SLO County’s unfunded pension liability reaches almost $1 billion
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San Luis Obispo County’s unfunded pension liability totals nearly $1 billion, San Luis Obispo County Pension Trust Fund executive director Carl Nelson told the Board of Supervisors on Tuesday.
The Pension Trust is still able to pay current SLO County retirees their benefits, but is estimated to be short $943 million it will need for future pensions, Nelson said.
The county will owe the balance over a 20-year period, and plans to close the gap in funding around 2040, according to Nelson.
“Right now, we’re playing catch up,” Nelson told supervisors at Tuesday’s meeting.
About 7,000 people currently participate in the county’s pension plan, he said.
The county pays about $131 million per year to retirees and their surviving spouses, with the average retiree older than 70 receiving $40,000 annually, Nelson said.
About 70% of retirees still live in San Luis Obispo County, Nelson said, so the county’s pension payments fuel the local economy.
“They go out to the movies, buy groceries, cars, go to farmers markets — and that adds to the local economy,” Nelson said.
What is the SLO County Pension Trust?
The county created its independent Pension Trust in 1958. In 1974, employee participation in the pension became mandatory.
County employees receive their pension for the remainder of their life after retiring, according to administrative office division manager Lisa Howe.
A Board of Trustees governs the trust and makes decisions about its investments, while the Board of Supervisors decides changes in benefits plans and employee contribution rates.
The county and its employees cover about 53% of an employee’s pension, according to Nelson. On average, 40% is paid by the employer and 13% is paid by the employee during the course of their career, he said.
The rest of the pension is funded by revenue from investments made by the Pension Trust Fund, including stocks, bonds and commingled funds, according to Nelson.
A retiree’s pension is decided by a few factors: when they were hired, how long they worked, their final salary and their age of retirement, Howe said.
Employees hired before 2011 receive the largest benefits plan. People hired in 2011 and 2012 receive a middle-sized benefits plan, employees hired in 2013 and beyond receive the smallest benefits plan — saving the county money, Howe said.
She noted that 63% of pension recipients are enrolled in the 2013 plan. By 2040, all retirees are expected to be in enrolled in the 2013 plan, she said.
Where does the unfunded pension liability come from?
The unfunded pension liability is the difference between the county’s liability, which is the benefits it owes retirees, and funds generated by the pension system’s investments.
In SLO County, the assets are worth about $1.7 billion, while the liabilities cost about $2.6 billion, Nelson said.
This means the pension fund is about 64% funded, according to Nelson. The pension trust should be fully funded around 2040, he said.
The current gap in funding was partly caused by a lower-than-expected rate of return on investments both in the present and projections for the future, according to Nelson.
The gap also widened because people are living longer than expected.
In the United States, people are expected to live an average of 77 years, Nelson said. However, a 65-year-old who worked in the public sector is expected to live to about 87, he said.
“It’s a good thing — people are expected to live longer. It makes pensions more expensive,” Nelson said.
Increases in inflation to adjust for the cost of living also widens the gap.
What happens when the unfunded pension liability grows?
As the unfunded pension liability grows, employers and employees may have to contribute more money to the pension fund to close the gap, Nelson said.
The board would decide any changes in pension contributions, however, and there is no current concrete plan to do so.
San Luis Obispo County Supervisor Bruce Gibson said he expects the county will have to pay employees more — both through increased contributions to the pension and a higher salary so employees can feasibly pay their portion.
“Our labor costs have gone up,” Gibson said. “That just limits how many people we can employ.”
Supervisor Dawn Ortiz-Legg noted that current employees are paying more into their pensions than their predecessors did.
“Our employees are contributing more than ever, and that it certainly takes a chunk out of their check,” Ortiz-Legg said. “In the past, that was not the case. And this generation is paying for the last generation in so many ways. So I just want to say thank you to the employees for that.”
This story was originally published December 14, 2023 at 8:00 AM.
