County to Be Billed for Pension Fund Error
Stunned by the recent discovery of two 20-year-old “calculation errors” that have deprived the Los Angeles County employees’ pension fund of more than $1 billion it should have collected, the pension investments board voted overwhelmingly Wednesday to compel the county to immediately begin paying an additional $25 million per year into the fund.
Overall, the county will be billed $40 million annually; of that, $15 million would come out of state and federal money the local government administers to run a variety of health, welfare and public safety programs.
Meanwhile, one elected member of the Los Angeles County Employees Retirement Assn.’s Board of Investments said he will move to sue the actuarial firm that made the two errors, Denver-based Towers Perrin.
“I think we will have to,” employee representative Simon Russin said in an interview. “Thank God for the phenomenal bull [stock] market” that has created an unexpected financial cushion for the behemoth pension fund.
“Otherwise,” Russin said, “this would have been an absolute disaster for the county and the pension fund.”
Russin predicted that his investment board colleagues will be embarrassed into voting for the proposed lawsuit. “They have to,” Russin said. “Otherwise, they’re fools. They’re breaching their fiduciary duties” to serve the more than 100,000 county employees and retirees participating in the pension system.
On Wednesday, addressing a packed audience at the investment board meeting, representatives from Towers Perrin and the pension fund reiterated that the more than $1 billion in unforeseen liabilities will not jeopardize the stability of the fully funded $24.6-billion pension program, thanks to profits on its stock market investments.
The only dissenter in the investment board’s 8-1 vote was county Probation Department representative Richard Shumsky.
He agreed with county Chief Administrative Officer David Janssen, who wrote the retirement association that the county shouldn’t be required to kick in another $40 million annually--at least not right away--thanks to the stock market-created pension fund surplus.
The retirement association’s chief executive officer, Marsha Richter, disagreed.
“To be honest, if it were a $10-million or a $15-million change, I’d say wait [a year or so],” Richter told the board members. “But it’s a $40-million change. . . . I think we need to start collecting that money now.”
The county Board of Supervisors has the option of using some of the money that it has in a giant surplus account at the pension fund to pay the $40 million a year, or it can come up with the funds from its operating budget.
But any surplus it uses now could hurt the county’s ability to repay the $1.9 billion it borrowed four years ago to beef up the pension fund in the first place.
That pension bond was structured so that much of the interest won’t come due until 2002, Richter said.
None of the county’s five supervisors returned calls seeking comment on how they plan to pay the $40 million.
But Janssen said he will recommend that the supervisors save the surplus as a hedge against inflation and poor stock market performance.
“I think the county needs to wean itself off of using the earnings from the retirement system to pay our contribution,” Janssen said.
He also said the pension fund and the county must take into account other unforeseen costs, including a court case cited in a Times story Tuesday.
Although some county officials said the court case held that employees’ overtime pay should have been included in the salary package on which their pensions are based, the case actually involves vacation pay, sick leave, holiday time and other benefits that, if included in workers’ pension packages, could raise the county’s employer pension fund contributions substantially, Janssen said.
Richter agreed with Janssen’s recommendation.
“Philosophically, I believe you should pay your ongoing costs and recognize them upfront,” she said. “I don’t buy my groceries or pay rent on credit. . . . If they don’t pay now, it’s a debt they have to recognize next year” or in later years.
Janssen said the county also is examining whether it can refuse to pay the $40 million--especially the $25 million that would not be covered by state and federal funds. But Richter said the county has no choice but to comply, based on state law giving the retirement association complete autonomy to raise the employer contribution rates.
Meanwhile, retirement association board members and their outside auditors couldn’t seem to agree on whether the pension fund’s actual liability is $1.2 billion, as stated in their own internal documents, or $1.5 billion--as stated Wednesday during the investment board meeting--or $1.1 billion, as some other county documents say.
Neither could they agree on how much of an impact such a shortfall will have on the fund, except that it is money they should have been collecting from the county and pension participants for 20 years.
At Wednesday’s meeting, the financial consultants responsible for the unanticipated liabilities apologized for the “discrepancies” that led to them.
But they stopped short of admitting any wrongdoing, and had no comment as to why the retirement association is replacing them with another actuarial firm.
“We very much regret the concerns that have arisen,” said David C. LaSueur, principal of Towers Perrin.
The calculation errors came to light in a recent independent audit ordered by the retirement association that was done by the firm of Milliman & Robertson.
