25 Feb The Vicious Pension Cycle
Whatâs the problem?
A Stanford economist, Joe Nation, examined SBCERA and concluded that the pension liability for San Bernardino County is at least $12 billion. However, in their most recent annual report the county reported their pension fund as being underfunded by a mere $2.7 billion. This isnât the first time that public watchdogs like Nation have refuted the Countyâs reported numbers. In 2017, the Press Enterprise found that âSBCERAâs $89,058 average full-career pension was the highest of any comparable fundâ in California[1]. More recently, the same number is nearly $100k for non-public safety and over $120k for public safety pensioners[2]. The County responded that they were unfamiliar with terms such as âaverage full-career pensionâ and that the average pension was only $39,972 a year in 2017. What is clear is that the figures put forth by the County cannot be trusted as they rely on semantics and overly-optimistic projections to mask the truth from its constituents.
An underfunded pension fund means that the value of the countyâs available assets to pay for retirement benefits falls short of the cost of those benefits. In other words, if the County decided to cash out their investments today, they would be left with a $12 billion shortfall to meet their obligations to pensioners. The biggest problem with an underfunded government pension plan, specifically SBCERA, is that it essentially represents an increasing multi-million dollar debt obligation that is passed on to taxpayers. Pensions differ from traditional 401ks in that the employer funds and guarantees a specific retirement benefit for each employee and takes on all the risk of doing so. The funding for benefits comes from two sources: 1) contributions from active public employees and 2) gains from investing those contributions in the stock market. In SBCERAs case, employee contributions and portfolio performance are both insufficient to cover obligations. When this happens, the county must make up for the difference by allocating more government funding to pensions that could go to other resources and services.
In 2020, San Bernardino passed several local sales tax measures for various municipal services including emergency response, public safety, clean drinking water, local businesses, street repair, after-school youth programs, disabled and senior programs, homelessness, and âgeneral city services.â Every year the pension fund fails to meet its predicted returns on investment, the county taxpayers pay for the difference through measures like this and donât even realize it. Existing government funds that could have supported these initiatives instead went toward pension debt, requiring additional taxpayer dollars to support basic services. In 2021 alone that amount, reported by SBCERA, was $2.7 billion. However, the true amount is much greater.
This âofficialâ value is largely based on projected future investment returns and assumes a rate of return of 7.25% and 2% inflation, however, SBCERA seldom realizes these projections. Between 2010 – 2020, their average return on investment was only 5.13%. And for the five-year period ending in 2014 they only returned an average of 3.94%[3]. Inflation as of February 2022 was 7.9%, the highest itâs been in 40 years and significantly higher than the 2% projection. SCBERA regularly increases pension payments based on the inflation[4] rate so when inflation increases, so does their liability. Additionally, they gamble with taxpayer dollars by investing 35% of their funds in risky foreign markets[5]. This is a sign of desperation, not safe investing. Recently, the county lost $14 million when the Province of Buenos Aires defaulted on its bond obligation to SBCERA[6]. Banking on unpredictable and volatile future returns to cover existing debts prevents you from paying what you owe today and passes the buck to the citizens to deal with in the future.
California officials also assume that pension returns will earn around 7%, which in 2020 put unfunded pension liabilities at $352.5 billion statewide, or $27,187 per household. However, Joe Nation analyzed the same numbers and assumed a much more realistic return rate of 3.25% which put unfunded liabilities at a near $1.1 trillion, or $81,634 for every family in this state. When Nation examined SBCERA specifically, he concluded that the real pension liability for San Bernardino county is at least $12 billion, not the $2.7 billion they are reporting. This would mean shutting down all the police and fire departments, county hospitals, and schools for several years just to catch up with outstanding pension obligations.
All of these factors combined leave SBCERA with a net loss but thatâs just half of the story. Even if they did meet their lofty investment goals, it still wouldnât be enough to get out of debt because the career politicians that prop up SBCERA have a mutually beneficial relationship with the labor unions. In exchange for vocal support and campaign funding, the supervisors agree to increase benefits, salaries, and wages for union laborers. This vicious cycle leads to lavish pension benefits above and beyond the standard pension of ½ your pay at a retirement age of 65. These include:
- Egregiously high payouts: According to the California Policy Centerâs â100K Clubâ[7], approximately 685 San Bernardino County public employees are receiving more than $100,000 pensions annually. At its current rate, annual pension contributions for public employees are projected to increase another 76% from 2018 to 2030, with more and more retirees earning $100,000+ pensions. The average pension benefit for a retired San Bernardino county employee who worked for a minimum of 30 years was $95,800 per year in 2020 according to Transparent California. When compared to an average public pension of $69,759 in neighboring LA county, $88,604 in Riverside county, and only $37,000[8] across the state of California, itâs immediately clear that San Bernardino retirees are better compensated than their counterparts. Furthermore, now six San Bernardino county retirees each receive over $300,000 in benefits every year whereas in Riverside County the largest yearly benefit is $240,808. In addition to their pensions, the County also provides up to an 8% match on 401k contributions[9] while the average is 3.5% according to the Bureau of Labor Statistics[10].
