 million per year, a 700 percent increase since 2000, three years before the county - like most others in the state - first boosted retirement benefits for workers.

State-mandated reforms and other county moves implemented over the past four years could result in retirement costs dipping by 2024, according to county projections, and falling dramatically by 2031, when the county expects to pay off the remainder of its now-$425 million in pension bond debt.

But members of the independent pension review panel appointed by the Board of Supervisors cast doubt on the county’s projections, saying they feared the sharp rise in taxpayer costs to support the $2.3 billion retirement system could continue beyond 2030 if no additional steps are taken to rein in pension costs.

“If nothing more is done, it’s likely that costs are going to keep going up,” said Bob Likins, a retired actuary and chairman of a seven-member panel formed last year to review the county’s progress on its pension reform efforts. “Our message is urgent because we don’t want what happened (with bankruptcies) in Vallejo and Stockton and San Bernardino to happen in Sonoma County.”

The panel’s report, which went to the Board of Supervisors on Tuesday, concluded that the county’s bid to curb costs - up more than 500 percent since 2000 - has fallen short and appears unlikely to hit savings targets established by supervisors five years ago when the county sketched out its first moves to overhaul the system.

Already, the county has extended its time frame to reduce taxpayer pension costs to 10 percent of total spending on employee salaries and benefits. Currently, annual costs for taxpayers total $113 million, or 19 percent of total payroll.

Based on its own projections, the county is highly unlikely to meet its newest so-called sustainability target in 2024, a point that Supervisor David Rabbitt, who has helped lead the reform efforts, acknowledged.

Report calls for action

While reforms to date are expected to save the county $178 million, according to the review panel, chronic underfunding extending back to 2006 - before recession-era investment losses hit pension funds across the nation - will result in losses for public services totaling more than $1 billion dollars by 2030, the review found.

“Without change, the ability to provide for the health, safety and welfare of county citizens will be severely compromised,” the panel said. Its 95-page report called for additional, “aggressive” actions to halt escalating costs, including higher employee contributions to the pension system and lower benefits for future employees.

In their meeting Tuesday, supervisors received the report and listened to a presentation from three members of the panel, the first independent, county-formed entity to study pension costs, which have been a high-profile political issue since the recession.

The general feedback from the board recognized the continued rise in pension costs, which supervisors have acknowledged as unsustainable. Board members also praised county efforts to date to seek savings for taxpayers.

“More work needs to be done, but we’ve bent down that cost trajectory and made significant progress,” Rabbitt said in an interview, echoing board comments Tuesday. “I’m proud of the work that we’ve done.”

But Rabbitt also voiced frustration with the pension panel’s recommendations, which he said failed to identify actions the county could take within its existing authority - a charge that Rabbitt noted was central to the panel’s formation nine months ago.

“The number one thing I wanted to find out is what actions can we take unilaterally right now to lower our overall costs, and they basically said just keep doing what you’re doing but accelerate it,” said Rabbitt, who also serves on the board of the Sonoma County Employees’ Retirement Association.

The pension fund handles retirement benefits for more than 4,600 retired county employees and more than 4,000 current workers.

Richer benefits approved in the early 2000s - now earned by more than 3,100 county retirees and promised to more than 3,000 employees - and $670 million in recession-era investment losses - equal to a third of the assets in the county’s retirement fund at the time - fueled the pension crisis for Sonoma County government.

Many local governments across California have confronted the same issue, prompting a state law enacted in 2013 that mandated lower benefit tiers for new employees and greater cost sharing with employees.

Market gains in recent years have buoyed Sonoma County’s pension system, but costs have continued to rise and unfunded obligations - the difference between current assets and projected payments to retirees - remain above $400 million. The county also owes $425 million on a pair of pension obligation bonds it issued to pay down those liabilities.

Divergent ideas proposed

The issue remains a divisive one, inciting criticism of the current board and sparking debate among candidates for county office. Rivals vying to succeed Efren Carrillo on the Board of Supervisors - former state Sen. Noreen Evans and organic farmer Lynda Hopkins - have put forward divergent ideas for how they would address the issue.

The pension review committee, which met 22 times between October 2015 and last month, concluded that despite reform efforts, costs continue to rise due largely to the retroactive benefit increases approved by the Board of Supervisors in the early 2000s when it boosted employees’ retirement formulas.

Almost overnight, that controversial move credited thousands of employees with better benefits for past service. Employees agreed to help pay for that benefit, but their higher contributions have fallen far short of costs, especially after the stock market crash in 2008, the panel found. The conclusion mirrored findings from a lengthy Press Democrat investigation, published in 2011-12, into the county’s skyrocketing pension costs.

“The genesis of the county’s problems were these retroactive increases, but we also realize the stock market went into the toilet and the county as the employer had to put in more money to make up those losses,” Likins said. “But our point is it’s the taxpayers who are really picking up those costs.”

