Pension board faces investment decision

By: GIG CONAUGHTON - Staff Writer | Friday, June 8, 2007 12:07 AM PDT ∞

SAN DIEGO ---- The independent agency that manages the county's $8 billion pension fund is set to wrestle with a decision that could increase the county's pension-fund debt and affect an ongoing dispute over retirees' health benefits.

Trustees of the San Diego County Employees Retirement Association are scheduled to decide next month whether to lower their investment-rate expectation from 8.25 percent to 8 percent ---- a decision that could have different impacts on the county, taxpayers and retirees.

The investment rate expectation is an important target because it is set to balance how much retirees, the county and its taxpayers should pay into the fund to make sure it can pay all the benefits it owes to beneficiaries.

If the rate is set too high and investments do not match expectations, the fund falls behind, creating a huge debt that could threaten its health.

If the rate is set too low, then the county, taxpayers and current county workers could pay too much into the fund, effectively paying costs that future taxpayers and beneficiaries should pay.

In addition, lowering or maintaining the expectation rate could have ripple-down effects for taxpayers and retirees.

Lowering the return expectation to 8 percent would increase the county's pension-fund debt, by "expecting" that the fund would have less investment earnings to support the $8 billion fund's 35,000 beneficiaries in future years.

Don Steuer, the county's chief financial officer, said Thursday that a study done last year suggested the change could bump the current $1.23 billion debt by up to $300 million to $1.53 billion.

That, in turn, would increase the amount that the county, taxpayers and pension-fund beneficiaries would have to pay into the fund each year.

Meanwhile, lowering the return rate and increasing the county's debt could also have an effect on the ongoing dispute between the county and retirement association over retiree health benefits.

Supervisors have called the long-granted but never-guaranteed health benefits a "ticking time bomb" that threatened the $8 billion fund's health. In December, they adopted a plan that would continue benefits for 7,000 older, poorer retirees, but kill them off for 17,000-plus current and future retirees.

Supervisors also told the retirement association to adopt the plan by June 30 or they would essentially cut health benefits for all retirees by eliminating a tax-free fund through which they're paid.

Last month, retirement association officials approved a counterproposal that supervisors will discuss next week.

That plan would keep retirees happy by continuing health benefits for all. But it could also make supervisors happy by promising that the retirement association would not use "excess" investment earnings to pay for the benefits until the county's pension fund debt ---- now at about 15 percent ---- was 10 percent or less.

The key to that plan was the promise that the retirement association would use its own $70 million reserve account to pay for health benefits for thousands of retirees until the county pension-fund debt shrank to 10 percent.

But if the return rate expectations are lowered and the county pension fund debt increased, it could take longer to shrink the debt and could exhaust the reserve fund.

On Thursday, an outside auditing agency weighed in on the rate-expectation issue ---- but provided association trustees with little help in determining which direction they might take.

The auditing firm, the Segal Co., told the San Diego County Employees Retirement Association for the third straight year Thursday that it should lower its investment return expectations ---- essentially because the 8.25 percent return expectation was too optimistic for current markets.

At the same time, however, Segal said the association could safely leave its expectation rate at 8.25 percent rather than lower it to 8 percent ---- because the pension fund has an aggressive management that has earned high returns.

Segal Senior Vice President Paul Angelo said that either decision would be embraced by his company. "What you've got is a choice between two correct answers," he said.

However, Angelo said the auditing firm specifically looked at the expectation issue without trying to weigh the possible effects the decision to lower or maintain the investment expectations would have. He said the firm was simply trying to determine which option was financially acceptable in relation to the investment market.

Association trustees, meanwhile, have chosen for the last two years to keep the target at 8.25 percent. Trustees' questions Thursday hinted that they may do the same when they make a decision July 19. But Executive Director Brian White would not say for certain that he'd recommend maintaining the present target.

Contact staff writer Gig Conaughton at (760) 739-6696 or gconaughton@nctimes.com.

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