O.C.’s Reserve for Pension Payments Is $1 Billion Short

Retirement payments to Orange County government employees are estimated to cost $1 billion more than current reserves, a figure that could grow after negotiations this summer with 11 unions that want increased payouts.

The amount of unfunded pensions has nearly doubled from a year ago, when county supervisors considered selling $734 million in bonds to cover pension debt. They decided against it, however, saying the bond fees would cost too much.

The pension problem won’t affect current retirees or those ready to stop working in coming years. But increased costs of covering retirement payouts divert money that could be used for other county services.

The pension figures are based on actuarial estimates, updated annually, that analyze a variety of factors, including the number of employees, current and future payments and benefits, and longevity and dependents.

The disparity continues to grow because the investments by the Orange County Employee Retirement System didn’t increase as much as expected over the last three years.

At the same time, supervisors joined governments across the state in adopting a generous pension hike for public safety workers that, beginning in July 2002, added $400 million to Orange County’s future payments.

Fueled by those sweetened benefits, representatives of the county’s other unions are negotiating for their own retirement boosts.

Safety workers -- among them sheriff’s deputies, firefighters and probation officers -- can retire at age 50 and earn 3% of their final year’s pay for each year on the job, up to 30 years. An employee could receive a pension of 90% of his or her salary.

Other county workers qualify for retirement at age 62 and earn 1.67% of their final year’s pay for each year on the job. Their pensions top out at 50.1% of their salaries.

The county spends nearly 40 cents of every payroll dollar on retirement costs for public safety employees and about 13 cents on pensions for other employees.

The Orange County Employees Assn., which represents 12,000 workers for the county and other public agencies, has met three times this month with county negotiators, with better pensions at the top of their list of demands.

Because most government workers don’t qualify for Social Security payments, many retirees are dependent solely on county benefits, union officials said.

County officials declined to comment on the specifics of negotiations.

But supervisors insisted the pension system couldn’t continue to grow unabated. Even without increased payouts, county pension costs for the current fiscal year are $183 million -- 30% more than last year.

Supervisor Bill Campbell said he would like employees to give up their guaranteed pension payments. Instead, he would like county and employee contributions to be set through negotiations, and future payouts would be based on how well the retirement system’s investments performed.

By law, the unfunded pension liability must be paid by selling bonds or by making payments over no more than 30 years.

In addition to the county’s retirement shortfall, an additional $300 million in the retirement system is owed by other agencies, including the Orange County Transportation Authority, the Sanitation District and the Fire Authority.

“We can no longer ignore this huge obligation without putting the services we provide and the employees that provide them at risk,” said James Campbell, chief aide to Supervisor Chuck Smith, who wants pension costs more closely examined.

Since 1990, only once -- in 2000 -- did the retirement system have enough funds to cover current and future benefits.

Supervisors unanimously approved the boost in safety pensions in December 2001.

By then, investment income already had begun to drop. At the end of 2001, the system was again in the red -- underfunded by $257 million.

Other California counties are in the same predicament, having adopted hefty retirement perks just as investments plunged in 2000. Governments have been scrambling to make up the payments from dwindling budgets.

This month, eight local agencies successfully petitioned the California Public Employees Retirement System, the state’s largest government pension system, to reduce this year’s contribution. They must make up the difference with interest beginning in 2007.

Orange County has an additional financial burden because it continues to pay the remaining $848 million in bonds from its 1994 bankruptcy. The county’s treasury lost about $1.7 billion to risky investments made by then-Treasurer Robert L. Citron. The county will pay about $90 million this year toward bankruptcy debt. Those bonds will be paid off in 2026.

Treasurer-Tax Collector John M.W. Moorlach, who was the first to publicly question Citron’s investment strategies, said if the pension imbalance continued to grow, the dollars owed could top the bankruptcy debt and harm the county’s credit rating.

Orange County is among 20 counties in the state with its own retirement system. Its reserves of $4.6 billion are estimated to cover about 78% of the cost of retirement benefits for current and retired employees.

The much larger Los Angeles County retirement system was estimated on June 30, 2003, to be able to cover 85% of future needs, leaving a hole of $3.9 billion. The city of Los Angeles’ system can cover about 75% of its future payments.

By law, employee contributions are capped according to a complex formula. The remainder of the system’s revenues are paid for by employer contributions, which rise or fall based on investment income.