[Employee_relations] Ballooning pension costs unchecked

[Tony Cardenas]

Pension cost pileup tied to change in rules

By Troy Anderson, Staff Writer Changes in a national accounting
guideline a decade ago helped set the stage for California's ballooning
pension liabilities by obscuring the long-term costs of providing the
richest benefits in the nation, a former CalPERS consultant says.  Under
changes by the Governmental Accounting Standards Board, pension funds
can amortize the cost of retroactive benefit increases over 30 years and
public employee unions can negotiate to defer salary increases in favor
of better pension benefits. 

But the shifts meant officials often were unaware of the full costs of
their decisions, Citrus Heights accountant Marcia Fritz wrote in a Sept.
30 letter to the board. That's because complex actuarial calculations
are simplified to a percentage increase in the government's contribution
to pensions for only the first few years.  "Within a year after the
rules took effect (in 1998), public employee unions successfully lobbied
for changes in funding policies that enabled them to receive increased
pension benefits at younger retirement ages for their members and mask
the costs to decision-makers," wrote Fritz, who has worked with
Assemblyman Keith Richman on pension reform proposals. 

Fritz's letter follows a recent Daily News review that found Los Angeles
area taxpayers are on the hook for at least an extra $110 billion in the
years to come to pay for retiree pensions, health care and workers'
compensation benefits.  National pension expert Stephen D'Arcy, a
professor of finance at the University of Illinois, agreed that stronger
accounting standards could have given elected officials a more accurate
picture of the impact of pension enhancements. 

"The key problem really is that legislators are interested in gaining
political support, and one way to do that is to be generous with pension
benefits," D'Arcy said.  "It's possible to defer recognition of the
costs of pension benefits to later generations, and unless taxpayers pay
attention to this - making it a priority in the voting process - then it
will continue, regardless of the accounting standards applied." 

Several years after the accounting rule changes, board members of the
state's largest pension fund - the 1.4 million-member California Public
Employees Retirement System - made recommendations and state, county and
city elected officials soon agreed to allow employees to retire at
younger ages with more pay, Richman said.  The pension enhancements were
retroactive and employees were allowed to calculate their pensions using
their single highest salary year, Richman said, adding that California
is the only state in the nation that does this. 

"CalPERS went around the state and told cities and counties that
increasing pension benefits was not going to cost them any additional
money, and they were just wrong" said Richman, a Granada Hills
Republican who plans to run for state treasurer next year. "As a result,
the Legislative Analyst says pension benefits in California are 25
percent higher than the next highest state."  Rob Feckner, president of
CalPERS' board of administration, denied Richman's charge.  "That is a
stunning distortion of the truth," he said. "We told each and every
public agency, in their customized reports, on how every single proposed
benefit change would affect their immediate and long-term costs." 

In her letter, Fritz noted that the changes coincided with a surge in
pension income from stock investments. And she also noted that by using
a methodology change allowed under 1999 legislation, the state actually
saved $547 million in the first two years after the benefit increases.
But, she said, "When market values later decreased, the board again
changed its methodology.  Each change reduced contributions and
increased insolvency in pension funds administered by CalPERS." 

Gerard C. Carney, spokesman for the independent, nonprofit GASB, which
sets financial accounting standards for government agencies, said the
guidelines that took effect in 1998 gave pension boards across the
nation ample opportunity to assess their unfunded liabilities.  The
guidelines just set new standards on how governments should disclose
their pension obligations, allowing more flexibility in how pension
increases were accounted for, he said.  "Ultimately, officials make the
decisions on how to rationally and fully fund the pensions," Carney
said. "We only set the financial reporting standards that, if followed,
disclose the results of those decisions." 

Robert Walton, assistant executive officer for governmental affairs at
the California Public Employees Retirement System, said Fritz's
assertion that the guideline changes created an atmosphere for pension
abuse is "ludicrous."  Walton denied CalPERS underestimated the costs of
enhanced benefits. CalPERS has an unfunded liability of $22.3 billion.
"CalPERS did not go around the state and tell employers that benefit
improvements wouldn't cost anything," Walton said. "We just didn't do
it. Anytime a public employer asks for a benefit increase, we are
required by law to give them the cost of that increase." 

But James F. Antonio, the retired state auditor of Missouri who served
as chairman of the accounting standards board from 1984 to 1995, said he
objected to the rule change a decade ago because it removed "virtually
all of those constraints on funding approaches" and failed the "fiscal
responsibility" test. 

Antonio said the guideline didn't "go far enough in requiring
recognition of pension costs. It had to do with the period of which we
were amortizing the unfunded liabilities." 
Mary Bradley, a member of the League of California Cities' Pension
Reform Task Force and Sunnyvale finance director, agreed with Fritz that
public employee unions persuaded elected officials to use the pension
surpluses in the late 1990s to grant benefit increases. 

Bradley said elected officials may have made poor decisions because the
pension fund data some were presented was two years old and didn't
reflect the debts that had begun to mount after the stock market began
to drop.  In her letter, Fritz encouraged the accounting standards board
to revise its rule and recommend government agencies fully amortize the
costs of pension enhancements while employees are working.  "I would not
say that elected officials are uninformed, but I can sure say that on
complicated issues such as pension reform, they take staff
recommendations," said P. Anthony Thomas, a pension reform lobbyist for
the 478-member League of California Cities. "And the majority of the
time staff are taking recommendations from actuaries." 

Troy Anderson, (213) 974-8985  troy.anderson at dailynews.com

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