Pension Changes Could Cost Taxpayers Millions : L.A. County: Counting of fringe benefits will raise retirement pay of officials, supervisors by 19% or more.

Los Angeles County officials have adopted changes in the county pension system that could cost taxpayers millions of dollars each year by boosting the retirement pay of hundreds of senior employees by at least 19%, according to records and interviews.

The pension changes were implemented over the past several years with little public discussion and no study of their impact on the financially troubled county.

Unlike the vast majority of other counties, Los Angeles requires that certain fringe benefits--such as car and medical insurance allowances--be counted with salaries when retirement pay is calculated.

Though some changes will benefit most of the county’s 85,000 employees, the Board of Supervisors and top county managers will derive the largest gains in retirement income, The Times found.

Chief Administrative Officer Richard B. Dixon, a county employee for 33 years, would receive an annual pension of at least $127,236--about a $25,000 increase because of changes he recommended to the supervisors.

The pensions of most supervisors will increase by at least several thousand dollars a year, and one supervisor will receive retirement pay that is higher than his annual salary of $99,297. Kenneth Hahn, who is leaving office this year after four decades, will receive a pension of $126,442 a year, retirement officials said.

County officials said they do not know the total cost of the pension hike. But experts consulted by The Times said the county could pay up to $50 million a year in increased contributions to the $13-billion pension plan.

Dixon said the estimate “sounds high.” And he said the pension increase was “fair and appropriate,” although “a lot of people will say this is terrible.”

“Your transportation allowance, your salary, and your benefits are altogether part of your total compensation” and should be included in calculating retirement pay, Dixon said.

The supervisors made “an informed decision,” said Dixon, and were aware that the changes will benefit them as well as county workers.

Supervisor Gloria Molina, a frequent critic of county spending practices, recently proposed rescinding the pension changes and asked the county’s civil grand jury to investigate.

“While taxpayers will be forced to fund these inflated pensions in future years, these changes occurred without the benefit of public debate or adequate public disclosure,” said Molina, who joined the board several months after the last changes were approved.

County Counsel DeWitt Clinton, said the action is irreversible because it is illegal to take away pension benefits already granted. The most that the board could do, he said, is to limit the pension rights of future employees.

Some supervisors defended the pension increases, although they had only vague recollections of the decision-making process and were unaware of the financial impact on county employees and themselves. They expressed surprise when informed that Dixon had not conducted studies to project the increase in the county’s annual contribution to the pension program, which now amounts to about $370 million.

Supervisor Deane Dana said he believed that “there were studies at the time.” When told there were none, he said: “It would have been nice to know the cost.”

The pension increases are necessary to attract and retain good managers, said Dana, adding that the rules were “adopted in a different economic climate.”

Supervisor Ed Edelman said: “I think there was some discussion.” When asked further about the program, Edelman said only, “I would defer on that.”

Supervisors Hahn and Mike Antonovich and former Supervisor Pete Schabarum did not return phone calls.

The county’s civil grand jury is examining county spending practices, and the supervisors are under fire for granting broad authority to non-elected officials, particularly Dixon, who has the power to award millions of dollars in contracts and maintains an open-ended expense account for himself and the supervisors.

Public employee retirement pay is the focus of statewide controversy.

State officials have begun a crackdown on so-called “pension spiking,” or efforts by public officials to inflate their salaries in an attempt to boost their retirement pay.

A recent audit by state Controller Gray Davis revealed widespread pension spiking in many public agencies by officials who pumped up their final year’s salaries by including sick leave, vacation days, automobile allowances and other perks in calculations of their compensation.

Assemblyman Dave Elder (D-San Pedro), who has proposed legislation to make intentional pension spiking a felony, said that Los Angeles County’s actions do not appear to be illegal but provide benefits that go “well beyond what anyone had in mind.”

The supervisors, Elder said, are operating by “the mushroom theory of management: They are being kept in the dark and fed manure.”

