HomeMy WebLinkAboutMINUTES - 08062013 - SD.4RECOMMENDATION(S):
ACCEPT report of the impact on pension costs of Contra Costa County Employees' Retirement Association
(CCCERA) Actuarial Valuation and Review as of December 31, 2012.
FISCAL IMPACT:
This is an information report with no specific fiscal impact. A report will be forwarded to the Board in the next few
weeks requesting adoption of FY 2014-15 CCCERA rates. It should be noted that the fiscal impact, as described in
the background of this report, of increased rates is approximately $55.6 million (excluding the Contra Costa County
Fire Protection District).
BACKGROUND:
The rising costs of pension benefits continue to be a key issue in Contra Costa. Annually as part of the Budget
Message, the County Administrator reports and projects pension costs. In this year's April 15, 2013 letter, the County
Administrator noted that over the last two years, employees in the majority of our bargaining groups began paying a
greater percentage of pension costs and that just as we began to look forward to paying off a significant pension
obligation bond in FY 2013-14, the anticipated relief associated with that change was virtually eliminated by the
pension board’s reduction of the assumed investment rate of return from 7.75% to 7.25%.
In a letter dated March 12, 2013, CCCERA’s actuary issued a report which projected employer contribution rate
changes based on an estimated 14.17% gross market value investment return for 2012 and other changes in economic
APPROVE OTHER
RECOMMENDATION OF CNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE
Action of Board On: 08/06/2013 APPROVED AS RECOMMENDED OTHER
Clerks Notes:
VOTE OF SUPERVISORS
AYE:John Gioia, District I Supervisor
Candace Andersen, District II Supervisor
Mary N. Piepho, District III Supervisor
Karen Mitchoff, District IV Supervisor
Federal D. Glover, District V Supervisor
Contact: Lisa Driscoll, County Finance
Director (925) 335-1023
I hereby certify that this is a true and correct copy of an action taken and entered on the
minutes of the Board of Supervisors on the date shown.
ATTESTED: August 6, 2013
David Twa, County Administrator and Clerk of the Board of Supervisors
By: June McHuen, Deputy
cc: Robert Campbell, Auditor-Controller
SD.4
To:Board of Supervisors
From:David Twa, County Administrator
Date:August 6, 2013
Contra
Costa
County
Subject:Impact of Contra Costa County Employees' Retirement Association Actuarial Valuation and Review as of December
31, 2012
assumptions including reducing the expected long-term rate of return assumption from 7.75% to 7.25%. The
projection was derived from the December 31, 2011 actuarial valuation results, which were the most current available
at that time.
At its Board meeting on July 24, the CCCERA board was presented with a report of the December 31, 2012
valuation figures by The Segal Group. At the conclusion of the report, the rates were adopted. The rates go into effect
July 1, 2014. The complete report can be found on CCCERA’s website at:
http://www.cccera.org/agendas/agendas%202013/agenda7.24.12.html. The following are highlights of that report.
BACKGROUND: (CONT'D)
Significant Issues in the Valuation Year (ending 12/31/12)
The California Public Employees’ Pension Reform Act (CalPEPRA) of 2013 (AB340) was passed on
September 12, 2012 and became effective on January 1, 2013. New PEPRA Tiers were created.
The results of this valuation reflect changes in the economic and non-economic assumptions adopted by the
CCCERA Board for the December 31, 2012 valuation.
Assumed Investment Rate of Return – decreased from 7.75% to 7.25%.
Retirement Rates – active members in all tiers are assumed to retire at slightly earlier ages overall.
Mortality Rates – all pre- and post-retirement mortality rates for non-disabled members have been
decreased.
Termination Rates – overall termination rates have been decreased.
Disability Incidence Rates – the probability of becoming disabled at each age has been decreased.
Individual Salary Increases – although inflationary and “across the board” increases (wage inflation)
decreased from 4.25% to 4.0%, Segal found the last three years’ of salary increases due to inflation
and across the board increases to be an anomaly and therefore the future salary increases due to
promotional and merit increases are projected slightly higher.
Terminal Pay – overall, the terminal pay assumptions are slightly higher at 12.5%. Terminal pay for
2012 averaged 9.16% for Cost Group 1. The three year average is 12.93% and the prior assumption
was 12.0%. Currently, a court “stay” prevents CCCERA from implementing AB 197. The proposed
assumptions do not reflect any potential changes due to AB 197 pending a decision by the Contra
Costa County Superior Court. If CCCERA is successful in the suit, terminal pay would be
approximately 2.99% for this group.
Service from Unused Sick Leave Conversion – overall sick leave conversion assumptions have been
decreased.
The ratio of the valuation value of assets to actuarial accrued liabilities decreased from 78.5% to 70.6%.
