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HomeMy WebLinkAboutMINUTES - 10172007 - C76 TO: BOARD OF SUPERVISORS 4C-17 o ntra �7 FROM: JOHN SWEETEN, County Administrator Costa DATE: FEBRUARY 2, 2003 r - - County SUBJECT: RESPONSE TO GRAND JURY REPORT NO. 0301, ENTITLED "UNDER FUNDED EMPLOYEE BENEFITS THREATEN THE COUNTY`S FINANCIAL STABILITY" SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION RECOMMENDATION: ADOPT report as the Board of Supervisors" response to Grand Jury Report No. 0301, entitled "Under Funded Employee Benefits Threaten the County's Financial Stability". BACKGROUND: The 2002/2003 Grand Jury filed the above-referenced report on November 4, 2002, which was reviewed by the Board of Supervisors and subsequently referred to the County Administrator, who prepared the attached response that clearly specifies: A. Whether the finding or recommendation is accepted or will be implemented; B. If a recommendation is accepted, a statement as to who will be responsible for implementation and a definite target date; C. A delineation of the constraints if a recommendation is accepted but cannot be implemented within a six-month period; and D. The reason for not accepting or adopting a finding or recommendation. CONTINUED ON ATTACHMENT: YES SIGNATURE: -----------------------------------------------------___ _-----_- a--_-_ .-- --- ------------------ x RECOMMENDATION OF COUNTY ADMINISTRATOR RECOMM ATION OF BOARD COMMITTEE APPROVE OTHER SIGNATURE(S): ----------------------------_ ACTION OF BOARD ON Fc_}nj11 20Q'A APPROVE AS RECOMMENDED OTHER VOTE OF SUPERVISORS I HEREBY CERTIFY THAT THIS IS A TRUE AND CORRECT COPY OF AN ACTION TAKEN X_UNANIMOUS(ABSENT III ) AND ENTERED ON THE MINUTES OF THE BOARD OF SUPERVISORS ON THE DATE AYES: NOES: SHOWN. ABSENT: ABSTAIN: ATTESTED 1'eby 11, 2003 CONTACT: JULIE ENEA(925)335-1077 JOHN SWEETEN, CLERK OF THE BOARD OF SUPERVISORS AND COUNTY ADMINISTRATOR CC: BOARD OF SUPERVISORS MEMBERS PRESIDING JUDGE OF THE GRAND JURY GRAND JURY FOREMAN COUNTY ADMINISTRATOR HUMAN RESOURCES DIRECTOR BY `t-"w � DEPUTY RESPONSE TO GRAND JURY REPORT NO. 0301 UNDER FUNDED EMPLOYEE BENEFITS THREATEN THE COUNTY'S FINANCIAL STABILITY FIN'DIN'GS 1. The County's total outstanding liability for financing pensions was over $832 million as of January 1, 2002 as follows: + $370 million. Unfunded accrued actuarial liabilities (UAAL). UAAL is money owed to the plan by participants and is based on assumptions recommended by actuaries and adopted by the plan board. This number appears in the Actuarial Valuation Report as of December 31, 2001, prepared by William M. Mercer, Inc. + $297 million. Outstanding balance of pension bonds as shown in the County's last Comprehensive Annual Financial Report. These bonds were sold by the County in 1994 for a total of$337 million and were used to retire the County's portion of the UAAL. + $85 million. Balance yet to be funded of the benefit improvements identified in the Ventura Decision and Paulson litigation settlement.* These cases required the County to enhance benefits and, in the absence of full funding by the CCCERA board, added to the liabilities of the plan. This was reported by the actuary, William M. Mercer, Inc. in January 2002. *Ventura County Deputy Sheriffs Association v. Board of Retirement of Ventura County Employees' Retirement Association— 1997. Cases consolidated into one case, entitled Vernon D. Paulson, et al.v. Board of Retirement of the Contra Costa County Employees Retirement Association. + $80 million. Estimated future costs outlined in the Active and Retired Experience Study by William M. Mercer, Inc. for the period 12/31/97 through 12/31/00. Following the experience study, the actuaries recommended that five changes be made in the actuarial assumptions. Three of these assumptions* were not adopted by the Association. Assuming the actuary's assumptions are correct, this action caused a potential increase in unrecognized future liability. *Changes in mortality tables, marital status analysis and final year's salary calculations. Response: Partially disagree. The following clarificationslcorrections are offered: + The $370 million URAL figure cited above includes approximately$40 million attributable to independent districts that are not part of the County's UAAL. + The $85 million liability related to the Ventura Decision and Paulson litigation settlement is included in the $370 million URAL, which is somewhat overstated as is indicated above. + The $80 million estimate of future costs apply to all employers participating in the Retirement System, not just Contra Costa County. 2. In fiscal year 2002/2003, the pension cost to the County, prior to the benefit increases granted by the Board of Supervisors on October 1, 2002, would have been approximately $109 million. + $43 million. The County Auditor/Controller's estimated normal cost. + $35 million. The Pension Bond debt service. + $14 million. The Cost of Living Allowance (COLA) subsidy for the period 7/1/02 through 12/31/02. + $17 million COLA for the period 1/1/03 through 6/30/03. (County estimate). Under Funded Employee Benefits Threaten County Financial Stability February 2, 2003 County Response to Grand Jury Report No. 0301 Page 2 The above figures did not include the County's costs for retiree health benefits, which the actuary estimates to be approximately $17 million for the fiscal year 2002/2003. Response: Agree. 