Pension Gap to Force O.C. Budget Cuts

A decade after Orange County declared bankruptcy, it is once again confronting a threat to its finances: the swelling cost of its pension system.

County officials are looking to slice as much as $84 million in the next fiscal year -- and potentially cut services -- so they can use the money to shore up the pension fund.

No cuts have been finalized, but options include layoffs, a hiring freeze and postponing construction and repairs, the county’s executive officer, Thomas G. Mauk, said in an interview this month.

“Obviously, services throughout the county have the potential to be affected, but we have not made those decisions yet,” he said.

Every county department has been asked to trim expenses. For example, probation department officials said they may cut as many as 62 of the 1,015 beds in juvenile detention facilities. Other departments declined to comment or didn’t return calls.

Some officials said the increased pension cost was only a fraction of the county’s $4.94-billion budget and would have little effect.

“I don’t think the public is going to see much in the way of degradation of services,” said Bill Campbell, chairman of the Board of Supervisors. “I think we are going to be able to manage through this.”

The proposed cuts are in response to a consultant’s finding this year that the Orange County Employees’ Retirement System was underfunded by $2.3 billion, about $1 billion more than previously realized.

As a result, beginning with the fiscal year that starts July 1, the county will have to pay an additional $84 million per year into the pension system, bringing its total contribution to about $210 million per year. The additional $84 million is nearly as much as the county spends each year to retire its bankruptcy debt.

The county is examining other ways to cut pension costs. It has asked the statewide California Public Employees’ Retirement System for an estimate of the cost of taking over management of the pension fund. In addition, the county retirement board last month adopted changes that reduced the financial burden in the short term but could be costly in the long run.

For example, one change means the county will contribute less upfront, but that means losing out on the larger investment return the money could generate.

After the county filed bankruptcy 11 years ago, it curtailed services to repay creditors.

The county is on track to repay its bankruptcy debt 10 years early. A new report says nearly $190 million left over from last year’s budget has been placed in reserve.

However, the hard lessons of the bankruptcy are still fresh in the minds of county officials and residents. This year, the Orange County Grand Jury issued a report calling rising pension costs “another county crisis,” and noted the county’s cost of funding the plan quadrupled from 2000 to 2004.

Like pension systems throughout the state, Orange County is facing the prospect of lower investment returns, a surge in the retirement-age population and the increasing longevity of retirees. But the county has also contributed to the problem in recent years by offering pension plans considerably more generous than the state average, according to the state controller’s office. One package, for example, would allow Orange County public safety employees with 25 years of service to retire at age 50 with 75% of their pay, compared with 57% in the rest of the state.

As a result, Orange County’s funding level ranks in the bottom third of state pension funds, the controller’s office said in a report.

Any discussion of public pensions is fraught with divisions along political fault lines. Rising pension costs are a rallying point for conservatives, who say government’s overhead costs should be kept to a minimum. Public worker unions, meanwhile, say the issue is a stalking-horse for ideologues who want to cut government spending.

John M.W. Moorlach, the county’s treasurer and a candidate for the Board of Supervisors next year, has been critical of sweetened pension offers to county employees in recent years and said their true costs are now becoming apparent.

“The problem is what it does to the county budget and what it pushes out,” he said. “Are we going to push out libraries, parks, welfare? What is going to be sacrificed to pay for this pension plan commitment?”

But Nick Berardino, general manager of the Orange County Employees Assn., said the pension fund shortfall was exaggerated and that the system could make accounting changes that would lower the deficit. He said the fund’s assumption of a 7.5% annual return was the lowest among any public pension fund in the state and that its returns had historically been much higher.

“So much of this deficit, or shortfall, is the result of the retirement board managing the system in an irresponsible fashion,” he said.

The expected budget cuts come after a new actuarial consultant that the Orange County Employees’ Retirement System hired issued a report in June concluding the system had $5.2 billion in assets but $7.5 billion in obligations, leaving it just 69% funded. By contrast, public pension funds statewide were 99% funded in 2002-03, the most recent year for which figures are available, according to the state controller’s office.

The Segal Co. said that of the $1 billion in additional unfunded liability, $365 million was due to enhanced benefits. The better benefits are leading to far more retirements than usual. Keith Bozarth, chief executive of the county pension system, said 550 employees had retired this year as of October, the vast majority of them after the new benefits took effect. Half that number retired the previous year.

Initially, the county expected it would have to pay an additional $129 million in the next fiscal year to shore up the fund. But according to a memo Mauk circulated to county supervisors this month, it managed to whittle that number down to $84 million.