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TO: BOARD OF SUPERVISORS �� ;• COSTA
3+ICOUNTYs
FROM: John Sweeten, County Administrator .
BATE: Jane 22, 2004
SUBJECT: Grand Jury Report No. 0409 — Budget Woes and Layoffs:
The Contribution of Pension Improvements
SPECIFIC REQUEST(S) OR RECOMMENDATION(S) & BACKGROUND AND JUSTIFICATION
RECOMMENDATIO!i S):
RECEIVE the Grand Jury Report No. 0409 entitled "Budget Woes and Layoffs: The Contribution
of Pension Improvements" and REFER it to the County Administrator's Office for response.
CONTINUED ON ATTACHMENT: YES SIGNATURE:
RECOMMENDATION OF COUNTY ADMINISTRATOR—RECOMMENDATION OF BOARD COMMITTEE—APPROVE®OTHER
SIGNATURE(S):
ACTION OF BOARD ON t APPROVED AS RECOMMENDS OTHER
VOTE OF SUPERVISORS
I HEREBY CERTIFY THAT THIS IS A
UNANIMOUS{ABSENT ) TRUE AND CORRECT COPY OF AN
AYES: NOES: ACTION TAKEN AND ENTERED
ABSENT: ABSTAIN: ON MINUTES OF THE BOARD OF
SUPERVISORS ON THE DATE SHOWN.
Contact:Jule Enea,Sr.Deputy CAO
ATTESTED_
JOHN SW ETEN,CLERK bF
THE BOARD OF SUPERVISORS
C C: CAO AND COUNTY ADMINISTRATOR
By DEPUTY
Court t1ra Jury r P .BOh912
Awk uosta Ma;yt nee,CA 945 a3-0091
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June 10, 2004 ` s,1 � N ;
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Board of Supervisors
651 Pine Street
........... .
Martinez, CA 94553
Bear Board of Supervisors;
Attached is a copy of Grand Jury Report No. 0409, `Budget Woes and Layoffs: The
Contribution of Pension Improvements"prepared by the 2003-2004 Contra Costa County Grand
Jury.
In accordance with California Penal Code Section 933.05, this report is being provided to you at
least two working days before it is released publicly.
Section 933.5(x) of the California Government Code requires that (the responding person or
,,nt;ty shall report one of the following actions) in respect to each finding:
i) "The respondent agrees with the finding."
(2) "The respondent disagrees with the finding."
(3) "The respondent partially disagrees with the finding."
1n the cases of both(2) and (3) above, the respondent shall specify the portion of the finding that
is disputed, and shall include an explanation of the reasons therefor.
In addition, Section 933.05(b) requires that the respondent reply to each recommendation by
stating one of the following actions;
The recommendation has been implemented, with a summary describing the implemented
action.
2. The recommendation has not yet been implemented, but will be implemented in the
future, with a time frame for implementation.
3. The recommendation requires further analysis. This response should explain the scope
and parameters of the analysis or study, and a time frame for the matter to be prepared for
discussion. This time frame shall not exceed six months from the date of the publication
of the Grand Jury Report.
Board of Supervisors
June 10, 2004
Page 2
4o The recommendation will not be implemented because it is not warranted or is not
reasonable, with an explanation thereof.
Please be reminded that Section 933.05 specifies that no officer, agency, department or
governing body of a public agency shall disclose any contents of the report prior to its public
release. Please insure that your response to the above noted Grand Jury report includes the
mandated items. We will expect your response, using the form described by the quoted
Government Code, no later than September 8, 2004.
Sincerely,
A. W. Ronat, Foreman
2003-2004 Contra Costa County Civil Grand Jury
cc: John Sweeten, County Administrator
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A REPORT BY
THE 2003-04 CONTRA COSTA COUTN Y GRAND JURY
725 Court Street
Martinez, California 94553
Report No. 0409
"BUDGET WOES AND LAYOFFS: THE CONTRIBUTIONS OF PENSION IMPROVEMENTS"
APPROVED BY THE GRAND JURY:
Date. G
ARTHUR.W. RONAT
GRAND JURY FOREMAN
ACCEP'T'ED FOR AILING:
RICHARD S. FLIER.
