HomeMy WebLinkAbout17 - Grand Jury ResponsesCITY OF
,= NEWPORT BEACH
n` City Council Staff Report
September 23, 2014
Agenda Item No. 17
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Dan Matusiewicz, Finance Director—(949) 644-3123,
dmatusiewicz@newportbeachca.gov
PREPARED BY: Dan Matusiewicz, Director
PHONE: (949) 644-3123
TITLE: Orange County Grand Jury Pension Report Responses
ABSTRACT:
On June 25, 2014, the Orange County Grand Jury released a report entitled "Orange County City Pension
Liabilities — Budget Transparency Critically Needed." The Grand Jury conducted interviews with experts
including senior staff from CalPERS and OCERS, Finance staff, and Human Resource staff from various
Orange County agencies. The report concluded with various findings and recommendations generally
calling for additional transparency in budgeting pension costs. Staff generally agreed with their
recommendations - but not all. In most cases, City processes already conform to Grand Jury
recommendations. The Grand Jury Report is attached as to this transmittal report, and includes City
responses and staffs previous position paper addressing the Grand Jury report and other questions we
have heard concerning pension liabilities. All Orange County cities are required to respond to each finding
and recommendation.
RECOMMENDATION:
Authorize the City Manager's issuance of the attached response to the Grand Jury regarding pensions and
pension transparency.
FUNDING REQUIREMENTS:
There are no funding requirements associated with this report.
DISCUSSION:
Recently the 2013-14 Grand Jury set out to investigate the ability of Orange County cities to address
unfunded liabilities associated with the CalPERS and OCERS pension plans, the predominant pension
plans of Orange County cities. The report states that based on a review of financial data publically
available from the CaIPERS/OCERS pension systems and city budgets, and reviews of city internal budget
and planning data with city finance managers; there were reasons to accept that OC cities are making
plans to pay down (amortize) these unfunded liabilities and will be able to do so.
The report notes that, "so long as OC cities meet their Annually Required Contributions (ARCs), the
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unfunded liabilities should approach zero. OC cities so far have been able to meet CalPERS' ARCs."
However, it was the conclusion of the Grand Jury that generally, published city budget data doesn't show
this with great clarity. They note that this assessment is not an indicator that cities would be unable to
address its unfunded liabilities, but rather the budget documents do not provide sufficient detail for the
public to make this determination.
Staff concurs that pension management is an important matter and that strategic decisions should be made
publicly and transparently. We also agree that there is always room for improved budget transparency.
However, recognizing that many pension matters are very complex, we do not believe that all pension
analysis can be practically encapsulated in a budget document. Oftentimes such analyses are better
suited for public meetings like the Finance Committee and City Council meetings, as well as community
newsletters and long range planning documents.
Please see the attached Grand Jury Report, City responses to the Grand Jury Report and staff's position
paper called "in Focus" for more information.
ENVIRONMENTAL REVIEW:
This activity has been determined to be statutorily exempt from the provisions of the California
Environmental Quality Act (CEQA) pursuant to Section 15262 (Feasibility and Planning Studies) of the
CEQA Guidelines. This statutory exemption applies to feasibility or planning studies for possible future
actions, which have not been approved, adopted or funded and that do not have a legally binding effect on
later activities.
NOTICING:
The agenda item has been noticed according to the Brown Act (72 hours in advance of the meeting at
which the City Council considers the item).
ATTACHMENTS:
Description
Attachment A - 2013-14 Grand Jury Report Orange County City Pension Liabilities
Attachment B - City Response to Grand Jury Report
Attachment C - Pension Liabilities In -Focus
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ATTACHMENT A
ORANGE COUNTY CITY PENSION
LIABILTIES
Budget Transparency Critically Needed
GRAND JURY 2013-2014
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Table of Contents
SUMMARY................................................................................................................................... 4
REASON FOR THE STUDY...................................................................................................... 6
BACKGROUND AND FACTS................................................................................................... 8
SomeKey Terms Defined....................................................................................................... 10
Overviews of CalPERS and OCERS.....................................................................................11
Pension Reform in California(PEPRA)................................................................................13
Unfunded liabilities of CalPERS and OCERS are both large and volatile ........................ 13
METHOD OF STUDY...............................................................................................................17
ANALYSIS..................................................................................................................................17
CalPERS Data on Unfunded Pension Liabilities of OC Cities ........................................... 17
PerCapita Assessment............................................................................................................ 19
Assessment of Unfunded Liabilities as a Percent of General Fund Revenues ................... 20
Calculating Unfunded Liabilities using Market Value instead of Actuarial Value of
Assets........................................................................................................................................ 21
GrandJury Interviews............................................................................................................ 23
Interviewswith CalPERS....................................................................................................... 24
Interviewwith OCERS........................................................................................................... 25
Interviews with City Human Resource Managers................................................................. 27
Interviews with City Finance Managers................................................................................ 28
Assessment of Budget Information Available Online.......................................................... 30
General budget information available online....................................................................... 31
Pension specific budget information available online.......................................................... 32
The impact of OC cities' outsourcing for public safety on transparency of budget
information — a tale of two cities........................................................................................... 32
Conclusions.............................................................................................................................. 35
FINDINGS................................................................................................................................... 35
RECOMMENDATIONS............................................................................................................ 36
REQUIRED RESPONSES......................................................................................................... 38
APPENDICES....
41
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ORANGE COUNTY CITY PENSION LIABILTIES
AppendixA — Acronyms......................................................................................................... 42
AppendixB — Glossary........................................................................................................... 43
Appendix C — A Brief Primer on Pensions........................................................................... 45
Pensions and their purpose................................................................................................... 45
Two major types of pension plans......................................................................................... 46
How pension benefits are specified....................................................................................... 47
How pension benefits (actuarial liabilities) for retired members are computed .................. 47
How pension (actuarial liabilities) for active members are computed ................................. 47
Actuarial Accrued Liability................................................................................................... 47
Actuarial Value of Assets....................................................................................................... 47
What it means to say a pension has unfunded liabilities....................................................... 47
2013-2014 Orange County Grand Jury Page 3
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ORANGE COUNTY CITY PENSION LIABILTIES
SUMMARY
Orange County (OC) cities rely almost entirely on two pension systems for their Public Safety
(fire and police) and "Miscellaneous" employees (basically everyone except fire or police), both
for their retirees and for current employees who will retire in the years ahead. Those two
pension systems are 1) the California Public Employees Retirement System (Ca1PERS) and 2)
the Orange County Employee Retirement System (OCERS) for cities which outsource their
police services to the Orange County Sheriffs Department (OCSD) and/or their fire services to
the Orange County Fire Authority (OCFA).
Current assets of both systems fall far short of what is needed to pay current and future retirees.
Ca1PERS at the state level had assets of $236.8 billion, liabilities of $340.4 billion, unfunded
liabilities of $103.6 billion and a funding ratio of 70% as of June 30, 2012'. OCERS had assets
of $9.5 billion, liabilities of $15.1 billion, unfunded liabilities of $5.7 billion and a funding ratio
of 63% as of December 31, 2012'.
The 2013-2014 Grand Jury investigated the ability of OC cities to recover from these unfunded
liabilities. Reviews of public financial data from the Ca1PERS/OCERS pension systems and city
budgets, and more importantly reviews of city internal budget and planning data with city
finance managers showed that there were reasons to accept that OC cities are making plans to
pay down (amortize) these unfunded liabilities and will be able to do so.
There are important actions being taken by cities which provide some assurance that OC cities'
optimism that they can recover from their unfunded pension obligations has some basis in
reality. Most important of these is that CalPERS and OCERS are committed to amortize their
unfunded pension liabilities over the next 20-30 years to zero via Annual Required Contributions
(ARCS) from the agencies they support. So long as OC cities meet their ARCs, the unfunded
liabilities should approach zero. OC cities so far have been able to meet CaIPERS' ARCS.
OC cities' relationships with OCERS are more complex, but cities have also been able so far to
pay for their outsourced fire/police services. Both the OCSD and the OCFA have their own
unfunded pension obligations with OCERS. However, so long as the amortization of
OCSD/OCFA unfunded liabilities is reflected in the costs of their services to the cities they
support, and so long as the cities can pay these costs, these unfunded OCERS liabilities will be
amortized as well.
In addition some cities have been successful in negotiating with their employee bargaining units
for their employees to carry a larger portion of the burden of pension costs and in some cases for
'Comprehensive Annual Financial Report, Fiscal Year Ended June 30, 2013, page 132, http://www.calpers.ca.aov/eip-docs/about/pubs/cafr-
2013.ml
' OCERS by the Numbers, 2012, page 26, http://www.occm.ora/pdf/Dublicationsfbrachures/bythmumben.v
2013-2014 Orange County Grand Jury Page 4
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ORANGE COUNTY CITY PENSION LIABILTIES
reduced benefits. This reduces the future overall costs of pensions and frees up funds that these
cities can apply to amortizing their unfunded liabilities. Some cities are also looking at
accelerating their amortization of unfunded pension liabilities.
Another long term factor in reducing unfunded pension liabilities is the Public Employees'
Pension Reform Act (PEPRA), which went into effect January 1, 2013. However, since the
reforms only affect employees hired after January, 2013, it will be many years before these
reforms will have an impact on unfunded liabilities.
Unfunded pension liabilities can be extremely volatile because they are driven by two
unpredictable elements:
1. Occasional extreme fluctuations in the market value of assets
2. Changes to key actuarial assumptions, and especially changes to assumed future rates of
return on investments
Hence, budgeting to reduce unfunded pension liabilities presents particular challenges for cities:
1. Pension catch up contributions typically comprise a significant percentage of projected
city General Fund expenditures
2. Projected annual contributions to catch up on unfunded liabilities are ramped up over
two to five years by Ca1PERS and OCERS. The impact of amortizing unfunded
liabilities is not completely revealed by looking only one year into the future, which is
typically as far as city budgets are projected
3. Unlike most planned city expenditures, there is essentially no way to reduce or defer
required pension contributions in future years
4. Projected unfunded pension liabilities are at risk of large changes year to year because
Annual Required Contributions are so dependent on the fluctuating market value of
assets and on key actuarial assumptions used in calculating the liabilities
Unfortunately, after examining a large sample of OC cities' budgets published online, the Grand
Jury found those budgets to be inadequate to establish any confidence that these cities are
addressing their unfunded pension liabilities. There are several reasons for this:
1. Cities typically do not show explicit line items for amortizing their unfunded pension
liabilities
2. Cities typically only show budget projections one year into the future
3. Cities that outsource fire and/or police services to Orange County Sheriffs Department
and/or Orange County Fire Authority typically provide minimal detail on planned future
expenditures for these services even as OCSD/OCFA deal with their own unfunded
pension liabilities with OCERS
2013-2014 Orange County Grand Jury Page S
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ORANGE COUNTY CITY PENSION LIABILTIES
It is extremely important to note the Grand Jury's assessment that a city's published budget data
is inadequate to establish confidence that a city will be able to address its unfunded pension
liabilities is not the same thing as an assessment that the city will be unable to address its
unfunded liabilities.
The 2013-2014 Grand Jury is very concerned that although cities have somewhat improved the
transparency of their budgets (partly in response to prior Grand Jury recommendations),
members of the public of Orange County cities will still find it difficult or impossible to
understand the current and changing impacts of unfunded pension liabilities on their city budget.
Of special concern to the Grand Jury is the lack of any traceability of OCERS OCSD/OCFA
unfunded pension liabilities to the budgets of cities which outsource to these agencies.
Given the potential impact of unfunded pension liabilities on Orange County cities and the
current lack of information visible to the public, the Grand Jury finds that it is critically urgent
that Orange County cities increase the transparency of this information. The Grand Jury believes
that a better informed public will more effectively engage with their political leadership to
address budget problems including the impact of large and volatile unfunded pension liabilities.
There is, of course, the added benefit that being required to show budget planning further into the
future and at a greater depth will require greater thoughtfulness on the part of cities in preparing
such budgets. The 2013-2014 Grand Jury also believes that a discussion of the critical
assumptions which form the basis in projecting out -year budgets and the associated risks
inherent in these assumptions is needed as part of any city's budget.
REASON FOR THE STUDY
Orange County cities are obligated to provide on-going pension benefits to retired employees
(and often to those employees' survivors) and to current employees who will retire sometime in
the future. These cities use two major pension systems to provide these pensions: the California
Public Employees' Retirement System (CalPERS) and the Orange County Employee Retirement
System (OCERS). Significant portions of these pension systems are unfunded.
Pensions for public employees are taking larger and larger percentages of OC City budgets both
for contributions to fund future pensions for current employees and to make up for insufficiently
funded pension obligations for retired employees. Cities are also dealing with their need to have
current employees contribute more toward their retirement. This report examines the size of OC
cities' unfunded pension liabilities for both their general/administrative/ technical personnel and
for their public safety personnel. It also examines metrics to help understand the relative
financial impacts of unfunded liabilities on OC cities.
2013-2014 Orange County Grand Jury Page 6
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ORANGE COUNTY CITY PENSION LIABILTIES
Media stories have raised major concerns that unfunded pension obligations are not only
growing, but are growing exponentially at all levels of government. Unfunded pension liabilities
with the Ca1PERS system have led two California cities to contemplate bankruptcy as a means of
dealing with the problem, although such drastic steps have been avoided so far.
The 2013-2014 Grand Jury is aware that there is a political element to any discussion of
unfunded pension liabilities. Unions may view the problem as being exaggerated as a means to
weaken the power of public employee unions and strip hard-won benefits and influence future
negotiations. Others are concerned with the affordability of pensions that many people describe
as "generous". The Public Employee Pension Reform Act (PEPRA) took effect in 2013 and is
designed to end practices and policies that permitted very high pension payments to some
retirees. No doubt some unfunded pension liabilities can be attributed to these practices, and it is
true that most current employees are not subject to these reforms because they apply only to
employees hired after January 1, 2013. However, the main contributors to current unfunded
liabilities are the result of the Great Recession and changing actuarial assumptions.
The focus of this report is forward looking. In whatever fashion OC cities got to their present
situation, the unfunded liabilities are real and must be dealt with. The objectives of this report are
to:
1. provide factual information about the extent of unfunded city pension obligations
2. provide sufficient background information on pensions such that members of the public
can follow and engage in informed discussion on unfunded pension obligations and their
impact on a city
3. assess the availability and utility of pension information in city budgets
The public commitment to addressing the issues in a timely manner and accepting some pain
now and not pushing the issues off to the future must be in place. If unfunded pension liabilities
are not addressed, cities could reach a crisis where outcomes are painful enough that they affect
the quality of life in Orange County. Money spent by OC cities to deal with unfunded pension
obligations necessarily comes at the expense of other services cities provide to their residents.
Catch up contributions to amortize these unfunded liabilities can be a significant expenditure in a
city's budget, and the growth and unpredictability of these unfunded liabilities make it difficult
to budget for future years. Orange County cities made painful cuts in services to their residents
in response to the 2008 Great Recession and would like to restore these services as the economy
recovers. However, restoration of services will be delayed or even further reduced in many cities
until unfunded liabilities are dealt with.
As a necessary part of the report's discussion of pension funding, some basic explanations of key
pension related terms are provided. The Grand Jury hopes this background will be an additional
2013-2014 Orange County Grand Jury Page 7
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ORANGE COUNTY CITY PENSION LIABILTIES
benefit of the report in helping the OC electorate to understand and make informed decisions in
response to pension funding issues when they are discussed.
Although Orange County is relatively wealthy compared to many other California counties,
unfunded pensions are still an issue for the county, its cities, and other county governmental
entities. Although unfunded pension liabilities are a problem for every County governmental
entity, due to the limited Grand Jury resources, this report focuses on pension issues for the 34
cities in Orange County. Another motivation for this choice is that discussions of unfunded
pension liabilities in the media have typically not gone to the level of detail of individual cities.
A prior 2011-2012 Grand Jury report' identified the need for greater transparency in public
employee compensation, especially in the area of employee pension costs. That report was well
written and had very valid recommendations. Subsequent to that report city budgets now contain
far more pension information for individual classes of employees, indeed sometimes down to
individual positions. However, the pension costs are not summarized in most city budgets such
that the cumulative costs of current employee pension obligations are visible. It is not possible
to see the forest for the trees. In addition, the focus of the 2011-2012 Grand Jury report was on
transparency of city pension -related compensation for current employees in city budgets. The
need for transparency on the cumulative effect of pension obligations for both current and retired
employee and on the impact of unfunded pension liabilities was not addressed.
This report does not examine other pension systems of importance to Orange County, which
definitely have their own unfunded pension liabilities. In particular Special Districts, Teacher
Retirement Systems, and Community College Districts are not studied. This report also does not
address the other elephant in the room, which is a post-retirement obligation for medical care and
similar non -pension benefits, an issue which deserves attention similar to that needed for pension
funding.
BACKGROUND AND FACTS
Table 1 lists the 34 Orange County cities alphabetically, their population, and the pension
systems they use. Note that some OC cities which use CalPERS for their Miscellaneous (non -
safety) employees' pensions also have "outsourced" public safety (police and/or fire protection)
to County agencies. Some cities contract with the Orange County Sheriff's Department (OCSD)
for police services, some with the Orange County Fire Authority (OCFA) for fire protection and
medical response services, and some cities contract with both. Cities that outsource for public
safety services also inherit pension obligations (and any associated funding issues) from the
County agencies to which they have outsourced. Ten OC cities rely on Ca1PERS for pensions
3 `TRANSPARENCY BREAKING UP COMPENSATION FOR—BUT WHYHIDE PENSION COSTS', 2011-2012 Orange County Grand Jury
Report, http://www.ocemndiurv.orpJt)dfs/t sparencvbreakineuncomponsationfoe.pdf
2013-2014 Orange County Grand Jury Page 8
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ORANGE COUNTY CITY PENSION LIABILTIES
for all their public safety as well as their non-public safety employees, eleven for one but not
both of their public safety services, and thirteen outsource both fire and police services.
Table 1. Orange County Cities, Population, and Pension Systems
City
Popula-
tion
Non -Safety
Employee
Retirement
System
Safety Employee -
Police Protection
Safety Employee -
Fire Protection
Aliso Viejo
47,823
CalPERS
Outsourced - OCSD
Outsourced - OCFA
Anaheim
336,365
CalPERS
Inhouse - CalPERS
Inhouse - CaIPERS
Brea
39,282
CalPERS
Inhouse - CalPERS
Inhouse - CaIPERS
Buena Park
80,530
CalPERS
Inhouse - CalPERS
Outsourced -OCFA
Costa Mesa
109,960
CalPERS
In house - CalPERS
In house - CaIPERS
Cypress
47,802
CalPERS
Inhouse - CalPERS
Outsourced -OCFA
Dana Point
33,351
CalPERS
Outsourced - OCSD
Outsourced - OCFA
Fountain Valley
55,313
CalPERS
In house - CalPERS
In house - CaIPERS
Fullerton
135,161
CalPERS
Inhouse - CalPERS
Inhouse - CalPERS
Garden Grove
170,883
CalPERS
In house - CalPERS
In house - CaIPERS
Huntington Beach
189,992
CalPERS
In house - CalPERS
In house - CaIPERS
Irvine
212,375
CalPERS
Inhouse - CalPERS
Outsourced -OCFA
La Habra
60,239
CalPERS
In house - CalPERS
LA County FD
La Palma
15,568
CalPERS
Inhouse - CalPERS
Outsourced -OCFA
Laguna Beach
22,723
CalPERS
Inhouse - CalPERS
Inhouse - CalPERS
Laguna Hills
30,344
CalPERS
Outsourced - OCSD
Outsourced - OCFA
Laguna Niguel
62,979
CalPERS
Outsourced - OCSD
Outsourced - OCFA
Laguna Woods
16,192
CalPERS
Outsourced - OCSD
Outsourced - OCFA
Lake Forest
77,264
CalPERS
Outsourced -OCSD
Outsourced -OCFA
Los Alamitos
11,449
CalPERS
Inhouse - CalPERS
Outsourced -OCFA
Mission Viejo
93,483
CalPERS
Outsourced - OCSD
Outsourced - OCFA
Newport Beach
85,287
CalPERS
Inhouse - CalPERS
Inhouse - CalPERS
Orange
136,416
CalPERS
Inhouse - CalPERS
Inhouse - CalPERS
Placentia
50,533
CalPERS
Inhouse - CalPERS
Outsourced -OCFA
Rancho Santa Margarita
47,853
CalPERS
Outsourced -OCSD
Outsourced -OCFA
San Clemente
63,522
Great West
Outsourced - OCSD
Outsourced - OCFA
San Juan Capistrano
34,593
OCERS
Outsourced - OCSD
Outsourced - OCFA
Santa Ana
329,427
CalPERS
Inhouse-CaIPERS
Outsourced -OCFA
Seal Beach
24,168
CalPERS
In house -CaIPERS
Outsourced -OCFA
Stanton
38,186
CalPERS
Outsourced - OCSD
Outsourced - OCFA
Tustin
75,540
CalPERS
Inhouse-CaIPERS
Outsourced -OCFA
Villa Park
5,812
none
Outsourced - OCSD
Outsourced - OCFA
Westminster
89,701
CalPERS
Inhouse-CaIPERS
Outsourced -OCFA
Yorba Linda
64,234
CalPERS
Outsourced -OCSD
Outsourced -OCFA
2013-2014 Orange County Grand jury Page 9
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ORANGE COUNTY CITY PENSION LIABILTIES
Some notes on Table 1 follow:
1. Population data is from 2010 Census (except for Mission Viejo and Santa Ana where
the data is from 2011)
2. Population data will be used later in the report as a way of scaling the size of
unfunded liabilities on a per capita basis. (Using consistent census data, even if a bit
old, does allow for a better apples -to -apples comparison among cities.)
