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HomeMy WebLinkAboutMINUTES - 06062006 - C.83 TO: BOARD OF SUPERVISORS '=6 L=°' Contra l CostaFROM: JOHN CULLEN, County Administrator ,•, 1141• DATE: MAY 26, 2006 County SUBJECT: RECEIVE GRAND JURY REPORT NO. 0606 CONCERNING RETIREE HEALTH CARE COSTS SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION RECOMMENDATION RECEIVE Grand Jury Report No. 0606 entitled "County Ignores Retiree Health Costs: The Financial Tidal Wave", and refer it to the County Administrator and Auditor-Controller for response. BACKGROUND Penal Code section 933 provides for final grand jury reports at any time during the grand jury's term and requires the governing body of any agency whose operations are the subject of a report to comment on the grand jury's findings and recommendations to the presiding judge of the superior court within 90 days from the date the governing body receives the report. Report No. 0606 was received on May 26, 2006 and requires a response by the Board no later than August 25, 2006. It is recommended that the Board refer the report to the County Administrator and the Auditor-Controller for preparation of a draft response to be returned to the Board for adoption. CONTINUED ON ATTACHMENT: C3'YES SIGNATURE: 01ECOMMENDATION OF COUNTY ADMINISTRATOR ❑ RECOM ATION OF BOARD COMMITTEE ©ROVE OTHER SIGNATURE(S): ACTION OF B ON ©t O APPROVED AS RECOMMENDED 4,OTHER ❑ VOTE OF SUPERVISORS: I HEREBY CERTIFY THAT THIS IS A TRUE AND CORRECT COPY OF AN ACTION TAKEN AND UNANIMOUS(ABSENT ► ENTERED ON THE MINUTES OF THE BOARD OF -� SUPERVISORS ON THE DATE SHOWN. AYES: NOES: ABSENT: ABSTAIN: ATTESTED: JUNE 6, 2006 Contact: JULIE ENEA (925)335-1077 JOHN CULLEN,CLERK OF THE BOARD OF SUPERVISORS AND COUNTY ADMINISTRATOR cc: COUNTY ADMINISTRATOR(ENEA) AUDITOR-CONTROLLER ' By: u . Grand Jury Contra 725 Court Street P.O. Box 911 Costa Martinez, CA 94553-0091 County ,, . '�,``-� .. FCONTRACOSTA CEIVED .�. Y 2 5 2006 ARD OF SUPERVISORS May 25, 2006 ' C'(1UN�Y CO. Contra Costa County Board of Supervisors Attn: John Gioia, Chairperson 651 Pine Street Martinez, CA 94553 Dear Supervisor Gioia: Attached is a copy of Grand Jury Report No. 0606, "County Ignores Retiree Health Costs" prepared by the 2005-2006 Contra Costa County Grand-Jury. Section 933.05 of the California Government Code requires that the responding person or entity shall respond to each finding and each recommendation in the report. The attached summary describes the required responses. 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 933.05 also 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. In addition to the written response, email an electronic version of the response to agard@contracosta.courts.ca.us. We will expect your response no later.than August 25, 2006. Sincerity, /obert nn dy Foreperson, 05-2006 Contra Costa County Grand Jury cc: John Cullen, County Administrator REQUIRED RESPONSES TO A GRAND JURY,REPORT Findings Section 933.05(a) of the California Government Code requires that.the responding person or entity shall report one of the following actions in respect to each finding: 1.- The respondent agrees with the finding. 2. The respondent disagrees with the finding. The respondent shall specify the portion of the finding that is disputed, and shall include an explanation of the reasons therefore. 3. The respondent partially disagrees with the finding. The respondent shall specify the portion of the finding that is disputed, and shall include an explanation of the.reasons therefore. Recommendations Section 933.05(b)requires that the respondent reply to each recommendation by stating one of the following actions: 1. 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. 4. The recommendation will not be implemented because it is not warranted or is not reasonable, with an explanation thereof. A REPORT BY THE 2005-2006 CONTRA COSTA COUNTY GRAND JURY 725 Court Street Martinez, California 94553 REPORT 0606 COUNTY IGNORES RETIREE HEALTH COSTS The Financial Title Wave MAY 25, 2006 APPROVED BY THE GRAND JURY: Date: 1.6 Irk / ROIfERT W. NNEDY GRAND JURY FOREPERSON ACCEPTED FOR FILING: Date: TERENCE L. BRUINIERS JUDGE OF THE SUPERIOR COURT Grand Jury �- ---------- Contra 725 Court Street P.O. Box 911 _ Costa Martinez,CA 94553-0091 (v=OJta } -- -------- County-----i- County Contact: Robert Kennedy Foreperson (925) 646-2345 For Immediate Release: COUNTY IGNORES RETIREE HEALTH COSTS The Financial Title Wave Summary By ignoring approximately $98 million of the costs of retiree health benefits, the Board of Supervisors adopted a"balanced" budget for fiscal year 2006-2007. Governmental accounting rules permit Contra Costa County and other public employers to expense the cost of retiree health benefits when they are paid ($32 million in 2006-2007) rather than when they are earned (($130 million in 2006-2007). Due to a change in accounting standards, by 2007-2008 the County will have to disclose