2011-2012 Santa Clara County Civil Grand Jury Final Report - An Analysis of Pension and*

Public sector employees are eligible for retirement at least 10 years earlier than is common for private sector employees. <b>Town Response:</b> We agree that the anecdotal evidence seems to support the conclusion of Finding #1. <b>Recommendation 1</b> The cities should adopt pension plans to extend the retirement age beyond current retirement ages. <b>Town Response:</b> The recommendation has been implemented. The Town of Los Altos Hills has created a second tier to its retirement plan which increased the retirement age for new employees from 55 to 60. We acknowledge that this is still five years earlier than most private sector employees, but is the oldest age eligibility allowed under CalPERS' current plans.

Campbell, Los Altos Hills, Los Gatos, Milpitas and Palo Alto have adopted second tier plans that offer reduced Benefits, which help reduce future costs, but further changes are needed to address today's unfunded liability. Santa Clara County and the cities of Cupertino, Los Altos, Monte Sereno, Morgan Hill, Mountain View, San Jose, Santa Clara, Saratoga, have not adopted second tier plans. <b>Town Response:</b> While we have no direct knowledge of what other cities have done, we agree that the Town of Los Altos Hills adopted a second "tier" to its retirement in 2011.

Retroactive Benefit enhancements were enacted by Cities using overly optimistic ROI and actuarial assumptions without adequate funding in place to pay for them. <b>Town Response:</b> We disagree with the finding. The Town of Los Altos Hills has not granted retroactive benefit enhancements and has no plans to do so. The Town has insufficient information to comment on other Cities' actions.

The Cities are making an overly generous contribution toward the cost of providing Benefits. Honorable Richard J. Loftus, Jr. August 30, 2012 <b>Town Response:</b> While the term "overly generous" is extremely subjective, in hindsight it is hard not to agree, especially as the costs of these benefits continue to rapidly increase, that the employer, whatever level of government that may be, cannot continue to absorb most or all the risks and costs of the various retirement benefits. <b>Recommendation 4A</b> The Cities should require all employees to pay the maximum employee contribution rate of a given plan. Town Response: The Town partially agrees with the recommendation as it applies to pensions and, as noted above, implemented it for new (Tier 2) employees last year. While the Town's current policy is to continue to pay both the employer and employee pension contribution for Tier 1 employees, Tier 2 employees do pay the CalPERS employee rate of 7%. The Town anticipates that the State of California may require the employees pay their share as part of the governor's pension reform. Should the governor's reform efforts fail, Town management will re-evaluate the employee pension contribution for Tier 1 employees next year. In regards to OPEB benefits, five years ago, the Town effectively created a second Tier for this benefit as well and amended its retiree medical plan to limit the benefit for all qualified annuitants hired after October 11, 2007 to the PEMCHA minimum. In 2012, the Town implemented a cafeteria plan which limited the medical benefit for active and qualified annuitants to the Kaiser plan premium rate. In 2013, the Town will implement a revised cafeteria plan which passes part of the increase in premium cost for dependent care on to the employee and/or the qualified annuitant. <b>Recommendation 4B</b> The Cities should require employees to pay some portion of the Past Service Cost associated with the unfunded liability, in proportion to the Benefits being offered. Town Response: The Town has not separately distinguished Past Service Cost from Normal costs, per se. However through the creation of a second tier for our Pension benefit plan, the Town believes that it has followed the Grand Jury recommendation by requiring employees of the second tier to pay 7% of eligible salary toward the cost of the benefit. This is the maximum allowed by CalPERS. For retiree medical benefits effective October 12, 2007, we have sharply reduced the benefit for new employees to the PEMHCA minimum and required annuitants who are or will receive the previous benefit package to pay a larger portion of the costs. At the time these changes were made, the Town believed that requiring any further contributions from current employees or Honorable Richard J. Loftus, Jr. August 30, 2012 annuitants would be too burdensome on a group that had not planned on these increased costs. However, in order to reduce the unfunded liability associated with this benefit, the Town has contributed significantly more than the actuarially required contribution (ARC) for each of the past several years and plans to continue to do so.

The Cities are not fully funding OPEB benefits as evidenced by large unfunded liabilities and small funded ratios. <b>Town Response</b>: Based on your report as well as some other reports of which we're aware, we agree with this finding's general conclusion. <b>Recommendation 5</b> The Cities should immediately work toward implementing policy changes and adopting measures aimed at making full OPEB ARC payments as soon as possible. <b>Town Response</b>: The recommendation has been implemented. As noted above, the Town has amended its plan to limit annuitant medical benefits for employees hired after October 11, 2007 to the PEMHCA minimum. In addition, the Town has done an actuarial evaluation of its OPEB plan and for each of the last two fiscal years has contributed more than the ARC in an attempt to reduce the unfunded liability and stabilize future payments.

The Cities' defined benefit pension plan costs are volatile. Defined contribution plan costs are predictable and therefore more manageable by the Cities. Town Response: We agree with Finding 7. <b>Recommendation 7</b> The Cities should transition from defined benefit plans to defined contribution plans as the new tier plans are implemented. Town Response: The recommendation has not yet been implemented, and we agree that most governments may need to "transition" away from defined benefit plans. But rather than a defined contribution Honorable Richard J. Loftus, Jr. August 30, 2012 plan, we believe that, in the near term, a more realistic and maybe even politically possible objective would be some sort of hybrid plan. The hybrid plan would continue a much more modest defined benefit plan that could provide a relatively safe and secure base retirement income, but would then supplement that plan with a defined contribution plan and/or Social Security. In addition, this new defined contribution plan, which could contain an employer match, would encourage younger employees to save for their retirement, give them a transferable asset while recognizing the risks inherent in retirement planning. Should the Governor be successful in his efforts to have the State adopt a "hybrid" risk sharing pension plan for new hires, the Town would certainly evaluate this option. Sincerely, and Chill Carl Cahill City Manager