Two 20-year-old "calculation errors" that only recently came to light have socked Los Angeles County's mammoth pension system with $1.2 billion in unforeseen liabilities, and will probably force cash-strapped county officials to spend an additional $25 million a year to make up for insufficient contributions to the fund.
Officials of the Los Angeles County Employees Retirement Assn. were stunned when told of the mistakes, which were discovered when pension administrators recently decided for the first time to bring in an outside actuarial auditing firm to look at their books.
The calculation errors were not the auditors' only disconcerting discovery: Based on what pension fund managers now agree are more accurate projections of county employee salaries, the age at which workers will retire or go on disability and other factors, the fund may confront an additional $260 million in unforeseen liabilities down the road, according to several memos from the retirement association's chief executive officer, Marsha Richter, to its Board of Investments.
"It was definitely a surprise," Richter said Tuesday of the disclosures. "Certainly it was not a good surprise."
At first, officials of the retirement association insisted "that there must be a mistake," Richter said. But subsequent review of the numbers by Towers Perrin, the firm that made the initial miscalculations, have sent pension administrators scrambling to contain the damage.
It is not clear what the underfunding will mean to the fiscal health of the nation's largest county; some financial analysts said late Tuesday that they were awaiting details.
The county is still pulling itself back from being on the brink of bankruptcy several years ago. And although it is on more solid financial footing now, it is still contending with the fallout from that crisis and is forcing all its departments--particularly those dealing with health care--to cut their budgets. The county also provides children's services and welfare, as well as police and fire protection in unincorporated areas.
As the supervisors gear up for budget battles this spring over what to continue to cut and what to try to restore, Chief Administrative Officer David Janssen has warned them that a huge structural deficit still threatens the county's long-term financial stability.
As for the pension fund problems, officials say no retired county employees are in immediate danger of losing any pension benefits. The behemoth $24.6-billion fund is 100% funded, and even has a surplus that has been used in recent years to help the county avoid bankruptcy. That surplus comes from unexpectedly huge gains in the stock market in recent years, a moratorium on employee raises, which holds down retirement costs as well, and the $1.9 billion the county borrowed in 1994 to pump up the pension fund.
Soaring Stocks Limit Damage
But internal retirement association documents show that its financial advisors want the Board of Supervisors to dramatically and immediately increase the county's annual contributions to the fund to make up for the years of underpayments. If the stock market had not done so well recently, the mistakes could have proved catastrophic, county officials concede.
The retirement association also wants the state and federal governments to annually kick in an additional $15 million or so combined, because of long-standing undercontributions by Sacramento- and Washington-based programs that are administered by the county and employ county workers.
Richter said the Board of Investments' nine members will be asked to approve those recommendations at a meeting today, after they are given a detailed assessment of the $1.2-billion shortfall and its ramifications. She said that approval is expected and that the county supervisors will have no choice but to pay, based on state law giving the retirement association complete autonomy to ensure that the pension fund is 100% funded.
The retirement association's board also is expected to approve several safeguards designed to ensure that such mistakes are not made again, including a similar audit every five years.
"These actions," Richter said in a March 17 memo to Board of Investments members, "will hopefully restore confidence in [the retirement association's] actuarial process."
The two errors found by auditors both involve extremely complicated underestimations of how much the county and its employees needed to contribute to the fund. Both were written into computer codes that have been used since about 1977, according to Richter and retirement association Chief Counsel David L. Muir.
Supervisors May Balk at Bailout Plans
In the association's defense, Richter said most public pension funds didn't audit their books until several years ago. And, she tells investment board members in one memo, she knows of "five other public retirement systems in California" with similar problems.