Supervisors learn of county’s spiraling pension obligations

STOCKTON — More than six years after voting as vice mayor in favor of Stockton’s Chapter 9 bankruptcy filing, now-Supervisor Kathy Miller says she is proactively working to steer San Joaquin County as far away as possible from similarly treacherous financial waters.

The commonality between Stockton in 2012 and San Joaquin County in 2018 is the specter of spiraling pension obligations.

Pension debt was only part of the problem in pre-bankruptcy Stockton. And by no means is San Joaquin County in imminent danger of a default.

But Tuesday morning, Miller brought the county’s pension experts before her fellow supervisors to provide information on an issue that costs government leaders sleep from one coast to the other.

“We’re making decisions all the time in terms of labor negotiations, in terms of budgets, for our departments,” Miller said after the supervisors’ meeting. “It’s important for us to have a full picture of how important that pension issue is so we can manage the entire budget.”

Here are some facts, as presented by Johanna Shick, the chief executive officer of the San Joaquin County Employees’ Retirement Association:

• A quarter-century ago, San Joaquin County had $500 million in pension obligations, but it had 93 percent of the needed funds.

• Today, the county’s pension obligation is nearly $3 billion. But the county has only 64.8 percent of that amount on hand.

• Back in 1993, all but about $21 million of the county’s pension debt was covered. Today, the yawning gap between what is on hand and what ultimately will be owed is about $1 billion.

“I think it’s really important for all of us to understand that we’re in it together,” Miller said. “This is our organization, this is our county government, these are our employees and these are our retirees.

“It’s to benefit all of us to make sure that the system stays healthy.”

All sorts of factors play into the valuation of the county’s pension fund holdings, most notably the amounts the county and its employees pay into the system, and how well the system’s investments performing from one year to the next.

The foremost issue is the difficulty in predicting the success or failure of the investments. San Joaquin County is projecting a 7.25 percent rate of return on its investments, and gambling everything on the accuracy of its prediction.

If the actual rate of return was, say, 10 percent, all would be rosy. But if salaries rise, inflation ramps up and investment returns are poor, it could be disastrous.

“It’s important to have realistic expectations,” Shick told the supervisors.

Plus, not all counties are created equal.

After the financial disaster of a decade ago, Shick said, Stanislaus County happened to have $200 million in reserve that it moved into the county’s pension fund. San Joaquin County had nothing to match Stanlislaus’ $200 million.

An option for some government bodies has been to purchase bonds aimed at reducing pension debt, but that comes with its own risks, which pre-bankruptcy Stockton learned the hard way when it took out $125 million in pension obligation bonds.

“(The California Public Employees’ Retirement System) ... promptly lost about half the money in the financial crisis,” Miller recalled. “So (the city) not only had the bond to pay off, they also had the increased liability to the pension.”

In comparison to other government bodies in the United States, San Joaquin County is somewhere in the middle in terms of its level of unfunded pension liability.

Sonoma County’s pension system is nearly 88 percent funded, Shick said. Elsewhere, however, there are pension systems that are barely above being 40 percent funded, said David Sancewich, a pension consultant for San Joaquin County. Sancewich was referring to Illinois, which he said is considering pension obligation bonds. San Joaquin County’s condition is far less dire, he said.

Miller said she still hears the echoes of Stockton’s bankruptcy, a preponderance of which fell on the backs of the city’s retired employees.

“I still get comments from people who are very bitter about the decisions that the Stockton City Council was forced to make that impacted their retirement benefits,” Miller said. “Those were hard decisions to make. I have no intention of allowing the county to go down the same reckless path.”