- Pension spiking: SBCERA allows public employees to inflate their payouts by cashing out benefits such as unused sick time, unused vacation, and on-call days at the end of their careers. This increases their final compensation amount, which in turn leads to larger pensions than they otherwise would be entitled to receive. This practice recently found its way into the courtroom when Alameda county employees sued to overturn a 2013 ruling that limited their ability to convert certain benefits. The Supreme Court of California unanimously voted to uphold the ruling in an effort to âclose loopholes and prevent abuse of the pension system.â However, the ruling only applied to public employees hired after December 31, 2012, so San Bernardino retirees continue to engage in this practice. Another common practice still in place is âChiefâs Disease,â where public employees can maximize their pension by filing a claim for either workmanâs compensation or disability near the end of their careers. These claims then allow them to retire with a more lucrative, tax-free pension.
- Pension Benefits for Dependents: Your pension is paid to you for life but keeps getting paid to your dependents (up to 60%) including children, spouses, and even parents upon your death. The average life expectancy for a California resident is 82 years. Therefore, if you retire at age 50, you will likely collect pension benefits for 32 years, and if you have a spouse who is 10 years younger than you, your pension benefits are paid out for 42 years. Public employees are also entitled to their pension even if they or their spouse have one or several other pensions. This is a common practice allowed by San Bernardino County known as pension âdouble-dipping.â
- Generous Early Retirement Options: Unlike other pension systems where the typical retirement age is 65, a public employee in San Bernardino can retire as young as 50 years old (the average retirement age is 53 years for public safety workers), and still receive 100% of their salary for life. These days, if youâre in your mid-fifties, you can expect to live another 25 to 30 years, and old-age longevity has been increasing rapidly over the past few decades, which only further balloons pension liabilities. Retirees continue to receive these additional years of pension benefits without any additional contributions. Combined with adjustments (increases) for inflation, many retirees can expect to see more income via pensions in their lives than they did from their salaries.
All of these additional benefits contribute to more debt and liability financed in a large part by private citizens who arenât even working for the government. In the words of Robert Fellner, Transparent Californiaâs research director, âthe extreme richness of San Bernardinoâs pension system is particularly indefensible compared to the relatively modest income of most county residents.â In 2019, the median income was only $27,235.
Whatâs the solution?
Historically, public employees were provided lucrative benefits like pensions to make up for uncompetitive salaries. These benefits attracted talent to the public sector that would otherwise look elsewhere . However, more recently, public employee compensation in San Bernardino far exceeds that of the private sector. In 2021, the median income of a government employee was more than double that of the private sector. If everyone in the county that doesnât work for them gets a 401k and social security, with a lower average salary, then we believe that is what the public employees should get. We are not a class society and no one is entitled to drastically more pay, less work, more benefits and higher pensions because they belong to the government class.
The government should also provide the County and its citizens with transparency on what the local sales tax measures include so they can be educated on the problems with the county and where their tax dollars will be spent. For example, in 2020, California had at least 99 local sales tax measures on the ballot for âgeneral city servicesâ (San Bernardino County was included in the list of counties where the sales tax measure was passed). Instead, the county should be transparent regarding their unfunded pension liabilities and their asks from the citizens and think strategically about how to best allocate tax dollars to get the most services for their citizens, not to line the pockets of employees.
Sources:
[1] https://www.pe.com/2017/05/24/a-riverside-city-employee-earned-257000-last-year-and-thats-just-overtime/
[2] https://transparentcalifornia.com/pensions/2018/sbcera-san-bernardino-county-pension/employers/
[3] https://www.sbcera.org/sites/main/files/file-attachments/exhibit_a_actuarial_valuation_and_review_and_related_reports_as_of_june_30_2021.pdf?1636151326
[4] https://www.sbcera.org/cost-living-adjustments
[5] https://www.sbcera.org/sites/main/files/file-attachments/sbcera_annual_comprehensive_financial_report_-_2021_sm.pdf?1638918313
[6] https://sbcsentinel.com/2021/03/sbc-pension-takes-a-huge-hit-with-argentine-default-on-bonds/
[7] https://100kclub.com/advanced-search/?adv-search=1&adv-term=SBCERA&adv-term-field=pension_system&adv-orderby=pension_system&adv-order=ASC
[8] https://account.sacbee.com/paywall/subscriber-only?resume=240415596&intcid=ab_archive
[9] https://hr.sbcounty.gov/employee-benefits/401k-defined-contribution-plan/#:~:text=The%20County%20matches%20your%20contribution,their%20contribution%20up%20to%203%25
[10] https://20somethingfinance.com/401k-match/