San Mateo County Grand Jury • 2007-2008

Issue | Background | Findings | Conclusions | Recommendations | Responses | Attachments Awareness Of San Mateo County

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Note: Missing finding numbers detected: F8, F9, F10, F11, F12, F13, F14, F15, F16, F17, F18, F19, F20, F21, F22, F23, F24, F25, F26, F27, F28, F29, F30, F31, F32, F33, F34, F35, F36, F37, F38, F39, F40, F41, F42, F43, F44

Findings and Recommendations 8 findings

Is your agency aware of the requirements of GASB 45 in regard to 70 97 reporting the cost of other post-employment benefits?

Related Recommendations (1)

Understand the requirements of GASB 45, especially with regard to the difference between current expenditures and long-term liabilities for other post employment benefits (OPEB). SSFUSD Response: Agrees with recommendation Recommendation has been implemented. The District’s Board of Trustees adopted a GASB 45 Compliance Plan at its May 8, 2008 meeting after a public study session. Comprehensive study materials were provided that offered an analysis of GASB 45 issues including results of the district’s actuarial analysis, e.g.- calculated ARC, UAAL, AAL; pay-as-you-go costs versus long term liabilities; funding options; and, timelines for implementation.

Does your agency have either funded or unfunded OPEB 53 74 liabilities?

Related Recommendations (1)

Comply with GASB 45 and disclose their OPEB liabilities in accordance with the implementation deadlines. SSFUSD Response: Agrees with recommendation The recommendation will be implemented by reporting OPEB liability on 2008-09 financial statements, as required by GASB 45 for a district with our annual revenues. 1

If your answer to #2 is Yes, does your agency's current financial 15 21 statement disclose funded and unfunded OPEB liabilities for your employees as required by GASB 45 standards?

Related Recommendations (1)

