I have been doing administration of defined-benefit pension and defined-contribution/401(k)plans for 40 years.
There are compelling advantages to defined-benefit plans. They provide lifetime income to participants and are efficient due to the pooling and professional management of the assets in the plan.
However, there are two rules that must be followed for defined-benefit plans to be sustainable long term. These are:
1. The plans must be kept well-funded, and;
2. Required employer contributions must be kept at a reasonable level.
Let’s look at what that means:
• Funded status: A well-funded pension plan should have a funded status of 100 percent, which means that the market value of assets in the plan should equal accrued liabilities in the plan. If assets equal accrued liabilities then the ongoing cost of the plan is what we call the normal cost, or the annual cost of benefits accruing during the year.
When pension benefits were negotiated the assumed cost of those benefits was the normal cost. If the plan is 100 percent funded then there is no cost to pay toward unfunded liabilities and the annual cost of the plan is what was negotiated in collective bargaining.
• Reasonable required contributions: Most experts would agree that a reasonable level of required employer pension contributions is 10 to 15 percent of payroll (10 percent if the entity participates in Social Security and 15 percent if the entity does not).
Now let’s look at how the entities in the Marin County Employees Retirement Association compare against the above.
MCERA’s members do not participate in Social Security.
The following is the funded status of the three MCERA entities:
• County of Marin — 86.4 percent.
• Novato Fire District — 88.9 percent.
• City of San Rafael — 72.5 percent.
Required employer (that is taxpayer) contributions (as a percentage of payroll):
• County of Marin — 26.5 percent,
• Novato Fire District — 48.69 percent.
• City of San Rafael — 60.96 percent.
Note that the funded status of the county and San Rafael would be even lower, except the county contributed an additional $35.5 million and San Rafael an additional $1 million of taxpayer money above the required amount over the past five years to pay down the pension unfunded accrued liability.
Analysis:
• Even with the additional taxpayer contributions allocated, all three entities fall far short of the 100-percent funded status that was anticipated when benefits were negotiated.
• Required taxpayer contributions are so ridiculously high they are offensive.
Conclusions:
• Plan assumptions are far too aggressive, since even with additional taxpayer contributions the MCERA plans fall well short of 100-percent funded status.
• Negotiated benefits are far too high, as evidenced by the excessively high required taxpayer contributions (there are more than 100 county retirees with annual pensions of more than $100,000 and many close to retirement with annual benefits in excess of $100,000).
• The plans are abusive to taxpayers and not sustainable long-term without major pension reform.
• Major pension reform must include the ability to adjust benefits accruing in the future for existing plan participants.
Bob Bunnell of Kentfield is a benefits manager and a charter member of Citizens for Sensible Pension Plans, a Marin-based public pension reform group.