CCCERA’s UAAL has increased from $1.5 billion to $2.3 billion. This increase is primarily due to changes
in actuarial assumptions and an investment return on actuarial value (i.e. after smoothing) that fell short of
the 7.75% assumed rate offset by lower than expected individual salary increases. Additional information is
provided below.
The changes in actuarial assumptions account for $570.2 million of the $815.5 million net increase.
Salary increases were not as high as assumed, which accounted for a $102.7 million decrease in the
UAAL.
The average employer rate calculated in this valuation (excluding any employer subvention of member
rates or member subvention of employer rates) has increased from 37.87% of payroll to 49.82% of payroll.
This increase is primarily due to changes in actuarial assumptions and the investment loss mentioned above.
The average member rate calculated in this valuation has increased from 10.98% of payroll to 12.20% of
payroll. This increase is primarily due to changes in actuarial assumptions.
The total unrecognized net investment gain as of December 31, 2012 is about $157 million as compared to
an unrecognized net investment loss of $389 million in the previous valuation. This net investment gain will
be recognized in the determination of the actuarial value of assets for funding purposes in the next few years.
The net deferred gains of $157 million represent about 3% of the market value of assets. Unless offset by
future investment losses or other unfavorable experience, the recognition of the $157 million market gains
is expected to have an impact on the Association’s future funded ratio and contribution rate requirements.
If the net deferred gains were recognized immediately in the valuation value of assets, the funded
percentage would increase from 70.6% to 72.7%.
If the net deferred gains were recognized immediately in the valuation value of assets, the average
employer contribution rate would decrease from 49.8% to about 48.0% of payroll.
Funding Status
Funding Status is used to determine whether the Pension Plan’s net Position will be sufficient to meet future
obligations. Assets are compared with the actuarial liabilities to determine what future contributions by the
members and by the employers are needed to pay all expected future benefits. This is an important measure. The
chart below provides several years of history beginning with the high of 2007. Although the funded ratio has
dropped, rate increases have been adopted which will ensure sufficient funding.
Summary of Actuarial Data
Exhibit A is a summary of key valuation results. As is always the case, future contribution requirements may
differ from those determined in the valuation because of:
Differences between actual experience and anticipated experience;
Changes in actuarial assumptions or methods;
Changes in statutory provisions; and
Differences between the contribution rates determined by the valuation and those adopted by the Board of
CCCERA.
Causes of Higher Than Predicted Rate Increases
Although significant rate increases were projected for FY 2014/15 based upon earlier Segal reports, actual rate
increases are significantly higher than had been anticipated. Over the last week CCCERA staff has conversed with
different employers and others trying to explain why the employer contribution rate in the valuation is so different
from their most recent projections. The explanation is that the effect that declining payroll has had on the
contribution rate was more significant than expected. Changes in payroll cause unpredictability in the contribution
requirements. The contribution requirement has two main components; the normal cost, and the amortization of
the UAAL. The normal cost rate is relatively stable, but the amortization rate is not. The amortization amount,
however, is predictable. The volatility comes in when expressed as a rate and the payroll growth differs from the
assumption. There is further slippage due to the 18-month delay when the amortization rate is applied to a
different payroll amount than was assumed. The 18-month delay is required in order for the actuary to prepare the
necessary reports, the Board of CCCERA to adopt the rates, and the employer to implement those rates.
Impact on County of Contra Costa
The following information is for planning purposes for FY 2014/15. The estimated salary base used is actual
County payroll from the August 10, 2012 pay through July 10, 2013 ($510.7 million). Because it is based upon
actuals, the base does not include vacant budgeted positions. The base excludes the Contra Costa County Fire
Protection District. The following assumptions have been applied for planning purposes:
the base has been adjusted for a 2% wage increase and a 0.5% merit increase;
the base wages are broken out by Tier I, Tier III, and Safety;
the safety tiers have been adjusted for the reduction in employee subvention;
the largest populations in each tier have been assumed for all (i.e. employees hired before 1/1/2011 for all
and Tier A for Safety);
the rates used for both FY 2013/14 and FY 2014/15 are from the 12/31/12 Segal report referred to as the
‘Blue Book’;
the rates used are specifically for County Cost Groups as defined by CCCERA:
the FY 2013/14 rates assume 7.75% interest, 4.25% wage inflation, plus merit salary increase
assumptions,
the FY 2014/15 rates assume 7.25% interest, 4.00% wage inflation, plus merit salary increase
assumptions,
the employer subvention of the employee rate for general tiers is assumed to be zero;
the aggregate rate, under and over $350, has been applied to the salary base; and
a prepay factor discount of .96 was applied.