Maintain long-term solvency while meeting OPEB obligations by: a) carefully reviewing the assumptions and results of actuarial OPEB liability estimates; and, b) adjusting OPEB compensation policies as needed. SSFUSD Response: Agrees with recommendation Recommendation has been implemented. As part of the District’s GASB 45 Compliance Plan, actuarial assumptions will be reviewed as part of the required commission of a bi-annual actuarial study. In addition, the District will re-evaluate the affects of OPEB on compensation levels and on accrued liability in response to the completion of every actuarial study. The GASB 45 Compliance Plan will be adjusted accordingly to maintain long term fiscal sustainability and well being. July 30, 2008 Hon. Joseph C. Scott Judge of the Superior Court Hall of Justice 400 County Center, 2nd Floor Redwood City, CA 94063-1655 Re: Grand Jury Findings on Reporting Requirements for Non-Pension Post-Employment Benefits Dear Judge Scott: The City of Brisbane agrees with all three findings of the Grand Jury. 1. As a San Mateo County government agency with OPEB Obligation, the City of Brisbane understands the requirements of GASB45 and the reporting of long-term liabilities (Annual required contribution less contributions made equals Net OPEB obligation). 2. The City of Brisbane is required to implement GASB45 for fiscal year 2008-09. We are planning for that implementation date and have engaged an actuary to determine our OPEB obligation. At this time, our council has directed us to continue with pay as you go rather than full funding. We will prepare the note disclosures for the Comprehensive Annual Report for the Fiscal Year Ending June 30, 2009. 3. As one cost saving move, the City of Brisbane has just changed the retirement policy for future hires. As such, we plan to have the actuary update our report for the fiscal year 2009/10. Under direction from council, we will review and adjust our assumptions accordingly. Sincerely, Stuart Schillinger Administrative Services Director PORTOLA VALLEY SCHOOL DISTRICT 4575 Alpine Road • Portola Valley, CA 94028 Phone: (650) 851-1777 • Fax: (650) 851-3700 • www.pvsd.net PVSD Anne E. Campbell, Superintendent Board of Trustees Tim Hanretty, Asst. Superintendent Donald Collat Steven Humphreys Judith Ann Mendelsohn Ray Villareal William Youstra August 18, 2008 Hon. Joseph C. Scott Judge of the Superior Court Hall of Justice 400 County Center; 2nd Floor Redwood City, CA 94063-1655 Dear Judge Scott, The Portola Valley School District Governing Board has received the Grand Jury’s recommendations regarding reporting requirements for non-pension post-employment benefits. The Governing Board agrees with the findings of the Grand Jury and responds as follows: 1. The Business Office of the Portola Valley School District fully understands the requirements of GASB 45, especially with regard to the difference between current expenditures and long-term liabilities for other post employment benefits (OPEB). The PVSD budget contains a line item for these liabilities. 2. The Portola Valley School District is in compliance with GASB 45 and has disclosed its liabilities in accordance with the implementation deadlines. Furthermore, the District has reviewed this matter with its independent financial auditor, and the annual audit has substantiated that this action has been taken. 3. The Portola Valley School District Governing Board takes very seriously its fiduciary responsibility to assure the long-term solvency of the school district and carefully monitors OPEB obligations. Thank you for the opportunity to respond regarding this important issue. Very truly yours, Ray Villareal, Board President Ormondale School Corte Madera School 200 Shawnee Pass 4575 Alpine Road Portola Valley, CA 94028 Portola Valley, CA 94028 CITY COUNCIL 2008 PEDRO GONZALEZ, MAYOR KARYL MATSUMOTO, MAYOR PRO TEM MARK N. ADDIEGO, COUNCILMEMBER RICHARD A. GARBARINO, COUNCILMEMBER KEVIN MULLIN, COUNCILMEMBER BARRY M. NAGEL, CITY MANAGER August 22, 2008 Honorable Joseph C. Scott Judge of the Superior Court Hall of Justice 400 County Center, 2nd Floor Redwood City, CA 94063-1655 RE: Awareness of San Mateo County Government Agencies of Reporting Requirements for Non-Pension Post-Employment Benefits Report Dear Judge Scott: The City Council and staff for the City of South San Francisco received the Grand Jury’s report on Reporting Requirements for Non-Pension Post- Employment Benefits and agree with the recommendations contained in the report. The City is aware of the reporting requirements of GASB Statement 45 and has acquired an actuary to perform the necessary study. The City will report on other post-employment benefits (OPEB) in its financial statements by June 30, 2009. The City recognizes the long-term liabilities associated with retiree healthcare and has begun to earmark funds for its OPEB liabilities, study investment vehicles/trust accounts, and examine the viability of current benefit levels. The City of South San Francisco appreciates the work by the San Mateo County Civil Grand Jury. Feel free to contact Jim Steele, the City’s Finance Director, if you have any questions. Sincerely, Pedro Gonzalez, Mayor City of South San Francisco cc: Barry M. Nagel, City Manager Jim Steele, Director of Finance August 7, 2008 Hon. Joseph C. Scott Judge of the Superior Court Hall of Justice 400 County Center, 2nd Floor Redwood City, CA 94063-1655 Dear Judge Scott: The Hillsborough City School District Board of Trustees has asked me to respond to the Grand Jury’s report regarding Reporting Requirements for Non-Pension Post-Employment Benefits Report.

Has your agency retained an actuary to determine the amount, if 37 51 any, of your OPEB liabilities?

Related Recommendations (1)

Has your agency retained an actuary to determine the amount, if any, of your OPEB liabilities? Yes______ No_______

Have you received an actuarial study of your OPEB liabilities? 26 36

Related Recommendations (1)

Have you received an actuarial study of your OPEB liabilities? Yes______ No_______ If Yes, please provide a copy of receipt of this questionnaire. 9

If your agency has not retained an actuary, do you have an 7 10 informal estimate of its unfunded OPEB liability?