JUDGE OF THE SUPERIORCOURT
CONTRA COSTA COUNTY GRAND JURY REPORT NO. 0409
Budget goes and Layoffs: The Contributions of Pension Improvements
To: Contra Costa County Board of Supervisors .
BACKGROUND
The Centra Costa County Employees Retirement Association(CCCERA) is a cost-sharing
multiple-employer defined benefits pension plan governed by the County Employee Retirement
Law of 1937. While CCCERA also includes employees of several special districts within the
county,this report considers Contra Costa County(County) employees only. When this report
uses the ward "employer"it means Contra Costa County.
The retirement plan is administered by a nine-member board (CCCERA Board)consisting of
four members elected by retirees and active employees and four members appointed by the
County Board of Supervisors (BUS). The County Treasurer-Tax Collector, an elected official, is
also a board member.
The total cast of the employee retirement plan is covered by employer contributions, employee
contributions and CCCERA investment earnings. A shortfall in any of these items must be made
up by the County, and ultimately,the taxpayer.
Grand Jury report No. 0301 issued in November 2002 warned that pension benefit increases
adopted in 2002 threatened future County financial stability. This topic is now addressed by the
2003-04 Grand Jury to show the county retirement costs while the BUS and County managers
mull over service cuts and employee layoffs.
FINDINGS
I. The County's retirement plan provides for pensions based on an employee's age
at retirement, years of service and highest one year's compensation. While age
and years of service are relatively straightforward concepts, `compensation"
creates certain problems because it is more than basic salary and, in fact, is likely
to include adjustments to increase the employee's final year's income. The
County uses the term"Retirement Base", which includes normal salary plus other
pay determined by CCCERA to be included in retirement calculations.
2. Ideally,pension casts would be paid during employees' working years so that
money paid into the pension system,,plus investment income, is available in the
future to pay pensions which begin at retirement and continue until ended by
death. The County annually budgets for and pays a share of the estimated costs to
keep the pension plan financially sound. There are several components to these
annual costs:
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a. The first component of the annual cost is the amount paid on account of the
"employers standard rate", which is determined by CCCI;RA's a.ctzaary. This rate
is derived from a prediction of how much should be paid now to fund the future
expense for the pensions of current employees. Currently this component acids
approximately 19 percent to the County's salary cast for non-safety employees
and 35 percent for safety employees.
b. The second component of annual cost is an amount due CCCERA because the
County has agreed to pay a part of the employees' contributions(called
"subvention"). CCCERA is required by pension law to calculate a rate for
employees. However, negotiated labor agreements compel the county to pay
approximately 50%of the retirement contributions otherwise payable by County
employees. For non-safety employees this subvention casts the County 2.4/0 of
salary costs. For safety employees the County's subvention cast is 3.7%. (Only
safety employees have agreed to pay a new additional 9 percentof wages,but that
total is reached after a series of.2.25 %steps over the contract period. The
County's agreement to pay the 50%covers only the basic rates; it has not agreed
to pay 50%of the new additional rate).
C. The third component of the county's annual pension cost is the amount required
to cover past and current shortages. Such shortfalls are determined by the
CCCERA actuaries and are called an Unfunded Actuarial Accrued Liability
(UAAL). A UAAL is created when the benefits expected to be due and paid by
the retirement fund are less than the value of the assets expected to be available.
Cance a URAL is created, the entire amount is the County's obligation to
CCCERA. Employees have no obligation to contribute to reduce a UAAL.
CCCERA permits the amount of a UAAL to be amortized and paid, with interest,
over twenty years.
3. The County has in the past elected to pay off UAALs by issuing pension
obligation bonds. In April 2003, for example,the county sold $322.7 million of
pension obligation bonds and paid the proceeds to CCCERA to pay off its UAAL.
This substituted one debt(bonds) for another(UAAL),with the county obtaining
a more favorable interest rate by issuing the bands. Annual debt service on
pension obligation bonds is another direct pension cost to the county.