The state-run Public Employees Retirement System, which represents scores of state and local agencies, prohibits its members from engaging in pension practices such as those used in Los Angeles. And many other counties avoid the practices as too costly and subject to abuse, according to interviews with two dozen pension administrators.

In Los Angeles, the retirement benefits of supervisors will be based not only on their annual salaries of $99,297, but also on an $8,280-a-year car allowance and a $19,000 annual cash payment they now receive to buy health insurance or to spend as they wish.

Under a program adopted last year, supervisors also are allowed to defer up to 10% of their annual salary, then collect it later when it could boost their earnings for pension purposes. The biggest pension increase was implemented at the beginning of 1991. It followed passage of an obscure state law that required counties to include certain fringe benefits in calculating pensions--unless the county officials take action to the contrary.

The law was briefly discussed in an October, 1990, Board of Supervisors meeting when a county employee expressed concern about how the costly changes would affect the health of the pension system.

In response, Dixon confirmed that medical payments and certain other fringe benefits would be applied to pension calculations. But the supervisors did not ask the chief administrative officer for figures on the fiscal impact, nor did he offer any.

“The board took no action,” Dixon said. As a result, the county automatically began adding the benefits to pension calculations on Jan. 1, 1991.

County retirement administrator Charles Conrad said he was not consulted about the changes and he does not know the cost. “We were notified after the fact,” Conrad said.

The new rules apply to the cash payments that the county has been paying in lieu of county-funded health coverage since 1985. The program initially applied to about 9,000 non-union workers, including all managers, but has been expanded and soon will cover virtually all of the county work force.

Unionized workers will receive money in addition to their regular salary to buy health insurance, pay for child care or spend any way they choose. Workers receive up to $224 a month if they are single or $442 a month if they have dependents.

Only about half of those amounts can be applied toward pension benefits, union officials said.

In contrast, management employees receive from 10% to 19% of their annual salary in cash to purchase benefits, and all of it is applied toward pension calculations. Some also are eligible for auto allowances and the deferred salary program, which are not available to rank-and-file workers.

“The working people of the county are paying for the perks of the top executives,” said Guido DeRienzo of the American Federation of State, County and Municipal Employees, which represents county mental health workers and mechanics. He said management should be able to live on the same medical benefits provided to rank-and-file workers.

Ramon Rubalcava, research director for Service Employees International Union Local 660, which represents 40,000 county employees, said the union supports the pension changes but wants their impact studied.

Dixon said he does not believe it is necessary to calculate the long-range impact on pension costs when making changes in salaries and fringe benefits. “I can’t remember us ever debating or pulling out the retirement costs of any benefit we’ve ever given,” he said. “Maybe we should, but we don’t.”

Administrators in several other counties said they routinely calculate the impact of such changes.

Actuarial experts contacted by The Times said the new rules could cost Los Angeles County $30 million to $50 million a year. Drew James, an actuary with W. F. Caroon & Co., which consults with 13 of the 20 counties that operate independent retirement systems under the 1937 County Retirement Act, said: “As pay goes up, benefits go up accordingly. It’s not a cheap endeavor.”

Inclusion of the the medical plan represents slightly less than a 10% increase in pension benefits for the county’s work force, records show. That corresponds to an increase of 10% to 15% in the contributions the county must make to the pension system, James said. Several other consulting actuaries, who spoke on the condition of anonymity, concurred with James’ estimates.

Pension administrators around the state generally said Los Angeles County’s pension rules are unusual and appear generous.

“I’m in the wrong county,” said Gary Feramisco, Santa Barbara County treasurer and retirement administrator, when told of the 19% increase in the pensions of top Los Angeles County officials.

Other than Los Angeles, only three of 20 counties that operate independent pension systems use the value of medical fringe benefits in calculating retirement pay.

Ventura, San Joaquin and Santa Barbara counties offer much smaller benefits than Los Angeles, paying $5,400 or less. Under Los Angeles’ program, some high-ranking employees, such as Dixon, receive as much as $32,110.

