PASADENA, Calif. -- The Los Angeles County Employees Retirement Association has been hit with an additional pension liability of $1.2 billion because of two computer coding errors.
Officials at the $22 billion fund were stunned by the miscalculation, discovered during an outside audit. They thought this year's investment gains would lead to a major surplus and would reduce employer and employee contributions.
Now, LACERA is expected to use all of its fiscal 1997 investment gains and an estimated $147 million of its existing $447 million surplus to stay fully funded.
In addition, the auditors are expected to recommend LACERA adopt changes in its actuarial assumptions and methods of calculations that could add another $500 million in liabilities.
A surprise liability is a problem for any plan sponsor, but for Los Angeles County, the stakes are unusually high. That's because as long as LACERA is 97.5% funded, the county can avoid increases in pension contributions, according to a 1994 agreement between the fund and the county.
The mistakes were found during the fund's first actuarial audit, performed by Milliman & Robertson Consulting Actuaries Inc., Seattle.
Marsha Richter, chief executive officer for LACERA, said officials with Towers Perrin, Denver, LACERA's actuary, agree miscalculations were made because of mistakes in a computer program.
Milliman & Robertson actuaries discovered two errors in calculations in the computer program used to identify liabilities.
One error underestimated liabilities associated with service-connected disabilities for pension fund members -- such as sheriff's deputies and firefighters -- who work in safety-related jobs.
The second underestimated liabilities for retirements that occur at age 60 for plan members in public safety and at 70 for general members.
Employees of Towers Perrin spent hours examining the computer code line by line to discover the location of the errors, Ms. Richter said.
David LeSeur, a Towers Perrin actuary who handles the LACERA account, said he couldn't comment. Joe Conway, a spokesman for Towers Perrin, said in a prepared statement: "It is a longstanding policy of Towers Perrin that the firm does not comment on the specifics of work performed for our clients. Towers Perrin is fully confident in the integrity and accuracy of our computer and software systems for actuarial valuations.
"Periodic reviews or audits of valuations for a client's retirement plan are a normal and sensible process of discussion and actuarial adjustments; variations within acceptable ranges and adjustments for variations are also normal within any valuation process. Any impact of actuarial adjustments needs to be considered in the context of the size and financial strength of the plan."
But Mr. Conway and other Towers Perrin officials didn't respond to questions on whether any other pension fund clients use the same valuation program or parts of the program as LACERA, or whether Towers Perrin compensates clients for errors in valuations caused by the firm.
errors since 1977
The computer coding errors that underestimated LACERA's liabilities probably have existed since 1977, when the program was developed, Ms. Richter said.
Ms. Richter doesn't know if the computer program is used in calculating liabilities of other funds, but said she thinks it's unique to LACERA.
Actuaries say actuarial audits aren't common.
"I don't think we have done one out of this office," said Steve Peterson, an actuary at the Boston office of Buck Consultants.
An audit that turned up liability errors of about 5% "would be significant," Mr. Peterson said.
The estimated error of $1.2 billion would be a little less than 5% of previously determined liabilities for LACERA.
Steve White, an actuary for Milliman & Robertson, said without such audits, under- and overestimates of plan liabilities are going undetected.
Ms. Richter declined to say whether LACERA officials were contemplating action against Towers Perrin.
Simon Russin, a LACERA trustee, said he plans to push for discussion "of anything we can do" against Towers Perrin.
Trustee Cody Ferguson declined to comment on whether Towers Perrin should compensate the pension fund for the computer errors. He said he won't comment until all information concerning the errors is known.
The 1994 agreement between the pension fund and the county involved the sale of pension obligation bonds by the county to bring LACERA to what was thought to be a fully funded level.
When LACERA officials made the deal with the county, both sides were unaware of the errors in the program used to calculate the fund's liabilities.
That agreement calls for a 75%-25% sharing between the county and LACERA of what are called excess reserves -- realized gains on investments in excess of the fund's actuarial investment assumptions, administrative costs, plan reserves and funding of additional member benefits.
The 75% share of the assets goes to the county, which still has about $800 million in that account to pay for its yearly fund contribution of about $320 million, Ms. Richter said.
But for LACERA, "that is $1.2 billion gone. That is a lot of money," Mr. Russin said.
He said he had hoped investment gains this year would be great enough to allow county employees to push for negotiations to have employee contributions to the fund reduced or eliminated.
"Those negotiations are out the window now," he said.
Ms. Richter said a reduction in the county's contribution seemed possible before the errors in calculation were discovered.
New actuary coming
Meanwhile, Towers Perrin is about to be replaced as the pension fund's actuary. Long before the errors were discovered, trustees had approved a search for a new actuarial firm. And despite an attempt to get rehired, Towers Perrin isn't among the three finalists.
Ms. Richter declined to name the finalists, saying they hadn't yet been announced to trustees.
Other pension funds have reported finding errors in calculating liabilities, Ms. Richter said. They generally are found when pension funds select new actuaries, who examine the assumptions and calculations made by the previous actuary.
But LACERA has had the same actuary since the 1970s, she said.
"I have been pushing for an RFP every five or six years, but I have been voted down on that," Mr. Russin said.
Mr. Ferguson said the county had conducted earlier searches for actuarial services, but Towers Perrin always won them.
But Mr. Russin said some fund trustees always picked Towers Perrin because it had the most experience with LACERA.
Richard Shumsky, chairman of the LACERA investment committee, couldn't be reached for comment.
This is the second major blow for LACERA in recent months.
Early this year, the California Supreme Court ruled retirement benefit calculations for some employees must count car, food and clothing allowances; bonuses; and standby pay as compensation.
The court decision is expected to cost California public pension plans tens of millions of dollars in new liabilities.
Ms. Richter said she didn't know what LACERA's liability would be following the court decision.