Sagging Markets Hit Pension Fund Balances Locally

By HOWARD FINE

Staff Reporter

Already reeling from revenue shortfalls, increased costs and greater demand for social services, local governments throughout L.A. County are being forced to pay out millions of dollars to shore up unsteady pension plans.

The plans, many tied to the struggling $130 billion California Public Employees Retirement System, have been hit with the double whammy of stock market losses and benefit increases.

The City of Los Angeles is looking to spend at least $90 million more in the year starting July 1 to ensure that its seven pension plans can meet all current and future obligations. That’s $90 million that could have gone towards the hiring of new police officers or eliminated the need to raise other taxpayer fees.

Meanwhile, L.A. County, which faces an $800 million budget deficit next year, may have to spend upwards of $10 million as a first installment to plug a pension-funding gap put at $175 million.

Dozens of other cities throughout the county are also scrambling to find dollars to fulfill pension obligations. Most of these contract with the Calpers, which has boosted its local government contribution rates after being hit with three years of market losses. The problems extend to school districts, water districts and other independent government agencies.

“This is a huge hit, and it comes when our revenues are falling short and we’re also grappling with huge increases in workers’ comp and health care costs,” said Mike Dennis, chief financial officer of the city of Santa Monica.

Doubling the deficit

The city will have to pony up an additional $6 million to Calpers next year, effectively doubling the size of its budget deficit. To cope, parking citation fees will be raised and citywide operating costs will be cut 5 percent.

So far, no local governments have had to resort to the extreme measures taken by Contra Costa County, which earlier this month announced plans to sell $320 million in pension obligation bonds.

Nevertheless, pension funds are caught in a squeeze. Three years of falling stock market prices have deprived them of the investment returns necessary to remain fully funded. Additionally, changes in state law and pressure from public employee unions prompted many public agencies to boost their pension benefit packages during the stock market boom, thus increasing annual pension obligations over the long term.

The benefit increases generally allow employees to retire earlier and still receive the same benefit levels. A change in the retirement formula that was also enacted will have a multiplying effect on these increases.

“When these pension benefit increases were rolling through, everyone rather foolishly believed that there would always be plenty of dough to go around,” said Ron Roach, an analyst with the California Taxpayers’ Association, which last week issued a report on the troubles of public pension funds. “Well, it turns out, they were acting on a fantasy surplus, somewhat like the state itself was in the last couple of years.”

Calpers was hit especially hard, thanks to its concentration of investments in telecom and tech stocks in the late 1990s. Since June 30, 2000, the portfolio lost $41.7 billion, or 24 percent of its value.

While Calpers’ main responsibility is to provide retirement funds for tens of thousands of state employees, it also has assumed management responsibilities for the retirement funds of some 1,800 other public agencies.

Last fall, notices went out to each of these public agencies warning them they would have to boost their contributions by anywhere from 2 percent of payroll to 16 percent of payroll for the 2003-04 fiscal year. The amount depends on the generosity of the government agency’s pension benefits and how well funded the pension plan is.

Even though stocks have been falling for three years, there generally is a two-year time lag before the imposition of such hikes, which means the bills for losses since June 2001 have yet to be sent. Most of the lag is due to compilation of actuarial data.

The increase to Santa Monica’s pension fund, at 18 percent of payroll, was actually slightly larger than the high-end estimate from Calpers, Dennis said. Santa Monica’s contribution will increase by another $5 million for the 2004-05 fiscal year.

“We haven’t even begun to address that situation,” he said.

Long Beach blues

The 2004-05 fiscal year is looking bleaker for the City of Long Beach’s $2 billion pension fund, which is also administered by Calpers. That’s when the city will finally run through its past surpluses and be forced to pay money to Calpers. The first hit is expected to be in the $30 million to $36 million range, about 10 percent of the city’s general fund, according to chief financial officer Bob Torrez.

Larger pension systems, like those at the City of L.A. and the county, are independent of Calpers. But they, too, have been hit with stock market losses, which have caused them to fall under the 100 percent full-funding threshold.

L.A.’s largest pension plan, the Los Angeles City Employees Retirement System, fell from 108 percent of full funding at the end of 2001 to 97 percent full funding at the end of 2002. As a result, the city has to fork over $125 million from its general fund to bolster the $6.7 billion fund in 2003-04, a $46 million increase from current levels.

The city’s five public safety pension funds, which are managed as a unit and cumulatively valued at around $10 billion, will require similar levels of additional cash, said city finance specialist Ray Ciranna.

“We are expecting these funds to dip under the 100 percent full-funding threshold when we look at the 2002 performance,” Ciranna said. The city is likely to kick in $35 million to $40 million next year to these funds.

One fund that won’t require additions is the Department of Water and Power pension fund. That’s because the DWP invested more conservatively, putting better than half of its assets in fixed-income or cash instruments. It still has a surplus of about $75 million.

“The fixed-income side of the portfolio has experienced an increase in value in recent years, so we’re in pretty good shape,” said Ron Vasquez, the DWP’s chief financial officer.

Also in decent shape is L.A. County’s massive pension fund, known as LACERA. As of June 30 of last year, it was at 99.4 percent of full funding, which translates to a shortfall of about $175 million. However, that shortfall is being amortized over 30 years, which means only $5 million to $10 million will be needed from the general fund this year, according to David Muir, chief counsel for LACERA.

“Of all the county pension funds I’ve looked at, Los Angeles County is by far the best run,” said Tom Branan, who analyzes public pension funds for his publication, Retirement Journal.

LACERA could take a bigger hit in three years, when previous surpluses that are also being spread over several years are exhausted. “The hits we’re taking now are nothing compared with the hits we’ll see starting in 2006,” Muir said.