July 29, 2004
Federation Faces Underfunded Pension
Faced with a pension shortfall of $20 million, the organized Jewish community's largest philanthropy finds itself forced to divert millions of donor dollars to employee retirement benefits, rather than to needed social services.
To cover the underfunded pension, The Jewish Federation of Greater Los Angeles and its 13 beneficiary agencies are slated this year to contribute $5 million to retirement plans, up from $4 million just two years ago. That means about 10 cents of every payroll dollar now goes to pensions, a higher percentage than at many other federations.
By contrast, the Jewish Federation of Greater Philadelphia spends about 3.5 cents on pensions, the Combined Jewish Philanthropies of Greater Boston about 4 cents, the Jewish Federation of Greater Atlanta about 4.5 cents and the UJA-Federation of New York 6 cents.
In addition to restricting cash that could be used for other purposes, the Los Angeles Federation's underfunded pension has caused headaches for the agencies gaining their independence from the Jewish Community Centers of Greater Los Angeles (JCC) , a Federation beneficiary agency. The pension shortfall means that the Westside JCC, the Zimmer Children's Museum and Valley Cities JCC might be responsible for paying off their share of the pension liability, a financial burden that could saddle them with tens of thousands of dollars in extra costs.
"I'd say it's a concern, but I wouldn't characterize it as a big concern," Federation President John Fishel said of the underfunded pension program, adding that the agency would cover all present and future pension payments owed to 120 retirees and 956 current employees.
However, agency heads speaking on background said the pension shortfall had made it more difficult to hire people, give raises or expand programs. They also worried that the relatively high contributions they're now making could persist for years, putting a long-term financial strain on their organizations.
Whatever size the concern, it isn't unique to The Federation. Corporate America has also experienced pension problems in recent years. Billions of pension fund dollars invested in the market vanished when the high-tech bubble burst and stocks plummeted.
Although Wall Street has come back some, U.S. businesses recently reported a pension shortfall of $278.6 billion, said Loretta Berg, spokeswoman for the Pension Benefit Guaranty Corp. in Washington, which is charged with protecting private-sector pensions of 44 million American workers and retirees.
California counties and cities are also struggling with pensions. Orange County, for instance, has shortfall estimated at $1 billion.
The amount of an unfunded pension liability often reflects how much money a company would need to pay off all earned retirement benefits if it terminated its retirement package.
Pension expert Lou Kravitz said The Federation's shortfall, along with many companies' pension problems, would likely disappear or shrink considerably in the next five to 10 years, as the stock market and interest rates rise as expected. Typically, pension liabilities move in the opposite direction of stocks and interest rates, said Kravitz, a former member of The Federation's pension committee and head of the retirement plan consulting firm, Louis Kravitz and Associates in Encino.
"The amount of underfunding goes up and down, so it's not something you necessarily should lose sleep over," he said.
Jack Klein, Federation executive vice president and chief operating officer, said his agency has addressed the agency's pension shortfall by gradually raising plan contributions over the years and by changing the mix of stocks and bonds in which retirement dollars are invested. He also said The Federation and its agencies have 30 years to pay down the underfunded pension plan, more than enough time.
"I think The Federation, agencies and lay leadership have done a very good job of managing the pension fund," Klein said.
Agency executives agree -- to a point. The Federation's pension plan is "a great benefit that has kept people in the Jewish community, but it might be proving too expensive to maintain at its current level," said Andrew Diamond, president and chief executive of Aviva Family and Children's Services.
Mitch Kamin, executive director of Bet Tzedek, another benificiary agency, said the plan has been great for worker retention. However, the costly benefit could be less appealing to more junior workers who might prefer the flexibility and portability offered by other options.
In an attempt to cut pension costs, The Federation has proposed modifying retirement plans for new employees, although benefits for current staff would remain intact.
Instead of offering new hires so-called "defined-benefit" plans, which guarantee an annual fixed income, The Federation now favors "defined-contribution" plans. Under those plans, employers set aside money for workers to invest in stocks and bonds of their choosing.
However, with defined-contribution plans, "the risk of the pension is in the hands of the employee," said Brett Trueman, a professor of accounting at the UCLA Anderson School of Management. In other words, if the market falters and wipes out workers' nest eggs, corporations and nonprofits have no obligation to make up the losses, he said.
Locally, most nonprofits appear to have retirement plans that are both less generous and less costly than The Federation's. A recent survey of 252 mostly Southern California nonprofits found that nearly four out of five offered benefits, but only 6 percent had defined-benefit plans like The Federation's, said Pete Manzo, executive director and general counsel for the Center for Nonprofit Management in Los Angeles. That's down from 13 percent a decade ago, he said.
"Nonprofits want to maximize their program activities, just like for-profits want to maximize shareholder value," Manzo said. "So they want to cut or contain costs."
Federation President Fishel said a lack of consensus among The Federation and beneficiary agencies led the organization to stick with the defined-benefit plan until now. Beginning in the early 1990s, The Federation reduced contributions from 6.6 percent to 3 percent and later to 1.5 percent. At the time, organization executives believed that the pension fund was flush or overfunded.
Jon Lepie, chief negotiator for the American Federation of State, County and Municipal Employees, Local 800, the union representing about 450 Federation and agency workers, said it appeared The Federation may have acted irresponsibly by lowering contributions. Without that tinkering, The Federation might have avoided the underfunding problem and the need to move away from defined-benefit retirement plans, which give workers more security and often more money than other options.
Fishel said the philanthropic agency used the savings from the lower rates to help "stabilize" Federation and agency programming that experienced significant funding cuts in the early 1990s. Later, The Federation and the agencies dipped into that money to raise salaries across-the-board. Klein, The Federation's COO, added that the organization's pension contributions have always exceeded legal requirements.
Union officials representing The Federation and beneficiary workers have reacted unenthusiastically to The Federation's proposal to scrap defined-benefit pensions for new workers, although they have not ruled out accepting the offer as part of larger negotiated settlement.
"If we're forced into cutting employment benefits because of management incompetence, shame on them," Lepie said.
Local 800 President Jeff Rogers said that The Federation had failed to live up to its contractual obligation to invite a union representative to pension committee meetings over the years. The presence of a union member might have "protected the pension," he said.
Klein declined to respond to Rogers' charge, saying that it was inappropriate to do so at this time, because of the ongoing negotiations with the union.
Officials at the United Jewish Communities, the umbrella organization for the nation's federations, said they had no information on the types of pension plans offered by individual members. However, several federations appear to have healthier retirement funds than the Los Angeles Federation's.
The Atlanta Federation offers defined-benefit pensions like the local Federation's but has no shortfall.
The Philadelphia Federation offers defined-benefit pensions to its employees and workers at 13 beneficiary agencies. The plan, which is underfunded by $1.5 million, offers benefits that are in some cases about half as generous as the Los Angeles Federation's. Still, four agencies have recently dropped their defined benefits in favor of defined contributions, said Angela Falcone, Philadelphia's chief financial officer.
The United Jewish Federation of San Diego County, like Atlanta, Boston and New York, has no underfunded pensions. The organization offers its employees a 403(b), the nonprofit version of a 401(k), and a defined-contribution plan.
Reflecting on the Los Angeles Federation's situation, Elias Lefferman said change is in order. The president and chief executive of Vista Del Mar Child and Family Care Services said beneficiary agencies could no longer afford to set aside an increasing percentage of donor and grant dollars for underfunded pensions.
"We need a new plan," he said.