3. Under present labor agreements, the County contributes approximately 80% of the annual cost of the pension plan and the employees contribute 20%. Response: Agree. 4. The County and the participating districts are responsible for 100% of the UAAL. The County alone is responsible for 100% of the pension obligation bonds. Response: Agree, with the clarification that the County is responsible for only the pension obligation bonds it issues, and not pension obligation bonds issued by other employers. At this time, all the pension obligation bonds outstanding were issued by the County. 5. There are no longer "excess earnings". Historically, the Association has enjoyed favorable returns on investments. The County has used these returns, "excess earnings", to defray a portion of the County's and employees' pension contributions, rather than using them to reduce the expanding unfunded liability. Investment market conditions suggest that these earnings will not be realized in the foreseeable future. Response: Partially disagree. The Retirement Board, not the County, determines how excess earnings of the pension fund will be used. In addition to using excess earnings to reduce employee and employer contribution rates, the Retirement Board has also used excess earnings to improve retiree benefits. The Retirement Fund excess earnings as of December 31, 2002 were exhausted. 6. The Board of Supervisors had been considering changes to the pension plan for more than six months. These changes would increase the County's UAAL as well as the County's rewired annual contribution. ♦ On January 17, 2002, County representatives entered into a tentative Memorandum of Understanding (MOU) with most county employee unions and organizations, which included certain changes to the retirement plan. a There was no clear estimate of what the total cost of these benefit changes would be. The Association, on recommendation of the County, tentatively agreed to allocate $100 million from the pension fund's "excess earnings" to partially defray the cost of the so called 3% at 50 and 2% at 55* benefits included in this MOU. However, the County has made no provision for the other benefit increases. *3%times final year's salary times years of service for safety employees at age 50 and 2%at 55 years of age using the same formula but applied to non safety employees, (A 50-year-old safety employee with 30 years service could retire at 90% of salary.) On October 1, 2002, the Board of Supervisors voted to approve and finalize this Memorandum of Understanding thereby significantly increasing the URAL. Response: Partially disagree. Clear estimates of the total cost of the benefit changes were provided to the Board of Supervisors prior to approval of the employee MOUS. In addition, preliminary estimates of the cost of the benefits were secured from actuaries representing both the County and the Retirement Board prior to the January 2002 tentative agreement. The County has implemented and will continue to implement Under Funded Employee Benefits Threaten County Financial Stability February 2, 2003 County Response to Grand Jury Report No. 0301 Page 3 budget adjustments to accommodate the cost of the new benefits. A substantial portion of the cost of the "3> at 50"benefit for safety employees will be borne by the affected employees. 7. Earlier this year a $200 per month increase for all who retired prior to december 31, 2001 was proposed. ♦ In addition to the increases noted in 6 above, this increase, if approved, would initially cost an estimated $127 million. ♦ On October 1, 2002, the Board of Supervisors did approve a $200 monthly increase for those who retired before 1983. This action, according to the actuary, will increase the UAAL by an estimated $23.7 million. Response: Partially disagree, in that the CCCERA Board of Trustees prefunded the new$200 benefit from its Unrestricted Excess Reserve. Therefore, the new$200 benefit will have no direct impact on the UAAL. 8. The County's annual contribution to the CCCERA will increase irrespective of the benefits adopted by the Board of Supervisors on October 1, 2002. Actuarial and administrative costs are rising and excess earnings formerly used to offset COLA and benefits costs are uncertain. Response: Agree, with clarification. Subsequent to the Grand Jury's report on this matter, the excess surplus earnings balance has been exhausted. This drop in excess surplus earnings is primarily a result of dramatic losses in the equities market since January 2000. CONCLUSIONS 1. Under funded employee benefits threaten the County's financial stability. Response: Counties have not been financially stable since the passage of Proposition 13 in 1978. The concern of counties is with financial viability. The Board's task is to try to maintain a viable organization that can deliver needed services in the context of many competing pressures. That responsibility has driven the Board's decisions in the past, and will guide the Board in the future. Note, too, that the County was more impacted this year by actions of the State Legislature than by the Board's decision to remain competitive in the job market. More important, the County has been — and will continue to be — impacted even more severely by events in the stock market. 