O.C. Faces Difficult Pension Choices

During two days of hearings in June, Orange County supervisors discussed all manner of spending for the coming year. They decided to shell out $10 million more for indigent healthcare and declined to kill a $187,000-per-year tourism promotion program.

But one of the biggest spending increases was barely mentioned. Buried in the appendix of the budget under the heading “Miscellaneous” was $65 million more for the county’s pension fund. The increase, which brought the county’s spending on pensions to $255 million this fiscal year, equaled more than half the county’s property tax windfall from recent lofty assessments.

The growing cost of paying for retired employees’ pensions and medical coverage is wreaking quiet havoc on Orange County’s finances, no small thing in a place still recovering from the largest municipal bankruptcy in history. The county owes its pension and retiree medical funds about $3.7 billion, an amount that dwarfs the $1.7 billion in debts it cited in the 1994 bankruptcy filing.

The spiraling burden is the result of soaring medical costs combined with a large population of retired workers who are expected to live longer. At the same time, investment returns that support the funds have fallen in recent years, dipping below 1.5% in 2003 and 2004.

The issue is a politically sensitive one for supervisors, because at least part of the pension fund’s increased cost is the result of sweetened labor contracts the board has approved. That has angered conservatives who complain that the cost is eating into the county’s ability to deliver services.

“Some things have to give,” said county Treasurer and Supervisor-elect John M.W. Moorlach, who takes office in January. “Everything is on the table.”

Supervisors and county officials are in the early stages of seeking a solution, but there are few palatable options.

The retiree medical fund faces $1.4 billion more in anticipated costs than it can pay for. Although investment returns once covered the county’s contribution, the county last year had to contribute $19.5 million to keep it afloat. This year, the county must pay $24 million.

If supervisors do not increase contributions or reduce costs, the fund will start spending more than it takes in by the end of this fiscal year. As a result, officials are contemplating ways to reduce the program’s costs.

One of them involves a complex plan to move the county’s obligation into a trust, moving the fund’s liability off the county’s books so it doesn’t harm its credit rating. Instead of reflecting $1.4 billion in debt, the county’s ledger would show only how much money it must pay to the trust each year. Still, this does not solve the problem of paying the debt.

Another option involves splitting the pool of medical beneficiaries into active and retired employees, which would require retirees to cover higher costs. Still others include freezing benefits and changing eligibility, such as increasing years-of-service and age requirements.

Those options have alarmed retirees, who believed continued medical care was provided under their union contracts and did not expect them to be taken away or made more costly.

“These are retirees, in spite of what the public may think of them, who worked very hard, gave up a lot and helped make this quality of life that we enjoy here in Orange County,” said Fred Branca, a 31-year veteran county accounting manager who is president of the Orange County Retired Employees Assn. “It’s a little disheartening.”

The county has taken the position that, unlike with pensions, it is not legally obligated to provide medical benefits for its retirees. Any changes to the program will have to be negotiated with the unions in the coming months, and officials say they must get it done before new accounting rules kick in at the start of a new fiscal year in July.

Still, county officials believe the issue could end up in court.

Though it is an even bigger obligation, the county has fewer options in dealing with the $2.3-billion shortfall in its pension plan.

Last year, an actuary determined the fund’s obligations were $1 billion more than previously projected, and despite changes in investment return assumptions and other accounting maneuvers, the county must pay more to cover the costs.

The county’s executive officer, Thomas G. Mauk, had asked department heads to find ways to cut their budgets -- and reduce county services -- in order to make the increased payments necessary to erase the shortfall.

The cuts were not made, however, because of better-than-expected property tax receipts. But the difficult choices still loom.

“This is not an easy thing,” Board of Supervisors Chairman Bill Campbell said at a meeting last week. “I believe we are going to try to be fair. Everyone must share the pain in some way.”