3. La Habra in North OC outsources its fire protection to the adjacent Los Angeles
County Fire Department
4. San Clemente uses Great West Retirement Systems for its non -safety employees,
although it is considering transferring to Ca1PERS for these employees. It currently
uses Ca1PERS for its five lifeguards
5. Villa Park no longer uses Ca1PERS for its non -safety employees, but unfunded
liabilities still exist since the city previously did use CalPERS for pensions for these
employees
6. Some Ca1PERS data later in the report is provided for "Safety" without specifying
whether Safety includes Police or Fire or both. In other cases Ca1PERS provides data
separately for Police and Fire
7. Many cities that currently outsource for fire and/or police services previously used in-
house employees for these services and still use Ca1PERS for those retired employees
and for the pension obligations incurred before active employees transferred to
OCFA/OCSD
Some Key Terms Defined
Pension systems receive contributions from current employees and from their employers and
accumulate and invest these assets to generate the stream of pension payments (the system's
liabilities) for their members.
The difference between the assets they hold and the assets they should have on hand to meet
their current pension payout obligations and to invest for future pension payments are their
unfunded liabilities.
The ratio of total assets to total liabilities is the "Funded Ratio" for each pension system.
Pension systems specify Annual Required Contributions from employers that are comprised of
current employee pension contributions, corresponding employer contributions, and catch up
contributions from employers to amortize their unfunded obligations.
Appendix B provides an extensive glossary of pension related terms. Appendix C provides a
general background discussion of pensions.
2013-2014 Orange County Grand Jury Page 10
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ORANGE COUNTY CITY PENSION LIABILTIES
Overviews of CaIPERS and OCERS
Both CaIPERS and OCERS provide top level descriptions in their Annual Financial Reports that
give excellent summaries of their systems, their scope, and some key financial indicators.
Extracts from these publications are provided below.
California Public Employees' Retirement System (CaIPERS) Overview from its Comprehensive
Annual Financial Report (CAFR) 2013`
"Established by legislation in 1931, the System became operational in 1932 for the
purpose of providing a secure retirement to State employees. A defined benefit retirement
plan, CaIPERS provides benefits based on a member's years of service, age, and highest
compensation.
The California Public Employees' Retirement System (CaIPERS) is now the nation's
largest public pension fund with total net position in the Public Employees' Retirement
Fund (PERF) of $262.0 billion as of June 30, 2013. CaIPERS membership consists of
1,104,237 active and inactive members and 574,759 retirees, beneficiaries, and survivors.
The PERF paid $16.6 billion in retirement benefits to 566,975 annuitants during the
Fiscal Year 2012-2013, compared with $15.4 billion paid to 543,722 annuitants during
the Fiscal Year 2011-2012. Benefit payments increased primarily due to an increase in
the number of retirees and the average benefit amount, including cost -of -living -
adjustments (COLA).
As of June 30, 2012, the date of the most recent actuarial valuation, the PERF was funded
at 83.1 percent, based on the actuarial value of assets. A better measure of benefit
security is the funded status on the market value of assets basis. On that basis, as a result
of the 0.14 percent investment return in 2011-2012, the funded status declined from 73.6
percent at June 30, 2011 to 69.6 percent at June 30, 2012. CaIPERS is making good
progress recovering from the financial crisis of 2008-2009 and Great Recession. As of
June 30, 2013, the PERF was approximately 74 percent funded.
The past fiscal year produced a landmark pension reform law in California called the
Public Employees' Pension Reform Act (PEPRA), which went into effect on January 1,
2013. The reforms apply to nearly all California public employee pension systems,
including CaIPERS, and generally to public employees hired on January 1, 2013, or later,
but not to public employees hired before the effective date."
Comprehensive Annual Financial Report, Fiscal Year Ended June 13, 2013, CaIPERS document located at http://w .calpm.ca.gov/eip-
docs/about/pubs/20I3-executive-summary.pdf
2013-2014 Orange County Grand Jury Page 11
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ORANGE COUNTY CITY PENSION LIABILTIES
Orange County Employee Retirement System (OCERS) Overview from its Comprehensive
Annual Financial Report (CAFR) 2012'
"OCERS is a public retirement system that provides service retirement, disability, death
and survivor benefits, administered in accordance with the County Employees Retirement
Law of 1937 (Government Code Section 31450, et seq.), to its members.
Member pension benefit payments increased by $46.3 million or 9.6% in 2012. The
number of retired members and beneficiaries receiving a benefit payment increased 5%
from 13,289 payees at the end of 2011 to 13,947 as of December 2012. The average
annual benefit paid to retired members and beneficiaries during 2012 was $38,020 an
increase of 4.4% over the average annual benefit payment of $36,422 in 2011.
Contributions received from employers and employees totaled $629.0 million in 2012, an
increase of 2.3% compared to 2011 contributions received of $614.8 million. The net
year-to-date rate of return on investments on a fair value basis was approximately 12.26%
in 2012, up from 0.74% return earned in 2011.
OCERS maintains a funding goal to establish contributions that fully fund the System's
liabilities, and that, as a percentage of payroll, remain as level as possible for each
generation of active members.
Based upon the most recent actuarial valuation as of December 31, 2012, prepared by the
System's independent actuary, OCERS funding status for the pension plan, as measured
by the ratio of the actuarial value of assets (which smooths market gains and losses over
five years) to the actuarial value of liabilities, decreased from 67.03% at December 31,
2011 to 62.52% at December 31, 2012 due primarily to the impact of decreasing the
investment assumed rate of return from 7.75% to 7.25%. The December 31, 2012,
OCERS funding status of 62.52% reflected a UAAL [Unfunded Actuarial Accrued
Liability] of $5.7 billion. OCERS funding status when measured using market value of
assets was 63.17% at the end of 2012 compared to 62.60% at the end of 2011.
OCERS had been using a 7.75 % assumed rate of return in its annual actuarial valuations
since 2004. In 2011, the Board [of Retirement] received a recommendation from the
System's actuary to reduce the assumed rate of return to either 7.5% or 7.25%. After a
thorough review and lengthy discussions, the Board decided to maintain the existing
assumption and revisit the matter in 2012 after they considered the revision to the
investment asset allocation policy. Even with the subsequent improved projections for
the revised asset allocation then evident, the System's actuary again recommended the
System's rate of return be reduced to either 7.50% or 7.25%. The Board adopted 7.25%
5 Comprehensive Annual Financial Report for the Fiscal Year Ended December 31, 2012, OCERS document
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ORANGE COUNTY CITY PENSION LIABILTIES
as the System's assumed rate of return to be effective with the 2012 actuarial valuation.
The ensuing cost impact to the employer's contribution rate as a result of this assumption
change will be phased -in over two years."
Pension Reform in California (PEPRA)
Recent reforms in California's public employee retirement systems have tried to address pension
cost drivers. These reforms have created two classes of employees: 1) employees who were
members of a California public employee pension system prior to January 1, 2013 ("Legacy"),
and 2) employees hired after January 1, 2013, who at the time of hiring were not members of a
California public employee pension system ("New"). Briefly excerpted below are highlights of
the pension reform legislation published by The California State Association of Counties`:
"Two bills (AB 340 and AB 197) enacted the California Public Employees' Pension
Reform Act (PEPRA). AB 340 made several changes to the pension benefits that may be
offered to employees hired on or after January 1, 2013, including setting a new maximum
benefit, a lower-cost pension formula for safety and non -safety employees with
requirements to work longer in order to reach full retirement age and a cap on the amount
used to calculate a pension. Among other things, AB 340 also enacted pension spiking
reform for new and existing employees, required three-year averaging of final
compensation for new employees, and provided counties with new authority to negotiate
cost-sharing agreements with current employees."
These reforms will mitigate the pension problem in the long term. However, since these reforms
generally only apply to New employees, there remains a large problem to be dealt with in the
next 10-30 years, which is pension payments for employees already retired or covered as Legacy
employees under the prior and far more generous pre-PEPRA rules. Given the slow rate of
hiring by cities and the grandfathering of Legacy employees, it will be a long time before these
reforms have any significant impact on pension liabilities.
Unfunded liabilities of Ca1PERS and OCERS are both large and volatile
Table 2 shows a history of the unfunded Public Employees' Retirement Fund (PERF) liabilities
for CalPERS, both as dollar amounts and in terms of funding ratio of assets divided by
liabilities.' Unfunded liabilities varied dramatically between 2003 and 2012 from $36.6 billion
in unfunded liabilities in 2003 down to ($2.9) billion (parentheses indicate a negative number,
which in turn implies an overfunded state) in 2007 and back up to $103.6 billion in 2012. The
Great Recession from December 2007 to June 2009 led to the CalPERS funding ratio dropping
dramatically from 101% in June of 2007 to 61% in June of 2009.
6California State Association of Counties, "2013 Public Employees Pension Reform Act Resources", http://www.csac.counties.org/2013-public-
emulovees-pension-reform-act-resources
7 Comprehensive Annual Financial Report, Fiscal Year Ended June 30, 2013, page 132, htty,//www.calpers.ca.eov/ein-docs/about/pubs/cafr-
2013.ndf
2013-2014 Orange County Grand Jury Page 13
17-15
ORANGE COUNTY CITY PENSION LIABILTIES
Table 2. Unfunded Accrued Liabilities Historical Data for Ca1PERS
Actuarial Valuation Date
Actuarial Accrued
Liabiity (AAL)
Market Value
of Assets
UAAL
Funded Ratio -
Market Value of
Assets Basis
6/30/2003
$180,922
$144,330
$36,592
79.77%
6/30/2004
$194,609
$167,110
$27,499
85.87%
6/30/2005
$210,301
$189,103
$21,1981
89.92%
6/30/2006
$228,131
$211,188
$16,943
92.57%
6/30/2007
$248,224
$251,162
-$2,938
101.18%
6/30/2008
$268,324
$238,041
$30,283
88.71%
6/30/2009
$294,042
$178,860
$115,182
60.83%
6/30/2010
$308,343
$201,632
$106,711
65.39%
6/30/2011
$328,567
$241,740
$86,827
73.57%
6/30/2012
$340,429
$236,800
$103,6291
69.56%
Dollars are in Millions
Figure 1 and Table 3 below are from an OCERS paper "The Evolution of OCERS Unfunded
Actuarial Accrued Liability"! These data show the dramatic growth of unfunded pension
liabilities in the OCERS system not dissimilar to CatPERS' experience. However, the data also
provide a good example of why focusing on the raw dollars does not paint a complete picture
and that funding ratios are needed to paint a complete picture. Figure 1 shows the OCERS
pension system's accrued liabilities going from a small overfunded status in 2000 to an unfunded
status approaching $5.7 billion by 2012.
What is missing from Figure 1 is the fact that the OCERS assets were also growing fairly
dramatically during this period, although not fast enough to keep up with liabilities growth.
Table 3 shows the same dramatic growth in OCERS unfunded liabilities as shown in Figure 1,
but also shows the growth in value of OCERS assets paralleling the growth in liabilities.
Unfortunately, asset growth did not keep up well enough with liabilities growth to avoid a
significant decline in funding ratio. OCERS went from a funding ratio of 104% in 2000 to 63%
in 2012. However, it should be noted that the funding ratio was relatively stable between 2004
and 2010 while at the same time the unfunded liability went from $2.2 billion to $3.8 billion.
Media coverage that only deals in terms of unfunded liabilities without looking at funding ratios
is misleading.
a The Evolution of OCERS Unfunded Actuarial Accrued Liability, dated December 31, 2012,
httn://www.ocm.ora/odf/finance/actuarial/evolution of ocers uaal.ndf
2013-2014 Orange County Grand Jury Page 14
17-16
ORANGE COUNTY CITY PENSION LIABILTIES
Changes in the value of assets are not the only source of volatility in unfunded liabilities. For
example, the seemingly small OCERS change in December, 2012, from an assumed rate of
return on investments of 7.5% down to 7.25% caused the County of Orange's projected county
retirement costs in 2015-2016 to grow by $50 million from $377 to $427 million!
Figure 1. Unfunded Accrued Liabilities Historical Data for OCERS
[The Y axis in OCER's paper should have indicated dollars are in thousands.]
' County of Orange 2012 Strategic Financial Plan, December 18, 2012.
htto://cams.oc2ov.com/Web Publisher Sam/A2mdal2 18 2012 files/images/56-12182012.PDF
2013-2014 Orange County Grand Jury Page 15
17-17
OCERS Total UAAL
uaroao9
ss.oa9.o90
$<.999.999
59,o61eo99
$ZOM B
■wau
SL0MM
'.1986 1987 1988 1989 1990 1991 1991 M n% 1995 1996 199! 1998 1999 2000 2001 2002 20M 2001 ZOOS 2006 1001 1008 2009 2010 20a 2012
Sllo99,a991
[The Y axis in OCER's paper should have indicated dollars are in thousands.]
' County of Orange 2012 Strategic Financial Plan, December 18, 2012.
htto://cams.oc2ov.com/Web Publisher Sam/A2mdal2 18 2012 files/images/56-12182012.PDF
2013-2014 Orange County Grand Jury Page 15
17-17
ORANGE COUNTY CITY PENSION LIABILTIES
Table 3. Historical OCERS Assets, Unfunded Liabilities, and Funding Ratios
Actuarial Valuation Date
December 31
Valuation Value of Plan
Assets
Total Unfunded Actuarial
AccruedLiabiliity (UAAL)
Funded Ratio
1985
$613,863
$462,121
57.05%
1986
$713,506
$507,409
58.44%
1987
$821,884
$522,098
61.16%
1988
$985,030
$468,828
67.75%
1989
$1,136,210
$515,778
68.78%
1990
$1,297,575
$543,340
70.49%
1991
$1,576,131
$196,763
88.84%
1992
$1,807,319
$332,763
84.45%
1993
$2,024,447
$280,572
87.83%
1994
$2,177,673
$372,386
85.40%
1995
$2,434,406
$199,478
92.43%
1996
$2,675,632
$176,262
93.82%
1997
$3,128,132
$204,835
93.85%
1998
$3,504,708
$177,978
95.17%
1999
$3,931,744
$85,535
97.87%
2000
$4,497,362
($162,337)
103.74%
2001
$4,586,844
$257,055
94.69%
2002
$4,695,675
$978,079
82.76%
2003
$4,790,099
$1,309,334
78.53%
2004
$5,245,821
$2,158,151
70.85%
2005
$5,786,617
$2,303,010
71.53%
2006
$6,466,085
$2,298,960
73.77%
2007
$7,288,900
$2,549,786
74.08%
2008
$7,748,380
$3,112,335
71.34%
2009
$8,154,687
$3,703,891
68.77%
2010
$8,672,592
$3,753,281
69.79%
2011
$9,064,355
$4,458,623
67.03%
2012
$9,469,208
$5,675,680
62.52%
2013-2014 Orange County Grand Jury Page 16
17-18
ORANGE COUNTY CITY PENSION LIABILTIES
METHOD OF STUDY
The Grand Jury took the actions listed below to accomplish this study:
1. Interviews were conducted with HR managers from three selected cities concerning their
pension systems.
2. Interviews were conducted with finance managers from three selected cities concerning
their pension systems.
3. Interview(s) were conducted with CalPERS experts on how they compute the value of
their assets, project their future liabilities, and identify and deal with unfunded pension
liabilities. Key actuarial assumption changes recently made and other changes that may
occur in the near future and their impact on unfunded liabilities were also discussed as
well as the impact of pension reform and further pension reforms being contemplated.
4. Interviews were conducted with OCERS senior managers on how they handle unfunded
pension liabilities.
5. Analyses were made of Ca1PERS-provided data on unfunded liabilities for each city's
Public Safety (Fire and Police) and Miscellaneous (i.e., their management and
administrative staff or more simply stated - their non -Public Safety staff) employees. The
analysis looked at the absolute dollar values of the unfunded liabilities as well as
measuring the liabilities on a per capita basis and relative to the size of the General Funds
of each city.
6. Criteria for minimum expectations for budget content and quality were identified and an
assessment of OC city budget data published online against these criteria was conducted.
ANALYSIS
CalPERS Data on Unfunded Pension Liabilities of OC Cities
CalPERS provided the 2013-2014 Grand Jury with the funding status of each Miscellaneous/
Safety pension plan which CalPERS provides for OC cities as shown earlier in Table 1. Table 4
shows data as of June 30, 2012, for those 34 OC cities.
The city of Anaheim, which uses CalPERS for all its employees including fire and police, has an
unfunded liability totaling $612 million. The city of Santa Ana has an unfunded liability totaling
$461 million, and this total does not include any unfunded pension liabilities carried by the
OCFA to whom Santa Ana outsources its fire protection.
The highest funding ratios (around 80%) are for "Second Tier" plans which pay a lower
percentage of final salary and set a much higher minimum age of retirement. The rest of the
plans vary significantly among OC cities, having funding ratios from a high of 77.5% to a low of
2013-2014 Orange County Grand Jury Page 17
17-19
ORANGE COUNTY CITY PENSION LIABILTIES
59%. The aggregate unfunded CalPERS pension liabilities of the 34 OC cities shown in Table 2
using Market Value of Assets (the current baseline approach) is over $3.3 billion dollars.
It is important to note that Table 4 does not show the total exposure to unfunded pension
liabilities for those cities which outsource fire and/or police services to OCFA and OCSD,
respectively and should be read accordingly. (Table 1 showed which cities outsourced these
services.)