2. With the October 1, 2002 decision to approve benefit increases, the Board of Supervisors has approved agreements that increase the already severe underfunding of the retirement plan. This action has placed additional liabilities on the County and insures a serious drain on future County finances. Response: The County is involved in the business of providing services to the public. This is done overwhelmingly by people. It is imperative, as a result, that the County have the ability to attract, hire, and retain the highest qualified and most experienced people to place in positions of great trust and sensitivity. Taxpayers and citizens deserve no less and, in good conscience, the County cannot do otherwise. In the Board's judgment, it was necessary to grant the wage and benefit package in order to maintain the County's competitive position in the job market. The County's costs will increase as a result, and the Board will have to make strategic adjustments to accommodate the increased cost. The Board is in the process of doing so now. Under Funded Employee Benefits Threaten County Financial Stability February 2, 2003 County Response to Grand Jury Report No. 0301 Page 4 3. By approving these increases, the Board of Supervisors is spending money it does not have. It is adding to the horrendous amount of pension plan unfunded liabilities totaling more than $832 million without any idea of how to pay for it. Response: Every pension system that requires annual contributions is "under funded" in the sense that its liabilities exceed its on-hand assets. The reality is that an increasing number of pension funds around the state and country are carrying significant unfunded liability. The County's pension fund is not unique in that regard. Pension systems promise a benefit in the future that must be paid for in the present. One of the elements used to finance future benefits is contributions that are paid in accordance with a calculated contribution rate. When factors affecting the calculation of that rate change (e.g., the "actuarial assumptions'), the contribution rate is no longer accurate. When that happens, an "unfunded actuarial liability"is created. Adjusting the contribution rate can eliminate the unfunded actuarial liability. Increasing the contribution rate will result in increased costs both to the County and employees. County employees have been advised of the estimated impact to their monthly contributions. The County Administrator is working with County departments to identify budget strategies to accommodate increases in County contributions to the Retirement Fund. As long as the County is financially viable and can pay its contributions, there is nothing sinister or irresponsible about carrying an unfunded actuarial liability or other debt for that matter. 4. Because the Association did not adopt all of the actuary's recommendations in the experience study, the employees have been relieved of their 20% obligation for the unrecognized costs. The total obligation will shift to the County and member districts. This action will result in further increases to the UAAL. Response: Agree. Failure to recognize actuarial liabilities creates UAAL, which is a 1001 employer cost. This growth in the UAAL will result in an increased contribution rate for the County and other member employers 5. The total obligation of the County to the pension plan is almost equal to the annual budget of the County. Response: Agree, if projected UAAL is counted as a part of our total obligation. It should be noted that the pension plan obligation is amortized over many years while the annual County budget is a current spending plan. The County budget is balanced. As a result of a drop in excess earnings in the County's pension system, and the inability of the system to subsidize certain employer and employee rates beginning in January 2003, the County implemented$17 million in staffing and program reductions for the fiscal year 200212003 budget. The annual County budget includes sufficient appropriations to address its annual pension plan obligations. In anticipation that the excess earnings shortfall is ongoing in nature, the County is developing a budget reduction plan for its fiscal year 200312004 budget that will further reduce spending. It is important to recognize that the primary cause of the pension system shortfall is losses in the equities market. 