4. Can October 1, 2002, the County granted significantly increased retirement
benefits to all County employees, safety and.non-safety. Safety employees
(generally Sheriff's Deputies and other law enforcement personnel)become
eligible to retire at 3%of salary per year of service at 50 years of age. Previously,
the standard was 2% at 55 years of age. The jump from 2%to 3% created a 50%
increase in retirement benefits,and since the age reduction encourages earlier
retirement,pensions will be payable over a longer period. Non-safety
employees,now receive the 2%retirement benefit at an earlier age, 55 years,
instead of the 60 years which was the previous standard.
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5. All of these benefit increases and retirement age reductions were retroactive for
current employees. Any eligible employee could retire immediately with the new
increased bene fits before paying any increased pension contributions. The costs
of retroactive increases are borne by the county.
6. Between October 1, 2002 and October 1, 2403, 286 County employees retired and
received enhanced benefits. Approximately 22% of the new retirees had been
safety employees. The retroactive costs became part of the enhanced benefits
UAAL. (CCCERA did transfer$100 million from its Unrestricted Reserve to be
applied against the UAAL, and the County received the benefit of a substantial
part of the transfer. See Finding 11).
7. The County's obligations to CCCERA are paid from the same sources as the
direct wages of employees. Almost half of the county's employees wages and
benefits are paid by allocations from state or federal government grants or from
county enterprise funds, while the remaining wages and benefits are paid from the
county's general fund. (Enterprise funds are the operating funds of a government
operation that is expected to be profitable or self-supporting). Obligations to
CCCERA must be paid from the general fund in the event that government grants
terminate, enterprise funds are reduced or allocations are insufficient.
8. Total retirement expense for the County as a percentage of the adopted General
Fund,Budget has risen dramatically.
Total Retirement Per Cent of
Expense General Fund
1994-1995 Total Retirement $37.8 million 5.60%
1998-1999 <` $54.8 million 7.38%
2001-2002 `` $69.6 million 6.72%
2003-2004 Budgeted $142.6 million 9.43%
2444-2005 Preliminary Estimate $143.4 million not available
This 2003-04 Budgeted figure includes a one-time $20 million offset, resulting
from the 2003 sale of pension obligation bonds. Otherwise 2003-2004 total
retirement expenses would be $122.5 million or 11.27%of the General Fund.
9. CCCERA uses a method called five-year smoothing to take investment gains and
losses into income. High income was realized during the rising stock market
which ended in 1999. Five year smoothing caused the retirement system to show
gains in its investment returns during the 2000-2002 down market, despite the
actual investment losses during time period. Such gains were reflected in its
Unrestricted Reserve.
10. CCCERA also maintains a Market Stabilization Account, which represents the
deferred return developed by smoothing realized and unrealized losses and gains
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(using five year smoothing)but smoothing only the deviations from total market
return from the return target adapted by CCCERA's Board. The target return
during 2002 was 8.5%. Market lasses over the dawn market period caused the
following negative balances in the Market Stabilization Account:
Date Balance
12/31/01 ($385,448,325)
6/30/02 ($568,385,973)
11. CCCERA's Unrestricted Reserve on 12/31/01 showed a positive balance of
$404.6 million. The lasses in the Market Stabilization Account',however, showed
that the apparent surplus in the Unrestricted Reserve was illusory. Nevertheless,
$100 million was transferred by the CCCERA Board from its Unrestricted
Reserve in 2002 to reduce the UAAL. (See Finding 6). The Unrestricted Reserve
is no longer available to "bail out"the County as County retirement costs rise in
the immediate future.
12. As of January 1, 2002, the County's total outstanding liability for past pension
costs was over$832 million.. As of October 31, 2003, this had increased to over
$1.263 billion as follows:
Pension Obligation Bonds $587,200,000
LJAAL Liability as of 12-31-02 176,800,000
Paulson Liability(See Finding 14). 24,800,000
Market Stabilization Account(?VISA) Lasses
As of 6-30--03 410,200,000
Actuarial recommended assumptions not
Adopted in 2001 (See Finding 13 b and c.) 64,200.000
Total $1,263,000,000
13. Any UAAL is not paid for proportionately by employers and employees. (See
Finding 2.c.). It is the sole responsibility of the County and therefore; the
taxpayers. The UAAL generally continued to increase every year since 2001, due
to:
a. The BOS approved retroactive enhanced pension benefits.
b. The CCCERA Board selected overly optimistic rates of investment return against
its actuary's recommendation.
