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The county's pension system, flush with investment earnings, was expected to have a $288 million surplus to cover the sweetened deal. But within a year, after the market soured and costs rose, the county was short about $40 million -- and the employee retirement package began weighing more heavily on the county's annual budget.
Past and present supervisors say the county still is paying for the decision. Said Supervisor Judy Case: "I think that has hurt us over the long term."
The county's retirement system, which now consumes about 14% of the money supervisors directly control, has required extensive borrowing and ever-higher contribution rates. The county is paying an estimated $141 million this year, nearly double what it did three years ago.
Though there are exceptions -- such as the city of Fresno -- many local governments are sagging under the burden of pensions. The city of San Diego ended up with a shortfall in its retirement system after increasing benefits without making provisions to finance future costs. The U.S. Securities and Exchange Commission recently filed a civil complaint against five former city officials, alleging they committed fraud by concealing the pension deficit.
Some agencies are looking for relief from mounting pension costs, and a lawsuit filed by Orange County officials could blaze a legal path that counties like Fresno might follow.
Without help in the courtroom or at the negotiating table, public agencies have little room to maneuver over benefits.
"The retirement benefits are places you can't cut," said Max Neiman, an associate director and senior fellow with the Public Policy Institute of California, a nonprofit and nonpartisan research agency.
The problem goes back to 2000, when the board was faced with two legal challenges. Employees were suing to prevent the county from skipping pension payments by instead using excess earnings in the retirement system as its contribution.
And an unrelated court decision said benefits such as bonuses and car allowances had to be considered as part of the compensation on which pensions were based.
Supervisors were offered an apparently simple solution: Use a $288 million surplus in the pension system to cover higher benefits earned up to that point. Post-settlement costs would be drawn from any future surplus or shared by the county and employees.
Under the new deal, for example, public safety employees who retired at age 50 would receive 2.5% of their highest pay rate over 12 months, multiplied by years of service, annually -- up from 2%.
The increase required approval from then-Gov. Gray Davis, who refused. Davis' veto said the higher formula "creates bad policy precedent and is unfair to employees of other counties."
Fresno County officials got around the veto by setting up a supplemental benefit.
But within the year, the surplus sank to about $250 million, and the county also needed millions to cover attorney's fees. An actuarial report forced the county to sharply increase its retirement contribution.
Today, former and current supervisors say the board acted on bad advice from county staff. Several say supervisors should have sought an outside opinion.
Former Supervisor Juan Arambula, now serving in the state Assembly, said he wouldn't have supported the deal if he'd understood the consequences.
"I think fundamentally we were misled," he said. "We were told there were savings and reserves to fully pay for the settlement, and that hasn't been the case."
A few years later, officials discovered another problem: retirees collecting more than 100% of their salaries.
The "Fresno Method" -- used nowhere else in the state -- let retirees use their highest pay periods to calculate benefits. Rather than the usual consecutive pay periods, retirees could pick weeks spiked by vacation cashouts, for example.
The Fresno County Retirement Board, which manages the pension fund, paid out nearly $1 million to about 250 employees before the practice was questioned. The county sued to stop the practice and eventually won in court.
The pension system also triggered the county's first long-term debt. In 1998, prior to enriching retirement, the county borrowed nearly $185 million to cover unfunded liability -- the money needed to cover accrued benefits for employees and retirees.
Four years later, the board refinanced the bonds and borrowed more. In 2004, the county incurred its largest single debt -- a $400 million bailout of the pension system.
Today, the county devotes more than $41 million annually to paying off pension bonds. It is cheaper in the end, because the retirement board would charge a higher interest rate to the county for the unfunded liability in the system.
Funded at 83%, the county's $3 billion retirement system is considered healthy by federal standards. The figure means the system has 83 cents for every $1 due in future benefits. But the ratio has declined every year since 2004 -- when the county issued its last pension bond.
By contrast, one of the healthiest public retirement systems in the state is in the city of Fresno.
The city has a total of $2.1 billion in two pension systems -- one for police and fire, the other for general employees. They aren't as generous as the county system, but both have ample cash to meet the obligations of current and future retirees.
Both have been overfunded for 13 straight years, and the city hasn't put in much because investment returns virtually cover contributions. The city's $245 million pension bond issue in 1994 also has been paid off.
Roberto Pena, retirement administrator for the county system, said there are some key differences. The city offers a lower benefit at a lower cost. And the city's bond proceeds were dumped into a soaring market, giving it a healthy boost.
With retirement costs soaring, some Fresno County officials are carefully watching a new lawsuit in Orange County.
There, the Board of Supervisors has sued the Orange County Employees Retirement System -- hoping to save an estimated $187 million in retroactive benefits due to public safety employees such as deputy sheriffs.
The lawsuit is based on a 2001 board decision to improve benefits for law enforcement employees. Those workers went from a formula of 2% at age 50 to 3% at age 50; the higher rates applied to past years of service.
Today's board now calls that a mistake because, aside from some small short-term contributions, public safety employees didn't contribute any money toward the retroactive benefit.
The lawsuit doesn't seek to recoup money already paid out, but would prevent future retirees from collecting the higher benefit for service prior to 2002, when the new rates took effect.
"I think we have a good case," said John Moorlach, chairman of the Board of Supervisors and the county's former treasurer. "I wouldn't do this on a lark."
Fresno County officials aren't saying they would file a lawsuit. But Henry Perea, chairman of the Board of Supervisors, said if Orange County prevails, Fresno County officials may consider renegotiating benefits: "Everything has to be left on the table."
James Bewley, president of the Fresno Deputy Sheriffs Association, said he's worried that will happen if the lawsuit succeeds.
"You will pretty much see a domino effect throughout the state, no matter what type of retirement you have," he said.
The reporters can be reached at cfontana@fresnobee.com, kginis@fresnobee.com or (559)441-6330.
To see more of The Fresno Bee, or to subscribe to the newspaper, go to http://www.fresnobee.com Copyright (c) 2008, The Fresno Bee, Calif. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
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