Taxpayers paid $68 million to the county pension system in 2015, while employees contributed $39 million through their paychecks. Investments added net income of $164 million, according to the pension fund’s latest actuarial report.

County employees already contribute to their pensions at among the highest rates among government colleagues in the state. But they should contribute significantly more to their retirement benefits, the panel concluded.

It also urged the county to craft a less-expensive, less lucrative hybrid retirement plan for new employees that would combine a defined-benefit pension with a defined-contribution 401(k)-type account.

Rabbitt took issue with those recommendations. Switching employees to a hybrid plan would require a change in state law, he noted. The county is also already working with unions on a goal of equal cost-sharing with employees who are set to receive the richer retirement benefits. New employees with the lower benefit tier already contribute half of the expected costs toward their retirements. Employees also contribute a sliver of costs associated with market risk.

“We inherited this system. Does it have vulnerabilities? Absolutely, but we’re on track to achieve our goals, and our employees already contribute 20 percent of their paychecks to their retirement,” Rabbitt said, citing employee payments for pensions and Social Security benefits. “What this report ignores is the retention and recruitment issues. We’re also an employer, and we want to be sure we’re being as competitive, fair and equitable as we can. That means having a benefit that is appropriate and financially sustainable.”

Rabbitt cited problems at the Sonoma County Sheriff’s Office, as well as other county departments, with employee recruitment and retention due to the rising cost of living and concerns over take-home pay.

Union balks at increase

Union representatives with the Service Employees International Union Local 1021 and law enforcement groups spoke against the committee recommendations Tuesday, arguing that any increased contribution in retirement benefits would impact the county’s ability to attract and keep qualified employees.

“We do have a hiring crisis right now in Sonoma County when it comes to law enforcement,” said Rick Walker, president of the Sonoma County Law Enforcement Association, which represents about 530 positions, including jail staff, park rangers, dispatchers and others. “Any change in the retirement system … would have a detrimental impact on public safety.”

Lisa Maldonado, field director for the SEIU Local 1021, the county’s largest group of unionized workers, pointed out that the county’s pension system is nearly 85 percent funded. Projections show costs reaching a level the board has identified as sustainable by 2030.

“The committee is calling for drastic measures that not only hurt workers, but are unnecessary,” Maldonado said.

Supervisor Susan Gorin echoed labor concerns over county employees leaving for other jurisdictions. Take-home pay and benefits have not kept pace with the cost of living in Sonoma County, she said.

“We are an employer,” Gorin said. “We have a responsibility to maintain an excellent workforce.”

But Carrillo, the board chairman, said the county must find ways to further reduce costs, perhaps by seeking greater employee contributions.

“Time alone is not going to solve this issue,” Carrillo said. “I think we have to continue to find ways of limiting the growth of the pensionable compensation … and yes, we need to work with our employees through labor negotiations.”

As part of its overhaul efforts, the county eliminated its payments to cover employees’ share of their pension costs - a perk that once offset 50 percent of supervisors’ contributions and covered other workers at lower rates.

Other perks, including maneuvers to spike pensions through end-of-career cashouts of accrued leave were also curtailed.

Last year, for the first time, supervisors also paid $3.5 million in a preemptive move to pay down the county’s unfunded pension obligations. The citizen committee recommended that supervisors continue to make such payments to help reduce long-term costs, a move the board previously indicated it plans to make as resources are available.

The most aggressive moves to bring down future costs could take years and require changes in state law or protracted negotiation with labor unions. Those include a new, lower benefit tier and addition of a hybrid retirement plan - shifts that would require state signoff - and higher employee contributions toward pensions.

The committee urged supervisors to begin undertaking such negotiations with the state legislature and employee unions.

“The county offers very generous benefits to its employees, and employees should be willing to pay a greater portion of those benefits,” said Deborah Lauchner, a member of the committee who helped bring Vallejo out of bankruptcy and was hired in 2014 as Santa Rosa’s top finance official.

Long-term panel sought

At present, the taxpayer-employee split on expected costs not associated with stock market fluctuation is 60-40 for employees outside of public safety departments. For public safety employees that ratio is about 70-30, according to the pension fund.

“Sharing in more of those costs doesn’t seem unreasonable,” Lauchner said.

County employees also contribute 3 percent of their pensionable pay towards costs associated with market fluctuation. The panel also recommended that contribution be increased.

At present, only about 1,000 of the county’s 4,000-plus employees are covered under the new, less generous benefit tier. The county is expected to see its largest pension savings when those employees make up a majority of the workforce, and when the county pays off the remainder of its pension bond debt in 2031.

The board voiced support for the panel’s call to establish a permanent citizens advisory committee to review progress on pension reform. Supervisors indicated they could form such a committee at a future date. Two supervisors could also be selected to focus on further reforms, Rabbitt said.

You can reach Staff Writer Angela Hart at 707-526-8503 or angela.hart@pressdemocrat.com. On Twitter?@ahartreports.