While Santa Barbara County continues to see modest economic growth, its largely unfunded pension obligations coupled with a move by the local retirement board to increase contributions, means belt tightening for all departments.
The combination also means a projected budget shortfall of $13.6 million for the coming fiscal year beginning July 1 that's expected to increase to $37.2 million by 2020-21, and that county employees will feel the affects of the higher contributions every time they cash their paychecks.
"As (pension costs go up), employees will pay more, so their take-home pay will be less, to a degree," said county Budget Director Tom Alvarez. "The employees will be paying more and we will be paying more."
The county Employees' Retirement System board voted late last year to increase the county's pension contribution, which, as a percentage of payroll, was projected to decrease by about 1 percent annually, reaching a projected 33 percent by fiscal year 2021-22, Alvarez said.
Instead, the retirement board took a more aggressive approach to pay down the unfunded liability of nearly $700 million. The approach, based in part on a change in financial assumptions, drops the investment forecast from 7.5 percent to 7 percent, which translates into a big financial hit for the county.
Thirteen percent of the county's total revenues are spent on pension contributions, for an annual payment of $110 million, which will increase with the changes to the investment forecast.
By comparison San Luis Obispo County, which has 3,000 fewer employees than Santa Barbara County, spends 5.1 percent, which equates to a $32 million yearly payment.
"Change in the actuarial assumption, means the employee/employer have to provide more (money) to pay out the pensions because you assume a lower investment return," County Executive Officer Mona Miyasato said.
With the changes, it's expected contributions to the county retirement fund will grow to $12.2 million for the coming fiscal year, and to $46 million by 2021-22, without much of an increase in revenues.
It's predicted by that fifth year, the increased costs will level off.
"That difference of 11 percent of your pensionable payroll is about $37 million a year, so that's really the biggest change from last year that's impacted us," Alvarez said about anticipated increased costs and budget shortfalls.
Increased expenditures facing the county over the next several years include behavior wellness inpatient care, cuts to state gas tax revenues, health insurance increases, additional capital costs for the Main Jail, Northern Branch Jail operations and deferred maintenance.
"A lot of our pension costs are covered by interest that is earned on invested funds," Alvarez said. "We have $2.5 billion invested presently ... (that's) anticipated to make 7.5 percent, but if you only earn 7 (percent) that's a big difference."
The county has 4,350 budgeted positions, with approximately 91 percent represented by 10 bargaining groups, and it has never issued pension obligation bonds to generate money for the retirement fund.
"I think in this county, the practice has been not to issue debt for these certain types of obligations" Miyasato said. "It's more a pay-go (system), which is a more fiscally conservative approach, and I think it has served the county well."
A mere three years ago, the county's retirement fund was funded at 81 percent and numbers were going up.
Today, that has dropped to 71 percent, mostly due to the fund not hitting its target return, which was 7.5 percent for 2016, when only a 1.3 percent rate of return was achieved. The year prior it was less than 1 percent.
When a retirement fund doesn't hit its target rate of return, the employer/employee must fund the difference, which is also adding to the county's increased pension costs.
"We weren't expecting the actual return from last year to be so low," Alvarez said.
The California Public Employees' Retirement System (CalPERS), which is just 68 percent funded, also saw its governing board recently move to lower the forecast from 7.5 percent to 7 percent. The higher contribution rates will be phased in over eight years.
Santa Barbara County officials had requested the local retirement board also phase in the higher rates over a longer length of time, but the board opted for the five-year period, Miyasato said.
"No one ever argued it shouldn't go down, just do it more gradually over time," Miyasato said. "Our retirement board wanted to take a more aggressive approach and do it faster. With CalPERS making that move, it's kind of signaling to everyone that 7 percent is probably going to be the new normal as far as pension funds are going."