Because of improper actuarial calculations, Contra Costa's public employee retirement system overpays about 10 percent of its pensioners -- and taxpayers must make up the resulting shortfall.
It's a statewide problem. Paul Angelo, senior vice president for The Segal Co., the retirement system's actuary, says 18 of 20 county-level pension systems in California, including Alameda County, use the same calculation method. Segal is the actuary for a majority of those systems.
The size of overpayments depends on the ages of retirees when they start drawing their benefits and of people they designate to receive their benefits after they die. The cumulative cost to taxpayers has not been computed.
Harvey Leiderman, attorney for the Contra Costa Employees' Retirement Association, says the calculation method, which fails to account for future cost-of-living adjustments to pension payments, violates state law.
The association's trustees, meeting Wednesday, instructed Angelo and Leiderman to figure out a fix before the board's July 11 meeting. The board didn't specify when it would implement changes or whether they would be applied to current workers and retirees.
Meanwhile, knowing they had a problem, trustees nevertheless irresponsibly approved more inflated payments for new retirees.
The Contra Costa association administers pension benefits for 17 public agencies, the largest being the county. At retirement, most employees choose the standard pension plan: Payments are based on formulas that consider years worked, top salary and retirement age. Upon the retiree's death, a spouse, domestic partner or minor child receives 60 percent of the benefit.
Following state law, the retirement system also offers retiring workers options of smaller pensions but, upon death, they can pass on the monthly benefits to one or more survivors for the rest of their lives. Those survivors could be grandchildren with much longer life expectancies. In fact, they need not even be relatives.
For those choosing optional payouts, an actuary calculates how payments to retirees should be reduced to ensure sufficient funds are left for payments to their designated survivors. The value in today's dollars of the future benefits should be the same if the employee chooses the standard retirement plan or one of the options. It should be, according to the law, "actuarially equivalent."
But in making those calculations, Angelo acknowledges, his firm doesn't account for pension cost-of-living increases of up to 3 percent annually. Consequently, the retirement system has not sufficiently reduced the payments to the retirees or surviving beneficiaries.
For example, consider someone retiring at age 57 who designates a 27-year-old beneficiary. According to Angelo, the pension payments to both are 12 percent higher than if the cost-of-living adjustments had been factored in. The younger the surviving beneficiary, the greater the overpayment.
The cost of overpayments must be shouldered by public agency employers, in this case, Contra Costa taxpayers. Pension contribution rates for employees are unaffected.
The practice apparently has been going on for decades. It came to light when Segal in May submitted benefit payment calculations for a retiree. Trustee Debora Allen noticed the assumptions included no cost-of-living adjustment.
If ever there was an argument for financial experts on pension boards, this is it. Allen is a certified public accountant whom county supervisors last year appointed as a trustee.
Ironically, at the same May meeting, the retirement board majority approved a policy change allowing staff to approve the calculations on its own, without board review. So, if Allen hadn't caught the error that day, the practice might have continued undetected.
Making matters worse, it turns out that retirement system staff sends out checks to most all new retirees before the board signs off.
It's time for change. Payments should not begin without board approval. Optional pension calculations should be subjected to board review. And financial experts should serve as pension trustees across the state.
According to Angelo, the 16 other county-level systems not considering cost-of-living adjustments when calculating optional benefit payments are: Fresno, Imperial, Kern, Los Angeles, Marin, Mendocino, Merced, Orange, Sacramento, San Bernardino, San Mateo, Santa Barbara, Sonoma, Stanislaus, Tulare and Ventura.
Finally, state lawmakers must address a key public policy question: Why allow retiring workers to designate someone other than a spouse or dependent minor as a recipient of lifetime pension benefits? There's no rational answer.