Tri Ta Mayor Margie L. Rice Mayor Pro Tem November 25, 2014 Diana Lee Carey Council Member Sergio Contreras The

F1

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. RESPONSE: The City of Westminster agrees with this finding. However, it should be noted that the City of Westminster pays its Annual Required Contribution (ARC) as billed from CalPERS and is not delinquent. The unfunded pension liabilities are a result of CalPERS changes in assumptions and investment returns and not from underpayments by the City.

Related Recommendations (1)

R1

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. RESPONSE: The City of Westminster has implemented this recommendation. The City currently posts adopted budgets back to Fiscal Year 2005-06 on its website. In addition, the City's CAFR is available back to Fiscal Year 2006-07. This information is easily found in a number of ways from the front page of the City's website. In addition, entering the word "budget" in the City's website search produces numerous results, primary to this is the link to the current fiscal year budget as well as budgets back to Fiscal Year 2008-09. Each City's budget information should contain not only this year/next year budget

F2

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 CalPERS and OCERS. RESPONSE: The City of Westminster partially agrees with this finding. However, the major dollar impact on unfunded liabilities was the enhanced benefits negotiated with employee groups in the early 2000s, which was made possible by changes approved by the California State Legislature and the passage of SB400 in 1999. Unfunded liabilities have been increasing for many years, regardless of any larger economic changes taking place.

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R2

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. RESPONSE: This recommendation will not be implemented. Multi-year budgets/projections beyond two years are notoriously inaccurate and of little value. Most costs are associated with salary and benefit expenditures, which are primarily dictated by existing Memorandum of Understanding (MOU) in place between the City and its labor groups. Also, CalPERS actuarial rates are only provided for one year in advance, with estimates provided for additional future years, so those costs cannot be accurately determined and incorporated into long-term (i.e., past two years) projections. In addition, revenues are volatile and are difficult to project accurately beyond two years. This is especially true in the City of Westminster since the City relies heavily on sales and property tax revenue, two sources of revenue directly impacted by economic forces completely outside of the control of the City. To prepare and present five years or more of estimates would not represent true projections and may in fact be a disservice to those believing that these estimates represent credible financial analysis when they are nothing more than "guesstimates."

F3

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. RESPONSE: The City of Westminster agrees with this finding.

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R3

Each city's budget should show separate line items for predicted employee and predicted employer contributions for the city pension system. RESPONSE: This recommendation will not be implemented. The City of Westminster already accounts for and displays salary and benefit costs at the "line item" detail level in its budget documents. In addition, these projected costs are presented by Department and individual program, where applicable. There is a single line item in the City of Westminster's budget to account for "PERS Retirement." Given the cost-sharing arrangement in place - employees contribute between 63% and 100% of the employee share of retirement costs depending on their bargaining unit and date of hire - the line item "PERS Retirement" in each budget detail page fully reflects the estimated net cost for that fiscal year of total estimated CalPERS retirement costs.

F4

Locating city budget information on a city web site is not always straightforward and prior year budgets are sometimes not posted by a city. RESPONSE: The City of Westminster partially agrees with this finding. We are unaware of what other cities may or may not do in regards to posting budget information. However, the City of Westminster's website posts the last seven biannual budgets and the past six years of annual comprehensive annual financial reports (CAFR) on its website under the easy to find "Financial Reports Online" link.

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R4

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. RESPONSE: The City of Westminster has implemented most of this recommendation. The impact of past and future budgets is presented in the budget document. Changes to fund balance (i.e., reserves) are clearly displayed for all major funds, showing past year actuals and projected future year estimates. The City of Westminster is currently planning to develop comprehensive reserve policies as part of the 2015-17 budget development process.

F5

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. RESPONSE: The City of Westminster partially agrees with this finding. We are unaware of what other cities present in their budget documents. However, the City of Westminster, in preparing its biannual budget, includes prior year data on actuals (tied to our annual CAFR) and adopted and revised budgets in addition to the current and one future fiscal year.

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R5

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 CalPERS projections should also be provided by the city. RESPONSE: This recommendation will not be implemented because the City of Westminster has always, and will continue to, utilize the most current CalPERS valuation report available as part of its budget development process. The CalPERS valuation reports are available and accessible on the CalPERS website. In addition, as described in the City's Response to Recommendation R3, the line item "PERS Retirement" included in each budget document already incorporates the full net cost to the City of each employee's retirement cost.

F6

City budgets often lack footnotes explaining key assumptions, risks, and unusual changes in budget amounts or revenues and expenditures. RESPONSE: The City of Westminster partially agrees with this finding. We are unaware of what other cities present in their budget documents. The City of Westminster includes notes in each Department and program budget detail page about assumptions made for expenditure line items. In addition, the City's "Budget Message" and "Transmittal Letter" included in every adopted budget provide ample detail about the various assumptions made in preparing the budget and even include discussion of known, future issues which could impact the City's fiscal health.

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R6

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 A discussion of the risks provided in budgeted expenditures for outsourced services. associated with these projections should also be provided by the agencies and incorporated in the city's budgets. RESPONSE: This recommendation will not be implemented. The City of Westminster has its own Police Department. While the City does contract with OCFA for fire services, the City is not involved with the accounting for the services provided. The OCFA does provide the City of Westminster - as a "cash contract" city - with estimates of future annual contract costs. It is assumed that these estimates provided by OCFA include assumed retirement cost increases 2.5 based on data provided by OCERS. This recommendation would have to be implemented by the OCFA and/or OCERS and not by the City of Westminster.

F7

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. RESPONSE: The City of Westminster partially agrees with this finding. We are unaware of The City of Westminster includes what other cities present in their budget documents. information on prior year General Fund reserve levels as well as projections for the next two years. We believe this is a sufficient amount of information, especially when coupled with the ten years available in the City's annual CAFR.

Related Recommendations (1)

R7

Each city that has CalPERS as a provider for pensions should include a provision in their agreements with CalPERS that CalPERS will post their Annual Valuation Reports online. RESPONSE: This recommendation will not be implemented and is unwarranted. CalPERS already provides this information for each City and agency with which it has a contract and makes this information publicly available on its website. The City would like to thank the Orange County Grand Jury for its efforts in researching these issues and for giving the City an opportunity to respond to its findings and recommendations. Should you have any questions regarding the information in this letter, please contact me directly at 714-548-3190 or [email protected]. Sincerely, Michael Solorza Administrative Services Director Cc: Mayor City Council City Manager

F8

Cities can control most future expenditures by increasing or decreasing budgets for these 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. RESPONSE: The City of Westminster agrees partially with this finding. The City budget is based on projected revenues and expenditures for the budget period, in Westminster's case, the two year budget cycle. The impact on reserves, based on the projected revenues and expenditures included in each adopted budget, are clearly shown in the budget document. These projected expenditures include known and anticipated payments to CalPERS (i.e., the annual required contribution, or ARC). To the extent possible, using publicly available data from CalPERS, the City of Westminster incorporates all known and anticipated changes to CalPERS actuarial assumptions in its budget planning process and documents. 7 7