California’s pension reform may be modest, but it will save Marin County taxpayers millions of dollars over the next several decades.
A new study by the county administration indicates that while savings will be minimal for the first few years, the state reform will add up to big bucks at Civic Center over the long run, totaling more than $40 million over the next two decades.
The reform lowers costs by cutting benefits for new hires, boosting the retirement age needed for full benefits, compelling new employees to share costs and curbing earnings used to calculate pensions.
“The estimated annual savings is small initially, but will substantially increase over the long term,” Deputy County Administrator Dan Eilerman said in a report to county supervisors. “On a cumulative basis, we estimate new tier savings of approximately $10.6 million over 10 years and approximately $41.3 million over 20 years.”
Savings next year are estimated at $200,000, rising to $1 million in five years.
In addition, if the county is able to negotiate cost-sharing provisions with existing employees, “we would save an additional $4 million per year,” Eilerman said.
Eilerman and his boss, County Administrator Matthew Hymel, urged that savings estimated at $3 million over the next five years, resulting from state pension reform, be used to pay down the county unfunded pension liability. Dedicating reform savings, along with other moves to pay down
liability, could increase the county pension program’s funded ratio to roughly 77 percent, near the ratio of at least 80 percent favored by most analysts.
In contrast, San Rafael’s pension program has a funded ratio of 63 percent.
The Civic Center pension and retiree health benefit program poses an unfunded liability for current employees estimated to run anywhere from $750 million to $2.5 billion, depending on the investment earning assumption used to calculate costs. County officials use an optimistic 7.5 percent earning assumption, while others, including finance guru Warren Buffett, say 6.2 percent or less is more appropriate.
Eilerman’s report will be discussed by the county board on Tuesday morning, along with an administration recommendation that the county draft options for a “hybrid” pension program, reach an accord with union negotiators and seek legislation establishing the legal authority to enact such a custom program for miscellaneous employees.
A hybrid plan would incorporate elements of private plans, with employees sharing stock market investment risk. “Over the long term, we believe this direction would better fit the next generation of workers by providing greater portability while sharing market risk,” Eilerman said. “Any potential new option would be subject to agreement with our collective bargaining units.”
The state reform signed into law this year by Gov. Jerry Brown increases the retirement age for new employees depending on their job, caps final salary on which pensions are based at about $136,000, eliminates a number of abuses of the system and requires workers who are not contributing half of their retirement costs to pay more. Brown said the moves will save $40 billion, which is welcome news for the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, which are at least $165 billion underfunded using optimistic calculations.
But Brown’s plan, pared down after negotiations with Democratic lawmakers, fell far short of a sweeping program he initially proposed, dropping a hybrid system that includes a 401(k)-style plan. Nothing was done to reduce skyrocketing retiree health care costs. And, among other shortcomings, there will be no independent members with financial expertise on the board of the state’s main pension fund.