Thursday, August 19, 2010

Will Ventura Pay For Bell's Bad Deeds?

The Bell compensation scandal is coming “home to roost” in lots of ways – but I’d like to talk about one in particular: The question of whether Ventura will get dragged into the Bell situation – and be required to foot part of the bill for Bell’s spiked pensions.

The latest issue is not how much Bell’s overpaid top employees will make, but who foots the bill. Ventura may be on the hook to pay a good portion of Bell Police Chief Randy Adams’s vastly increased pension because Adams spent 20 years working for the Ventura Police Department. We may be in the same situation with Angela Spaccia, Bell’s assistant city manager, who also worked for Ventura – but not for nearly as many years. (A bill now pending in the state legislature may get us off the hook, however.)

Adams doubled his annual pension – from something like $200,000 to $400,000 – by working at a very high salary in Bell for one year. But under the rules governing the California Public Employee Retirement System, previous employers are apparently on the hook for a pro-rata share of Adams’ pension. Adams worked in Ventura longer than anywhere else, so under one interpretation of PERS rules, we’ll have to pay about 60% of Adams’ pension spike.

This is ridiculous, of course. An irresponsible city council 80 miles away makes a sweetheart deal with a guy who left our employ 15 years ago and all of a sudden we’re on the hook for many tens of thousand of dollars a year. PERS has put Adams' pension on hold for now (along with Spaccia’s and Bell City Manager Richard Rizzo’s) while Attorney General Jerry Brown investigates the situation. We have joined with Simi Valley and Glendale, Adams’s other previous employers, in fighting against the increased price of Adams’ pension – and we’re committed to continuing the fight.

The whole Bell situation, however, has begun to shine a light on PERS’s policies regarding who actually pays for pensions, which have traditionally been anything but transparent. In many ways, these policies make sense. But it may be time for a change, especially if the good times of skyrocketing stock market and real estate values that we have experienced over the last 20 years have come to an end.

PERS is the largest pension system in the world. It provides pensions for over 1 million people and has assets worth more than $200 billion, including huge investments in both stocks and real estate. PERS tries to pay as much of its pension costs from return on investment as possible, but if investment returns fall short, the member agencies – such as Ventura – must pay the difference.

Conceptually, then, here’s what happens:

-- We give money to PERS for every employees’ pension.

-- PERS invests that money and gets a return.

-- If that’s not enough to cover pensions for our employees (which are of course guaranteed at a certain level – that’s the “defined benefit” approach), PERS asks us for more money to cover the difference.

Right now, the city’s retirement assets at PERS total something like $360 million, which is about 85% of the amount of money required to cover the pension costs, according to PERS’ projections.

We don’t, however, receive an itemized bill from PERS that says, here’s how much you have to sock away for each current employee’s pension and here’s how much additional you have to pay because we missed our goals for investment return. So, for example, there will be no line item for “Paying Randy Adams’ pension because of what Bell did”.

Instead PERS calculates all of our obligations and translates that into a formula – expressed as the percentage of overall employee compensation required to cover the PERS bill. I think this number is currently something like 40% for public safety employees and 28% for non-safety employees.

This sounds like a lot. But remember, this isn’t just the amount of money we’re socking away for current employees. It also includes whatever we must pay to cover the cost of retiree pensions if PERS misses its investment targets (which obviously it has been doing lately). And we recently crossed an important threshold – we now have more retirees than current employees.

PERS does the calculation this way because, like Social Security, it is not an investment fund where you park your money and hope for a return. Rather, it is an enormous investment pool that seeks to spread risk as much as possible – usually the risk of low stock market returns but, as we have now seen, the risk of elected officials acting irresponsibly as well. PERS spreads risk in many ways. It spreads investment risk over hundreds of agencies. It spreads the risk of unusually high pensions, as we now know, among all of that retiree’s employers. Among smaller cities, PERS spreads this same risk among many cities. Bell City Manager Rizzo’s pension (reputed to be in excess of $600,000 a year) will be borne in part by 140 smaller cities in the PERS system, including Bell. (Apparently, Adams’ pension will not be covered by this small-city pool because he worked mostly for bigger cities).

In addition, PERS spreads the risk of low investment returns out over time through a process called “smoothing”. If PERS investment returns do not meet the targets – as has been the case the last couple of years – obviously PERS’s member agencies have to pay more money to cover pension costs. Instead of sending us that increased bill all at once, however, PERS spreads the increase out over time so we don’t feel the blow all at once.

Usually this is not a big problem, because most cities have pay scales that are more or less in line with one another. (I would guess that virtually all public sector salaries in California are within plus-or-minus 20% for the equivalent job.) But Bell’s misdeeds throw this equilibrium out of whack, which is why I think we hang tough on not paying the pensions of Randy Adams and Angie Spaccia.

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