Table 4. Unfunded Pension Liabilities by City and Plan Using Market Value of Assets
CITY
PLAN
Accrued
Liability
Market Value
of Assets
UAL
Funded
Ratio
ALISO VIEJO
MISCELLANEOUS
$2,570,113
$1,983,533
$586,580
77.2%
Anaheim
MISCELLANEOUS
$1,045,037,179
$712,496,875
$332,540,304
68.2%
Anaheim
SAFETY POLICE
$565,213,783
$395,053,409
$170,160,374
69.9%
Anaheim
SAFETY FIRE
$345,724,884
$236,154,719
$109,570,165
68.3%
Brea
SAFETY
$191,751,7501
$127,377,145
$64,374,605
66.4%
Brea
MISCELLANEOUS
$102,226,046
$72,815,975
$29,410,071
71.2%
BUENA PARK
SAFETY
$185,001,886
$136,426,394
$48,575,492
73.7%
BUENA PARK
MISCELLANEOUS
$109,953,460
$77,968,001
$31,985,459
70.9%
Costa Mesa
MISCELLANEOUS
$225,186,488
$141,225,952
$83,960,536
62.7%
Costa Mesa
SAFETY POLICE
$212,645,063
$129,017,818
$83,627,245
60.7%
COSTA MESA
SAFETY FIRE
$161,328,098
$100,677,450
$60,650,648
62.49/
CYPRESS
SAFETY
$65,259,215
$47,574,444
$17,684,771
72.9%
Cypress
MISCELLANEOUS
$58,995,020
$44,534,686
$14,460,334
75.5%
DANA POINT
MISCELLANEOUS
$14,606,788
$11,273,064
$3,333,724
77.2%
FOUNTAIN VALLEY
SAFETY 1STTIER
$144,802,443
$99,113,405
$45,689,038
68.4%
FOUNTAIN VALLEY
MISCELLANEOUS 1STTIER
$78,548,900
$51,520,993
$27,027,907
65.6%
FOUNTAIN VALLEY
SAFETY POLICE 2NDTIER
$100,138
$75,901
$24,237
75.8%
FOUNTAIN VALLEY
MISCELLANEOUS 2ND TIER
$31,032
$24,768
$6,264
79.8%
FOUNTAIN VALLEY
SAFETY FIRE 2NDTIER
$422
$315
$107
74.6%
Fullerton
SAFETY
$372,812,731
$247,403,994
$125,408,737
66.4%
Fullerton
MISCELLANEOUS
$227,961,576
$170,608,016
$57,353,560
74.8%
Garden Grove
SAFETY
$387,791,595
$251,498,319
$136,293,276
64.9%
Garden Grove
MISCELLANEOUS
$231,098,351
$155,545,807
$75,552,544
67.3%
Huntington Beach
SAFETY
$552,535,708
$350,648,228
$201,887,480
63.5%
Huntington Beach
MISCELLANEOUS
$431,175,037
$298,603,254
$132,571,783
69.3%
Irvine
MISCELLANEOUS
$262,485,223
$168,840,560
$93,644,663
64.3%
Irvine
SAFETY
$162,425,349
$114,537,221
$47,888,128
70.5%
LA HABRA
SAFETY
$124,453,943
$87,149,408
$37,304,535
70.0%
La Habra
MISCELLANEOUS
$79,216,276
$59,609,354
$19,606,922
75.2%
LA HABRA
SAFETY POLICE 2NDTIER
$753
$563
$190
74.8%
LA PALMA
SAFETY
$33,248,911
$24,518,826
$8,730,085
73.7%
LA PALMA
MISCELLANEOUS
$22,117,712
$16,031,551
$6,086,161
72.5%
LA PALMA
SAFETY 2ND TIER
$7,511
$5,8951
$1,616
78.5%
LA PALMA
MISCELLANEOUS 2ND TIER
1 $576
$460
$1161
79.9%
2013-2014 Orange County Grand Jury Page 18
17-20
ORANGE COUNTY CITY PENSION LIABILTIES
CITY
PLAN
Accrued
Liability
Market Value
of Assets
UAL
Funded
Ratio
Laguna Beach
MISCELLANEOUS
$80,291,956
$55,443,941
$24,848,015
69.1%
LAGUNA BEACH
SAFETY POLICE
$57,585,435
$42,465,368
$15,120,067
73.7%
LAGUNA BEACH
SAFETY FIRE
$45,735,935
$33,727,163
$12,008,772
73.7%
LAGUNA BEACH
SAFETY LIFEGUARD
$4,662,336
$3,533,903
$1,128,433
75.89/
LAGUNA BEACH
SAFETY FIRE 2ND TIER
$21,221
$16,085
$5,136
75.89/
LAGUNA BEACH
SAFETY POLICE 2ND TIER
$119
$90
$29
75.69/
LAGUNA HILLS
MISCELLANEOUS
$11,150,476
$8,428,814
$2,721,662
75.691
LAGUNA NIGUEL
MISCELLANEOUS
$21,979,272
$16,962,917
$5,016,355
77.2%
LAGUNA NIGUEL
MISCELLANEOUS 2NDTIER
$576
$460
$116
79.9%
LAGUNA WOODS
MISCELLANEOUS
$1,799,940
$1,389,138
$410,802
77.2%
LAKE FOREST
MISCELLANEOUS
$16,886,211
$13,032,252
$3,853,959
77.2%
LOS ALAMITOS
SAFETY
$24,809,272
$18,091,332
$6,717,940
72.9%
LOS ALAMITOS
MISCELLANEOUS
$23,970,8581
$17,582,564
$6,388,294
73.3%
Mission Viejo
MISCELLANEOUS
$55,336,400
$37,971,519
$17,364,881
68.69/
Newport Beach
SAFETY
$424,868,507
$252,131,503
$172,737,004
59.3%
Newport Beach
MISCELLANEOUS
$302,006,850
$200,149,332
$101,857,518
66.3%
Orange
SAFETY
$395,287,607
$265,861,717
$129,425,890
67.3%
Orange
MISCELLANEOUS
$271,876,517
$187,707,479
$84,169,038
69.0%
PLACENTIA
SAFETY
$69,929,197
$47,548,284
$22,380,913
68.00%
PLACENTIA
MISCELLANEOUS
$44,543,255
$34,400,240
$10,143,015
77.2%
PLACENTIA
MISCELLANEOUS 2ND TIER
$70
$56
$14
80.09/
RANCHO SM
MISCELLANEOUS 1STTIER
$3,578,445
$2,373,225
$1,205,220
66.3%
RANCHO SM
MISCELLANEOUS 2ND TIER
$66
$53
$13
80.3%
SAN CLEMENTE
SAFETY LIFEGUARD
$4,771,964
$3,412,298
$1,359,666
71.5%
Santa Ana
SAFETY
$886,484,216
$639,122,005
$247,362,211
72.1%
Santa Ana
MISCELLANEOUS
$670,676,090
$456,703,295
$213,972,795
68.1%
SEALBEACH
SAFETY
$55,626,490
$41,020,779
$14,605,711
73.7%
SEALBEACH
MISCELLANEOUS
$37,784,994
$29,273,349
$8,511,645
77.5%
STANTON
MISCELLANEOUS
$16,135,869
$11,943,044
$4,192,825
74.00%
TUSTIN
SAFETY
$96,725,338
$67,268,742
$29,456,596
69.5%
Tustin
MISCELLANEOUS
$79,578,148
$60,726,631
$18,851,517
76.3%
TUSTIN
SAFETY POLICE 2ND TIER
$634
$474
$160
74.8%
VILLA PARK
MISCELLANEOUS
$3,584,194
$2,504,067
$1,080,127
69.9%
WESTMINSTER
SAFETY
$190,808,021
$140,326,367
$50,481,654
73.5%
Westminster
MISCELLANEOUS
$103,786,629
$70,524,912
$33,261,717
68.0%
Yorba Linda
IMISCELLANEOUS
1 $52,656,1981
$35,770,1661
$16,886,032
67.9%
Per Capita Assessment
Since the cities in Table 4 vary greatly in size, the Grand Jury calculated these unfunded
liabilities for a selected set of cities on a per capita basis to provide a normalized measure of the
impact of these liabilities. Table 5 below provides this assessment for the 10 OC cities that rely
on Ca1PERS for all their Miscellaneous and Safety employees. These 10 cities are the only ones
for which an apples -to -apples comparison is possible because unfunded pension liabilities for
those cities which outsource fire and/or police services to OCFA and OCSD are not available.
2013-2014 Orange County Grand Jury Page 19
17-21
ORANGE COUNTY CITY PENSION LIABILTIES
No city on the list stands apart as having an overwhelming liability when measured using this
metric. However, the table does show that unfunded liabilities on a per capita basis do vary by a
factor of well over two among these cities. Notably, the city with the highest per capita liability
in the list is one of the wealthiest as well.
Table 5. Unfunded Actuarial Liabilities (UAL) by City Computed on a Per Capita Basis
city
Total Misc plus
Public Safety
UAL
City
Population
Per Capita UAL
for Misc plus
Public Safety
Anaheim
$612,270,843
343,248
$1,783.76
Brea
$93,784,676
40,330
$2,325.43
Costa Mesa
$228,238,429
111,918
$2,039.34
FOUNTAIN VALLEY
$72,747553
56,464
$1,288.39
Fullerton
$182,762,297
138,534
$1,319.26
Garden Grove
$211,845,820174,389
51,214.79
Huntington Beach
$334,459,263
194,708
$1,717.75
Laguna Beach
$53,110,452
23,176
$2,291.61
Newport Beach
$274,594,522
87,068
$3,153.79
Orange
$213,594,928
139,419
$1,532.04
Assessment of Unfunded Liabilities as a Percent of General Fund Revenues
Another (and potentially better) way of comparing the burden of unfunded pension liabilities is
by looking at the ratio of the unfunded pension liabilities of a city to one year's General Fund
revenues for that city. Arguably, the differences in wealth of these cities would be reflected in
the differences in their General Fund revenues tied to property and sales taxes and would provide
a better measure of the burden of these liabilities on the city's resources. The Grand Jury
calculated these ratios in Table 6 for the same 10 cities shown in Table 5. Again the cities when
assessed using this metric vary by over a factor of well over two, and again there is not any city
in the list that stands apart as having an overwhelming liability when measured using this metric.
Also interesting is that different cities fare better depending on the metric used - per capita versus
percent of General Fund. A significant drawback to the General Fund Percentage metric is the
difficulty to achieve any reliable apples -to -apples comparison since city revenues are structured
differently. In addition, some cities have their own water and power utilities which have their
own associated revenues, and all cities have different sources of grant and bond revenues.
2013-2014 Orange County Grand Jury Page 20
17-22
ORANGE COUNTY CITY PENSION LIABILTIES
Table 6 — Unfunded Pension Liabilities as a Percentage of Annual General Fund Revenues
CITY
Total Misc plus
Public Safety UAL
Total General
Fund Assumed
Revenues from
Current
Adopted Budget
Budget Year
of Adopted
Budget
Unfunded
Pension
LiabiIityasa
Percent of
General Fund
Revenues
Anaheim
$612,270,843
$491,847,000
2013
124.5%
Brea
$93,784,676
$49,431,294
2013-2014
189.7%
Costa Mesa
$228,238,429
$103,250,486
2013-2015
221.1%
FOUNTAIN VALLEY
$72,747,553
$37,032,042
2013-2014
196.4%
Fullerton
$182,762,297
$154,333,191
2013-2014
118.4%
Garden Grove
$211,845,820
$92,351,000
2013-2014
229.4%
Huntington Beach
$334,459,263
$298,239,325
2013-2014
112.1%
Laguna Beach
$53,110,452
$48,425,000
2013-2014
109.7%
Newport Beach
$274,594,522
$255,333,875
2013-2014
107.5%
Orange
$213,594,928
$90,139,158
2013-2014
1 237.0%
It is critical to note that attempts at measuring the impact of unfunded pension liabilities such as
provided in Tables 5 and 6 would not be needed if the cities provided adequate budget data! It
would be a simple matter of checking whether a city's predicted revenues for current and future
years are sufficient to meet total planned expenditures in those years including the pension
related expenditures. In order to have a balanced budget, increased pension expenditures will
have to be matched with increased revenues and/or cuts to other major budget items.
Calculating Unfunded Liabilities using Market Value instead of Actuarial Value of Assets
On April 17, 2013, the Ca1PERS Board of Administration approved a recommendation to change
its amortization and smoothing policies. Prior to this change, CalPERS employed a smoothing
policy which spread investment returns over a 15 -year period; after the change investment
returns were smoothed over a 5 -year period. As a result, the dramatic impact of the 2007-2009
Great Recession on investment returns, which fell in the middle of this 5 year period, was much
more heavily weighted than when 15 years of returns were used.
Table 7 below shows data for the plans listed in Table 1 as of June 30, 2012, but now showing
unfunded liabilities computed using Actuarial Value of Assets instead of Market Value of
Assets. These data were provided at Grand Jury request in order to assess the impact of the
Ca1PERS decision in 2012 to use Market Value instead of Actuarial Value of Assets in
computing unfunded liabilities. Recall that the aggregate unfunded liabilities using Market
Value of Assets from Table 4 was $3.3 billion. The aggregate unfunded Ca1PERS pension
2013-2014 Orange County Grand Jury Page 21
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ORANGE COUNTY CITY PENSION LIABILTIES
liabilities from Table 7 of the 34 OC cities calculated using Actuarial Value of Assets (the prior
baseline approach) is $1.9 billion dollars.
The 2013 decision by CaIPERS to use Market Value instead of Actuarial Value resulted in an
increase in the calculation of unfunded liabilities of OC cities of $1.4 billion!
Table 7. Unfunded Liabilities using Actuarial Value of Assets
CIN
PLAN
Accrued Liability
Actuarial Value
of Assets
UAL (AVA)
Funded
Ratio
ALISO VIEIO
MISCELLANEOUS PLAN
$2,570,113
$2,343,664
$226,449
91.2%
Anaheim
MISCELLANEOUS PLAN
$1,045,037,179
$854,296,252
$190,740,927
81.7%
Anaheim
SAFETY POLICE PLAN
$565,213,783
$473,232,689
$91,981,094
83.7%
Anaheim
SAFETY FIRE PLAN
$345,724,884
$283,210,761
$62,514,123
81.9%
Brea
SAFETY PLAN
$191,751,750
$152,827,533
$38,924,217
79.7%
Brea
MISCELLANEOUS PLAN
$102,226,046
$87,360,7041
$14,865,342
85.5%
BUENA PARK
ISAFETY PLAN
$185,001,886
$162,856,5901
$22,145,296
88.0%
BUENA PARK
MISCELLANEOUS PLAN
$109,953,460
$93,518,5271
$16,434,933
85.1%
Costa Mesa
MISCELLANEOUS PLAN
$225,186,488
$169,039,6531
$56,146,835
75.1%
Costa Mesa
SAFETY POLICE PLAN
$212,645,063
$153,878,616
$58,766,447
72.4%
COSTA MESA
SAFETY FIRE PLAN
$161,328,098
$120,181,921
$41,146,177
74.5%
CYPRESS
SAFETY PLAN
$65,259,215
$56,791,149
$8,468,066
87.0%
Cypress
MISCELLANEOUS PLAN
$58,995,020
$53,426,741
$5,568,279
90.65/
DANA POINT
MISCELLANEOUS PLAN
$14,606,788
$13,319,805
$1,286,983
91.2%
FOUNTAIN VALLEY
SAFETY FIRSTTIER PLAN
$144,802,443
$118,314,870
$26,487,573
81.7%
FOUNTAIN VALLEY
MISCELLANEOUS FIRSTTIER PLAN
$78,548,900
$61,269,357
$17,279,543
78.0%
FOUNTAIN VALLEY
SAFETY POLICE SECOND TIER PLAN
$100,138
$90,3521
$9,786
90.2%
FOUNTAIN VALLEY
MISCELLANEOUS SECONDTIER PLAN
$31,032
$29,439
$1,593
94.9%
FOUNTAIN VALLEY
SAFETY FIRE SECONDTIER PLAN
$422
$378
$44
89.6%
Fullerton
SAFETY PLAN
$372,812,731
$296,723,845
$76,088,8861
79.61Y.
Fullerton
MISCELLANEOUS PLAN
$227,961,576
$204,542,656
$23,418,920
89.7%
Garden Grove
SAFETY PLAN
$387,791,595
$301,757,326
$86,034,269
77.8%
Garden Grove
MISCELLANEOUS PLAN
$231,098,351
$186,575,813
$44,522,538
80.7%
Huntington Beach
SAFETY PLAN
$552,535,708
$420,518,819
$132,016,889
76.1%
Huntington Beach
MISCELLANEOUS PLAN
$431,175,037
$357,911,394
$73,263,643
83.0%
Irvine
MISCELLANEOUS PLAN
$262,485,223
$198,147,071
$64,338,152
75.5%
Irvine
SAFETY PLAN
$162,425,349
$134,947,3981
$27,577,951
83.0%
LA HABRA
SAFETY PLAN
$124,453,943
$104,033,0611
$20,420,882
83.6%
La Habra
MISCELLANEOUS PLAN
$79,216,276
$71,487,6041
$7,728,672
90.2%
LA HABRA
SAFETY POLICE SECOND TIER PLAN
$753
$675
$78
89.6%
LA PALMA
SAFETY PLAN
$33,248,911
$29,268,914
$3,979,997
88.0%
LA PALMA
MISCELLANEOUS PLAN
$22,117,712
$18,886,895
$3,230,817
85.49/
LA PALMA
SAFETY SECOND TIER PLAN
$7,511
$7,025
$486
93.5%
LA PALMA
MISCELLANEOUS SECONDTIER PLAN
$576
$546
$30
94.8%
Laguna Beach
MISCELLANEOUS PLAN
$80,291,956
$66,214,802
$14,077,154
82.5%
LAGUNA BEACH
SAFETY POLICE PLAN
$57,585,435
$50,692,281
$6,893,154
88.0%
LAGUNA BEACH
SAFETY FIRE PLAN
$45,735,935
$40,261,203
$5,474,732
88.0%
LAGUNA BEACH
SAFETY LIFEGUARD PLAN
$4,662,336
$4,206,731
$455,605
90.2%
LAGUNA BEACH
SAFETY FIRE SECONDTIER PLAN
$21,221
$19,147
$2,074
90.2%
LAGUNA BEACH
SAFETY POLICESECOND TIER PLAN
$119
$107
$12
89.9%
2013-2014 Orange County Grand Jury Page 22
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ORANGE COUNTY CITY PENSION LIABILTIES
CITY
PLAN
Accrued Liability
Actuarial Value
of Assets
UAL (AVA)
Funded
Ratio
LAGUNA HILLS
MISCELLANEOUS PIAN
$11,150,476
$10,018,286
$1,132,190
89.8%
LAGUNA NIGUEL
MISCELLANEOUS PLAN
$21,979,272
$20,042,710
$1,936,562
91.2%
LAGUNA NIGUEL
MISCELLANEOUS SECOND TIER PLAN
$576
$546
$30
94.8%
LAGUNA WOODS
MISCELLANEOUS PLAN
$1,799,940
$1,641,350
$158,590
91.2%
LAKE FOREST
MISCELLANEOUS PLAN
$16,886,211
$15,398,391
$1,487,820
91.2%
LOSALAMITOS
SAFETY PLAN
$24,809,272
$21,596,207
$3,213,065
87.0%
LOSALAMITOS
MISCELLANEOUS PLAN
$23,970,858
$20,714,154
$3,256,704
86.4%
Mission Viejo
MISCELLANEOUS PLAN
$55,336,400
$44,251,357
$11,085,043
80.0%
Newport Beach
SAFETY PLAN
$424,868,507
$302,365,698
$122,502,809
71.2%
Newport Beach
MISCELLANEOUS PLAN
$302,006,850
$238,869,992
$63,136,858
79.1%
Orange
SAFETY PLAN
$395,287,607
$318,640,102
$76,647,505
80.6%
Orange
MISCELLANEOUS PLAN
$271,876,517
$225,061,652
$46,814,865
82.8%
PLACENTIA
SAFETY PLAN
$69,929,197
$56,759,9211
$13,169,276
81.2%
PLACENTIA
MISCELLANEOUS PLAN
$44,543,255
$40,645,959
$3,897,296
91.3%
PLACENTIA
MISCELLANEOUS SECOND TIER PLAN
$70
$66
$4
94.3%
RANCHO SM
MISCELLANEOUS FIRSTTIER PLAN
$3,578,445
$2,822,266
$756,179
78.9%
RANCHO SM
MISCELLANEOUS SECOND TIER PLAN
$66
$63
$3
95.5%
SAN CLEMENTE
SAFETY LIFEGUARD PLAN
$4,771,964
$4,061,973
$709,991
85.1%
Santa Ana
SAFETY PLAN
$886,484,216
$766,597,172
$119,887,044
86.5%
Santa Ana
MISCELLANEOUS PLAN
$670,676,090
$547,675,894
$123,000,196
81.7%
SEALBEACH
MISCELLANEOUS PLAN
$37,784,994
$34,588,2281
$3,196,766
91.5%
SEALBEACH
SAFETY PLAN
$55,626,490
$48,967,8281
$6,658,662
88.0%
STANTON
MISCELLANEOUS PLAN
$16,135,869
$14,111,427
$2,024,442
87.5%
TUSTIN
SAFETY PLAN
$96,725,338
$80,300,869
$16,424,469
83.0%
Tustin
MISCELLANEOUS PLAN
$79,578,148
$72,395,531
$7,182,617
91.0%
TUSTIN
SAFETY POLICE SECOND TIER PLAN
$634
$568
$66
89.6%
VILLA PARK
MISCELLANEOUS PLAN
$3,584,194
$2,958,706
$625,488
82.5%
WESTMINSTER
SAFETY PLAN
$190,808,021
$167,512,113
$23,295,908
87.8%
Westminster
MISCELLANEOUS PLAN
$103,786,629
$84,550,883
$19,235,746
81.5%
Yorba Linda
MISCELLANEOUS PLAN
$52,656,198
$42,905,265
$9,750,933
81.5%
Grand Jury Interviews
As discussed under Method of Study, the Grand Jury conducted interviews with experts
representing the three key players in the pension processes for cities: city human resources
managers, city finance managers, and senior staff from Ca1PERS and OCERS, the primary
pension systems used by OC cities. Before summarizing those individual discussions, it will be
useful to share some candid comments without being more specific as to where these comments
came from.
