Shocker: $12M in Extra Fees

“Unfortunately, because of the substantial mistakes by Segal, you’ve been put into this predicament. I hope in the future that you look at the performance of your actuary and take appropriate action then.”
– Tom Dominguez, President, Assoc. of Orange County Deputy Sheriffs

Leaders of Orange County’s (California) largest public retirement system publicly criticized their contract statisticians for taking months to reveal information that is slated to trigger at least $12 million per year in extra payments from cities and other public agencies.

The changes, by the actuary firm Segal Consulting, affect government payments into public safety pension plans for the county Sheriff’s Department, Orange County Fire Authority, and the county’s probation department.

In a report by Nick Gerda on the “Voice of OC” website, we learned that a lot of those costs will be passed on to cities – like Stanton, Mission Viejo and San Clemente – that contract with the Sheriff’s Department. The increase would start its three-year phase-in next summer, potentially impacting other services in those cities.

But while the assumption changes were made last July, the firm didn’t point out the increase to the Orange County Employees Retirement System until late April, about nine months later.

That prompted a backlash from pension board members who described it as a major omission by the firm, especially given the time cities and the county need to prepare to absorb the cost.

“The problem is that Segal doesn’t seem to inculcate into its philosophy, for the people at the very bottom, when you run into a problem, you need to recognize the problem,” pension board member Frank Eley said during a recent board meeting.

“We’re all upset way back here,” he said of himself and his fellow board members.

Representatives of Segal acknowledged the mistake.

“The number was there, we just didn’t report it to you. That was the mistake we made, and there’s no excuse for that,” said Joseph LoCicero, Segal’s president and CEO.

That was a different attitude than the firm’s earlier reaction to the concern, according to pension board member Roger Hilton.

“Obviously you have a different tone today than you did last week,” Hilton told Paul Angelo, a Segal vice president who serves as the main actuary for the Orange County system.

Angelo’s response at the time was that he didn’t disclose the increase because “nobody asked” about it, Hilton said.

Hilton was also bothered that Angelo didn’t disclose the increase when walking through his assumptions with the board months earlier.

“It kind of disturbs me that we go through this whole study” without Angelo highlighting the big increase to the safety payments, he said.

The omission has prompted the Association of Orange County Deputy Sheriffs to call on the board to fire Angelo’s firm.

“Unfortunately because of the substantial mistakes by Segal…you’ve been put into this predicament,” said Tom Dominguez, president of the deputies’ union. “I hope in the future that you look at the performance of your actuary and take appropriate action then.”

While there wasn’t movement in that direction by board members Monday, Segal’s contract is slated to go out for a competitive bid starting in September. The firm can submit a bid to keep the work, but would be evaluated against any other companies that apply.

Segal, which is based in San Francisco, also serves as contract actuaries for other major pension funds in California.

These include the employee pension funds for the city of Los Angeles and counties of San Diego, San Bernardino, Sacramento and Alameda.

It’s unclear exactly how much, in dollar terms, the recently revealed changes will impact cities, the county and the Fire Authority.

Angelo told board members he didn’t have the figures with him on Monday. And Steve Delaney, the pension system’s CEO, said after the meeting that they weren’t yet available.

But county staff said it’s expected to amount to a $12 million additional cost for the county sheriff’s department alone, with much of that passed on to cities that contract for sheriff services.

Among them is Laguna Woods, where the city’s total budget is just $4 million.

“We have some significant cuts to programs that impact our citizens” in the upcoming budget, said Margaret Cady, the city’s treasurer and director of administrative services.

In asking for a three-year phase-in period, Cady asked that the board “recognize the impact to people who are going to suffer down the line.”

After unanimous public comment supporting the three-year phase-in, the board voted to approve it 7-1, with Wayne Lindholm voting against and Tom Flanigan abstaining.

The phase-in would start in the fiscal year that begins next July.

The ultimate increases are 6.4 percent for law enforcement, 6.5 percent for probation and 4.3 percent for the Fire Authority plans.

While these percentages may not seem like much, it adds up when dealing with the massive amounts of cash that agencies pay into the retirement system.

For example, the county pays roughly $200 million each year toward the law enforcement plan, much of which is ultimately paid for by the cities that contract with the county for sheriff services. That translates to the roughly $12 million increase for the sheriff’s department.

The cities that contract with the sheriff for law enforcement – and are thus expected to pick up much of the tab – are Aliso Viejo, Dana Point, Laguna Hills, Laguna Niguel, Lake Forest, Laguna Woods, Mission Viejo, Rancho Santa Margarita, San Clemente, San Juan Capistrano, Stanton, Villa Park and Yorba Linda.

The biggest factor in the increased public safety pension payments was changes to the mortality assumptions by Segal.

Those were based on data surrounding deaths of pensioners over the past three years. But some board members argued – and the actuary agreed – that the public safety plan is unusually volatile.

That volatility, in turn, can lead to spikes and drops in assumptions that create major financial hits to agencies.

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