Per the assumptions above, the following rates have been applied to base salary:
The following year-over-year increase in pension cost is projected using these rates on the salary base as
described:
The previous projection after the adopted change in assumed investment rate was a cost increase of approximately
$33 million. The current projection given all economic, non-economic and demographic updates from the
tri-annual study is $55.6 million.
Strategy
In June 2014, the County will pay off one of its two remaining pension obligation bonds (POBs). Because of this
bond retirement, pension costs in FY 2014/15 would have been $32.99 million less than in FY 2013/14. In June
2006, monies anticipated from this payoff were directed by the Board to the County’s Other Post Employment
Benefit Trust Fund.
At that time the report notes that there were contingencies to these resources being available in the future. One of
the contingencies specified was “CCCERA continuing to meet its assumed rate of investment—among other
things”. It is likely that the County Administrator will shortly recommend that the POB payment monies be
redirected towards the FY 2014/15 pension cost increase. This recommendation would reduce the gap between the
$55.6 million projected FY 2014/15 increase in pension costs and available funding to $22.7 million. This is still
a very large number, but significantly more manageable. Over the coming months County Administrator staff will
work with departments to plan for these increased costs. It is unlikely that current vacant positions will be filled.
The silver lining to these increased costs is that the CCCERA Board has taken seriously its fiduciary responsibility
to the fund and has taken steps to ensure that members’ pensions are adequately funded now and in the future. The
County, in turn, will take the necessary steps to adjust future budgets to fully fund its obligations. The City of
Detroit bankruptcy has made it impossible to ignore the financial issues looming for municipalities. In order to
avoid being the “Detroit of the Future”, Contra Costa must address its underlying issues−the high cost of benefits
and specifically the unfunded and unsustainable retirement benefits.
CONSEQUENCE OF NEGATIVE ACTION:
This is an information report requiring no specific action. A report will be forwarded to the Board in the next few
weeks requesting adoption of FY 2014-15 CCCERA rates.
CHILDREN'S IMPACT STATEMENT:
None.
ATTACHMENTS
Exhibit A
Pension Costs 2014 Powerpoint Presentation
Exhibit A
CCCERA – Liability2Contra Costa County is the largest employer in the CCC Employees' Retirement Association representing approximately 83% of the members in the plan
CCCERA – Funded RatioActuarial Valuation Date Funded Ratio12/31/0789.9%12/31/0888.5%12/31/0983.8%12/31/1080.3%12/31/1178.5%12/31/1270.6%3
County’s Share of Unfunded LiabilityActuarial Valuation DateTotal UAAL County Share12/31/07$0.56 Billion$0.47 Billion12/31/08$0.69 Billion$0.57 Billion12/31/09$1.02 Billion$0.85 Billion12/31/10$1.31 Billion$1.09 Billion12/31/11$1.49 Billion$1.24 Billion12/31/12$2.28 Billion$1.89 Billion4Considering the County’s CCCERA, POB ($294 million) and OPEB liabilities ($932 million) alone, the current challenge exceeds $3.12 Billion dollars.Contra Costa County is the largest employer in the Contra Costa County Employees' Retirement Association representing approximately 83% of the members in the plan
FY 2013-14 FY 2014-15 Rate Growth RetirementEmployer Employer Percentage CompensibleRateRateIncreaseRate IncreaseTier I 30.14% 38.76% 28.60% 8.62%Tier III 29.34% 37.85% 29.00% 8.51%Safety 63.41% 88.77% 39.99% 25.36%Employer Rates - Pension5
FY 2013-14 FY 2014-15Estimated Employer EmployerSalary BaseCostCostIncrease Tier I $15,280,387 $4,605,509 $5,922,678 $1,317,169 Tier III $428,635,019 $125,761,515 $162,238,355 $36,476,840Safety $79,544,360$50,439,078$70,611,528$20,172,450Subtotal $523,459,766 $180,806,102 $238,772,561 $57,966,459TOTAL (discounted) $173,573,858 $229,221,658 $55,647,801Employer Costs - Pension6
Fiscal Issues Facing the County•Increased AV over budgeted 2%•New and improved health care cost numbers •Contra Costa County Fire’s dwindling reserves•Slow revenue recovery •Impacts of Sequestration cuts•Affordable Care Act (ACA) impacts•Union Negotiations and Long term health insurance issuesNeed to take the long view on recovery and work together to get through this
Fiscal Issues Facing the County8•Increased Revenue FY 13/14 (net Increase) $3,741,609•AV budgeted 2% = $5,328,232•Actual 3.45% = $9,741,609•Increased Pension Costs FY 14/15 ( Net Increase) $22,600,000•Projected increase ($33,000,000•New Projection ($55,600,000Likely to require not filling vacant positions and other reductions in the coming months