The one word used to describe public employee pensions was "generous". Given Grand Jury
members' knowledge of Social Security and private employer pensions, it finds that adjective
appropriate. However, whether the pensions were generous before pension reform or are
generous even after pension reform, the focus of this Grand Jury is on the ability of cities to deal
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ORANGE COUNTY CITY PENSION LIABILTIES
with unfunded obligations tied to these pensions and on how transparent city budgets are with
respect to the impact of these liabilities.
One other topic discussed was the recent practice of cities offsetting newly required increased
employee contributions to their pensions by raising employees' salaries by a corresponding
percentage. A city, instead of directly paying part of what is nominally the employee's share of
pension contributions to the pension system instead pays it to the employee, who in turn pays it
to the pension system as part of his/her contribution. To take a real example, the city of Garden
Grove decided to offset an increase of 3% in public safety employee pension contributions with a
3% increase in salary." In some ways this looks like a very tempting zero-sum game; the new
rules are followed, and the city's budget and employee's take home pay are essentially
unaffected. The catch is that the employee will now have a base salary at retirement 3% higher
than the pension system had been assuming in predicting its pension payout to that employee.
This increased pension payment will be made for the remainder of that employee's life, i.e., a
new unfunded pension liability has been created.
Interviews with CalPERS
Experts from CalPERS were very helpful in discussing with the Grand Jury the actuarial
assumptions they use in projecting pension liabilities. Of particular interest was the recent
decision by CalPERS to use Market Value of Assets instead of Actuarial Value of Assets. The
choice is obviously a philosophical one since Actuarial Value had been the standard approach for
many years. On April 17, 2013, the CalPERS Board of Administration approved a
recommendation to change its amortization and smoothing policies. Prior to this change,
CalPERS employed an amortization and smoothing policy which spread investment returns over
a 15 -year period; after the change investment returns were smoothed over a 5 -year period. The
consequence of this change in asset valuation method was discussed in the Analysis section of
this report.
Other possible changes to critical actuarial assumptions were also discussed. CalPERS plans to
move from the mortality tables they currently use to tables used by the Social Security system,
which reflect the longer life expectancies enjoyed by US residents. Also being considered is a
further move to mortality tables which reflect the life expectancies of the residents of California
who live almost two years longer than the average US resident. Good news for Californians is
ro"Police to get Raises to Offset Higher Pension Payments-, Voice of Orange County article dated September 24, 2013,
htto://w .voiceofoc.org/oc central/garden grove/article e96a94d4-24de-Ile3-bl84-0019bb2963f4.htm1
2013-2014 Orange County Grand Jury Page 24
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ORANGE COUNTY CITY PENSION LIABILTIES
not good news for pension liabilities since California pension systems can expect to be paying
pensions to their retirees for two to four years longer than they had been planning.
Interview with OCERS
Senior Managers from OCERS discussed their perspective on unfunded pension liabilities for
Orange County cities which outsource fire and/or police to OCFA and OCSD. OCERS
experienced the same increase in unfunded pension liabilities for all pensions managed by
OCERS as did Ca1PERS due to the impact of the Great Recession which began in 2007 on the
value of their assets. In 2012, OCERS changed their assumed rate of return on assets from
7.75% to 7.25%, which had a large impact on their computation of unfunded liabilities. They
also moved to amortizing unfunded liabilities over 20 years instead of 30 years. Both these
changes significantly increased the catch up contributions they require from their members. On a
positive note, OCERS is starting to see a recovery in the current prices of their equity and real
estate holdings, which is beginning to be reflected in the actuarial (smoothed) values of their
assets.
Like Ca1PERS, OCERS also worries about events that could cause their unfunded liabilities to
grow — the greatest possible impact would come from a decision to further reduce the actuarial
assumption of the rate of investment return on their assets. Another concern is whether even the
7.25% rate of return can be maintained over the next several years. Many markets have
recovered to pre -Great Recession valuations after a six year bull market, which may be losing
steam. Despite the uncertainties, OCERS managers are confident that their system is robust
enough to work through short term ups and downs and that they will continue to improve their
funding status.
OCERS managers also pointed out that tracing the flow of OCERS unfunded pension liabilities
to cities is much harder than tracing the equivalent flow from Ca1PERS to Orange County cities.
Ca1PERS has a direct fiduciary relationship with individual cities and communicates the pension
contributions required from each city via its Annual Valuation Reports. Ca1PERS provides
Valuation Reports for pension plans for each city, one for Miscellaneous employees, one for
Police, and one for Fire. Sometimes the Police and Fire plans are combined into a single Safety
plan and sometimes plans are split into "Tier 1" and "Tier 2", but it is always clear which plan
applies to which city. (This structure is easily seen in Table 2.) OCERS does not have a direct
fiduciary relationship with any OC city for public safety employees. The two agencies relevant to
this report that OCERS has such a relationship with are the Orange County Fire Authority and
County of Orange. The flow of unfunded pension liabilities from OCERS to the Orange County
Fire Authority and to the County of Orange and then from the Orange County to the Orange
County Sheriff's Department is reasonably straightforward. But the flow from those agencies to
2013-2014 Orange County Grand Jury Page 25
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ORANGE COUNTY CITY PENSION LIABILTIES
individual cities which outsource public safety functions to them is far more convoluted and far
less visible.
OCERS breaks down pension fund assets, liabilities, unfunded liabilities, and required annual
contributions by "Rate Groups". OCFA has its own unique rate groups with OCERS, one for
general personnel and one for safety. OCERS does not have a direct relationship with the
Orange County Sheriff's Department; its fiduciary relationship is with the County of Orange.
However OCERS pensions for Sheriffs department employees can be isolated in the Annual
Valuation Report for the County of Orange. A separate rate group for Sheriffs Department
personnel (Group 7) within the overall Annual Valuation is where data for fund assets, liabilities,
unfunded liabilities, and required annual contributions for police personnel can be found.
OCERS has become more aware of the fact that their final pension "customers" are not only the
County of Orange or even the OCSD and OCFA. In many cases individual OC cities that
outsource fire and/or police services to OCFA and OCSD are their ultimate customers whose
budgets are impacted as OCERS works to recover from unfunded liabilities. OCERS is working
on developing better outreach to and communication with OC cities.
A further discussion on tracing unfunded pension liabilities to cities which
outsource to OFCA
OCFA provides fire services to two classes of cities in Orange County, eight Structural Fire Fund
(SFF) members and fifteen Cash Contract Cities (CCC) members. SSF cities have part of their
property tax designated for fire protection, which is paid directly to the OCFA and is typically
not shown on a city's budget. CCC cities are directly billed quarterly for fire services, and these
expenditures are typically shown as an expenditure on a city's budget. Tracing the impact of
OCFA's unfunded pension liabilities owed to OCERS to individual OC city budgets via material
online does not appear possible.
The OCFA makes general statements" about reducing its unfunded pension liabilities:
"The policy .... was last updated on May 22, 2008 to require the OCFA to annually
review the feasibility of accelerating payment of the unfunded pension liability."
"OCFA employer retirement rates for safety members were scheduled to decrease by
about 2.3%, however, in order to help pay down OCFA's Unfunded Actuarially Accrued
Liability (UAAL) the budget includes a carryover of the higher safety member employer rates
Orange County Fire Authority 2013.2014 Adopted Budget, htto://www.oefa.ore/ unloads/ndf/2013-14% 20Adonted%20Budeet websitel.ndf
2013-2014 Orange County Grand Jury Page 26
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ORANGE COUNTY CITY PENSION LIABILTIES
from 2012/2013. This is a first small step to help address OCFA's intent to reduce long term
liabilities."
However, since "Salaries and Employee Benefits" are lumped together as a single line item
throughout the remainder of the budget, there is no way of really seeing actual dollar amounts for
what this UAAL is nor for planned expenditures to reduce it, if any. No discussion of how
pension costs are allocated to individual CCC cities is provided, and no discussion of how
pension costs are incorporated into current and future quarterly billings for SFF cities is
provided.
Interviews with City Human Resource Managers
Very early in the study interviews were held with the Human Resource (HR) Managers of three
OC cities to get their perspective on how their city was dealing with pensions for their
employees. The city HR managers were very open in answering Grand Jury questions, and all
were consistent in describing their pension processes.
The Grand Jury was informed that benefits including pensions are part of labor negotiations
conducted with unions representing different groups of employees. Memoranda of
Understanding (MOUs) document the results of these negotiations. Specific terms of city
pension plans vary depending on the negotiated labor agreements and are drawn from a menu of
plans supported by Ca1PERS. Pension plans specify the minimum age of retirement and the
pension benefit to be paid in terms of a percentage of the employee's highest year of salary times
the number of years of service. The total percentage is capped, but for Legacy employees there
is no cap on highest salary used in computing the pension benefit. Hence there is no cap on the
annual pension benefit paid. However, post-PEPRA employees' pensions are currently capped
at—$130K.
When a person is hired, that employee is assigned to a particular pension plan based on position
and job title. Typically movement across pension plans is rare for current employees. A more
typical situation is when an employee is hired from another city to do the same type of work, in
which case pension benefits will be grandfathered.
The HR managers helped clarify the impact of pension reform in the near term (not much since
nearly all their employees are grandfathered as Legacy employees under the more generous
pension agreements. Only New employees hired since January 1, 2013, fall under the PEPRA
reformed pension rules. With the continued slowdown in hiring, only a small percentage of
current employees are New (typically much less than 10%). The managers were well aware of
the issues associated with pensions, their impact on city finances, and the impact of pension
2013-2014 Orange County Grand Jury Page 27
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ORANGE COUNTY CITY PENSION LIABILTIES
reform. In general they were confident that they had processes in place to avoid abuses of the
pension rules by any attempt on the part of a retiring employee to include "non-PERSable"
income as part of the base salary used to compute pension benefits. They (and city finance
managers whom the Jury talked with separately) believe the PEPRA pension reforms will
substantially reduce future unfunded pension liabilities. However, they were quick to point out
that it will be many years before any significant effect falls to the bottom line of their city's
pension liabilities.
Interviews with City Finance Managers
Interviews were held with the Finance Managers of the same three OC cities the Grand Jury had
previously met with to interview the HR managers. These interviews sought their perspective on
how their city was dealing with unfunded pension liabilities. The city finance managers were
very open in answering Grand Jury questions and made helpful suggestions on some key areas
on which to focus.
The Finance Managers the Grand Jury met with project revenues and expenditures one year out
in their formal budgets. Current year budgets are posted online as they are first proposed to and
then adopted by their city. None of the cities' budgets shows separate line items at the summary
level for pension expenditures, although pension/retirement benefit expenditures are provided in
substantial detail at lower levels in their budgets. The Finance Managers acknowledged that it
would be arduous to sum up all the detailed pension expenditures to arrive at the total pension
related expenditures. Planning budgets are developed for several years further into the future and
discussed internally, but not typically posted.
When CalPERS does its Annual Valuation Report for a city's pension plan(s), CalPERS will
discuss the report with the city and (very rarely) make adjustments based on those discussions.
City Finance Managers use the Annual Required Contributions from the Annual Valuation
Reports to develop the pension related expenditures for their budget.
Each city withholds employee pension contributions and sends them bi-weekly to CalPERS. The
city's employer pension contributions and any city catch up pension contributions are paid from
the city General Fund to CalPERS.
When asked about the recent move by CalPERS from an Actuarial Value basis for estimating
current value of assets to a Market Value basis, no value judgment was expressed, but the
resulting jump in unfunded liabilities was noted by all. The finance managers viewed the
remaining actuarial assumptions used by CalPERS as reasonable under current economic
conditions, but are aware that the assumptions can be expected to change if circumstances
change. They are particularly sensitive to any downward adjustment to projected rates of return
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ORANGE COUNTY CITY PENSION LIABILTIES
on investment of plan assets as such an adjustment could substantially increase the actuarial
value of their unfunded liabilities and hence their catch up contributions.
Another concern discussed was the likely move by pension funds to use more realistic mortality
assumptions based on Social Security tables, which will increase unfunded liabilities. In
addition, Californians have the third highest life expectancy in the United States (only residents
of Hawaii and Minnesota live longer, by 1.11 and 0.48 years, respectively) and have a life
expectancy 1.7 years longer than the average expectancy for the United States total population. A
further move to using mortality tables reflecting California's better than national average life
expectancy, if implemented as expected, will further increase unfunded liabilities.
City Finance Managers were consistent with their HR managers in their evaluation of the impact
of pension reform. Nearly all current employees are Legacy employees; "New" employees
typically comprise a few percent and well less than 10% of their total employee population.
Only employees hired after January 1, 2013 are New under the PEPRA definitions, and hiring of
new employees has primarily occurred only in the cases of retirements of current employees.
New hires to replace positions cut in response to the 2008 Great Recession have been on hold for
the most part.
Except for one of the three cities which outsourced fire protection to OCFA, all three cities
interviewed by the Grand Jury use CalPERS for their Miscellaneous employees and for their
public safety employees. The city outsourcing fire protection is a Cash Contract City member of
OCFA and is billed quarterly for fire services. The quarterly rate paid reflects an agreed to
number of skilled personnel and physical assets such as fie stations, trucks, and ambulances.
Pension costs including any catch up pension costs are included in the bottom line charge to the
city and not separately accounted for.
The managers were well aware of the issues associated with dealing with unfunded pension
liabilities and their impact on their city's finances. However, none of them saw the liabilities,
even at their current size, as catastrophic and were making adjustments in planned city
expenditures to deal with them. They acknowledge that the adjustments will not come without
pain as valuable city services that were cut in response to revenue shortfalls caused by the Great
Recession will not be reinstituted as quickly as they had hoped. Significant amounts of the
revenue increases they are seeing as the recovery develops will be going to catching up on
unfunded pension liabilities. For example, one city's internal budget shows pension
contributions ramping up from 8% to 12% of their General Fund and remaining there for several
years and then ramping back down to 8% based on CalPERS projected Annual Required
Contributions. The link between CaIPERS projected annual contributions and the city's budget is
critical to establishing some confidence that unfunded pension liabilities, while painful, are not
2013-2014 Orange County Grand Jury Page 29
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ORANGE COUNTY CITY PENSION LIABILTIES
catastrophic. It must also be noted, of course, that as discussed earlier in this report, unfunded
liabilities can be volatile, and budgets as they are updated annually must keep in synch with
changes in annual required contributions from Ca1PERS.
Some of the finance managers were working to develop better ways to present future
expenditures for pensions in their budgets and in their briefings to their City Councils. In one
case the finance manager was already planning a proposed update to their budget structure to
clearly identify and separate pension expenditures at the top level of the city budget, an approach
which matched the model the Grand Jury had brought to the interview.
The ability of some of the finance managers to communicate the impact of unfunded pension
liabilities to their City Councils and labor unions has led to some success in labor negotiations
regarding pensions. Such agreements where employees have agreed to carry a larger portion of
the burden of pension costs and in some cases agreed to reduced benefits have also made it
possible for these cities to meet their overall pension funding obligations by offsetting increased
amortization payments for unfunded liabilities with higher employee contributions.
This better understanding of unfunded pension liabilities has also led to the consideration of
accelerated catch up payments to Ca1PERS to increase the amount of assets being managed and
to obtain the projected returns on those assets.
Assessment of Budget Information Available Online
Since cities are expected to make their budget information available online, the Grand Jury
examined a large sample of OC cities' online budget information. Significant effort was
expended reviewing and assessing how well each city's posted budget disclosed how it was
dealing with its unfunded pension liabilities. Although the original intent was to look at
budgeting for pension liabilities, it quickly became apparent that the quality and usefulness of
posted budget information in all areas varied greatly among the cities. Fundamental deficiencies
in budget information posted by OC cities need to be addressed before looking in detail at
pension information in those budgets.
Based on discussions with city Finance Managers and on its review of budget data posted by
cities, the Grand Jury developed a conceptual "Ideal Budget Practices" model that will provide
the necessary visibility to members of the public of how their cities are budgeting in general and
budgeting for pension liabilities in particular. The paragraphs below describe the general criteria
against which city budgets were assessed and then the criteria used to assess budgeting for
pension expenditures.
2013-2014 Orange County Grand Jury Page 30
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ORANGE COUNTY CITY PENSION LIABILTIES
Rather than scoring each city against each criterion, which would be very labor intensive and
subject to possible error/oversight, the Jury has listed the key elements of the ideal model as
separate recommendations to each city in this report. In some cases a city may already meet
some of the recommendations, and some cities may agree to implement some of the
recommendations and not others. However, as the recommendations are implemented, the
members of the public of these cities will benefit from better budget information and from the
discipline imposed on the cities in preparing high quality and transparent budgets.
General budget information available online
The Grand Jury assessed each city's web site for the general quality of budget information
posted according to the following criteria:
1. Is annual budget information posted?
2. Are prior annual budgets posted, and if so, for how many years?
3. Does the current budget show prior year budgets, and if so, for how many years?
4. Does the current budget show future year budget projections, and if so, for how many
years?
5. Are key assumptions about future revenues discussed?
6. Do budgets show prior, current, and projected future city General Fund reserves?
7. Is there any discussion of trends in city General Fund reserves?
8. Is there any discussion of a target for how much reserve the city deems desirable?
9. If the city reserves are below the desired level, is there a discussion of how the desired
level of reserves will be accumulated?
Prior year budget data are important in order to discern trends in revenues and expenditures. Just
having prior year budgets posted is helpful, but including at least one year's prior budget data in
the city's current budget makes it far easier to make comparisons than to separately download
multiple files and bounce back and forth among them to look for trends. Budget information
should include at least two prior years, as projecting a "trend" based on only two data points
(current and most recent prior year) is dubious at best.
Even more important than prior year budget information are projections of future year revenues
and expenditures. Future year budget projections are especially important for understanding the
impact of unfunded pension liabilities. Unfunded pension liabilities have five critical attributes:
1. Budgeted pension catch up contributions typically comprise a significant percentage of
projected General Fund expenditures.
