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Tuesday, Mar 29 2011 10:00 PM

PENSIONS IN PERIL: Rising costs to endanger workers, services for years

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BY JAMES BURGER, Californian staff writer jburger@bakersfield.com

This fiscal year, Kern County will spend $245.9 million to fund pensions for current and retired workers, a mix of cash payments and principal and interest on pension bonds.

That's around $15 of every $100 in the county's $1.6 billion annual budget.

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PENSIONS IN PERIL

This is Part One of a three-part series examining Kern County's troubled pension system and possible fixes.

PART ONE: How big the problem is now and what will happen if we don't act.

PART TWO: A slew of bad decisions and flat-out malpractice helped create the mess. And lots of little pay bumps compound the problem. Plus, not all county pensioners live large.

PART THREE: There are proposed solutions, but none is a quick fix.

The county will pay millions more each year for the rest of this decade, number crunchers for Milliman Inc., the Kern County Employees' Retirement Association's contract actuarial firm, told the association board last June.

Unions and other critics of this worst-case calculation point out it assumes that a whole host of future factors -- including pay, market returns and demographics -- will track exactly as actuarials assume they will. Critics say a market rebound will save the fund and changes to pensions and pay levels already in the works will assure that dark day never comes.

But so far, those actuarial predictions are largely on target.

The annual bill for all Kern County Employees' Retirement Association employers -- the county, courts and special districts -- was set at $226.8 million in December. Six months earlier Milliman predicted a $227.5 million bill.

But even if the unions and bureaucrats see the future better than the number-crunchers, few people think the county has an easy financial decade ahead.

That means the public could see fewer sheriff's deputies and firefighters, even fewer library hours, browner parks and less aid to the poor, elderly and sick.

FUTURE UNCERTAIN

The top appointed official in county government -- Kern County Administrative Officer John Nilon -- said he believes in a turnaround.

"I'm more optimistic than Milliman," he said. "I think we're going to have to ride the storm for four or five years."

But he recognizes the now-rising county pension costs will severely impact how the county does business -- even if a strong market rebound does develop.

There will be "substantially less employees and substantially less services to the public," Nilon said.

During a recent Board of Supervisors meeting, Nilon was asked if the county could be expected to see revenue growth that would cover the substantial pension payments.

"We will not have any ability to recover based on any revenue," Nilon replied. "Our options are to reduce expenditures. We can lay off staff. We can reduce contributions to organizations. We can reduce service and supply budgets."

ON THE FRONT LINE

Parks and Recreation Director Bob Lerude, who leads one of the county departments hit hardest by cuts the past three budget years, said the pension line-item in his budget is a looming threat.

In this fiscal year, the Parks and Recreation budget was set at $11.9 million. Of that, $1.98 million -- more than 16 percent -- was dedicated to paying for pensions.

Lerude expects that to drop down a little -- to about $1.6 million this year -- simply because he has not replaced several people who have left the department.

"It's killing our department. We don't have enough people. We don't have enough money for operations," he said.

Lerude has already laid off large numbers of his front-line staff, the people who clean, mow, water and maintain parks and community centers. He's left many more jobs vacant.

In 2006-2007, Parks had 142 funded positions. This year it was allocated only 94 workers -- a 34 percent drop.

Layoffs emptied 16 of those 48 lost jobs. The rest were left open after retirements, resignations and terminations.

Lerude has managed to avoid closing senior centers and other such facilities. But the budgeting process before him promises yet another tough test -- demanding he reduce expenditures by 5 percent and prepare a 20 percent "step-down" plan as a worst-case option.

"We have picnic tables and water fountains and ball fields and lights," Lerude said. When employee costs go up, "We don't have as much to pay out on the operations end. The graph for the operation amounts has to go down. That pie keeps getting swallowed up."

Fire Chief Nick Dunn said pensions soaked up an additional $5.4 million from his $118.2 million 2010-11 budget and will jump by another $2 million next fiscal year.

During the 2010 budget development process, with a flat budget and spiking costs, Dunn was almost forced to close some rural fire stations to save money. But he was able to pull in a $9 million fire grant and spread it out over two years to keep the stations open.

Dunn is hopeful that property taxes dedicated to fire department operations will go up and the markets will turn around before the grant money runs out and he is forced to start talking about closing fire stations -- or taking some other drastic action to cut costs.

And the financial downturn and rising costs are creating structural problems in his ability to provide services, he said.

Usually the fire department spends about $4.5 million a year to replace aging fire engines and other heavy equipment.

"This is the fourth year in a row that we haven't purchased major equipment. We're digging a deep hole," Dunn said.

For most county departments, with tax revenues still weak and pension costs climbing, next year promises to be a bigger challenge than the last.

FUNDAMENTAL CHANGE

Nilon said county government isn't used to dealing with prolonged downturns in revenues. At most, he said, counties have seen one or two bad years and weathered the storm by tightening belts, holding their breath and working through to the next economic turnaround.

However, the recent recession, the perpetual drain on local resources from the troubled state budget and the burden of rising pension costs have dished out three years of pain to county spending plans.

And there is no robust economic rebound on the horizon.

So, Nilon said, the county is changing the way it budgets, adding more analysis of long-term trends to the discussion and making decisions on a one-year spending plan while looking several years down the road.

"A lot will be decided this budget cycle because we're going to set the tone for several years," he said.

It won't be easy.

Nilon said the reserves and resources the county has used to get by in the past have largely been exhausted. While the county still maintains a rainy day reserve of nearly $42.6 million, he said, tapping it to fund ongoing county costs creates a constant drain on the fund that will quickly empty it in future years.

But in the end, Nilon said, the county needs to see its pension burden ease.

"If we can drag it another five years, there's a chance the chain will break," Nilon said. "The market turnaround is essential. We need to have the market turn around."

COST OF CHANGES

Kern County unions agree with Nilon that a strong, sustained rebound in the stock market would do a lot of good. What they don't like is the tough line the county is pursuing in setting union contracts.

Talks between the county and most of its unions have broken off.

And union leaders argue forcefully that the changes the county is seeking to pensions, pay and benefits will have their own damaging impact on the quality of county services.

Kern County Sheriff's Cmdr. Joe Pilkington of the Kern County Sheriff's Command Association said the county sweetened pensions to combat a very real problem -- large shortages of good candidates for law enforcement and fire department jobs.

Gutting benefits will send the most experienced and valuable workers into retirement, decrease the quality of people working in the department and increase Kern County's legal liability, he said.

"We are the ones that know what happens when an inexperienced sergeant makes a bad decision," Pilkington said.

Recent retirement requests to KCERA from workers targeting the hot March/April retirement window -- when new retirees can claim an immediate cost of living increase in their pensions -- support the notion a new exodus is coming.

Some 93 county employees are expected to leave during those two months -- an 82 percent increase from the same period last year. Many workers have said that retiring now may be the only way to avoid paying more for pensions and benefits.

Nilon agreed there would be a large, one-time financial hit if droves of senior workers retire, cashing out their unused vacation and sick leave.

"The board is very concerned about that because many of the people you lose will be your most effective senior managers," he said.

Nilon said supervisors weren't looking to force workers into retirement as some money-making strategy. But they do have a plan to deal with the cost spike.

In many cases, supervisors will leave the job open, slowly saving enough money from unpaid salaries and benefits, until the cost of the retirement has been made up.

At that point, Pilkington said, the county could just dump the job for good.

"If you can do without the job that long ...," he said.

Nilon confirmed the county will look hard at each job to see if the position is really needed.

"When we come through this, county government is going to look substantially different," Nilon said.

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