SAN BERNARDINO, CA – Today, Supervisor Neil Derry unveiled a public pension reform package addressing the spiraling costs of county employee retirement obligations and will seek to place it on the November 6th ballot for voter approval.
Pension costs as a percentage of total county expenditures have risen from 3 percent in 1999 to nearly 10 percent of all expenditures in 2011. Accordingly, the county contribution to the public employee pension fund has increased from $43 million to $232 million. This number figures to grow given lackluster returns on the pension investment portfolio that now leaves the fund underfunded by $1.7 billion.
“Simply put, actuarial and investment return assumptions have not lived up to projections and county taxpayers are subjected to an unabated and underfunded pension obligation that cannot be sustained under present conditions,” Supervisor Derry stated.
The proposed measure would:
- Increase the retirement age for new county employees
- Decrease the amount of money employees could earn each year towards their pension benefit
- Require all new and current employees to contribute to their pensions
- Minimize the effects of pension spiking by averaging annual compensation over their final three years of employment versus the current single highest year
San Bernardino County employees receive a defined benefit pension based on their classification, number of years of services and their highest annual compensation. Currently, public safety employees receive a “3 percent at 50” benefit and non-safety employees receive a “2 percent at 55” benefit.
This proposal would amend this formula so that new public safety employees receive “2 percent at 50” and new general employees receive “2 percent at 62.” With the passage of state legislation, the retirement ages would rise to 55 and 65, respectively.
What does 3 percent at 50 mean?
It means that all public safety employees can retire at the age of 50. Their annual pension income is a two-step calculation. First, you take the number of years they worked and multiply that number by 3 to get a percentage multiple. Second, you multiply their highest annual salary by that multiple.
For example, a public safety employee earning $100,000 a year and retiring at the age of 50 with 25 years of service time would receive $75,000 a year for the rest of their life, adjusted for inflation (25 x 3 = .75%, $100,000 x .75% = $75,000).
Defined Benefit vs. Defined Contribution
Each pay period, the County of San Bernardino puts aside a certain amount of money towards each employee’s pension. This money is invested in the stock market, bonds and other asset classes. In order for the pension fund to meet its pension obligations, it must earn 7.5% or more each year. If the pension fund earns less than 7.5%, the County is obligated to make-up the difference.
In the private sector, most employees have a defined contribution retirement account. A set amount goes into your account each month and your account grows or shrinks based on how the market performs. For public employees, their pension is guaranteed by the taxpayers.
“It is unrealistic to expect the taxpayers to shoulder all the risk for these risk-free pensions at the same time they are bearing all the risk with respect to their own retirement accounts,” Derry said.
This measure follows substantive dialogue by the Board of Supervisors over the last couple of years and is a natural extension of our recognition that reforms need to be implemented. Supervisor Derry particularly wishes to praise Supervisor Janice Rutherford for her leadership on this issue.
Before it can be submitted to the voters, the Board of Supervisors must vote to place it on the ballot by August 9th. Supervisor Derry will introduce the proposal to the board on July 31st.