2. Projected annual contributions to catch up on unfunded liabilities are ramped up over
two to five years by CaIPERS and OCERS, so the impact of unfunded liabilities is not all
revealed by looking only one year into the future.
2013-2014 Orange County Grand Jury Page 31
17-33
ORANGE COUNTY CITY PENSION LIABILTIES
3. Unlike most planned city expenditures, there is essentially no way to reduce or defer
required pension contributions in future years.
4. Projected unfunded pension liabilities are at risk of large changes year to year because
they are so dependent on the key actuarial assumptions used in calculating them.
5. The recent switch to Market Value of Assets used in calculating unfunded liability will
introduce more volatility in the estimate of these unfunded liabilities.
Pension specific budget information available online
After assessing the general utility of city budget data, the Grand Jury looked for budget data
relevant to assessing that city's budgeting for pension expenses and in particular for addressing
unfunded pension liabilities. Each city's budget was assessed against the following criteria:
1. Are pension related sources of revenue and expenditures visible as separate line items
under revenues and expenditures at the summary level of the budget?
2. Are city expenditures for pension related expenses broken out into at least 3 sub-
categories: pension contributions withheld from employee pay, employer pension
contributions for current employees, and employer catch up contributions for unfunded
liabilities as assessed by the pension system?
3. Does the budget clearly specify the source of the Annual Required [Pension]
Contributions (ARC) assessed by the pension system (typically CalPERS) used in its
budget by document title and date?
4. Is there a clear mapping of the total Annual Required [Pension] Contributions (ARC)
assessed by the pension system (typically CaIPERS) into one or more line items at the
Summary level of the budget?
5. Annual Required [Pension] Contributions (ARC) are updated annually by the pension
system. Does the budget discuss the risks associated with these predictions of future
catch up contributions? The city needs to state whether they are using the projections
provided or whether they have adjusted them down or up because the city believes the
projections are respectively too pessimistic or too optimistic.
The impact of OC cities' outsourcing for public safety on transparency of budget information — a
tale of two cities
When cities outsource public safety services to OCFA and OCSD, the transparency and quality
of information provided can decrease dramatically. The paragraphs below look at the impact of
outsourcing fire protection to OCFA and to OCSD on transparency in two cities' budgets.
2013-2014 Orange County Grand Jury Page 32
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ORANGE COUNTY CITY PENSION LIABILTIES
Santa Ana
In April 2012, the city of Santa Ana joined OCFA as its 23`d member city. OCFA added Santa
Ana's 192 firefighters and 11 non-swom personnel and 10 fire stations. 12 Santa Ana continued to
maintain its own police department, as it had done since its founding. Santa Ana's Adopted
2013-2015 Budget" is an excellent example of what can happen to transparency of budget
information when a city outsources a public safety service. The table below compares the
information available in Santa Ana's budget for its police and fire services.
Budget Information Metrics
Police
Fire
Pages of budget information
47
9
FY 2013-2014 Budget (Millions)
$103.8
$40.2
Percent of total General Fund
51%
20%
Budget line items
23
1
Total Personnel (FY 13-14)
580
UNKNOWN
Line items for personnel assignments to
department/ office positions
144
46
Line items for personnel assignments to
department/ office positions Containing
Meaningful Data
144
0
The page counts of budget information for Santa Ana fire and police look proportional, but once
the data are examined in any detail, the lack of comparable information is remarkable. The
budget for in-house police services breaks down personnel expenditures by office/department
and for each of these down to expenditures for salaries, retirement, health services, and even to
training and membership/dues, etc. The job titles of authorized personnel budgeted to work in
each office/department are also listed separately. For example, the budget shows 3 Police
Sergeants budgeted for Police Investigations and 24 Police Sergeants to Field Operations, etc. In
particular, expenditures for each office/department for "Salaries Retirement" are provided.
(Unfortunately, a further sub -division of these retirement expenditures into employee, employer
matching, and amortization of unfunded liabilities is lacking, which is a problem for all OC
cities.) The information provided for outsourced fire services is reduced a single line of data (the
one containing the $40.2 million total cost in the Table above), and all 46 authorized positions
are listed as "0"!
"Orange County Fire Authority 2013.2014 Adopted Budget, page 2, lmp://www.ocfa.org/ uploads/pdf/2013-
14%20Adonted%20Budeet websitel.odf
13 City of Santa Ana FY 2013-2015 Adopted Budget, httn://www.ci.santa-ana.ca.us/finance/budeet/2013-2015/dm=mtsi2013-
2015 adopted budeet.ndf
2013-2014 Orange County Grand Jury Page 33
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ORANGE COUNTY CITY PENSION LIABILTIES
Note that Santa Ana is a OCFA Cash Contract City (CCC), so at least the annual cost for fire
protection does show up as a single line item on Santa Ana's budget. As we will see below, not
even this single dollar value for the cost of fire protection is available in Lake Forest's budget.
Lake Forest
The city of Lake Forest outsources to OCFA for its fire protection and to OCSD for its police
protection. A review of their Operating Budget for Fiscal Year 2013-2014" shows a wide
variation of the budget information provided by the city even when they outsource both safety
services. Because Lake Forest outsources both fire and police services, Lake Forest's budget for
Public Works was looked at as an example of the extent and quality of budget information
provided for work to be done with in house resources.
Lake Forest is a Structural Fire Fund (SFF) member of OCFA, and the cost of fire protection is
deducted as a part of their property tax. As far as the cost of fire protection outsourced to OCFA
to Lake Forest, the following is the entirety of the information provided in the their budget: "The
Orange County Fire Authority funds its service in the City of Lake Forest using a formula
derived from direct property tax income. The amount allocated is based on 11.11% of 1% of the
total value of properties in Lake Forest." No dollar value is provided. Out -year projections,
risks to cost of service and/or cuts in service if property tax values do not support current levels
of service, etc., are not discussed.
Budget Information Metrics
Public Works
Police
Fire
Pages of budget information
16
6
2
FY 2013-2014 Budget (Millions)
$9.4
$13.4
UNKNOWN
Percent of total General Fund
24%
34%
0%
Budget line items
56
36
NONE
Total Personnel (FY 13-14)
15
53.5
UNKNOWN
Line items for personnel assignments to
department/ office positions
1
9
NONE
Line items for personnel assignments to
department/ office positions Containing
Meaningful Data
1
9
NONE
As can be seen, the city does provide comparable levels of detail for planned expenditures for
their public works and police services even though the first is done in-house and the latter is
outsourced. In this instance there is actually better information about staffing levels for the
14 City of Lake Forest, Operating Budget, Fiscal Year 2013-14, htto://www.Iakeforestca.eov/civica/filebank/blobdload.asp?BloblD=8219
2013-2014 Orange County Grand Jury Page 34
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ORANGE COUNTY CITY PENSION LIABILTIES
outsourced work for police protection than for the in house work. It is worth noting that the fact
that police services are outsourced to OCSD is not called out explicitly in the Lake Forest budget
and even the fact that it is outsourced is only apparent because the expenditures are labeled as
"Contract Personnel".
Mechanisms for closing the loop from the unfunded OCERS pension liabilities for OCFA and
OCSD through those agencies to the individual OC cities which outsource one or both of their
public safety functions to them must be developed. Otherwise it will be difficult for the taxpayers
of these cities to feel confident in their city's budgeting for these services.
Conclusions
Orange County cities have large unfunded pension liabilities. They do appear to have sufficient
resources to amortize these liabilities, but these liabilities are volatile and need to be clearly
addressed in cities' budgets in order to gain the confidence of their residents that this is actually
the case. Such confidence can only be achieved by far greater transparency in their budgets.
FINDINGS
In accordance with California Penal Code Sections 933 and 933.05, the 2013-2014 Grand Jury
requires (or, as noted, requests) responses from each agency affected by the findings presented in
this section. Although the findings are stated in terms of all Orange County cities, each city
should respond to each finding as it applies to itself only. The responses are to be submitted to
the Presiding Judge of the Superior Court.
Based on its investigation of Pension Funding Status of Cities in Orange County, the 2013-2014
Orange County Grand Jury has arrived at 12 principal findings, as follows:
F.I. OC cities have large unfunded pension liabilities both in terns of absolute dollar value and
on a per capita basis and as a percentage of city General Fund revenues.
F.2. OC cities' unfunded pension liabilities have been increasing on a year over year basis over
the past several years as a result of the 2007-2009 Great Recession and as key actuarial
assumptions have been changed by CatPERS and OCERS.
F.3. There are risks to OC cities of changes to key actuarial assumptions including revisions
downward of expected returns on investment and the likely move by pension funds to using
more realistic mortality assumptions, which would increase unfunded liabilities.
F.4. Locating city budget information on a city web site is not always straightforward and prior
year budgets are sometimes not posted by a city.
F.S. City budgets posted online project revenues and expenditures for at most one or two years
into the future and sometimes do not show prior year data.
2013-2014 Orange County Grand Jury Page 35
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ORANGE COUNTY CITY PENSION LIABILTIES
F.6. City budgets often lack footnotes explaining key assumptions, risks, and unusual changes in
budgeted amounts or revenues and expenditures.
F.7. City budgets sometimes do not provide trend data on the accumulation/drawdown of
reserves and lack details on the city's plan for the size of its reserves or their intended uses.
F.B. Cities can control most future expenditures by increasing or decreasing budgets for those
expenditures as funds are available. However, increases to annual required contributions to their
pension systems are imposed externally, change unpredictably, and when they occur, are ramped
up over two to five years.
F.9. City budgets posted online do not explicitly show the link between planned city pension
expenditures and pension system actuarial reports and those reports' annual required
contributions. Risks associated with predictions of future annual required pension contributions
based on risk assessment data provided by their pension systems and/or based on their own
analysis are not discussed.
F.10. Pension costs for New (Post-PEPRA) employees will be substantially lower than for
Legacy employees, but only a small percentage of current employees, typically only a few
percent of total employees, are New. Substantially reduced pension costs for cities as a result of
pension reform will not be realized for one or more decades.
F.11. Ca1PERS Annual Valuation Reports for Miscellaneous and Safety City employees are
available to the public online for a very small number of cities.
F.12. OCERS provides pension plans for OCFA and OCSD employees, but there is no way to
trace through publically available sources OCERS unfunded pension liabilities to the city
budgets which outsource to OCFA and OCSD for fire and police services.
Penal Code §933 and §933.05 require governing bodies and elected officials to which a report is
directed to respond to findings and recommendations. Responses are requested, from
departments of local agencies and their non -elected department heads.
RECOMMENDATIONS
In accordance with California Penal Code Sections 933 and 933.05, the 2013-2014 Grand Jury
requires (or, as noted, requests) responses from each agency affected by the recommendations
presented in this section. The responses are to be submitted to the Presiding Judge of the
Superior Court.
2013-2014 Orange County Grand Jury Page 36
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ORANGE COUNTY CITY PENSION LIABILTIES
Based on its investigation of Pension Funding Status of Cities in Orange County, the 2013-2014
Orange County Grand Jury makes the following 8 recommendations:
R.I. Each city should post its current and at least three most recent prior year budgets on the
city's web site, and these budgets should be easily located. Each city's web site should have a
search engine and a single search on the word "budget" should immediately link to the current
budget. (F.1) (F.4)
R.2. Each city's budget information should contain not only this year/next year budget
projections, but should show at least five years of projected revenues and expenditures.
Projections should be at the same level of detail and use the same line item structure as
information for the current budget. (F.1) (F.2) (F.3) (F.5) (F.8) (F.10)
R.3. Each city's budget should show separate line items for predicted employee and predicted
employer contributions for the city pension systems. (F.8) (F.9)
R.4. Each city's budget should provide trend data on the accumulation/drawdown of reserves
and provide details on the city's policy for the size of its reserves and on the intended uses of
such reserves. In particular any discussion of reserves should address possible use of reserves to
accelerate amortization of unfunded pension liabilities. (F.7)
R.S. Each city using Ca1PERS for one or more of its pension plans should identify the names and
dates of the Ca1PERS Annual Valuation Report(s) which call out Annual Required Contributions
(ARCS) for these plans and should provide a separate expenditure line item for predicted city
catch-up contributions for the city pension systems based on these ARCS. A discussion of the
risks associated with these Ca1PERS projections should also be provided by the city. (F.1) (F.2)
(F.8) (F.9)
R.6. Each city which outsources fire or police services to OCFA and/or OCSD should require
them to provide projections of future costs of service out at least five years into the future and
require that these projected costs explicitly show the relationship of projected pension costs
including amortization of unfunded liabilities. This level of pension cost information should be
provided in budgeted expenditures for outsourced services. A discussion of the risks associated
with these projections should also be provided by the agencies and incorporated in the city's
budgets. (F.6) (F.12)
R.7. Each city that has Ca1PERS as a provider for pensions should include a provision in their
agreements with CalPERS that Ca1PERS will post their Annual Valuation Reports online. (F.11)
2013-2014 Orange County Grand Jury Page 37
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ORANGE COUNTY CITY PENSION LIABILTIES
REQUIRED RESPONSES
The California Penal Code §933 requires any public agency which the Grand Jury has reviewed,
and about which it has issued a final report, to comment to the Presiding Judge of the Superior
Court on the findings and recommendations pertaining to matters under the control of the
agency. Such comment shall be made no later than 90 days after the Grand Jury publishes its
report (filed with the Clerk of the Court); except that in the case of a report containing findings
and recommendations pertaining to a department or agency headed by an elected County official
(e.g. District Attorney, Sheriff, etc.), such comment shall be made within 60 days to the
Presiding Judge with an information copy sent to the Board of Supervisors.
Furthermore, California Penal Code Section §933.05 (a), (b), (c), details, as follows, the manner
in which such comment(s) are to be made:
(a) As to each Grand Jury finding, the responding person or entity shall indicate one of the
following:
(1) The respondent agrees with the finding
(2) The respondent disagrees wholly or partially with the finding, in which case the response
shall specify the portion of the finding that is disputed and shall include an explanation of the
reasons therefore.
(b) As to each Grand Jury recommendation, the responding person or entity shall report one of
the following actions:
(1) The recommendation has been implemented, with a summary regarding 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, with an explanation and the scope and
parameters of an analysis or study, and a time frame for the matter to be prepared for discussion
by the officer or head of the agency or department being investigated or reviewed, including the
governing body of the public agency when applicable. This time frame shall not exceed six
months from the date of 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 therefore.
(c) If a finding or recommendation of the Grand Jury addresses budgetary or personnel matters
of a county agency or department headed by an elected officer, both the agency or department
head and the Board of Supervisors shall respond if requested by the Grand Jury, but the response
2013-2014 Orange County Grand Jury Page 38
17-40
ORANGE COUNTY CITY PENSION LIABILTIES
of the Board of Supervisors shall address only those budgetary /or personnel matters over which
it has some decision making aspects of the findings or recommendations affecting his or her
agency or department.
Comments to the Presiding Judge of the Superior Court in compliance with Penal Code section
§933.05 are required from:
Required/Requested
Responses
F1
F2
F3
F4
F5
F6
F7
F8
F9
F10 F11
F12
Cities Councils of:
Aliso Viejo
X
X
X
X
X
X
X
X
X
X
X
X
Anaheim
X
X
X
X
X
X
X
X
X
X
X
X
Brea
X
X
X
X
X
X
X
X
X
X
X
X
Buena Park
X
X
X
X
X
X
X
X
X
X
X
X
Costa Mesa
X
X
X
X
X
X
X
X
X
X
X
X
Cypress
X
X
X
X
X
X
X
X
X
X
X
X
Dana Point
X
X
X
X
X
X
X
X
X
X
X
X
Fountain Valley
X
X
X
X
X
X
X
X
X
X
X
X
Fullerton
X
X
X
X
X
X
X
X
X
X
X
X
Garden Grove
X
X
X
X
X
X
X
X
X
X
X
X
Huntington Beach
X
X
X
X
X
X
X
X
X
X
X
X
home
X
X
X
X
X
X
X
X
X
X
X
X
La Habra
X
X
X
X
X
X
X
X
X
X
X
X
La Patna
X
X
X
X
X
X
X
X
X
X
X
X
Laguna Beach
X
X
X
X
X
X
X
X
X
X
X
X
LagunaHills
X
X
X
X
X
X
X
X
X
X
X
X
LagunaNiguel
X
X
X
X
X
X
X
X
X
X
X
X
Laguna Woods
X
X
X
X
X
X
X
X
X
X
X
X
Lake Forest
X
X
X
X
X
X
X
X
X
X
X
X
Los Alamitos
X
X
X
X
X
X
X
X
X
X
X
X
Mission Viejo
X
X
X
X
X
X
X
X
X
X
X
X
Newport Beach
X
X
X
X
X
X
X
X
X
X
X
X
Orange
X
X
X
X
X
X
X
X
X
X
X
X
Placentia
X
X
X
X
X
X
X
X
X
X
X
X
Rancho Santa Margarita
X
X
X
X
X
X
X
X
X
X
X
X
San Clemente
X
X
X
X
X
X
X
X
X
X
X
X
San Joan Capistrano
X
X
X
X
X
X
X
X
X
X
X
X
Santa Ana
X
X
X
X
X
X
X
X
X
X
X
X
Seal Beach
X
X
X
X
X
X
X
X
X
X
X
X
Stanton
X
X
X
X
X
X
X
X
X
X
X
X
Tustin
X
X
X
X
X
X
X
X
X
X
X
X
Villa Park
X
X
X
X
X
X
X
X
X
X
X
X
Westminster
X
X
X
X
X
X
X
X
X
X
X
X
Yorba Linda
X
X
X
X
X
X
X
X
X
X
X
X
2013-2014 Orange County Grand Jury Page 39
17-41
ORANGE COUNTY CITY PENSION LIABILTIES
Required/Requested
Responses
RI
R2
R3
R4
R5
R6
R7
Cities Councils of:
Aliso Viejo
X
X
X
X
X
X
X
Anaheim
X
X
X
X
X
X
Brea
X
X
X
X
X
X
Buena Park
X
X
X
X
X
X
X
Costa Mesa
X
X
X
X
X
X
Cypress
X
X
X
X
X
X
X
Dana Point
X
X
X
X
X
X
X
Fountain VaHey
X
X
X
X
X
X
FuIlerton
X
X
X
X
X
X
Garden Grove
X
X
X
X
X
X
Huntington Beach
X
X
X
X
X
X
hvine
X
X
X
X
X
X
X
La Habra
X
X
X
X
X
X
X
La Palma
X
X
X
X
X
X
X
LagunaBeach
X
X
X
X
X
X
Lagum Hills
X
X
X
X
X
X
X
Lagurm Niguel
X
X
X
X
X
X
X
Lagena Woods
X
X
X
X
X
X
X
Lake Forest
X
X
X
X
X
X
X
Los Alamitos
X
X
X
X
X
X
X
Mission Viejo
X
X
X
X
X
X
X
Newport Beach
X
X
X
X
X
X
Orange
X
X
X
X
X
X
Placentia
X
X
X
X
X
X
X
Rancho Santa Margarita
X
X
X
X
X
X
X
San Clemente
X
X
X
X
X
X
X
San Juan Capistrano
X
X
X
X
X
X
X
Santa Ana
X
X
X
X
X
X
X
Seal Beach
X
X
X
X
X
X
X
Stanton
X
X
X
X
X
X
X
Tustin
X
X
X
X
X
Villa Park
X
X
X
X
X
Westnmtster
X
X
$Xx
X
X
X
Yorba Linda
X
X
X
X
X
2013-2014 Orange County Grand Jury Page 40
17-42
ORANGE COUNTY CITY PENSION LIABILTIES
APPENDICES
2013-2014 Orange County Grand Jury Page 41
17-43
ORANGE COUNTY CITY PENSION LIABILTIES
Appendix A — Acronyms
ARC — Annual Required Contribution
CAFR — [CalPERS] Consolidated Annual Financial Report
CalPERS - California Public Employees' Retirement System
COLA — Cost of Living Adjustment
GDP - Gross Domestic Product (GDP)
OC - Orange County
OCERS - Orange County Employee Retirement System
OCFA- Orange County Fire Authority
OCSD — Orange County Sheriff/Coroner's Department
PEPRA - Public Employees' Pension Reform Act
PERF — Public Employees' Retirement Fund
2013-2014 Orange County Grand Jury Page 42
17-44
ORANGE COUNTY CITY PENSION LIABILTIES
Appendix B — Glossary
Accumulated Plan Benefits - Benefits attributable under the provisions of a pension plan to
employees for services rendered to the benefit information date.
