Scrutiny Shifts to O.C. Pension Panel’s Reserve

SANTA ANA —  Although Orange County’s retirement system has amassed an “embarrassingly large” $200-million reserve, it continues to draw millions of dollars from government coffers at a time when county finances are in crisis.

In an April 22 memo to the Board of Supervisors, Auditor-Controller Steven E. Lewis wrote: “Clearly the actuarial assumptions and policies of the system have not been in our best interest, and we are being overcharged.”

The county contributes more than $69 million a year from its general fund to the retirement system. County officials say they can trim that amount by about $15 million a year if the retirement board will agree to reduce its surplus.

The county faces an estimated shortfall of $65 million to $75 million in the upcoming budget.

By state law, a public employee pension fund should have at least 1% of its total assets in reserve. The county’s retirement system, worth $1.5 billion, has about 13% of its money in reserve.

That reserve was created by the retirement system’s success in getting a high rate of return on its investments--so successful that it earned an impressive 15% in 1989-90, state records show.

But it is the size of the surplus that has become a point of bitter contention between the county and the pension fund’s managers.

“You need to ask the question, how safe do you want to be?” Victor Heim, retirement board vice chairman, said Thursday. “It’s a question of judgment. If the surplus got too low, got depleted,” then both the county and pension beneficiaries could suffer.

Lewis, however, considers the surplus a serious problem, which he outlined in his two-page memo.

“The county has been audited by federal auditors, and they believe the rates we are paying the retirement system are excessive,” he said.

Talks between the county and the retirement board about the surplus have yielded little progress.

“They’re holding us hostage,” Chuck Hulse, the county’s chief deputy auditor-controller, said of the retirement board. “We can’t even talk with them.”

Meanwhile, the animosity between the two factions has been fueled in recent weeks by revelations of extensive travel by retirement board members, particularly a recent 26-day, $15,000 trip to Europe.

But while the travel issue has captured center stage, the surplus talks may have greatest significance for taxpayers.

“The retirement system’s . . . excess reserves are embarrassingly large,” Lewis wrote in his memo. “. . . We are now having to negotiate additional benefits for retirees at a time when we can least afford them.”

Heim, who heads the committee negotiating with the county, defended the size of the reserve.

“The surplus results from earnings beyond our anticipation, which speaks well for the investments of the fund,” he said. “The larger the surplus, the better off the fund.”

When the pension system’s investments exceed an annual rate of return of 7.5%, a goal set by the retirement board, the excess goes into the surplus, according to Raymond Wells, assistant treasurer-tax collector.

Orange County’s retirement system outperformed all other county pension systems in fiscal year 1989-90, according to the state controller’s office. The next closest in rate of return were Marin County at 12.5%, Contra Costa County at 11.9% and Kern County at 11.8%.

Orange County’s return last year was even higher than the 9.8% earned by the Public Employee Retirement System, the huge pension fund operated for 1,200 public agencies in California. PERS, however, outstripped Orange County over a five-year period, earning 13.8% to 9.4%, according to the state controller’s office.

As for what to do about the the county retirement fund’s reserve, Auditor-Controller Lewis has urged county supervisors to consider one of two options:

Refuse to adopt the contribution rates proposed by the retirement board. That would prompt a lawsuit, which Lewis argued could force a resolution of the matter.

Create a separate board of investment, which would supervise the retirement system’s money. The county could then negotiate the surplus question with that board.

The second idea has attracted particular attention this week, in reaction to revelations about the travel by the retirement board members. After the recent trip to Europe, in which board members met with fund managers and attended seminars, Lewis rejected $5,000 in personal expenses.

Supervisor Roger R. Stanton has led the attack against the board’s travels. On Thursday, he requested that the county administrative officer examine the possibility of forming a separate board of investment. The officer would then provide a recommendation to supervisors.

“It would be people who have qualification in the investment field who would be serving, and we would have more assurance that business is being conducted properly,” Stanton said. “This certainly would remove any misconception that has been created over this brouhaha over this (European) trip.

“I don’t know if I think it’s a good idea” to form a separate board of investment, he said. “That’s the very reason I want it investigated by the CAO.”

Stanton’s colleagues, however, were less enthusiastic about that course.

“When something happens in government, all of a sudden everybody wants to reinvent the wheel,” said Supervisor Thomas F. Riley. “That’s how we get growth in the bureaucracy.”

Creating a new board, he said, would only add another layer of administration and do nothing to cut travel costs.

Riley also had some unsolicited advice for Stanton.

“I don’t think Roger has ever served on the retirement board,” said Riley, who was once a member of the retirement board. “Maybe that’s what he should do. If he really wants to take care of this problem, maybe he should get on that board and make his views known.”

Stanton, however, dismissed the idea: “I don’t think we necessarily have an obligation to join every group that we have an opinion about.”

Board Chairman Gaddi H. Vasquez and Supervisor Don R. Roth also expressed reservations about creating a new investment board.

“Before I’m going to start shooting guns in every direction, I want to know what our options are,” Roth said. “I join Roger in wanting to have an opportunity to monitor what they’re doing. But I don’t know whether another board is the answer.”

Vasquez has asked to meet with the chairman and other members of the pension board next week to hear their side.

“I’m still absorbing information,” he said. “I’m going to evaluate it and weigh it, and I’m going to reserve final judgment until I hear more.”

But as the controversy swirls around the issue of travel, several county officials and pension board members say it is the question of the pension fund’s surplus that is at the core of the tension between the county and the pension fund managers.

County Treasurer-Tax Collector Robert L. Citron, a member of the retirement board, said creating a separate board of investment “would solve whatever problems they (supervisors) might think they have with the pension board. I’m not talking about the travel. I’m talking about the control of the retirement fund.

“The board of retirement making decisions which the county believes are not in the county’s best interest, like in the case of the reserves, is at the core of all of this,” he said.

Public Employee Pension Funds

Return on investments in the 1989-90 fiscal year for California counties operating their own retirement systems. The assets are as of Dec. 31, 1988.

Total Assets Rank County Return (millions) 1. Orange 15.0% $1,095 2. Marin 12.5% $234 3. Contra Costa 11.9% $639 4. Kern 11.8% $410 5. Santa Barbara 11.7% $301 6. Ventura 11.4% $510 7. Alameda 11.1% $745 8. Fresno 11.1% $469 9. Stanislaus 11.1% $185 10. Sonoma 10.8% $165 11. Sacramento 10.4% $686 12. San Luis Obispo 10.4% $109 13. Mendicino 10.3% $ 50 14. Los Angeles 10.0% $8,061 15. Merced 9.7% $132 16. San Joaquin 9.3% $389 17. San Mateo 9.3% $470 18. San Bernadino 8.5% $745 19. San Diego 8.4% $878 20. Imperial 7.6% $ 60 21. Tulare 7.0% $188 -- PERS * 9.8% $63,000

* The Public Employee Retirement System, which handles pensions for 1,200 public agencies, including 36 counties. It is the fourth largest public investment fund in the world. PERS figures are for the calendar year 1990.

Source: State controller’s office

Times staff writer Jim Newton contributed to this report.