6. Present and future taxpayers of Contra Costa County will have to pay for these pension obligations. How that will be done is unknown. It was not provided for in the October 1, 2002 action taken by the Board of Supervisors. This leaves a very serious problem for the citizens of the County. Response: Please reference the County's response to Conclusion No. 3. Under Funded Employee Benefits Threaten County Financial Stability February 2, 2003 County Response to Grand Jury Report No. 0301 Page 5 RECOMMENDATIONS The 2002-2003 Grand Jury makes the following recommendations to the County Board of Supervisors: 1. Neither approve nor adopt any new pension benefit improvements that would require additional funding or add further to the retirement plan indebtedness. Response: Will not be implemented, because it is not warranted. Pension system analysis requires a thorough understanding not only of pension system funding concepts and jargon, but also of public sector recruitment, hiring and retention issues and practices; legal issues regarding labor relations and court cases affecting pension benefits; the history and implications of various legislative enactments as they affect counties generally and Contra Costa County specifically; the broad array of County program responsibilities and funding sources, and the history of local, State, and federal actions that affect expenditures, revenues, and funding strategies, among other things. These are the kinds of issues elected county supervisors and appointed administrators must deal with on a weekly basis. These issues form the context within which individual decisions and policies are formulated. The Board of Supervisors cannot be expected to adopt the recommended policy because decisions regarding pension benefits must be considered on a case-by-case basis in the context of all related factors. The County Administrator has, however, retained the services of a pension system expert to act on a contractual basis as a member of his management team on pension system issues and strategies, and to advise the Board of Supervisors regarding these matters. 2. Develop a plan of action, with schedules and checkpoints, to immediately reduce the unfunded liability of the County's retirement plan. Response: Will not be implemented because it is not within the Board of Supervisors' discretion. It is the responsibility of the Retirement Board to manage the unfunded liability of the Retirement Fund. The County will, however, analyze financing options to save taxpayer dollars. In recognition of increased employer contribution rates that will result from accumulated earnings shortfalls and recent benefit increases, the County will analyze the merits of issuing Pension Obligation Bonds (POBs) to eliminate the UAAL, and potentially reduce the overall cost of the County's pension plan. In addition, note that given the opportunity presented by the term expirations for two Board of Supervisors appointees to the Retirement Board, the Board of Supervisors appointed new trustees to both seats. One replacement appointee is an investment market expert; the other is a member of the Board of Supervisors. These changes are anticipated to improve the level of communication between the Retirement Board and the County regarding issues of mutual concern. 3. Apply any excess earnings either to reserves to offset market losses or to pay down the unfunded liabilities of the plan. They should not be used to offset County and employee contributions to the plan. Response: Will not be implemented because it is not within the Board of Supervisors' discretion. Decisions concerning the expenditure of excess Retirement Fund earnings are properly within the discretion of the Retirement Board. Having said that, the County Under Funded Employee Benefits Threaten County Financial Stability February 2, 2003 County Response to Grand Jury Report No. 0301 Page 6 will seek to persuade the Retirement Board to act in a manner consistent with this recommendation. 4. Recommend to their appointed CCCERA trustees that the Association reconsider and adopt the three unadopted actuarial assumptions as set forth in finding number 1, to more adequately track and appropriately fund the URAL. Response; Requires further analysis. The Board of Supervisors will consider recommendations regarding this matter within 180 days. COMMENTS The Grand Jury should be commended for its effort to protect the public's and the County's interests. In taking on an evaluation of the local pension system, it has selected for itself a task that is both multifaceted and complex. The Board of Supervisors is appreciative of the Grand Jury's concerns. The Board of Supervisors is very concerned about the status of the County pension system, and understands the implications of pension system liabilities on the County's fiscal circumstances. The Board has made a number of strategic decisions in the last year to enhance its ability to protect the interests of taxpayers with regard to pension system issues, while acting responsibly to attract and maintain a workforce that will serve the needs of Contra Costa residents.