Actuarial Assumptions - Assumptions used in the actuarial valuation process as to the
occurrence of future events affecting pension costs, such as mortality, withdrawal, disablement
and retirement; changes in compensation and national pension benefits; rates of investments
earnings and asset appreciation of depreciation; procedures used to determine the actuarial value
of assets; characteristics of future entrants for open group actuarial cost methods and others
relevant items.
Accrual Basis - The recording of the financial effects on a government of transactions and other
events and circumstances that have cash consequences for the government in the periods in
which those transactions, events and circumstances occur, rather than only in the periods in
which cash is received or paid by the government.
Actuarial Accrued Liability - The portion, as determined by a particular cost method, of the
total present value of benefits that is attributable to past service credit.
Actuarial Gain (Loss) - A measure of the difference between actuarial and expected experience
based upon a set of actuarial assumptions. Examples include higher than expected salaries
increases (loss) and a higher return on fund assets than anticipated (gain).
Actuarial Present Value - The discounted value of an amount or series of amounts payable or
receivable at various times, determined as of a given date by the application of a particular set of
actuarial assumptions.
Amortization - (1) The portion of the cost of a limited -life or intangible asset charged as an
expense during a particular period. (2) The reduction of debt by regular payments of principal
and interest sufficient to retire the debt by maturity.
Annuity - A fixed sum of money paid to someone each year, typically for the rest of their life.
Auditor's Report - In the context of a financial audit, a statement by the auditor describing the
scope of the audit and the auditing standards applied in the examination, and setting forth the
auditor's opinion on the fairness of presentation of the financial information in conformity with
generally accepted accounting principles (GAAP) or some other comprehensive basis of
accounting.
Comprehensive Annual Financial Report (CAFR) - The official annual report of a
government. It includes the basic financial statements and their related notes prepared in
2013-2014 Orange County Grand Jury Page 43
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ORANGE COUNTY CITY PENSION LIABILTIES
conformity with GAAP. It also includes supporting schedules necessary to demonstrate
compliance with finance -related legal and contractual provision, required supplementary
information, extensive introductory material and a detailed statistical section.
Defined Benefit Pension - A company pension plan in which an employee's pension payments
are calculated according to length of service and the salary they earned at the time of retirement.
Defined Contribution Pension - A defined contribution plan, unlike a defined benefit plan, does
not promise a specific amount of benefits at retirement. In these plans, the employee or the
employer (or both) contribute to the employee's individual retirement account.
Entry Age Actuarial Cost Method - A method under which the actuarial present value of the
projected benefits of each individual included in an actuarial valuation is allocated on the level
basis over the earnings or services of the individual between entry age and assumed exit age(s),
Normal Cost - The ongoing annual cost allocated to the system by a particular actuarial cost
method for providing benefits (future cost). Normal cost payments are made during the working
lifetime of the member.
Pension - a regular payment made during a person's retirement from an investment fund to
which that person or their employer has contributed during their working life.
Pension Contribution - The amount paid into a pension plan by an employer (or employee),
pursuant to the terms of the plan, state law, actuarial calculations or some other basis for
determinations.
Pension Trust Fund - A fund used to account for public employee retirement benefits. Pension
trust funds, like nonexpendable trust funds, use the accrual basis of accounting and have a capital
maintenance focus.
PERS-able — payments to an employee which can be included as "salary" in calculation of
pension benefits.
UAAL Amortization Payment - The portion of pension contributions, which is designed to pay
off (amortize) the unfunded actuarial accrued liability in a systematic fashion. Equivalently, it is
a series of periodic payments required to pay off a debt.
Unfunded Actuarial Accrued Liability (UAAL) - The excess of the actuarial accrued liability
over the actuarial value of assets.
2013-2014 Orange County Grand Jury Page 44
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ORANGE COUNTY CITY PENSION LIABILTIES
Appendix C — A Brief Primer on Pensions
A discussion on pensions is needed as background to this report for those members of the public
who may be aware of and concerned about problems with unfunded pension liabilities, but are
not familiar with the sometimes arcane terms used in discussing them. The primer below is a
synthesis and simplification of material publically available from various sources including:
1. Comprehensive Annual Financial Reports from Ca1PERS and OCERS
2. Discussions with senior management and technical staff of Ca1PERS and OCERS
3. Discussions with senior financial managers from three Orange County cities
4. Wikipedia
Any violation of Einstein's (possibly apocryphal) dictum, "Everything should be made as simple
as possible, but no simpler," is solely the responsibility of the Grand Jury and not of the various
sources listed above.
The paragraphs below briefly examine:
1. Pensions and their purpose
2. Two major types of pension plans
3. How pension benefits are specified
4. How pension benefits (actuarial liabilities) for retired members are computed
5. How pension benefits (actuarial liabilities) for active members are computed
6. Actuarial Accrued Liability (AAL)
7. Actuarial Value of Assets
8. What it means to say a pension has unfunded liabilities
Pensions and their purpose
A pension is a contract for a fixed sum to be paid regularly to a person, typically following
retirement from service. There are many different types of pensions, including defined benefit
plans, defined contribution plans, as well as several others. A retirement plan is an arrangement
to provide people with an income during retirement after they are no longer earning a steady
income from employment. Often retirement plans require both the employer and employee to
contribute money to a fund during their employment in order to receive defined benefits upon
retirement. A recipient of a retirement pension is known as a pensioner or retiree. Retirement
pensions are typically in the form of a guaranteed life annuity, thus insuring against the "risk of
longevity" (i.e., outliving one's savings).
2013-2014 Orange County Grand Jury Page 45
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ORANGE COUNTY CITY PENSION LIABILTIES
Two major types ofpension plans
Retirement plans are classified as defined benefit or defined contribution according to how the
benefits are determined and by their associated methods of funding. A defined benefit plan
guarantees a certain payout at retirement, according to a fixed formula which usually depends on
the member's salary and the number of years' of membership in the plan. A defined contribution
plan will provide a payout at retirement that is dependent upon the amount of money contributed
and the performance of the investment vehicles utilized.
Defined benefit plans
A defined benefit (DB) plan is a plan in which an employee's benefit on retirement is determined
by a set formula, rather than depending on investment returns on that employee's savings.
Traditionally, retirement plans have been administered by institutions which exist specifically for
that purpose. A typical form of defined benefit plan is the final salary plan, under which the
pension paid is equal to the number of years worked, multiplied by a percentage of the member's
salary at retirement. Normally a minimum number of years worked and/or a minimum
retirement age are specified.
The employer's cost of a defined benefit plan is not easily predicted since it depends so much on
the plan's ability to achieve the predicted rate of return on investment of the plan's assets as they
are accrued. Since the pension benefit to the employee is defined, any shortfall in investment
returns or longer than actuarially predicted employee life span post retirement for example must
be made up by the employer. The employer assumes all the risk in providing the defined benefit.
Defined contribution plans
In a defined contribution plan, contributions are paid into an individual account for each
member. The contributions are invested, for example in the stock market, and the returns on the
investment (which may be positive or negative) credited to the individual's account. On
retirement, the member's account is used to provide retirement benefits, sometimes through the
purchase of an annuity which then provides a regular income. Defined contribution plans have
become widespread all over the world in recent years, and are now the dominant form of plan in
the private sector in many countries.
In a defined contribution plan, investment risk and investment rewards are assumed by each
individual/employee/retiree and not by the sponsor/employer, and these risks may be substantial.
In addition, participants do not necessarily purchase annuities with their savings upon retirement,
and bear the risk of outliving their assets.
Despite the fact that the participant in a defined contribution plan typically has control over
investment decisions, the plan sponsor retains a significant degree of fiduciary responsibility
over investment of plan assets, including the selection of investment options and administrative
providers.
2013-2014 Orange County Grand Jury Page 46
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ORANGE COUNTY CITY PENSION LIABILTIES
Both the CalPERS and OCERS plans used by OC cities are defined benefit plans
How pension benefits are specified
Pension benefits are specified as a percentage of highest annual average compensation times the
number of years of service at the age of retirement. For example, "3% at 50", a benefit held by
many city public safety employees, means that such an employee can retire at age 50 and receive
3% of his/her highest salary times the number of years of service. For example, a police officer
hired at age 25 and retiring at age 50 with his/her highest annual salary at $160,000 will receive
an annual pension of $120,000 (3% times 25 years times $160,000).
How pension benefits (actuarial liabilities) for retired members are computed
The pension liability for a retired member is computed based on his/her current pension
payment, current age, and predictions of cost of living increases, inflation, and mortality.
How pension (actuarial liabilities) for active members are computed
The pension liability of an active member is computed based on his/her current salary, age, and
predictions of the age at which the member will retire, salary increases occurring until
retirement, inflation, and mortality. Other factors taken into consideration are the probabilities
the member will become disabled or will terminate his/her service earlier than anticipated.
Actuarial Accrued Liability
The present value of the sum of active and retired members' pension benefits is the actuarial
accrued liability
Actuarial Value of Assets
The value of pension plan investments and other property used by an actuary for the purpose of
an actuarial valuation is the actuarial value of assets (sometimes referred to as valuation assets).
Actuaries often select an asset valuation method that smoothes the effects of short-term volatility
in the market value of assets.
What it means to say a pension has unfunded liabilities
The difference between the actuarial accrued liability and the actuarial value of assets
accumulated to finance a public pension is its unfunded liability.
2013-2014 Orange County Grand Jury Page 47
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ATTACHMENT B
DRAFT RESPONSE
September 23, 2014
The Honorable Glenda Sanders
Presiding Judge of the Superior Court
700 Civic Center Drive West
Santa Ana, CA 92701
RE: "Orange County City Pension Liabilities -Budget — Budget Transparency Critically Needed"
Dear Judge Sanders:
The City of Newport Beach has reviewed the 2013-2014 Orange County Grand Jury Report,
"Orange County City Pension Liabilities — Budget Transparency Critically Needed." In response
to the Grand Jury's findings and recommendations outlined in said report, the City of Newport
Beach offers the following responses:
Finding 1. OC cities have large unfunded pension liabilities both in terms of absolute
dollar value and on a per capita basis and as a percentage of city General Fund
revenues.
City Response:
The City of Newport Beach agrees with the finding that Orange County cities have large
unfunded pension liabilities. The City continues to believe that any use of pension liability on a
per capita basis misinforms and is a poor comparative indicator of pension funding progress
across cities.
First, we note our appreciation that the Grand Jury points out that the ability -to -pay metric
(versus the per capita metric) might be a "potentially better way" of comparing unfunded pension
liabilities (page 20).
There are three fundamental problems with the per capita metric. No. 1 — It is nearly impossible
to make accurate comparisons across cities. Each city has different operations within its
service portfolio and budget. Newport Beach is a full-service city with its own library system,
lifeguards, trash service (up until March 2014), water and wastewater system, and municipal
police and fire/emergency medical departments. Each of these departments' annual pension
expense is reported and approved in the budget. There are cities in the county with as large or
larger populations that outsource such services to other public agencies or service providers.
One neighboring city does not have a city library system nor a city water and wastewater utility.
Another neighboring city has no city fire department, no city water and wastewater department,
and no city library. These cities may hire other public agencies with pensioned employees to
provide those services to their residents and as a result, pension costs may not be reflected in
these cities' budgets. One would have to look at the budget of numerous small special districts,
the Orange County Public Library District, the Orange County Sheriff's Department, the Orange
County Fire Authority, and more to decipher the true pension liability per capita for each
geographic city.
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No. 2 — This statistic can misinform about how pension costs are funded, as it does not take into
consideration the varied resources used to pay the City's obligations. In Newport Beach,
employees pay one of the largest shares of pension costs - nearly $7.4 million (and growing) is
deducted from staffs paychecks every year. This represents 27% of the total pension payment
made. Moreover, local pension funding (on top of investment earnings) is also funded from the
City's numerous visitors, local employers and their employees. For example, revenues from
visitors who use the City's parking lots, buy a car at a local dealership, stay in a hotel room, or
eat at restaurants, are used to pay the City costs, including pensions.
No. 3 — Pension liability per capita says nothing about a city's ability to fund the liability. The City
of Newport Beach is one of the most financially secure and stable cities in the county and has
the financial means to better mitigate the financial risks associated with rising pension costs
when compared to other cities (see response to Finding 3 below). This is supported by the
published reaffirmation of the City's "AAA" credit rating by Fitch (dated August 1, 2014). It
stated the following about Newport Beach:
"Prudent financial management has resulted in a history of positive operations, augmenting the
city's very high reserves, despite large planned general fund investment in capital projects.
Management has successfully implemented expenditure savings, including major labor
concessions and the use of contracted services. The city's total debt burden is low and likely to
remain so given limited near-term capital needs. Amortization is average and the city has
reduced retiree health care costs, though pension contributions are expected to rise. Carrying
costs, including debt service and retiree benefit contributions, remain affordable. Total annual
carrying costs, including debt service, pension ARC and OPEB contributions constitute a low
13.9% of governmental fund spending in fiscal 2013. Expenditure controls to date have been
moderate, including early retirement incentive plans, increased employee contributions to
pension plans, contracting services, and freezing vacant positions. Financial management
policies are robust and continue to improve to meet the city's financial needs. They include a
contingency reserve equal to 25% of the general fund operating budget, up from 15% at the
time of Fitch's last review. "
Finding 2. OC cities' unfunded pension liabilities have been increasing on a year over
year basis over the past several years as a result of the assumptions that have been
changed by CaIPERS and OCERS.
City Response:
The City of Newport Beach agrees in part with the finding. "Over the past several years' there
has been a significant increase in liabilities, due to actuarial assumption changes and the
dramatic fall of the markets in 2008-2009. However, in 2013 and 2014 our unfunded liability fell
significantly. Not enough to bring us back to pre -recession levels, of course. We note how
important it is to assign a date in time to any unfunded liability value, as the contributing factors
(assets and liabilities) can fluctuate dramatically depending on the date used.
Finding 3. There are risks to OC cities of changes to key actuarial assumptions including
revisions downward of expected returns on investment and the likely move by pension
funds to more realistic mortality assumptions, which would increase unfunded liabilities.
Page 2 of 8
17-51
City Response:
The City of Newport Beach agrees with the finding. We are thankful that CalPERS has made
some steps in the right direction on rates of return and workforce mortality assumptions.
Finding 4. Locating city budget information on a city web site is not always
straightforward and prior year budgets are sometimes not posted by a city.
City Response:
The City of Newport Beach disagrees with the finding in terms of our own data — we cannot
speak to the websites of other cities. The City provides access to the most current and prior
year budgets going back to FY 1927-28. Budget documents can be accessed from the several
menu paths on the City website under the "About (City)," "Finance Department," "City
Government," and "Residents" web page menus at: www.newportbeachca.gov or can be
accessed directly at: www.newportbeachca.gov/budget.
Budgets prior to FY 2008-09 can be found on the same "City Salary and Budget Documents"
web page under "Prior Year Budget Documents."
Finding 5. City budgets posted online project revenues and expenditures for at most one
or two years into the future and sometimes do not show prior year data.
City Response:
The City of Newport Beach partially disagrees with the finding in terms of our own data; we
cannot speak to the budget documents of other cities. The City does present prior year
revenues and expenditures going back four years from the current year adopted budget but
deliberately presents and adopts a one-year operating budget. The City prepares many long-
range planning documents and projections where long-term planning is prudent and necessary
especially for capital replacement and debt management. These tools take various forms from
spreadsheets to databases.
Finding 6. City budgets often lack footnotes explaining key assumptions, risks, and
unusual changes in budgeted amounts or revenues and expenditures.
City Response:
The City of Newport Beach partially agrees with the finding. We can always do better to explain
budgeting practices and assumptions. A discussion of key budget highlights can be found in the
Transmittal Letter of the Budget. A discussion of pension risk can be found on pages 148-150
of the Performance Plan.
Finding 7. City budgets sometimes do not provide trend data on the accumulation
/drawdown of reserves and lack details on the city's plan for the size of its reserves or
their intended uses.
City Response:
The City of Newport Beach partially disagrees with the finding. The City does provide detail
regarding the size of reserves and projects its sources and intended uses for two fiscal years
(please see pages 19-24 of the FY 2014-15 Budget Detail document at:
www.newportbeachca.gov/budget.) Most analysts seek historical trend data from city
Comprehensive Annual Financial Reports (CAFR) and not the budget. The City also believes
Page 3 of 8
17-52
that trend data ought to be compiled from the CAFR, which are based on audited actual results
and can be obtained at: www.newportbeachca.gov/cafr.
Finding 8. Cities can control most future expenditures by increasing or decreasing
budgets for those expenditures as funds are available. However, increases to annual
required contributions to their pension systems are imposed externally, change
unpredictably, and when they occur, are ramped up over two to five years.
City Response:
The City of Newport Beach agrees with the finding. One of the most impactful actuarial
assumptions that affect the City's pension funded status and annual required contribution is the
assumed and actual rate of return on the pension assets that are invested in the pension trust.
The actual rate of return is largely dependent on financial markets and economic cycles. As a
result, the City's pension assets can vary from one actuarial valuation to the next. Even when
the City diligently pays CalPERS the Annual Required Contribution (ARC), determined by
pension actuaries, the funded status of the plan can change rapidly over a short period of time.
As demonstrated in the chart below, CalPERS investment returns decreased 24% in fiscal year
2009 and by fiscal year 2011 had increased 21.7% from the prior year.
CalPERS Investment Returns
30111,
3 0%
3 0%
30%
z0%
i0%
00%
-24.0%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
While the equities markets are now above the levels in 2007, they still fall short of the where
investment balances would have been had they continued to grow 7.5% annually since 2007.
Fortunately, the risks are somewhat mitigated by the City's ability to set aside significant
resources. During both strong and uncertain economic times, reserve funds provide the City
with budgetary options that can help mitigate the need to cut services.
Finding 9. City budgets posted online do not explicitly show the link between planned
city pension expenditures and pension system actuarial reports and those reports'
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17-53
annual required contributions. Risks associated with predictions of future annual
required pension contributions based on risk assessment data provided by their pension
systems and/or based on their own analysis are not discussed.
City Response:
The City of Newport Beach disagrees with the finding with respect to our own documents,
website, and discussions. We cannot speak to other cities documents, websites and
discussions. City budgets do incorporate the annual required contributions from the latest
actuarial reports. We continue to have robust discussions with our pension actuaries, Council,
the community, and our Finance Committee about where pension costs are headed, how to
lower them, and why. Narrative discussions can be found in the Transmittal Letters of our
budget as well as pages 148-150 of the FY 2014-15 Performance Plan (summary budget
document) at: www.newportbeachca.gov/budget. The City Manager's newsletter — mailed out
to all residences in Newport Beach — also typically discusses pension issues.
Finance Committee review and discussions of our actuarial reports and or subsequent
discussions can be found on our website under Finance Committee Agendas at:
http://newportbeachca.ciov/index.aspx?page=964 "View Past Meetings" See example, Finance
Committee discussions:
• November 18, 2013
• February 23, 2013
• May 7, 2012
• November 7, 2011
Finding 10. Pension costs for New (Post-PEPRA) employees will be substantially lower
than for Legacy employees, but only a small percentage of current employees, typically
only a few percent of total employees, are New. Substantially reduced pension costs for
cities as a result of pension reform will not be realized for one or more decades.
City Response:
The City of Newport Beach agrees with the finding; however, we note our appreciation that
PEPRA was enacted into law to assist all Californians in bringing a bit more realism to public
employee retirement benefits.
