Commentary: Marin’s Pension Plans and Local Taxes

By Bob Bunnell.

A well-managed defined-benefit pension plan has a funded ratio of 100 percent.

There is no unfunded liability and the annual cost of the pension plan is the cost of benefits that accrue only for that year, which is called the normal cost.

Not a single defined-benefit plan in the Marin County Employees Retirement Association is taking steps, other than drastically increasing taxpayer contributions, to reduce the literally hundreds of millions of dollars of unfunded liabilities attributable to overly generous benefits.

Unfunded liabilities arise primarily from plan assumptions not being met. Accurate assumptions such as the rate of investment return, rate of salary increase and rate of mortality are vital to the plan maintaining a strong funded status.

As an example, if the plan assumes that plan investments will return 8 percent annually and the plan only earns 5 percent for the year, then there is an unfunded liability generated in the amount of the 3 percent underperformance.

For a $2 billion plan like the county’s pension plan, the result is a $60 million deficit.

A plan such as MCERA that cannot reduce any benefits if assumptions are not met should either have low-risk investments and assumptions, or a very conservative benefit structure.

MCERA has neither.

Investments are much too risky and thus investment return assumptions too high.

The benefits that our elected officials negotiated were far too high. If the true cost of these benefits had been recognized, benefits would have been lower and there would have been little or no unfunded liabilities.

The structuring of these plans by our elected officials has been so bad and the level of benefits so egregious that the required contributions for the unfunded liabilities are now more than the normal cost for MCERA member agencies.

The required taxpayer contributions for the county, as a percentage of its payroll, is 10 percent for the normal cost, plus another 17 percent for the unfunded liability.

In the Novato Fire District, the normal cost is 22 percent and the unfunded liability is 25 percent.

The city of San Rafael’s is 16 percent normal cost and 42 percent for the unfunded liability.

Please note that these required pension contribution numbers are incredibly high compared to private industry where a total employer contribution of 15 percent of payroll is high.

There are three ways to address unfunded liabilities — increase contributions, decrease benefits or both.

Other than benefit changes for new employees (none of which are part of the unfunded liability), the county, Novato Fire and San Rafael have only increased taxpayer contributions.

They say they are constrained by California law and cannot do otherwise.

Additionally, the county recently used $32 million of unallocated funds to reduce its large pension debt.

This is money that could have been used for other identified needs, such as library services, Marin’s’s emergency radio system and children’s programs.

These needs will now have to be met through increased taxes.

The “Reed Initiative” is a proposed constitutional amendment that is expected to be on the November 2016 ballot that would create a legal path to adjust future pension benefit-accrual rates.

It is a legal tool that would allow our local governments to adjust excess pension benefits.

Yet our elected leaders at the county, Novato Fire and city of San Rafael have not supported this important initiative.

Our elected officials were supposed to hold the line in negotiations with public unions so that benefits were reasonable and huge unfunded liabilities did not occur.

They failed to do this.

They expect taxpayers alone to pay for their bad management and ineffective negotiations.

Now, they add insult to failure by not supporting the Reed Initiative.

The next time they ask us for still more taxes we should remind them that pension reform should come first.

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