in its financial statements the unfunded liability for retiree health benefits earned over past years, estimated at between $1.4 and $2.6 billion. Although varying interest rate, health cost, and other key assumptions may produce a wide range of estimates, the cost issues are daunting with any set of reasonable assumptions. The Grand Jury recommends that the Board of Supervisors stop deferring these costs to the future and place the.highest priority on developing strategies to address retiree health costs. The complete report is available on the Grand Jury web site: www.cc-courts.org/grandjury. CONTRA COSTA COUNTY GRAND JURY REPORT 0606 COUNTY IGNORES RETIREE HEALTH COSTS The Financial Title Wave TO: Contra Costa County Board of Supervisors BACKGROUND For employers like Contra Costa County ("County"), which provide health insurance for their active and retired employees and pay most of the cost, managing retiree health costs presents a major financial challenge. For many years,health care costs, for both employees and retirees, have increased at a rate significantly faster than the general inflation rate. Furthermore, the number of retirees is growing—employees'are retiring sooner and/or living longer, and the large "baby boom" generation has begun to retire. This is not just an accounting issue. The cost of retiree health care is escalating rapidly. Funding these costs will result in a significant decrease in funds available for County services— far more than the $20 million that the County had to cut to"balance" the 2006-2007 budget FINDINGS Retiree Health Costs 1. The County provides health insurance for active and retired employees and pays most of the cost, generally ranging between 80% and 98%of the total cost, depending on the insurance plan selected. 2. The County pays the same percentage of the cost for retirees as for active employees. 3. Five years of service qualifies an employee for retiree health benefits. 4. Between fiscal year 2001-2002 and the budget for fiscal year 2006-2007, the cost for retiree health insurance doubled—from $16 million to $32 million. 5. Like many other public employers, the County expenses the cost of retiree health benefits over the employee's retirement when they are paid ("pay-as-you-go"), rather than over the employee's service when they are earned ("accrual basis"). MAY 25,2006 CONTRA COSTA COUNTY GRAND JURY PAGE 2 REPORT 0606 COUNTY IGNORES RETIREE HEALTH COSTS 6. The Governmental Accounting Standards Board ("GASB") establishes standards for financial accounting and reporting for state and local governments. 7. The County has elected to follow all GASB pronouncements. 8. GASB 45, "Accounting and Financial Reporting by Employers for Post-employment Benefits Other than Pensions"("GASB 45")provides an accounting standard that is analogous to the pension accounting standard and will result in a calculation and disclosure of an unfunded liability for retiree health similar to the one for pensions. 9. GASB 45 requires, no later than fiscal year 2007-2008, that the County: a. Disclose the unfunded liability for health benefits (and other post-employment benefits other than pensions)that have been earned by all active employees and retirees. b. To the extent they are funded, increase its annual health care cost to include the normal cost of benefits as they are earned, plus.an amount that amortizes the unfunded liability. c. Disclose the funding policy and status. 10. Although there is no current requirement to fund any of the unfunded liability, a directive requiring funding could be issued in the future or credit rating agencies could, in effect, require partial or full funding by their credit.rating actions and practices. 11. An independent actuarial firm has recently completed an actuarial analysis as of January 1, 2006, for the County, including Fire Districts, under two discount assumptions: (1) 4.5%, which relates to the current pay-as-you-go method and (2) 7.9%, which would reflect a fully funded plan. These estimates are based on GASB 45 and are summarized below. Contra Costa County Retiree Health Costs (in millions) ..::tom:'s9:,:t.. iE'^.•`ro ..�.... •.s•: ;, ,,; . �`:.���;x��np:ua�,�,+• :ens;e�:.•m,•-':.,:¢:...., �:. S .=Discount,..: _� .. ' dun ed.,::�r::����� n . ��k _ :.,;•: :•' _� . := �. ::•�. .�..� ,�: .a5��. .. -.�: �a`1Eiili{,"ms's:: �" bio" "4:•-::�.,u � ' R :rb a ...i,a..•... �.,-..Sf.r..,......,.._.�.a ......_...a......__ccG^nL�•.