Finding 11. CalPERS Annual Valuation Reports for Miscellaneous and Safety City
employees are available to the public online for a very small number of cities.
City Response:
Annual Valuation reports for most or all CaIPERs agencies can be obtained directly from the
CalPERS website at: https://www.calpers.ca.gov/index.Fsp?bc=/about/forms-pubs/calpers-
reports/actuarial-reports/home.xml
Finding 12. OCERS provides pension plans for OCFA and OCSD employees, but there is
no way to trace through publically available sources OCERS unfunded pension liabilities
to the city budgets which outsource to OCFA and OCSD for fire and police services.
Page 5 of 8
17-54
City Response:
Not applicable.
Recommendation 1. Each city should post its current and at least three most recent prior
year budgets on the city's web site, and these budgets should be easily located. Each
city's web site should have a search engine and a single search on the word "budget"
should immediately link to the current budget. (Finding 1) (Finding 4)
City Response:
The recommendation has been implemented. The City provides access to the most current and
prior year budgets going back to FY 1927-28. Budget documents can be accessed from the
several menu paths on the City website under the "About (City)," "Finance Department," "City
Government," and "Residents" web page menus at: www.newportbeachca.gov or can be
accessed directly at: www.newportbeachca.gov/budget.
Budgets prior to FY 2008-09 can be found on the same "City Salary and Budget Documents"
web page under "Prior Year Budget Documents" Please see
http://ecros.newr)ortbeachca.gov/Web/Browse.asr)x?startid=5743&cnb=Financiallnformation&db
id=0
The City's website contains a search engine and locates budget documents when the word
"budget" is searched.
Recommendation 2. Each city's budget information should contain not only this
year/next year budget projections, but should show at least five years of projected
revenues and expenditures. Projections should be at the same level of detail and use the
same line item structure as information for the current budget. (Finding 1) (Finding 2)
(Finding 3) (Finding 5) (Finding 8) (Finding 10)
City Response:
This recommendation will not be implemented at "the same level of detail" as current budgets.
The City recognizes that long-term forecasting is an essential part of prudent fiscal planning,
especially as it relates to long-term capital replacement and debt management and does so in
various internal planning tools. The City also believes long-term forecasts are best managed
and are more meaningful at the 30,000 -foot -level. The City respectfully disagrees that preparing
five year operating budgets at the department/object level would provide informative results and
believe this action would be so speculative that it may not accomplish the desired result.
Recommendation 3. Each city's budget should show separate line items for predicted
employee and predicted employer contributions for the city pension systems. (Finding 8)
(Finding 9)
City Response:
This recommendation has been implemented. The normal cost of pension plans, the employee
contribution towards pension plans, the amortized cost of unfunded liability, and the net
CalPERS pension cost to the City are segregated in the FY 2014-15 Budget Detail at:
www.newporbeachca.gov/budget.
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A description of the accounts and explanation of these terms can be reviewed on the
unnumbered third page of the FY 2014-15 Budget Detail at: www.newportbeachca.gov/budget.
Recommendation 4. Each city's budget should provide trend data on the
accumulation/drawdown of reserves and provide details on the city's policy for the size
of its reserves and on the intended uses of such reserves. In particular any discussion
of reserves should address possible use of reserves to accelerate amortization of
unfunded pension liabilities. (Finding 7)
City Response:
We agree that trend data on reserves, reserve policies, and a regular discussion of strategic
uses of reserves deserves strong transparency. We question whether the entire
recommendation is best suited for budget documents.
Council Policy F-2, "Reserves" provides staff guidance concerning the size and intended
purpose of reserves, directs staff to pay 100% of the Annual Required Contribution (ARC), and
contemplates use of reserves when the funded status of the pension plans fall below acceptable
actuarial standards (www.newportbeachca.gov/policies).
The City provides detail regarding the size of reserves and projects its sources and intended
uses for two fiscal years (please see pages 19-24 of the FY 2014-15 Budget Detail document
at: www.newportbeachca.gov/budget). Historical trend data can be culled from Comprehensive
Annual Financial Reports (CAFR) which are audited actual results and are readily available at:
www.newportbeachca.gov/cafr.
Use of reserves to amortize unfunded pension liabilities and other pension mitigation strategies
are complex discussions involving consultation with our actuaries and careful financial analysis.
We discuss the status of our pension plans, potential risks and opportunities with our Finance
Committee in a public and noticed meeting on a regular basis. To us, the Committee and
Council discussions, which have tended to occur at least annually and often more so, are ideal
mechanisms for decision-making in the public eye.
Recommendation 5. Each city using CaIPERS for one or more of its pension plans
should identify the names and dates of the CalPERS Annual Valuation Report(s) which
call out Annual Required Contributions (ARCS) for these plans and should provide a
separate expenditure line item for predicted city catch-up contributions for the city
pension systems based on these ARCS. A discussion of the risks associated with these
CaIPERS projections should also be provided by the city. (Finding 1) (Finding 2) (Finding
8) (Finding 9)
City Response:
This recommendation has been implemented. There is a direct correlation between the
budgeted fiscal year and the pension contribution rates for any given fiscal year (The pension
contribution rates determine the Annual Required Contribution).
The City does provide a separate expenditure line for the "catch-up" portion of the ARC. This
represents the amortization of the Unfunded Actuarial Liability (UAL). A description of the
accounts and explanation of these terms can be reviewed on the unnumbered third page of the
FY 2014-15 Budget Detail at: www.newportbeachca.gov/budget.
Page 7 of 8
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Narrative discussions of the "risks associated with CalPERS projections" can be found pages
148-150 of the FY 2014-15 Performance Plan at: www.newportbeachca.gov/budget.
Recommendation 6. Each city which outsources fire or police services to OCFA and/or
OCSD should require them to provide projections of future costs of service out at least
five years into the future and require that these projected costs explicitly show the
relationship of projected pension costs including amortization of unfunded liabilities.
This level of pension cost information should be provided in budgeted expenditures for
outsourced services. A discussion of the risks associated with these projections should
also be provided by the agencies and incorporated in the city's budgets. (Finding 6)
(Finding 12)
City Response:
Not applicable to our community. We do, however, appreciate the Grand Jury's recognition that
there can be a less visible pension liability affecting communities that contract for public safety
and other services. Including these liabilities in the broader discussion of city -by -city liabilities,
while still inadequate for the reasons stated in our response to Finding 1, would at least start to
tilt the "per capita" playing field a little closer to level.
Recommendation 7. Each city that has CaIPERS as a provider for pensions should
include a provision in their agreements with CaIPERS that CaIPERS will post their Annual
Valuation Reports online. (Finding 11)
City Response:
This recommendation has been implemented. The City of Newport Beach's annual CalPERS
Annual Valuation reports can be obtained directly from the CalPERS website at:
https://www.calpers.ca.gov/index. isp?bc=/about/forms-pubs/calpers-reports/actuarial-
reports/browse-res u Its.xm I &strCat I d=2&g=n ewport-beach-city.
If you have any questions about the City's response to these findings and recommendations,
please do not hesitate to ask us.
Sincerely,
Dave Kiff
City Manager
17-57
ATTACHMENT C
AEW�Rr
Focus: Pension Liability
Ci o®@
City of Newport Beach tG
By Dave Kiff, City Manager, and Dan Matusiewicz, Finance Director
croa"
August 12, 2014
In recent weeks, a few newsworthy things have brought public employee pensions back into focus:
1. The Orange County Grand Jury came out with a report (Orange County City Pension Liabilities -
Budget Transparency Critically Needed — June 25, 2014) asking for additional transparency in local
governments' pension liabilities, among other things.
2. The giant California Public Employees Retirement System (PERS) announced that its estimated rate
of return for the fiscal year that ended June 30, 2014 was 18.4%. This is well higher than its annual
assumption of a 7.5% return. The year that ended June 30, 2013 brought PERS an estimated 13.2%
rate of return.
3. Some attention was focused on a new rule by the Governmental Accounting Standards Board
(GASB) known as GASB No. 68, which revised and established new financial reporting requirements
for cities like ours.
As is typical with any news about pensions, one perspective or another may use the information to
advocate a certain strategy. We respect that. But we also encourage your caution.
Please know that the City of Newport Beach views its employees' pension costs as a matter of significant
concern. Effective pension reform is critical to every municipality's success. Our City Council has taken
significant steps towards reducing pension costs to date.
Here are some common assertions relating to pensions here that deserve your deeper thought:
1 -The amount of our pension liability. It was estimated at $275 million on June 30, 2012 —that was 25
months ago. Our most recent information shows it going down by about $17 million (6.2%) in one year
to $257.9M as of June 30, 2013. We haven't been notified of that formally yet but anticipate our official
plan valuation in early September. Currently, June 30, 2012's data is the only formal data anyone
has. That meant that we had a market value of $462 million in our PERS account for that day, but
needed another $275 million (an estimate) to be able to fully fund our retirees' and future retirees'
benefits for that day. This shortfall is called the Unfunded Actuarial Liability or "UAL" —referred to here
as our pension liability. About 70% of the pension liability is attributable to benefits for persons already
retired.
Because our PERS portfolio is based on equities, real estate performance and other factors, the very
next day the unfunded liability changed. In a year, or over the course of two years, it can change a great
deal. The pension liability in August 2014, with the Dow Jones Industrial Average in the 16,300 range, is
likely to be different from the unfunded pension liability on June 30, 2012 when the Dow was 12,880.
The unfunded pension liability is still high, though.
2 — "Newport Beach the highest pension liability per capita of any city in Orange County." There are at
least three reasons why this statistic has very limited value, if any value at all.
First, it compares apples to oranges. Each city has different operations within its portfolio and
budget. Newport Beach is about as full-service as cities come — we have our own library system, our
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own lifeguards, our own trash service (up until March 2014), our own water and wastewater system,
and municipal police and fire/emergency medical departments. Each of these departments' annual
pension expense is reported and approved in the budget.
FYI, the City's unfunded pension liability and something we call the schedule of pension funding progress
(which includes the unfunded liability) is and has always been shown in the City's Comprehensive
Annual Financial Report (CAFR). You can find that at: www.newportbeachca.gov/CAFR (please see
pages 126-130 of the June 30, 2013 report).
It's nearly impossible to make accurate comparisons across cities. Even the Grand Jury makes a mistake
here by writing that the 10 cities it compares provide an "apples to apples" comparison (p20).
Respectfully, that's not so. One neighboring city doesn't have a city library system nor City water and
wastewater. Another big neighbor to us (not one of the 10 though) has no city fire department, no city
water and wastewater department, and no city library.
But typically there are public agencies with pensioned employees providing most of those services to
residents in these cities. The costs just don't show up as a line item in the city government's
budget. One would have to look to numerous small special districts, the Orange County Public Library
District, the Orange County Sheriff's Department, the Orange County Fire Authority, and more to
decipher the true pension liability per capita for each geographic city.
Second, it ignores (and tends to misinform about) how pension costs are funded. If we were you and
read "per resident" we might assume that residents are responsible alone for pension costs. But that's
not so. In Newport Beach, our employees pay one of the largest shares of pension costs — nearly $7.4
million (and growing) is deducted from staff's paychecks every year. That's 27% of the total pension
payment made. Local pension funding (on top of investment earnings) is also funded from our
numerous visitors, local employers and their employees — every time someone parks in our parking
lots, buys a car at a local dealership, stays in a hotel room, or eats at a restaurant, these visitors help pay
for all city costs, including pensions.
Newport Beach, Brea and Laguna Beach are examples of cities that rank high on the per capita
metric. In the case of Newport and Laguna, both are coastal cities that have smaller nighttime
populations, but heavy visitor use and, in our case, lots of daytime office workers. We have to provide
services (like fire, emergency medical, police, water, sewer, beach maintenance, lifeguarding, more) to
tens of thousands more people than our resident base. But these visitors and day office workers also
help pay for the service through sales taxes, hotel bed taxes, use of our concessions, and more.
Third, pension liability per capita says nothing about a city's ability to actually pay it off. The Grand
Jury's report did analyze and compare a city's ability to fund the liability. The Grand Jury report said,
notably, the city with the highest per capita liability in the list is one of the wealthiest as well (meaning
Newport Beach) (p20). The Grand Jury said that Newport Beach has the lowest unfunded liability as a
percentage of general fund revenues (p21).
The Grand Jury said that this ability -to -pay metric was a "potentially better way" of comparing unfunded
pension liabilities (p20) than pension liability per capita.
3 - "Didn't PERS earn 18% return on its investments this year? Problem solved — right?" This is the
other perspective, and caution is needed here, too.
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First, the stock market would need to be significantly higher than it is today to recoup all of the losses
from the recession of 2008-2010. And even significant gains — such as 18.4% in one year — are gains
made from a smaller investment portfolio than had that portfolio risen consistently at 7.5% per year.
Second, it is clear across California that the pension benefits given years ago to many municipal
employees assumed things that haven't come to pass. The pension estimates assumed that a greater
percentage of staff members would choose to retire a few years or more after their earliest retirement
eligibility date. They also assumed that retirees' life expectancy would be shorter. Both assumptions
appear to have been wrong. So changes here, too, are calculated into our pension liability (for the
pension wanks, this is done via regular "mortality and experience studies"), and tend to increase the
liability. Thus, pension liability is almost always changing — each time a new study is done, for instance.
4 - GASB 68 (the new accounting rule) will dramatically change the City's fiscal picture.
No, it won't. First, what is GASB? The Governmental Accounting Standards Board (GASB) is an advisory
board (www.gasb.org) whose mission is to improve the standards of state and local governmental
accounting and reporting to provide more useful information that educates the public.
Current accounting standards require that cities report two perspectives on their finances. The first is
the "fund" perspective — with liquid assets (cash, receivables, etc) and near-term liabilities (such as the
current year's planned expenditures) as the primary focus.
The second perspective is the government -wide financial perspective - where we show long-term assets
and long-term liabilities on a government -wide balance sheet. We do this now, and it's fully explained
in our Comprehensive Annual Financial Report (CAFR).
GASB 68 elevates the reporting of the pension liability onto the government -wide balance sheet a
further development of this long-term perspective. However, when reported on a government -wide
balance sheet, our data will show that our long term assets total about $2.5 billion (billion with a "b"),
and include the city's infrastructure. Our long-term liabilities include the pension liability (which as of
June 30, 2012 was $275 million) and our civic center certificates of participation (about $116.5 million at
the end of June 2015).
Because this information was previously disclosed in our financial statements, the new accounting
standards do not change the City's fiscal picture, about which Fitch Ratings most recently (August 1,
2014) said as it reaffirmed our "AAA" Issuer Credit Rating:
• "Prudent financial management has resulted in a history of positive operations, augmenting the
city's very high reserves, despite large planned general fund investment in capital projects.
Management has successfully implemented expenditure savings, including major labor concessions
and the use of contracted services.
• "Low Debt, Carrying Costs. The city's total debt burden is low and likely to remain so given limited
near-term capital needs. Amortization is average and the city has reduced retiree health care costs,
though pension contributions are expected to rise. Carrying costs, including debt service and retiree
benefit contributions, remain affordable. Total annual carrying costs, including debt service,
pension ARC and OPEB contributions constitute a low 13.9% of governmental fund spending in fiscal
2013.
• "Expenditure controls to date have been moderate, including early retirement incentive plans,
increased employee contributions to pension plans, contracting services, and freezing vacant
positions.
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• "Financial management policies are robust and continue to improve to meet the city's financial
needs.
"They include a contingency reserve equal to 25% of the general fund operating budget, up from
15% at the time of Fitch's last review.
Going Forward
A good question to ask about pensions is this: What has the city done to try and fix the problem — and
is it enough? Here is what the Newport Beach City Council has done (among other things):
• The City is paying more now to eliminate the liability faster. The Council in 2013 adopted a Fixed
Amortization Schedule to eliminate the pension liability over a shorter period of time. We will pay
an additional $72.2 million over 30 years to reduce the unfunded liability by approximately $185.7
million. This will avoid $113 million in interest. For non -safety employees, the current liability
should be eliminated in 21 years, with the Safety employees' current liability gone in 25 years.
• Employees are paying more for their own pensions. To the tune of $7.4 million in FY 14-15. Many
employees pay about 11% of their salary towards PERS (increasing to 12.35% in July 2015). Others
pay between 8% and 12.8% (some increasing to 13.5%) of their salary. In 2014-15, the City's
employees on average will be exceeding the goal set by Governor Brown for 2018 in terms of paying
for their share of pension costs.
• Thoughtful Outsourcing. Outsourcing (including outsourcing the community's very well -liked in-
house residential trash service as of March 2014) has helped reduce the overall amount of staff at
the City from 833 full-time positions in FY 2009-10 to 727 now. This does not affect the legacy
unfunded liability, but it can stop additional liability from accruing.
• We have always paid what PERS says we owe. City Council Policy F-2 directs us to pay 100% of the
annual required pension contribution ("ARC") each and every year.
• The City established lower benefit formulas for new employees. These are:
o New staff coming from other agencies where they were PERS members can retire at:
• Age 60 with 2% of salary for each year's service (all non -Safety)
• Age 50 with 2% of salary for each year's service (Fire personnel)
• Age 55 with 3% of salary for each year's service (Police personnel)
o New staff coming in who have not been members of PERS:
• Age 62 with 2% of salary for each year's service (all non -Safety)
• Age 57 with 2.7% of salary for each year's service (Fire and Police)
The above steps earned Newport Beach a "Rose" award for pension reform from the Orange County
Taxpayers Association in 2013.
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Is all of that enough? It's hard to say. All things being equal, we believe that Newport Beach has
accomplished a lot — maybe as much or more than nearly any other city in the region. More can always
be done, but it requires extensive labor negotiations and even changes in State laws or PERS rules.
Here are some of the suggestions we hear:
"Move the public employees into a 401(k) -style defined contribution plan like the private sector." We
can't do this yet — it's not legal. When we hire someone, we can only offer benefits that the PERS
system offers, and right now PERS and the Legislature have not created new or hybrid 401(k) -style
plans. Which is in part why we've outsourced more and have hired fewer full-time employees.
The State could be of more help in pension reform, although they too have made progress over the last
few years. A key for localities would be to allow us to have more leeway in negotiating locally -beneficial
reforms (like allowing defined contribution (DC) plans to play a more prominent role in retirement
benefits) with our bargaining units.
"Get out of PERS entirely." This cannot be done without a huge, nearly impossible payment to meet all
of the pension obligations right now. PERS calculates the withdrawal number at a very conservative
discount rate based on US Treasury yields, not the current 7.5% discount rate.
"Employees should pay more." As noted, most employees are paying between 8% and 12% or more of
their salary for pension costs. That's $7.4 million from their paychecks in this year alone. It's also more
than most of the cities that compete with us for quality staff members. For most of our staff, this
payroll deduction is now over half of the cost of their own pension benefit cost (referred to as the
"normal" cost).
We note that about 70% of the pension liability accrued is attributable to persons already retired. If
current employees pay more of this cost, then they are paying for a benefit that retirees receive. And at
what point do our employees decide to leave to another community that may not have the same
pension deductions? We always want to serve the Newport Beach community well by retaining quality
staff—from engineers to planners, from police officers to paramedics, and more.
"The City should be paying off the pension liability even faster." Maybe — but maybe not. The Dow
was at 17,000 a few weeks ago, and now it's lower. A lot of money deposited with PERS a few weeks
ago might have taken a nice haircut by today. In light of that, the Council's adoption of the fixed
amortization schedule combined with payments that "dollar -cost -average" investments over time
makes good sense. The other things to keep in mind about paying more to PERS now include:
• Does paying more now amend the current cooperation whereby employees pay more of the
pension costs? This does seem to be a good partnership that appropriately moves the cost burden
away from the City's general fund and your tax dollars.