Several other counties have health benefit programs like Los Angeles’ but do not include such payments in pension calculations. “It’s like being paid twice,” said Joseph Coffrini, Marin county treasurer and retirement administrator.

Five counties include car allowances in pension calculations, but they offer much smaller benefits than Los Angeles, which has been including auto allowances in pension calculations since 1987. Most of these counties provide executives a few thousand dollars for cars, while Los Angeles pays 486 top officials $4,800 to $8,300 annually in auto allowances.

Other counties--such as Kern and Sacramento--pay car allowances but do not include them in pension calculations.

Bill Douglas, employee relations officer for Kern County, said a $355-a-month car allowance paid to about 300 top managers is not included in pension calculations because “that is a reimbursement for expenses and therefore not compensation.”

In late 1991, Dixon, by administrative action, executed a program that allowed county executives to defer 10% of their salary for up to 10 years. The program was adopted, Dixon said, to demonstrate sacrifice by county managers as the county faced cash-flow problems.

“While the program could never have a material effect upon the county’s cash flow, it can have a substantial effect upon the pensions of the 19 county managers who elected to participate,” Molina said. “This clever maneuver could spike the pensions of some top county officials by over $10,000 per year. The combined effect of the salary and merit deferral programs could inflate some pensions by nearly $20,000 a year.”

County officials say they have not calculated the impact.

None of the other counties surveyed by The Times had programs like the deferred salary plan.

Pension consultants say large companies in the private sector usually are not as generous in computing pension benefits as Los Angeles County.

While many companies have fringe benefits programs similar to those of Los Angeles County, “few would use it in calculating pension benefits,” said Duane Bollert, manager of the Los Angeles office of Hewitt Associates.

County Pension System

BACKGROUND

Los Angeles County operates one of the largest public pensions funds in the state, with more than $13 billion in assets.

It is designed to provide its employees with an income in their retirement. Pension benefits are based on age at retirement, years of service and annual compensation. Payments also vary according to job classification and the pension rules in effect when the employee was hired. Benefits can range from as little as 7.28% of annual compensation for an 55-year-old employee with 10 years service to 100% of earnings for some employees retiring at age 63 with 41 years of service.

The county contributes about $370 million a year to the pension fund, which is then invested. Most employees also contribute to the fund and their contributions total about $100 million a year. Pensions are paid from the combined earnings of the fund.

HOW IT WORKS

Los Angeles County’s rules for calculating pension benefits differ from those of most public retirement systems. Based on rules implemented in the last several years, the county now includes the value of a variety of fringe benefits in calculating pension benefits:

* Benefits: The value of medical and other fringe benefits, which can range as high as 19% of total salary.

* Automobile allowances: As much as $8,300 a year for some managers.

* Deferred compensation: Top executives have the option of deferring up to 10% of their pay, then collecting it in later years when it will have the effect of enlarging the employee’s pension base.

EXAMPLES

Here are the pensions that members of the Board of Supervisors and Chief Administrative Officer Richard B. Dixon would earn if they retired this year, followed by the amount the pensions have increased as a result of the new rules:

SUPERVISORS DISTRICT PENSION CHANGE (Salary: $99,297) Kenneth Hahn 2 $126,442 $27,145 Ed Edelman 3 $83,027 $17,819 Deane Dana 4 $36,904 $7,924 Mike Antonovich 5 $19,766 $4,238 Gloria Molina 1 Not yet eligible

CHIEF ADMINISTRATIVE OFFICER PENSION CHANGE (Salary: $169,000) Richard B. Dixon $127,236 $24,552

NOTE: Figures do not include the impact of any salary deferrals, which are kept confidential. Dana and Antonovich must serve two more years to realize the full benefit of the pension changes because they are in a different retirement plan than the other veteran supervisors.

SOURCE: County records and retirement officials