�:..i::•�� .i=t�z{;<�- ..fii 4.5% $2,561 $85 $130 $215 7.9% 1,420 47 55 102 Discount Rate: The interest rate used in developing present values to reflect the time value of money. MAY 25,2006 CONTRA COSTA COUNTY GRAND JURY PAGE 3 REPORT 0606 COUNTY IGNORES RETIREE HEALTH COSTS Unfunded Liability: The present value of benefits attributed to employee service as of January 1, 2006, less any assets held for the plan. Currently there are no assets held for the plan. Liability Amortization: Principal portion of the Unfunded Liability, assuming a 30- year amortization period, to be amortized each year. Normal Cost: The portion of the retiree health costs attributed to employee service for 2006. Required Contribution: The Normal Cost plus the Liability Amortization for the year. 12. The costs of retiree health benefits are offset to the extent they are reimbursed by the State and Federal Governments; however, there is uncertainty regarding the treatment of pre-funded amounts in determining these expense reimbursements. Chronology 13. GASB 45 was issued in June 2004. 14. In September 2005, County staff received a preliminary estimate of the County's unfunded liability and annual expense under GASB 45. 15. At the February 28, 2006 Board of Supervisors' (`BOS")meeting, a very brief presentation of the preliminary estimate was made and an independent actuary was retained to perform a full retiree health actuarial valuation for the County, consistent with GASB 45. 16. At the May 2, 2006 BOS meeting, to achieve a balanced budget for fiscal year 2006- 2007 (which included retiree health costs on a pay- as-you-go basis) the BOS approved a reduction of 200 staff positions. 17. At the May 4, 2006 meeting of the BOS Finance Committee, the Committee discussed the valuation authorized on February 28, 2006, and directed County staff and the actuary to: • Analyze alternative changes to healthcare benefits. • Analyze alternative funding approaches. • Investigate unresolved issues including State and Federal cost reimbursements. • Collaborate with the California State Association of Counties to seek information and solutions. No definitive action plan or timeline for these actions was established. MAY 25,2006 CONTRA COSTA COUNTY GRAND JURY PAGE 4 REPORT 0606 COUNTY IGNORES RETIREE HEALTH.COSTS CONCLUSIONS 1. The current pay-as-you-go method of measuring retiree health costs understates the County's costs by$98 million($32 million of pay-as-you-go costs compared with $130 million of normal cost) and violates a basic tenet of accounting that expenses should be recognized in the year they are incurred (like the County's pension accounting does). The result of pay-as-you-go accounting is to defer the burden of these costs to the future. 2. The BOS has been extremely slow to address retiree health issues, as demonstrated by its failure to request or receive any meaningful information on retiree health costs (as measured by GASB 45, which was issued in June 2004) until 2006—a prerequisite to developing effective strategies. 3. Although varying interest rate, health cost, and other key assumptions may produce a wide range of estimates, the cost issues are daunting with any set of reasonable assumptions. For example, if health costs increase faster than assumed in the actuary's estimate, the County's cost issues will be larger. 4. Balancing future budgets will be significantly more challenging than the recently approved budget for 2006-2007. When the normal costs of retiree health benefits are taken into account, substantially greater cuts in services will likely be required. 5. Until well-developed short-term and long-term strategies and action plans to address retiree health costs and benefits are in place, the issues needing resolution will continue to grow in size and complexity. RECOMMENDATIONS The 2005-2006 Contra Costa County Grand Jury recommends that the BOS do the following: 1. By July 31, 2006, establish a plan for addressing retiree health benefits and costs with timelines and responsibilities. 2. By September 30, 2006, review alternate approaches to: • Health benefits, including retiree eligibility requirements, co-pays, deductibles, and employee contribution level. • Funding amounts and timing. 3. By September 30, 2006, research the issues regarding State and Federal expense reimbursements of pre-funding retiree health benefits and the related dollar impact on current County programs. MAY 25,2006 CONTRA COSTA COUNTY GRAND JURY PAGE 5 REPORT 0606 COUNTY IGNORES RETIREE HEALTH COSTS 4. Within this calendar year, establish short-term and long-term cost reduction strategies addressing questions such as: • What approaches to cost containment are most appropriate? • Should the County's contribution for retirees continue to be the same percentage as for active employees? • Should a new tier for new employees be created with reduced retiree health benefits? 5. Within this calendar year, establish short-term and long-term funding strategies for retiree health costs. 6. Fund at least half of the normal cost for retiree health benefits in 2007-2008 to reduce the rate of increase in the unfunded liability. (Based on 2006-2007 estimates, this would roughly double the annual cost for retiree health—from $32 million to $65 million.) REQUIRED RESPONSES Findings: Contra Costa County Board of Supervisors: 1-17. Recommendations: Contra Costa County Board of Supervisors: 1-6. MAY 25,2006 CONTRA COSTA COUNTY GRAND JURY PAGE 6