Skimming the Cream

This is a letter from Association Member James Gleason to the Pension Reform Committee (June 2, 2004)*

Subject: Skimming the Cream

Independent consultants have informed you that the CERS trust fund has earned 8% over recent years. During these years, 8% annually has been credited to employer and employee contribution accounts and to the DROP accounts. This of course, skimmed the earnings and provided insufficient funds for the liabilities in the "waterfall".

In 2002,when contingent benefits were not paid to retirees for the first time, CERS staff explained to a formal meeting of retirees that there was no money left after paying out the 8% to the interests represented by the majority of the CERS Board. Staff went on to say that underfunding had nothing to do with lack of funds for distribution to other accounts. The staff professional explained that there would not be any funds for the waterfall no matter how much money was in the fund. The waterfall would only be funded with money in excess of 8%……. Neither staff nor the Board considered the alternative of establishing a lesser assumption rate and managing the fund to meet all its obligations.

This reflects the state of mind of the CERS Board and its staff. It has become a cultural phenomenon. The Board and staff look upon the 8% credit to be an absolute. This is part of the mindset of the City Manager and the employee unions to reduce contribution costs to the City and employees and reap maximum benefits for employees while disregarding other liabilities of the System. It honestly does not occur to staff or the Board that all liabilities of the System should be evaluated and the assumption rate established in keeping with a funds management plan to meet all the System’s liabilities. Such thinking is counter to the ingrained culture. Among other impacts, it has contributed to the huge deficit and lack of funds for health benefit reserves and has deprived retirees of contingent benefits.

The same political forces molded the Corbett legal settlement. The Corbett benefit was funded for current employees—became "contingent" for retirees. And, as Larry Stirling explained, the 13^th check was an agreed-upon legal settlement to allow retirees to equitably participate in the earnings of the System, much of the earnings come from funds contributed by retirees during their years of employment. The settlement actually gave retirees less than a previous agreement provided.

The suggested new composition of the Board should prevent recurrences, but the ordinances should be changed now to incorporate the contingent benefits as an actuarial liability of the System. This is even more important because of the PRC’s action to recommend a funding plan that will not achieve full actuarial funding…producing less principal upon which earnings would be made.

* The opinions of the authors are their own and not necessarily those of SDREA.