• What about the opportunity cost?
o What programs, landscaping and park projects, or community buildings might not happen if
more resources go to PERS today?
o If we pay more to PERS today and sacrifice a road repair project or a tree trimming cycle, that
could have a the perverse effect of damaging property values over time, and result in reduced
quality of life and lower tax revenues.
Another important thought about the "pay more now" strategy is that the pension liability is not like a
mortgage, where you have a fixed amount and often a fixed plan to pay it off. Pension liability is
17-62
actuarially -based — meaning it's based on very complex assumptions that can change over and over
again, moving the number up or down. Your payoff plan therefore, needs to be adjusted and refined
frequently in order to hit the target at the end.
In closing, please think critically about what you read about pensions — including what we wrote
here. This is but one perspective.
Again, consider asking people "what would you do differently than what's being done now?" The
answers aren't easy. If you have any questions about pensions, please do not hesitate to ask us.
Dave Kiff
City Manager
949-644-3001 or dkiff@newportbeachca.gov
Dan Matusiewicz
Finance Director
949-644-3123 or danm@newportbeachca.gov
17-63
}
a n
September 23, 2014
The Honorable Glenda Sanders
Presiding Judge of the Superior Court
700 Civic Center Drive West
Santa Ana, CA 92701
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CITY OF NEWPORT B., --
Office
Office of the City Manager
RE: "Orange County City Pension Liabilities -Budget — Budget Transparency Critically Needed"
Dear Judge Sanders:
The City of Newport Beach has reviewed the 2013-2014 Orange County Grand Jury Report,
"Orange County City Pension Liabilities — Budget Transparency Critically Needed." In response
to the Grand Jury's findings and recommendations outlined in said report, the City of Newport
Beach offers the following responses:
Finding 1. OC cities have large unfunded pension liabilities both in terms of absolute
dollar value and on a per capita basis and as a percentage of city General Fund
revenues.
City Response:
The City of Newport Beach agrees with the finding that Orange County cities have large
unfunded pension liabilities. The City continues to believe that any use of pension liability on a
per capita basis misinforms and is a poor comparative indicator of pension funding progress
across cities.
First, we note our appreciation that the Grand Jury points out that the ability -to -pay metric
(versus the per capita metric) might be a "potentially better way" of comparing unfunded pension
liabilities (page 20).
There are three fundamental problems with the per capita metric. No. 1 — It is nearly impossible
to make accurate comparisons across cities. Each city has different operations within its
service portfolio and budget. Newport Beach is a full-service city with its own library system,
lifeguards, trash service (up until March 2014), water and wastewater system, and municipal
police and fire/emergency medical departments. Each of these departments' annual pension
expense is reported and approved in the budget. There are cities in the county with as large or
larger populations that outsource such services to other public agencies or service providers.
One neighboring city does not have a city library system nor a city water and wastewater utility.
Another neighboring city has no city fire department, no city water and wastewater department,
and no city library. These cities may hire other public agencies with pensioned employees to
provide those services to their residents and as a result, pension costs may not be reflected in
these cities' budgets. One would have to look at the budget of numerous small special districts,
the Orange County Public Library District, the Orange County Sheriff's Department, the Orange
County Fire Authority, and more to decipher the true pension liability per capita for each
geographic city.
Newport Beach Civic Center 9 100 Civic Center Drive • Post Office Box 1768
Newport Beach, California 92658-8915 • ww-v.newportbeachca.gov (949) 644-3000
Letter to the Honorable Glenda Sanders
September 23, 2014
Page 2 of 8
No. 2 — This statistic can misinform about how pension costs are funded, as it does not take into
consideration the varied resources used to pay the City's obligations. In Newport Beach,
employees pay one of the largest shares of pension costs - nearly $7.4 million (and growing) is
deducted from staff's paychecks every year. This represents 27% of the total pension payment
made. Moreover, local pension funding (on top of investment earnings) is also funded from the
City's numerous visitors, local employers and their employees. For example, revenues from
visitors who use the City's parking lots, buy a car at a local dealership, stay in a hotel room, or
eat at restaurants, are used to pay the City costs, including pensions.
No. 3 — Pension liability per capita says nothing about a city's ability to fund the liability. The City
of Newport Beach is one of the most financially secure and stable cities in the county and has
the financial means to better mitigate the financial risks associated with rising pension costs
when compared to other cities (see response to Finding 3 below). This is supported by the
published reaffirmation of the City's "AAA" credit rating by Fitch (dated August 1, 2014). It
stated the following about Newport Beach:
"Prudent financial management has resulted in a history of positive operations, augmenting the
city's very high reserves, despite large planned general fund investment in capital projects.
Management has successfully implemented expenditure savings, including major labor
concessions and the use of contracted services. The city's total debt burden is low and likely to
remain so given limited near-term capital needs. Amortization is average and the city has
reduced retiree health care costs, though pension contributions are expected to rise. Carrying
costs, including debt service and retiree benefit contributions, remain affordable. Total annual
carrying costs, including debt service, pension ARC and OPER contributions constitute a low
13.9% of governmental fund spending in fiscal 2013. Expenditure controls to date have been
moderate, including early retirement incentive plans, increased employee contributions to
pension plans, contracting services, and freezing vacant positions. Financial management
policies are robust and continue to improve to meet the city's financial needs. They include a
contingency reserve equal to 25% of the general fund operating budget, up from 15% at the
time of Fitch's last review."
Finding 2. OC cities' unfunded pension liabilities have been increasing on a year over
year basis over the past several years as a result of the assumptions that have been
changed by Ca1PERS and OCERS.
City Response:
The City of Newport Beach agrees in part with the finding. "Over the past several years" there
has been a significant increase in liabilities, due to actuarial assumption changes and the
dramatic fall of the markets in 2008-2009. However, in 2013 and 2014 our unfunded liability fell
significantly. Not enough to bring us back to pre -recession levels, of course. We note how
important it is to assign a date in time to any unfunded liability value, as the contributing factors
(assets and liabilities) can fluctuate dramatically depending on the date used.
Finding 3. There are risks to OC cities of changes to key actuarial assumptions including
revisions downward of expected returns on investment and the likely move by pension
funds to more realistic mortality assumptions, which would increase unfunded liabilities.
Newport Beach Civic Center • 100 Civic Center Drive • Post Office Box 1768
Newport Beach, California 92658-8915 • vvwx w.newportbeachca.gov (949) 644-3000
Letter to the Honorable Glenda Sanders
September 23, 2014
Page 3 of 8
City Response:
The City of Newport Beach agrees with the finding. We are thankful that CalPERS has made
some steps in the right direction on rates of return and workforce mortality assumptions.
Finding 4. Locating city budget information on a city web site is not always
straightforward and prior year budgets are sometimes not posted by a city.
City Response:
The City of Newport Beach disagrees with the finding in terms of our own data — we cannot
speak to the websites of other cities. The City provides access to the most current and prior
year budgets going back to FY 1927-28. Budget documents can be accessed from the several
menu paths on the City website under the "About (City)," "Finance Department," "City
Government," and "Residents" web page menus at: www.newportbeachca.gov or can be
accessed directly at: www.newportbeachca.gov/budget.
Budgets prior to FY 2008-09 can be found on the same "City Salary and Budget Documents"
web page under "Prior Year Budget Documents."
Finding 5. City budgets posted online project revenues and expenditures for at most one
or two years into the future and sometimes do not show prior year data.
City Response:
The City of Newport Beach partially disagrees with the finding in terms of our own data; we
cannot speak to the budget documents of other cities. The City does present prior year
revenues and expenditures going back four years from the current year adopted budget but
deliberately presents and adopts a one-year operating budget. The City prepares many long-
range planning documents and projections where long-term planning is prudent and necessary
especially for capital replacement and debt management. These tools take various forms from
spreadsheets to databases.
Finding 6. City budgets often lack footnotes explaining key assumptions, risks, and
unusual changes in budgeted amounts or revenues and expenditures.
City Response:
The City of Newport Beach partially agrees with the finding. We can always do better to explain
budgeting practices and assumptions. A discussion of key budget highlights can be found in the
Transmittal Letter of the Budget. A discussion of pension risk can be found on pages 148-150
of the Performance Plan.
Finding 7. City budgets sometimes do not provide trend data on the accumulation
/drawdown of reserves and lack details on the city's plan for the size of its reserves or
their intended uses.
City Response:
The City of Newport Beach partially disagrees with the finding. The City does provide detail
regarding the size of reserves and projects its sources and intended uses for two fiscal years
(please see pages 19-24 of the FY 2014-15 Budget Detail document at:
www.newportbeachca.gov/budget.) Most analysts seek historical trend data from city
Newport Beach Civic Center • 100 Civic Center Drive • Post Office Box 1768
Newport Beach, California 92658-8915 • www.newportbeachca.goc (949) 644-3000
Letter to the Honorable Glenda Sanders
September 23, 2014
Page 4 of 8
Comprehensive Annual Financial Reports (CAFR) and not the budget. The City also believes
that trend data ought to be compiled from the CAFR, which are based on audited actual results
and can be obtained at: www.newportbeachca.gov/cafr.
Finding 8. Cities can control most future expenditures by increasing or decreasing
budgets for those expenditures as funds are available. However, increases to annual
required contributions to their pension systems are imposed externally, change
unpredictably, and when they occur, are ramped up over two to five years.
City Response:
The City of Newport Beach agrees with the finding. One of the most impactful actuarial
assumptions that affect the City's pension funded status and annual required contribution is the
assumed and actual rate of return on the pension assets that are invested in the pension trust.
The actual rate of return is largely dependent on financial markets and economic cycles. As a
result, the City's pension assets can vary from one actuarial valuation to the next. Even when
the City diligently pays CalPERS the Annual Required Contribution (ARC), determined by
pension actuaries, the funded status of the plan can change rapidly over a short period of time.
As demonstrated in the chart below, CalPERS investment returns decreased 24% in fiscal year
2009 and by fiscal year 2011 had increased 21.7% from the prior year.
CaIPERS Investment Returns
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While the equities markets are now above the levels in 2007, they still fall short of the where
investment balances would have been had they continued to grow 7.5% annually since 2007.
Fortunately, the risks are somewhat mitigated by the City's ability to set aside significant
resources. During both strong and uncertain economic times, reserve funds provide the City
with budgetary options that can help mitigate the need to cut services.
Newport Beach Civic Center • 100 Civic Center Drive • Post Office Box 1768
Newport Beach, California 92658-8915 • www,newportbeachca.gov (949) 644-3000
Letter to the Honorable Glenda Sanders
September 23, 2014
Page 5 of 8
Finding 9. City budgets posted online do not explicitly show the link between planned
city pension expenditures and pension system actuarial reports and those reports'
annual required contributions. Risks associated with predictions of future annual
required pension contributions based on risk assessment data provided by their pension
systems and/or based on their own analysis are not discussed.
City Response:
The City of Newport Beach disagrees with the finding with respect to our own documents,
website, and discussions. We cannot speak to other cities documents, websites and
discussions. City budgets do incorporate the annual required contributions from the latest
actuarial reports. We continue to have robust discussions with our pension actuaries, Council,
the community, and our Finance Committee about where pension costs are headed, how to
lower them, and why. Narrative discussions can be found in the Transmittal Letters of our
budget as well as pages 148-150 of the FY 2014-15 Performance Plan (summary budget
document) at: www.newportbeachca.gov/budget. The City Manager's newsletter — mailed out
to all residences in Newport Beach — also typically discusses pension issues.
Finance Committee review and discussions of our actuarial reports and or subsequent
discussions can be found on our website under Finance Committee Agendas at:
http://newportbeachca.gov/index.aspx?page=964 "View Past Meetings" See example, Finance
Committee discussions:
• November 18, 2013
• February 23, 2013
• May 7, 2012
• November 7, 2011
Finding 10. Pension costs for New (Post-PEPRA) employees will be substantially lower
than for Legacy employees, but only a small percentage of current employees, typically
only a few percent of total employees, are New. Substantially reduced pension costs for
cities as a result of pension reform will not be realized for one or more decades.
City Response:
The City of Newport Beach agrees with the finding; however, we note our appreciation that
PEPRA was enacted into law to assist all Californians in bringing a bit more realism to public
employee retirement benefits.
Finding 11. CalPERS Annual Valuation Reports for Miscellaneous and Safety City
employees are available to the public online for a very small number of cities.
City Response:
Annual Valuation reports for most or all CalPERs agencies can be obtained directly from the
CalPERS website at: https://www.calpers.ca.qov/index.Isp?bc=/about/forms-pubs/calpers-
reports/actuarial-reports/home.xml
Finding 12. OCERS provides pension plans for OCFA and OCSD employees, but there is
no way to trace through publically available sources OCERS unfunded pension liabilities
to the city budgets which outsource to OCFA and OCSD for fire and police services.
Newport Beach Civic Center • 100 Civic Center Drive • Post Office Box 1768
Newport Beach, California 92658-8915. www.newportbeachca.gov (949) 644-3000
Letter to the Honorable Glenda Sanders
September 23, 2014
Page 6 of 8
City Response:
Not applicable.
Recommendation 1. Each city should post its current and at least three most recent prior
year budgets on the city's web site, and these budgets should be easily located. Each
city's web site should have a search engine and a single search on the word "budget"
should immediately link to the current budget. (Finding 1) (Finding 4)
City Response:
The recommendation has been implemented. The City provides access to the most current and
prior year budgets going back to FY 1927-28. Budget documents can be accessed from the
several menu paths on the City website under the "About (City)," "Finance Department," "City
Government," and "Residents" web page menus at: www.newportbeachca.gov or can be
accessed directly at: www.newportbeachea.gov/budget.
Budgets prior to FY 2008-09 can be found on the same "City Salary and Budget Documents"
web page under "Prior Year Budget Documents" Please see
http://ecros.newportbeachca.gov/Web/Browse.aspx?startid=5743&cnb=FinancialInformation&db
id=0
The City's website contains a search engine and locates budget documents when the word
"budget" is searched.
Recommendation 2. Each city's budget information should contain not only this
year/next year budget projections, but should show at least five years of projected
revenues and expenditures. Projections should be at the same level of detail and use the
same line item structure as information for the current budget. (Finding 1) (Finding 2)
(Finding 3) (Finding 5) (Finding 8) (Finding 10)
City Response:
This recommendation will not be implemented at "the same level of detail" as current budgets.
The City recognizes that long-term forecasting is an essential part of prudent fiscal planning,
especially as it relates to long-term capital replacement and debt management and does so in
various internal planning tools. The City also believes long-term forecasts are best managed
and are more meaningful at the 30,000 -foot -level. The City respectfully disagrees that preparing
five year operating budgets at the department/object level would provide informative results and
believe this action would be so speculative that it may not accomplish the desired result.
Recommendation 3. Each city's budget should show separate line items for predicted
employee and predicted employer contributions for the city pension systems. (Finding 8)
(Finding 9)
City Response:
This recommendation has been implemented. The normal cost of pension plans, the employee
contribution towards pension plans, the amortized cost of unfunded liability, and the net
CalPERS pension cost to the City are segregated in the FY 2014-15 Budget Detail at:
www.newporbeaGhca.gov/budget.
Newport Beach Civic Center i 100 Civic Center Drive • Post Office Box 1768
Newport Beach, California 92658-8915 ` cvww.newportbeachca.gov (949) 644-3000
Letter to the Honorable Glenda Sanders
September 23, 2014
Page 7 of S
A description of the accounts and explanation of these terms can be reviewed on the
unnumbered third page of the FY 2014-15 Budget Detail at: www.newportbeachca.gov/budget.
Recommendation 4. Each city's budget should provide trend data on the
accumulation/drawdown of reserves and provide details on the city's policy for the size
of its reserves and on the intended uses of such reserves. In particular any discussion
of reserves should address possible use of reserves to accelerate amortization of
unfunded pension liabilities. (Finding 7)
City Response:
We agree that trend data on reserves, reserve policies, and a regular discussion of strategic
uses of reserves deserves strong transparency. We question whether the entire
recommendation is best suited for budget documents.
Council Policy F-2, "Reserves" provides staff guidance concerning the size and intended
purpose of reserves, directs staff to pay 100% of the Annual Required Contribution (ARC), and
contemplates use of reserves when the funded status of the pension plans fall below acceptable
actuarial standards (www.newportbeachca.gov/policies).
The City provides detail regarding the size of reserves and projects its sources and intended
uses for two fiscal years (please see pages 19-24 of the FY 2014-15 Budget Detail document
at: www.newportbeachca.gov/budget). Historical trend data can be culled from Comprehensive
Annual Financial Reports (CAFR) which are audited actual results and are readily available at:
www.newportbeachca.gov/cafr.
Use of reserves to amortize unfunded pension liabilities and other pension mitigation strategies
are complex discussions involving consultation with our actuaries and careful financial analysis.
We discuss the status of our pension plans, potential risks and opportunities with our Finance
Committee in a public and noticed meeting on a regular basis. To us, the Committee and
Council discussions, which have tended to occur at least annually and often more so, are ideal
mechanisms for decision-making in the public eye.
Recommendation 5. Each city using CalPERS for one or more of its pension plans
should identify the names and dates of the CalPERS Annual Valuation Report(s) which
call out Annual Required Contributions (ARCs) for these plans and should provide a
separate expenditure line item for predicted city catch-up contributions for the city
pension systems based on these ARCs. A discussion of the risks associated with these
CaIPERS projections should also be provided by the city. (Finding 1) (Finding 2) (Finding
8) (Finding 9)
City Response:
This recommendation has been implemented. There is a direct correlation between the
budgeted fiscal year and the pension contribution rates for any given fiscal year (The pension
contribution rates determine the Annual Required Contribution).
The City does provide a separate expenditure line for the "catch-up" portion of the ARC. This
represents the amortization of the Unfunded Actuarial Liability (UAL). A description of the
Newport Beach Civic Center + 100 Civic Center Drive • Post Office Box 1768
Newport Beach, California 92658-8915 9 tivww.newportbeachca,gov (949) 644-3000
Letter to the Honorable Glenda Sanders
September 23, 2014
Page 8 of 8
accounts and explanation of these terms can be reviewed on the unnumbered third page of the
FY 2014-15 Budget Detail at: www.newportbeachca.gov/budget.
Narrative discussions of the "risks associated with CalPERS projections" can be found pages
148-150 of the FY 2014-15 Performance Plan at: www.newportbeachca.gov/budget.
Recommendation 6. Each city which outsources fire or police services to OCFA and/or
OCSD should require them to provide projections of future costs of service out at least
five years into the future and require that these projected costs explicitly show the
relationship of projected pension costs including amortization of unfunded liabilities.
This level of pension cost information should be provided in budgeted expenditures for
outsourced services. A discussion of the risks associated with these projections should
also be provided by the agencies and incorporated in the city's budgets. (Finding 6)
(Finding 12)
City Response:
Not applicable to our community. We do, however, appreciate the Grand Jury's recognition that
there can be a less visible pension liability affecting communities that contract for public safety
and other services. Including these liabilities in the broader discussion of city -by -city liabilities,
while still inadequate for the reasons stated in our response to Finding 1, would at least start to
tilt the "per capita" playing field a little closer to level.
Recommendation 7. Each city that has CaIPERS as a provider for pensions should
include a provision in their agreements with CaIPERS that CaIPERS will post their Annual
Valuation Reports online. (Finding 11)
City Response:
This recommendation has been implemented. The City of Newport Beach's annual CalPERS
Annual Valuation reports can be obtained directly from the CaIPERS website at:
https://www.calpers.ca.gov/index.isp?bc=labout/forms-pubs/calpers-reports/actuarial-
reports/browse-results.xml&strCatld=2&g=newport-beach-city.
If you have any questions about the City's response to these findings and recommendations,
please do not hesitate to ask us.
Sincerely,
'b� a�
Dave Kiff
City Manager
Newport Beach Civic Center • 100 Civic Center Drive • Post Office Box 1768
Newport Beach, California 92658-8915 • w-ww.newportbeachca.gov (949) 644-3000
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