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Is Alameda County Paying Enough Into Its Pension System?

An analyst from Mendocino County says Alameda and other counties are seriously underfunding their employees retirement. County officials disagree.

Does Alameda County need to pay more into its employees' retirement system?

An analyst from Mendocino County says it does, along with Contra Costa and at least four other counties.

In fact, the analyst, John Dickerson, says these counties may have to double the amount of money they're putting into pensions.

If that happened, counties would have to decide whether to slash programs or ask voters for large tax increases.

"This is like the Exxon Valdez. It's a huge ship with such enertia, it'll take years to turn it even slightly," said Dickerson.

Dickerson's contention and his scenario are strongly contested by county financial experts.

"We cannot validate any of his findings," said Donna Linton, Alameda County assistant county administrator. "The rumors of our death are greatly exaggerated."

Dickerson, a public sector pension expert with 30 years of financial experience, posted his online report in early January. He studied six counties, including Alameda and Contra Costa, that are not part of the California Public Employees Retirement Systems (CalPERS). A summary of his report was also posted by the California Public Policy Center.

Dickerson put together his independent report after reading about a proposal by Moody's Investor Services last summer. The credit rating agency concluded that government employee pension data was understating the credit risks caused by unfunded pensions.

Moody's does not have any authority to force government officials to make changes in their pension funding systems. However, the agency can lower credit ratings, potentially causing governments to pay more for money they borrow.

The agency hasn't announced when it'll decide whether to lower credit ratings, but Dickerson said it could be as early as next month.

Among the changes Moody's officials are recommending is that government pension systems reduce their projected rate of return on their investments from an average of 7.7 percent to 5.5 percent.

They also recommend government agencies pay more into their pension systems to amortize them over a 17-year period instead of a 20 to 30-year period.

Alameda County's projected rate of return right now is 7.9 percent. Linton said that figure is based on historical returns.

The county also has an amorization period of 21 years. Linton said that figure is based on calculations by the Alameda County Employees' Retirement System (ACERA), which has been overseeing pensions since 1948.

The county releases a financial report every year. Pensions are part of it. Here are the numbers.

  • The county has 7,903 retirees and beneficiaries receiving pensions right now. There are another 10,746 employees currently working who are expected to be eligible for pensions in the future.
  • Those current and future retirees are projected to collect $6.3 billion in pensions over their lifetimes. Alameda County's portion of that pension liability is $4.7 billion. The rest is covered by the employees themselves and other agencies.
  • The ACERA pension fund has $4.8 billion invested. That leaves an unfunded pension liability of $1.5 billion.
  • Alameda County pays $149 million every year toward that unfunded liability. Some of that is reimbursed by federal and state agencies. Employees pay $50 million into it every year.

Linton said Alameda County is paying what ACERA estimates needs to be paid. She said the system is on solid financial footing.

Dickerson disagrees. He says under Moody's calculations the pension liability is greater and Alameda County's portion would rise from $4.7 billion to $6.3 billion.

He added the increased payments the county needs to make to cover this increased unfunded pension liability would eat up 94 percent of the county's annual property tax revenues.

"This isn't vapor. This is real money," said Dickerson.

Dickerson said local governments are handcuffed by state laws that require agencies to guarantee pension benefits to public employees. In other words, lowering benefits is not a realistic option.

"Given California law, counties can't do what they need to do," said Dickerson.

Linton said this is all a lot of panic without solid reasoning.

She said it's quite possible Moody's will not lower credit ratings because the company grades on a curve and if every agency's pension is increased, then nothing really changes.

She added ACERA has been funding pensions for decades and, so far, the system hasn't gone broke.

Paul Roma February 16, 2013 at 02:36 PM
It means that the counties have zero flexibility in terms of adjusting the benefits they've committed to. They made these rich benefits/pension promises back when they were raking in the cash, thinking they could support them forever. Now that times are tough and tax collections dropped off, they cannot rollback or reduce any of those benefits, so their only options will be to cut future services and future employee benefits.
Zinn February 16, 2013 at 06:08 PM
Alameda County runs a sound, conservative, fiscally responsible retirement program. I have no problem with the management of said program. Even through the great recession the program held it's own..
David February 16, 2013 at 06:15 PM
It would be helpful to read the proposed reason behind the 17 year amortization idea. The expect rate of return should definitely be closer to 5%, however, as this matches equity yields + inflation, real estate rental returns, and mixed-grade corporate bond yields.
Dan Arnhem February 18, 2013 at 08:57 PM
"Alameda County's projected rate of return right now is 7.9 percent. Linton said that figure is based on historical returns." You have to realize that Donna Linton has zero training or skill in long term security analysis. Living in the dream world of a 7.9% return gets her through the day and makes the Bd. of Supes happy. Everyone is happy. The future is many years away. Of course you could ask someone like Warren Buffett what the true rate of return Donna Linton should expect, it goes more like this "Most public pension funds assume, for example, that they will earn 7.75% or 8% a year, on average, while Buffett has said that 6% would be more realistic." What is missing from the Bd. of Supes, and the general public, is the ability to realize just how HUGE the difference is between 7.9% and 6.0% over 20 or 30 years. It becomes immense, even though we think of it as only a couple percent. Donna Linton has her head in the sand, but in 10 or 15 years, she'll be retired and on her pension. Never looking back.
David February 19, 2013 at 12:25 AM
And her pension won't be what she thought it would be. Promises which can't be kept, won't be kept.

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