Pension system short by millions

Dave Brooks

City taxpayers will need to kick in an additional $50 million to

cover the costs of the city’s pension system for police officers and

firefighters, a recent budget report shows.

The large unfunded liability is the result of a benefits package

negotiated by union leaders in May 2001 that allows officers to

retire as early as age 50 and collect pensions equal to 90% of their

final salaries for the rest of their lives. City officials disagree

on the effects the retirement plan will have on city coffers.

The plan is managed through a series of investments by a state

agency, the Public Employees Retirement System. The city contracts

with the agency to invest city money in a retirement fund to pay for

pensions and post-employment benefits. On a recent investment report,

the agency was said to control nearly $190 billion in assets, making

it the nation’s largest public pension fund.

City Finance Director Dan Villella said the agency makes

conservative predictions on returns from its investments, and strong

earnings in coming years could reduce the funding gap.

“I think [the amount the city owes] will definitely go down,”

Villella said. “Their earning assumptions are a little low.”

At current assumptions, Huntington Beach needs to invest $50

million on top of its existing $270 million in assets to earn the

rate of return required to fund the city’s pension system.

The report showed that in 2001, the city was over-investing in

the retirement package, but a funding gap began to develop after the

city approved a new pension plan.

Under the deal, negotiated by former union boss Russell Reinhart,

retired police officers receive 3% of their salary for every year

they worked on the force. An officer who worked at the department for

30 years would receive 90% of his final salary for the rest of his

life. The city’s firefighters later negotiated a similar deal.

Within two years, the city went from an $11-million surplus in its

retirement fund to a $50-million deficit. Villella said that

discrepancy will decrease as the fund begins to incorporate strong

investment returns into its financial reports.

“I think they will soon start ratcheting down our annual

contribution,” Villella said.

It the short term, however, the city will be making some big

payments. This year, the city paid $9.1 million to the investment

pool to take advantage of a 3% savings for paying in a lump sum.

Councilman Dave Sullivan said such large payments are a drain on

general funds usually earmarked for roads and city services. He said

when the plan was adopted, its backers argued that the retirement

system would pay for itself without any additional contributions from

the city. That was in May 2001, before the Sept. 11 terrorist attacks

and the subsequent stock market slump.

Sullivan said he thinks city employees should pay into a fixed

contribution plan such as a 401k.

“The current system doesn’t make sense -- you don’t see any

companies out in the private sector doing that,” he said. “We have a

unsustainable system, and I think it’s going to lead to fiscal

disaster.”

Councilman Keith Bohr suggested a more measured approach to the

pension system, arguing that the city should analyze the fund’s

performance in the next two years to see if earnings improve.

“We need to look at the whole program,” he said. “If we can’t

afford it, we can’t afford it, but I’m not ready to pull the plug on

it yet.”

Most cities in Orange County offer their police and firefighters

similar retirement benefits, and ending Huntington Beach’s pension

system would make it difficult to recruit new officers, he said. The

retirement system also serves as an incentive for officers to retire

before they can no longer perform their duties.

“We have to look at what other cities do and see how they respond

to this issue,” he said. “I would not want to be the first out of the

system, but I also don’t want to be loyal to our employees to the

point where it costs us financially.”