SANTA ANA, Calif. -- Orange County's chief executive officer has begun to study alternatives to the county's defined benefit plan, including instituting a defined contribution program or joining CalPERS.
The withdrawal threat is in response to the retirement system's decision to pay additional retroactive benefits to retirees.
Last month, an Orange County Superior Court judge ordered the $4.1 billion Orange County fund not to increase the payments. (The increase was to have gone into effect July 1.) But the temporary order by Judge Tully Seymour is expected to last only until a hearing is held on whether to continue the restraining order through the end of the trial between the retirement system and the county concerning the payments, said Deborah Gmeiner, deputy county counsel.
The extra payments were to be made to retirees under the retirement system's interpretation of a state supreme court opinion last year. That decision directed county retirement systems to pay benefits based not only on a worker's salary but also on such other items as car allowances and bonuses.
But the fund's interpretation spurred a lawsuit by the county, and a threat by some participating employers to withdraw from the plan.
The Orange County Fire Authority, and the Orange County Transit Authority also are investigating a withdrawal from the Orange County system to join the California Public Employees' Retirement System.
All three participants -- among the largest of OCERS' 16 participating employers -- cite the added cost of paying retirees three years of additional benefits.
Pension fund officials say they do not know how much money would be removed from the fund if the county and the two authorities withdraw. But County Supervisor William G. Steiner estimated the county alone accounts for about $2 billion to $3 billion.
The retirement system board's decisions to pay the additional retirement benefit and use investment earnings to offset the extra costs were spawned by a California Supreme Court decision effective last October that directed county retirement systems to recalculate benefits payable to retired public employees and to pay the increased benefits.
The opinion, in Ventura County Deputy Sheriffs' Association vs. Board of Retirement of the Ventura County Employees' Retirement Association, changed the definition of "compensation earnable" for purposes of calculating retirement contributions and benefits for retirement systems under the County Employees' Retirement Law of 1937. Under that decision, pensions should be based not only on a worker's salary, but also on other benefits such as car allowances and bonuses.
While a few of the 20 counties governed by the 1937 act have granted additional pensions under the Ventura case to current employees, Orange County is so far the only one to give retirees three years of retroactive benefits. No other county retirement system has made the additional benefits retroactive.
Orange County is looking at other retirement program options in direct response to the board's Ventura decisions, said County Treasurer John M.W. Moorlach. (Mr. Moorlach is a member of the OCERS board, and voted with the majority on the Ventura benefits issue.)
"The county's position was that if you're going to be generous with these funds, we'll look for other alternatives," Mr. Moorlach said. "It's a valid decision, but made in haste. There's no need to react dramatically."
So far, it is unclear whether the Orange County Board of Supervisors would be willing to leave the retirement system.
Mr. Steiner, the county supervisor, said joining CALPERS was not something he would "strongly embrace."
"I think my colleagues would be reluctant to make a change unless there was a powerful reason to do so," Mr. Steiner said. But he added staff members were gathering information about a defined contribution program and a bolt to CalPERS "so the board understands the retirement system is not the only game in town."
Gary Burton, chief finance officer and assistant chief executive officer said the county already has a voluntary 457 plan and is precluded by state law from starting a 401(k) plan. Still, Mr. Burton said the county is investigating "other types of pension structures and plans that we might be able to implement" as an alternative to OCERS.
An official with the Orange County Transportation Authority said the authority would not seriously consider leaving OCERS for the state retirement system unless there is an adverse decision to the county in its suit against OCERS.
Joan Steiner, chief of finance, administration and human relations of the Orange County Fire Authority, said Ventura-related expenses are expected to cost the authority about $2.3 million. Considering the financial impact of the retirement system's decisions, Ms. Steiner said "it was just good business sense" to look at other options. The feasibility study is being conducted by the state retirement system, and Ms. Steiner said she did not know when it would be completed.
The authority already has a deferred compensation plan with PEBSCO and she said switching all employees to that plan could be another option.
In March, the OCERS Board of Retirement sued Orange County in county superior court asking the court to declare the board's course of action is consistent with the Ventura decision. The board contends the Ventura decision had left several key points unclear, including the issue of retroactivity. The county countersued, arguing no additional benefits should be paid to retirees until an appellate court clarifies the Ventura opinion.
"They should have gotten a legal determination from a court before they made their decision," said Thomas C. Agin, assistant county counsel for Orange County. "If eventually a court tells the county that it is right, then the retirement system is going to have to do something to get the payments back -- like sue each of the retirees to recover the payments."
While it was the first, OCERS is not the only retirement system to be sued. Lawsuits challenging Ventura-related decisions have been filed in Sacramento, Contra Costa and Marin counties.
The board initially determined the extra costs would be borne by the employees and the various plan sponsors.
But on May 4, the OCERS board determined it had sufficient investment earnings to pay for all Ventura-related benefits owed to current retirees, to require no arrears contributions from any members, and to decrease the amount of contributions required of the county and the 15 other participating employers. The fund earned 17.7% in calendar year 1997, said Administrator Raymond Fleming. Consequently, the OCERS board earmarked $200 million for Ventura-related expenses, including reducing the county's contribution.
The following day, Orange County CEO Janice M. Mittermeier notified the board in a memo that the county would be "gathering information" about CalPERS and defined contribution programs.
On May 20, the county filed a motion asking the court to stop the retirement system from making the Ventura-related benefit payments. The county also is asking the court to stop OCERS from using investment returns to pay for any Ventura-related expenses, including decreasing its own contribution. At deadline, the parties were awaiting a court date.
A source close to the case who spoke on condition of anonymity said that should Orange County be successful and enjoin OCERS from using the excess investment returns, it could cost the county $10 million to pay Ventura-related costs.