Leaders from some of Orange County’s smaller cities are growing increasingly concerned about recent discussions by the Orange County Employees Retirement System (OCERS) board regarding more aggressively paying down the system’s future unfunded liabilities.
At its meeting April 15, the OCERS board will consider a suggestion that it lower the amortization period on future liabilities, a move similar to a homeowner refinancing a mortgage from a 30-year term to a 25-year term.
Although the liabilities could be eliminated in less time, annual payments would be higher. It is this possibility that has frightened leaders of some cities, especially those that suffered the most from the Great Recession and the death of redevelopment.
“That would really, really make our payments astronomical,” said Stanton Mayor David Shawver, who held a meeting at Stanton City Hall Tuesday to bring attention to the concerns. “The unfunded liability might be solved for the future, but it would be on the back of our local cities.”
Joining Shawver in his public concern are leaders of the county’s labor unions, who say that a shortening of the amortization schedule — especially in light of the board’s decision in December to lower its projections on investment returns — would be damaging to both county employees and taxpayers.
“When all you hear from leaders of cities and counties is how we are struggling to recover from recession, that is not the time to make things more difficult,” said Jennifer Muir, spokeswoman for the Orange County Employees Association.
Meanwhile, the system’s CEO, Steve Delaney, indicated in an email that Shawver might be overreacting.
Delaney wrote that because the change from a 30-year to 25-year amortization period would be for future liabilities, there is no way currently to estimate the cost. But if the board acts on the suggestion by The Segal Company, its New York-based consulting actuary, the cost would be “minimal compared to current employer contribution rates,” Delaney wrote.
OCERS has estimated that approximately 70 percent of the system’s future liabilities are funded. Unfunded liability has been estimated at $4.46 billion.
OCERS board Chairman Tom Flanigan had little to say regarding the proposal except that the board is “reviewing it, discussing it and trying to gather as much info as we can.”
Board member Chris Prevatt, who also serves on OCEA’s board, characterized the adjustment being discussed as “a small, technical change” that is in line with what other pension systems are doing across the state. “We’re having a conversation and may possibly take action on how we smooth things in the future,” he said.
Nonetheless, Stanton, which made headlines last year for its brush with bankruptcy, is in such dire straights that city leaders are nervous about any change, no matter how small it might be.
And beyond guarding against the possibility of payments going up, Shawver is advocating that the OCERS board consider lengthening the amortization period on its current unfunded liability. The result would be a lowering of the required minimum payments by cities.
“Lowering the minimum payments would allow taxpayers to get some relief from the constant increase in taxes that hit us from every direction,” Shawver said.
Stanton and Westminster are among the cities that in many respects structured their budgets around the tax revenue from redevelopment. They were hit especially hard by Gov. Jerry Brown’s successful push last year to eliminate redevelopment agencies as part of his effort to balance the state budget.
“We’ve had to let people go and redo everything. It’s really been horrific,” said Diana Carey, a councilwoman in Westminster.
Westminster would be affected by the re-amortization because it is a contract city with the Orange County Fire Authority, which is covered by OCERS. The fire authority would pass on the increased pension costs to its contract cities.
Stanton would be doubly hit because it contracts with the fire authority for firefighting and ambulance services and with the Orange County Sheriff’s Department for police protection.
Any increase in costs due to the re-amortization would be in addition to increases already coming. In December, OCERS lowered the return it expects to earn from investments — known as the “assumption rate” — from 7.75 percent to 7.25 percent. When the assumption rate goes down, the overall projected unfunded liability goes up along with the required annual payments into the system.
Shawver said Stanton is estimating that the change in assumption rate will increase its cost for firefighters by $200,000 in the 2014-15 fiscal year and by another $200,000 in the following year.
“Something as simple as that ends up affecting all of the cities that contract with OCFA,” Shawver said.
The issues facing the cities are set against the backdrop of the ongoing and much larger battle between conservatives and labor unions over how unfunded pension liabilities should be paid. The fight is all the more intense in Orange County because all of the county’s major labor unions are in contract negotiations.
Conservatives, led locally by Orange County Supervisor John Moorlach, have argued that such a lowering of the assumption rate is not only justified but doesn’t go far enough. In Moorlach’s opinion, even a 7.25-percent return is a lot to expect from a relatively conservative investment portfolio like the one OCERS manages.
“Talk to someone like [famous investor] Warren Buffett ,and he says you should be at 6 percent,” Moorlach said.
And regarding the problems facing Stanton and Westminster, Moorlach showed little sympathy.
“As for the contract cities of the world, they made a lot of other decisions that are affecting them now,” he said. “David Shawver said his city should be 96 percent redevelopment. Does that mean someone else should be making imprudent decisions? I don’t think so.”
Union leaders, meanwhile, have said that the decision by the OCERS board was ideologically based and not necessary. They pointed to the fact that the California Public Employees Retirement System (CalPERS) has its assumption rate set at 7.5 percent.
“They artificially lowered the assumption rate below the level it needed to be,” said OCEA’s Muir. “They continue the narrative that the system is broken, but what it really did was increase the cost to taxpayers and members who pay into the system.”
Muir was also quick to point out that it is easy for Moorlach to take such a position because while the county’s general employees pay as much as 17 percent of their salaries into the pension system, Moorlach is in the most generous plan (2.7 percent at 55) and does not pay anything toward his own pension.
Moorlach’s standard response to this charge is that his motives are pure because he advocates reducing all public-sector pensions, including his own.
Kimberly Edds, the spokeswoman for the Association of Orange County Deputy Sheriffs echoes Muir’s comments on the assumption rate. “They are making some dramatic decisions,” Edds said. “It will cost OC taxpayers another $68 million [annually] because of the change in the assumption rate.”
However, the association is taking things a step further in the current debate by agreeing with Shawver that OCERS should at least consider a restart of the amortization schedule. If that was done based on a 25-year repayment schedule, the county would save between $52 and $53 million annually, Edds said, quoting from an actuarial study commissioned by the association.
“We’re not saying this is what needs to be done, but we are looking at different options,” Edds said. “We want the system to work.”
Correction: A previous version of this article incorrectly estimated the percentage that some county employees pay out of their paychecks toward their pension. We regret the error.
Please contact David Washburn directly at [email protected].