Pension Fund Windfall Is Boon for O.C.

By ESTHER SCHRADER

May 1, 1998 12 AM PT

TIMES STAFF WRITER

Three years after risky investments sent Orange County spiraling into bankruptcy, extraordinary returns from Wall Street have unexpectedly pumped an extra $220 million into the county pension fund.

The windfall means that 6,800 of the county’s retirees will get a lump-sum payout that is twice what they were expecting--if the Orange County Retirement System’s board votes to disburse the funds at its meeting Monday. It also could mean that current county employees won’t have to pay as much into the retirement fund in the future.

The pension fund is separate from the investment pool that suffered $1.64 billion in losses during the 1994 bankruptcy. Contrary to what happened then, Wall Street in the past year has proved a boon to many municipalities and government entities, including the independently run county retirement fund; its 20% rate of return more than doubled its usual 8%, officials said Thursday.

“When you talk about an investment pool, well, that’s a bad word around here,” said one senior retirement system official. “But there’s no plot here, and no tricks. This is possible due to the extraordinarily successful earnings of the system’s investments last year. There’s really nothing more to it than that.”

Its timing could not have been better.

Since February, the county’s retirement system has been working to find the money to pay more benefits to its members. It was then that the county had elected to raise pension payouts and make three years of retroactive payments after a court ruling.

In October, the state Supreme Court ruled that Orange and 19 other counties covered by a 1937 benefits law owe their employees pensions based not only on their salaries but also on other perks such as car allowances and bonuses. For generations, the counties covered by the law did not count such extras toward pensions.

The payouts voted on in February totaled about $3,000 per retiree, on average.

With the windfall, retirees will get an average of nearly double that amount--although some will gain far more than others.

The retirees are to begin receiving the payout checks in July. Under the proposal being considered Monday, future pension payments to the retirees would also increase. In addition, the county’s 16,000 active workers would no longer be obligated to contribute $35 million to make up for the past pension fund deficit.

The windfall may also mean the county and its workers will have to pay less into the system from now on to fund pensions for future retirees, sources close to the board said. Exactly how much that savings will be depends on future investment returns.

The investment earnings are so huge that even after making the payouts, the fund would still have plenty left over to cover a future stock market meltdown, retirement system officials said.

“It’s a good ending for not only the county and the taxpayers but the members of the system,” said Thomas Fox, chairman of the retirement board and an employee with the Orange County Sheriff’s Department. “It’s no secret that last year was a very good year in the equity market, and we have, as we have for several years now, a certain amount of excess earnings. It will be terrific to be able to use them this way.”

Retirement system officials hope that using the extra earnings to comply with the court’s ruling will resolve lawsuits filed against it by the county, its largest employees union, a smaller union and several employees. County officials have contended the board’s decision to award retirees three years of back pension payments is too generous. Union members are seeking larger benefits for themselves but resist contributing more from their paychecks to fund pensions for retirees.

Orange County’s retirement system, like its counterparts in other counties, operates independently of county government. The decisions of its board are not subject to approval by the Board of Supervisors, and its money is independent of other county funding sources.

But Don Drozd, an attorney for the Orange County Employees Assn., said the payout is unlikely to stop the union from preparing to fight the retirement board.

“This is obviously a situation that has been of deep concern to all of our members, and we’ve been pleased to hear that they may have found another way to fund those back benefits payouts,” Drozd said.

“But there are still other outstanding issues with regard to how benefits are calculated in the future. We are going forward with our preparations to file a lawsuit.”

Bill Kirkwood, president of the Retired Employees Assn. of Orange County, and a county pensioner himself, said he was “astounded” when he heard this week of the investment gains.

“When I was told they were gonna have enough funds to go around, well, I was delighted,” Kirkwood said. “Of course we’re very excited about it, because it was a cost that we were going to have to pay for, and now we’re not.”

As of Jan. 1, the retirement fund was valued at $3.8 billion, an increase of more than 20% over its value from the previous January.

Under the plan under consideration by the board Monday, the system would retain $130 million of the $220-million windfall against possible market downturns, said Tim Marnell, an actuary for the retirement system.

Of the balance, $77 million to $80 million would be used to pay for the back benefit hikes. The rest would be funneled to other retirement system funds, he said.

The amount that retirees are owed varies wildly. Some, such as clerical workers, will receive payouts in the hundreds of dollars. Police officers and firefighters, who are eligible for a long list of salary add-ons, will benefit the most. A few retirees who held top positions will receive more than $25,000 in back benefits, Marnell said.

“This is the continuation of the board’s efforts to be fair and equitable to all parties involved,” retirement board administrator Ray Fleming said. “Since all parties involved contribute, all parties should benefit.”

But County Supervisor Charles V. Smith, one of two county officials on the retirement board, was guarded about using the investment earnings.

“The money is probably there, but what are the ramifications as far as costs to the retirees? I don’t know. And we haven’t, or at least I haven’t, gotten any feedback as to how this is going to impact the cost to the county,” Smith said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Design for Earnings

The county employees’ investment fund increased 20% in 1997, using a formula that diversified its holdings nearly evenly between stocks and bonds. That gain was in line with the returns earned by three of four major market indexes. All percentages rounded:

Employee Investment Allocation (as of Dec. 31, 1997)

Domestic stocks: 33%

International stocks: 11%

Domestic bonds: 35%

International bonds: 4%

Real estate: 12%

Private placements*: 5%

* Funds invested in small companies by hired managers

Note: Cash and equivalents are less than half of 1%

****

1997 Returns

County employees: 20%