In its second report in two years on this topic, the San Mateo County civil grand jury lambastes county officials over a pension plan for county employees that it says is underfunded by at least $1 billion and likely $2 billion.
The county will pay $92.5 million of its $1.9 billion budget toward that liability for the current fiscal year, according to the April 10 report. To put that number in perspective, over that same period, the county is paying $89.7 million for Sheriff's Office services, $83 million for capital projects, and $56.6 million for road construction and operation, the report says.
Over the past four years, annual payments from the pension fund, known as SamCERA, to county pensioners have risen 34 percent to $139.2 million. The median annual benefit per retired employee is $23,981, the report says. Twenty-four of those retirees receive $150,000 to $199,000 and five receive over $200,000.
The grand jury accuses the county of consistently overestimating the annual return on its independently managed $2.3 billion investment portfolio. The most recent projection is an annual return of 7.5 percent, but over 10 years, the rate has been 5.54 percent a year, the report says.
That return compares poorly to the 7.6 percent annual return for 69 of the largest college endowment funds over 10 years, the report says. Of 88 public pension plans that responded to a survey, San Mateo County's plan ranked 82nd for a one-year return, 88th for five years, and 83rd for 10 years.
There are detailed comparisons and "what if?" questions in the report. Had the county placed its portfolio with the investment management company Vanguard Group Inc., for example, its total return over five years would have been 3.62 percent a year versus 0.12 percent. Over 10 years, the return would have been 6.29 percent a year versus 5.54 percent.
If a projected rate of return is too optimistic, the shortfall can raise costs for taxpayers, the report says. The grand jury examined three independent studies of SamCERA's unfunded liabilities, with each of them using estimated returns of 5.5 percent a year -- the same rate of return that the county received on its investments. Two of the studies by Stanford University in 2012 and by the National Bureau of Economic Research in 2010 estimated SamCERA's unfunded liability to be $2.5 billion.
The grand jury slams the county for data that is not included in its annual message to the public, called the Popular Annual Financial Report. This report, the jury says, did not describe an $11 million investment loss for fiscal year 2012, did not point out that the county's performance is in the bottom 20 percent among its peers, did not note that the fund missed its target rate of return, and did not acknowledge the county's own estimate of a nearly $1 billion unfunded liability and the county's recent contribution of $104 million solely to reduce that liability.
Not mincing words, the report accuses the county management of rampant optimism. "Instead of meaningfully addressing SamCERA's unfunded liability problem, the Board of Supervisors has adopted a strategy best described as 'hope.'" The report gives these examples:
■ Hope that SamCERA will not have to raise its annual contribution to pay down the unfunded liability.
■ Hope for a 7.5 percent rate of return despite the failure to get that over the past year, the past five years, and the past 10 years.
■ Hope that regulatory and bond-rating agencies will not demand acknowledgment of a larger unfunded liability.
■ Hope that recent pension changes will significantly reduce the unfunded liability.
■ Hope that unpopular changes to employee pay and pension benefits can be avoided.
In the summer of 2012, then-candidate Supervisor Warren Slocum foretold some of these complaints. In response to a question on the extent of the pension plan's underfunding, Mr. Slocum replied, in part: "Our assumed expected rate of return (7 1/4 percent or so?) understates our unfunded liability since that is not a likely attainable or sustainable rate of return. Many corporations use 5 or 6 percent.
"What this means is that our unfunded liability is really much higher -- maybe double -- and to pay it down would take much more than we currently pay annually toward our employees' retirement. That could mean that our annual structural deficit is significantly more than has previously been acknowledged."
Go to this link to read the grand jury's report.