C, The CCCERA Beard refused to adopt their actuary's recommendations
concerning employee morbidity and employee marriage benefits.
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All of the above caused the employees' and employer's contributions to be
underestimated. The employer alone must make up for the cost of the shortfall as
part of the UAAL.
14. In February 2004, the CCCERA Board again refused to follow its actuary's
recommendation concerning assumed rate of return on investment. In the near
future CCCERA's actuary will issue a new report and recommendations, on the
non-economic assumptions, including morbidity and marriage,benefits.
15. As stated in Finding No. 1, a retiree's pension under the 1937 Retirement Law is
based on three factors; age, years of service and final compensation. A 1997
California Supreme Court decision in the Ventura case included various types of
payments in salary computations to establish"final compensation"for pension
purposes. The Paulson case was brought by retired County employees to obtain,
essentially, the same treatment. The Paulson litigation was settled and the
settlement binds the County.
a. The most recent listing of county pay items lists some 69 separate items which are
included in compensation to implement Ventura and Paulson The vast majority of
the types of pay included are specialized in nature and take into account particular
skills or qualifications of employees. Following are examples of types of
remuneration included.in final compensation since the Ventura/Paulson cases:
Merit pay, longevity pay, standby pay, bilingual pay,holiday pay, educational
incentive pay and uniform allowance.
b. Certain types of monetary remuneration are not included in compensation.
Reimbursements for job-related expenses and overtime compensation(for work in
excess of what is normal work tune) are examples of such payments. Generally,
the cash value of common fringe benefits such as employer paid health insurance
and retirement contributions is not included in compensation for pension
calculations.
16. Cash received by some management employees(both non-union and union
members) in exchange for certain benefits (called a sell-back)during the final
twelve months of employment may be used to "spike"the final year's
compensation. A sell-back of accumulated vacation is an example.
a. Some managers, are permitted to sell-back unused vacation(within certain
limits). Ventura/Paulson merely requires that amounts received for a sell-hack be
included in final compensation. Agreeing to allow employees to sell back the
vacation is a concession made by the county. Without that concession;the
spiking could not occur.
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b. Managers who have unused vacation can spike their final year compensation by
selling back the maximum permitted at the end of the calendar year preceding
retirement and another maximum amount in the next calendar year. By retiring
before twelve months passes after the first sale,bath sale amounts are included in
compensation for retirement purposes.
C. Hypothetically, a Manager with long tenure and many hours of unused vacation
can spike his or her final compensation and pension by almost 20%by calculated
use of this vacation.
17. 4f the 50 highest paid county employees who retired in the year following
October 1, 2002, 30 spiked their final compensation for retirement by selling-back
unused accrued vacation. Twenty-six of these 30 sold back vacation in two
calendar years but within a year of retirement.
18. No changes were made in 2002 to the County's rules on vacation sell-back to
reduce the impact of rules which permit salary augmentation.
19. Assembly Bill 55, enacted in 2003,provides for purchase of additional service
credit(called"air time"). This benefit is not available unless the BCS authorizes
it,which it has not clone. If authorized, employees could elect to purchase up to
five years of service credit(to add to their years of actual employment)to add to
their retirement. Since the employees pay the additional contributions (usually at
or about the time of retirement) "air time"is claimed to be a"cost neutral"
benefit. "Air time"would not be cost neutral if any subsequent increase in
retirement benefits is approved by either the BOS or the CCCERA.Board.
20. Senate Bill 274, enacted in 2003, authorized an optional benefit called"DROP"
(Deferred Retirement Option Program) for specified safety members. "DROP"
permits an employee who is eligible to retire to keep working at,normal pay,but
without any increase in pension benefits. The pension find treats the employee as
if retired and sends monthly retirement checks to an escrow account. When the
employee does retire, a lump sum is paid from the escrow account and the retiree
starts receiving monthly pension checks. The BOS has not elected to adopt this
benefit. Although this benefit may appear to be cost neutral at the time of
retirement, it would not be cast neutral if any subsequent increase in retirement
benefits is approved.
