Stanislaus must account for $200 million in employee pension debt

Stanislaus County’s financial reports won’t look as healthy as in previous years because of rules that require the county to account for a $202 million unfunded pension liability.

The $1.8 billion fund managed by the Stanislaus County Employees’ Retirement Association is short $202 million in fulfilling the retirement benefits promised to county employees and retirees, and taxpayers are on the hook for a significant portion of that.

New governmental accounting standards require the county to report the total pension liability as debt. In previous years, only the portion of the county’s annual contribution to StanCERA for unfunded liability was recorded on balance sheets, or about $2 million.

Public employee retirement systems had to comply with the new accounting rules in 2014. Counties, the state and other agencies that sponsor retirement plans were expected to adopt the standards in 2015.

The $202 million unfunded obligation was highlighted in the audited financial reports presented to the Board of Supervisors in the past week and will have a negative effect on the county’s bottom line. It lowered the county’s net worth – assets minus liabilities – from $742 million in 2014 to $539 million last year.

The accounting rules also serve as a reminder that the county needs to catch up on fulfilling retirement benefits earned by employees.

“If that number continues to get bigger, it will ultimately put more stress on the county budget,” StanCERA Executive Director Rick Santos said.

Every year, the county and other employers contribute millions of dollars to StanCERA and are expected to contribute more if the association’s investment earnings are below par.

StanCERA invests the annual contributions made by the county and its employees in domestic and international equities, real estate funds and fixed income securities. The portfolio’s value is supposed to cover the total amount of benefits owed to current and future retirees.

Most public employee pension systems are underfunded. City of Modesto workers are part of the California Public Employees’ Retirement System, which had a pension debt of $62 billion in 2013.

A county-by-county comparison in the audit report to supervisors showed Stanislaus faring better than neighboring counties. San Joaquin County’s unfunded pension liability was $1.2 billion, and smaller Merced County had pension debt of $428 million. Fresno County had $816 million in unfunded liabilities.

Santos said the unfunded obligation fluctuates each year based on whether StanCERA’s investments earn more or less than the expected 7.75 percent. Other factors determine how much the association will owe in pension benefits for retirees and the county’s 4,170 employees. Some of those factors include salary increases, retirement trends and mortality.

Besides county workers, StanCERA administers retirement benefits for employees of Ceres, Stanislaus Superior Court and certain special districts. The total unfunded liability is estimated at $295 million.

Santos said StanCERA is on track to close the unfunded liability gap over 20 years through employer contributions and investment returns. For the year ended June 30, 2015, employers paid almost $54 million into the system, employees contributed $23 million and investments earned $69 million. StanCERA made $100 million in benefit payments and had $2.4 million in administrative expenses.

The pension system was 87 percent funded owing to double-digit investment returns in the previous two years. Santos believes it will drop to 81 percent after earnings were only 4.2 percent last year.

The director said StanCERA has been one of the healthiest county pension funds in the state, largely because the county has maintained control over salary increases, which drive pension costs.

In January, StanCERA’s board decided to lower the expected rate of annual investment returns to 7.25 percent, as the portfolio is reshuffled to less risky investments.

The board is concerned about volatility in investment markets. “We saw what happened in 2007-08 and we are taking steps to mitigate results like that,” Santos said.

This story was originally published March 26, 2016 at 5:46 PM with the headline "Stanislaus must account for $200 million in employee pension debt."