21. A defined contribution pension plan is an alternative to a defined benefits plan.
Linder a defined contribution plan the employer agrees to wake a fixed or
determinable contribution, which may change over time. Contributed funds are
invested, as in a defined benefits plan, but investment risk is borne by the
employees who are members of the pension plan. The employer has no risk
equivalent to the risk of being subject to a future DAAL.
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ADDITIONAL B ACKGROLUSM
In the weeks preceding the 2002 IROS action to adopt the increased pension benefits, and at
varices times in the year and one-half since their adoption, interested parties have informed the
public of reasons believed to justify these increases. The public should be aware of certain facts
and consider facts in light of several of the reasons asserted by advocates for improved benefits.
Consider the following:
a. Reason asserted: The benefits are necessary to recruit employees.
Facts: This reason is heard most often in discussions of safety employees
(primarily deputy sheriffs). There were numerous applicants for deputy positions
and the percentage of applicants who were hired remained relatively constant. The
following statistics showing applicants for and hiring of deputies by the Sheriff's
Office are noteworthy:
Applicants Hirees %hired
2001 New recruits 929 36 3.8
(No previous experience)
Lateral applicants 310 26 8.3
(from other law agencies)
2002 New recruits 1953 85 4.4
Lateral applicants 269 29 10..8
2003 New Recruits 968 31 3.2
Lateral applicants 95 9 9.5
b. Reason asserted; .Employees are payingfor the improved benefits themselves,
through payroll deductions.
Facts: Only Deputy Sheriffs and other safety employees have agreed to a new
deduction for increased retirement benefits. This deduction began as 2.25% of
wages,but increases cumulatively each year. See Finding 2.b. Although this new
retirement deduction is not subject to the 50% share provision, the County in
effect is paying for the employees' share because raises totaling 21%were
granted to safety employees over the five year MOLT. The raises of 2 1% fully
offset the 9% increase in retirement deductions. Raises for non-safety employees
were not as high as those granted to safety employees.
C. Reason asserted: Doom and gloom predictions of the adverse impact of the
improved retirement benefits will be shown to be without merit once the stock ,
market rebounds and CCC'ERA's investment results improve.
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Facts: CCCERA uses a five year smoothing method to reduce the impact of
changes (whether favorable or unfavorable)in investment performance. (See
Findings 9 and 10). Although 2003 saw substantial investment profits, the losses
which ended in about 2002 will still be included in overall investment results for
several years, ?Moreover,the economic slump and bear market caused such
substantial lasses(in earnings and in CCCERA's portfolio)that the County's
consulting actuary forecasts that 18%returns for the next five years will be
required to bring back the fund to its earlier financial position.
CONCLUSIONS
SIONS
As retirement costs continue to increase as a percentage of the General Fund, critical services,
such as infrastructure repair, law enforcement, social welfare and health, will be reduced. Many
of these reductions will fall upon those that can least afford to lase these services..
RECONMIENDATION
The 2003-04 Contra Costa County Grand Jury recommends that:
1. The BCS promptly close the existing defined benefits retirement plan to all new
non-union employees and adopt a defined contributions plan for nonunion
employees hired after the new plan is adopted.
2. The BOS target pension provisions in labor agreements as they expire and
negotiate changes to replace the defined benefits retirement plan with a defined
contributions plan for all union employees hired after the effective dates of the
changes in the labor agreements.
3. The BOS review, at the earliest practicable time, all pay provisions and other
arrangements which can be used by an employee to spire final compensation at
retirement. Following the review, the BOS eliminate those pay provisions and
arrangements(e.g., vacation sell-back)which exceed the requirements of the
County Employee Retirement Law of 1937 and Ventura/Paulson.
4. The BOS enact the planned changes of recommendation 3 for nonunion
employees without delay and target the planned changes for labor agreements in
the next negotiating cycles.
�. BOS not approve any pension benefit changes which would require additional
funding from the County.
6. BOS not approve any pension benefit changes which are supposed to be cost
neutral (such as provided by AB 55 and SB 274)unless CCCERA's actuary
certifies that there is cost neutrality bath at the time of adoption and in the future
under any foreseeable circumstances.
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