Related Recommendations (1)

If your agency has not retained an actuary, do you have an informal estimate of its unfunded OPEB liability? Yes______ No_______ If Yes, what is that informal estimate? _________________

Has your agency set aside or earmarked any funds for your OPEB 23 32 liabilities? 7b. If Yes, is it in a trust? 2 3 Total 72 100 Responses to the Yes/No questions indicated that: • Seventy of seventy-two agencies were aware of the requirements of GASB 45.3 • While 70 agencies acknowledged awareness of GASB 45, only 53 agencies indicated they had OPEB liabilities; i.e., had an obligation to pay benefits for both current and former employees. • Even though 53 agencies indicated they had OPEB liabilities, only 15 indicated that they were already reporting those liabilities.4 Most were not yet reporting OPEB liabilities because their disclosure dates are from 2008 to 2010. • More than half of the agencies had retained an actuary to help determine the agency’s OPEB obligations. • About a third of the agencies had set aside or earmarked funds for their OPEB liabilities. Only two of these agencies had deposited said funds in a separate trust account. Two agencies indicated they were unaware of GASB 45 requirements, but one has no employees and the other believes it has no obligations. It appears that 13 of these agencies, all school districts, have been reporting their ongoing current year’s OPEB expenditures rather than their liabilities. Agencies were also asked to provide some quantitative information regarding their OPEB expenditures and obligations. The detail data is in Appendix 2. Table 3 shows a summary: Table 3: Summary Statistics 5 latoT elbigilE seeyolpmE seeriteR & tnerruC elbigilE seeyolpmE tnerruC elbigilE seeriteR tnerruC BEPO erutidnepxE tnuomA yltnerruC edisA teS detamitsE BEPO ytilibaiL tnerruC erutidnepxE eeriteR rep edisA teS elbigilE rep eeyolpmE detamitsE rep BEPO elbigilE eeyolpmE Minimum 1 0 0 0 2,040 150,000 112 282 8,312 Maximum 1,600 1,000 716 8,158,533 30,115,703 58,218,000 23,182 19,800 123,708 Median 108 85 32 189,744 500,000 5,586,250 4,795 4,380 55,300 Mean 293 194 99 526,294 2,017,020 17,057,060 6,041 5,898 58,612 Standard 381 242 154 1,193,464 6,169,952 24,406,518 5,003 5,679 42,418 Deviation StdDev/Mean 130% 124% 156% 227% 306% 143% 83% 93% 72% The 72 agencies responding to this survey have a wide range of purposes and sizes; their diversity is evident in Table 3. The large differences between minima and maxima, means and medians, and the large standard deviations (relative to the means) all confirm the diversity (heterogeneity) of the agencies in the County. This diversity is evident not only in terms of purpose and size, but also in the nature of the benefits. The most generous agencies pay full medical coverage premiums for spouses/survivors as well as retirees, and some agencies grant different benefits to different employee categories. Table 4 (below) shows the number of agencies granting each benefit type to each category of employee. Here again, the diversity of the agencies prevents meaningful generalization. Not all agencies have boards, councils, police or fire staff. More agencies offer health benefits than dental benefits, and so on, moving from left to right. Table 4: Benefit and Employee Categories Question 10 Employee Mental Other- Category Health Dental Vision Health specify Board 12 9 6 1 Council 9 2 Management 45 20 13 1 1 Administration 43 18 12 2 1 Police 16 1 Fire 14 2 1 Public Works 17 1 Other-specify 31 18 13 1 1 Total 187 71 45 4 4 Table 5 (below) shows that vesting for life is not universal, but is more frequent for the employee categories of council, police, fire and public works. For example, 14 agencies grant health benefits to firefighters (Table 4), and those health benefits are vested for life (Table 5). The last row in Table 5 shows the percentage of lifetime vesting for each benefit type (the totals of Table 5 divided by the totals of Table 4). In other words, of the 187 instances of health care benefits granted, 124 (66%) of those instances were vested for life. Table 5: Vesting for Life Question 11 Employee Mental Category Health Dental Vision Health Board 5 2 2 Council 9 1 Management 27 4 2 1 Administration 28 6 4 1 Police 14 1 Fire 13 2 1 Public Works 14 1 Other-specify 14 4 4 1 Total 124 21 13 3 % Vested 66% 30% 29% 75% Conclusions Most agencies in the county are making good faith efforts to comply with GASB 45. The 72 agencies who responded to this survey had varying degrees of awareness of the requirements set forth in GASB 45, but none was totally unaware. Fifteen agencies indicated, some perhaps mistakenly, that they are already reporting OPEB liabilities. All of those that had not yet reported, but knew they were required to do so, had submitted deadline dates. However, four of those that have set 2008 deadlines had not yet retained actuaries, so it may be difficult for them to meet their deadlines. GASB 45 only requires disclosure of actuarially estimated liabilities; it does not require pre-funding of those liabilities, nor does it require analysis of the ability of an agency to fulfill its OPEB commitments. Even pre-funding of the actuarial accrued liability (AAL) does not ensure that an agency will be able to pay its future OPEB costs because:

Related Recommendations (1)

Has your agency set aside or earmarked any funds for your OPEB liabilities? Yes__________ No___________ If Yes, how much has been provided? $__________________ If Yes, is it in a trust? Yes____ No____

F45

We are also very much aware of the effects of this reporting on our personnel compensation policies given the expected future costs of providing these post-retirement benefits. We are required to implement GASB 45 disclosure in our comprehensive annual report for the year ended June 30, 2009, and expect to have our independent actuary produce the final valuation before that time. Should you or the Grand Jury need additional information please let me know. I would be pleased to discuss this matter at your convenience. Very truly yours, Donald W. McVey Director of Finance and Administrative Services Cc: Patricia E. Martel, City Manager Maria Cortes, City Clerk 333 – 90TH STREET DALY CITY CALIFORNIA 94015-1895 Phone (650) 991-8048

Related Recommendations (1)

R45

Additional Recommendations 3

These recommendations are not explicitly linked to specific findings.

R8

What is the total number of current employees and retirees that will receive OPEB benefits under your current program? _______________ How many are current employees?__________ Retirees?_____________
R9

What was your agency's total cost of premiums/contributions for OPEB in your most recent fiscal year? __________________ If your agency does have obligations to provide OPEB to retired employees, please indicate which OPEB benefits are available to each category of employee by checking the cells in the table below (check if the benefit is available). Health Dental Vision Mental Long Other-specify Health Term Care Board Council Management Administration Police Fire Public Works Other-specify 10
R10

Are OPEB benefits vested for life? Please indicate which OPEB benefits are vested for life for each category of employee by checking the cells in the table below (check if the benefit is vested for life). Health Dental Vision Mental Long Other-specify Health Term Care Board Council Management Administration Police Fire Public Works Other-specify 11

Conclusions 3

CL1 Page 6

All estimates of future results, including the AAL, depend on actuarial and financial assumptions which may significantly differ from actual results.
CL2 Page 6

The AAL is a forecast of the cost of benefits already accrued by current employees, vested former employees, and retirees.
CL3 Page 6

The assumptions themselves are usually based on past (albeit recent) experience, which may not be predictive of the future. 6 Examples of the key assumptions which could change unexpectedly: • Employee behavior in terms of turnover and age of retirement • Benefit terms and costs • Financial rates of return Many actuarial studies provide multiple estimates of AAL based on varying assumptions. These estimates can vary over a wide range. For example, one responding city’s high estimate of its unfunded AAL was more than 50% greater than its low estimate. The high estimate assumed no pre-funding and a rate of return of 4.25%, while the low estimate assumed full pre-funding and a 7.75% return. These pairings of funding methods with rates of return are logical, in that a short-term rate of return of 4.25%, with no pre- funding, was easily attainable in 2006-2007. However, in April 2008, the San Mateo County Investment Pool returned 3.40%, significantly less than its return of 4.75% in May 2007.5 Similarly, the pre-funding assumption that a diversified portfolio of long- term investments, including stocks, would return 7% to 8% was realistic, given actual returns for 2003-2007. But a pre-funded, long-term diversified investment portfolio could return much less than 7% in 2008, perhaps even less than 0%. The S&P 500 stock index declined by more than 9% from May 2007 to April 2008 (1,531 to 1,388). These observations are not meant to disparage. They are presented only to show that actuarial estimates are no better than their assumptions. Over the 20 and 30 year amortization periods typically assumed by these estimates, many changes affecting the adequacy of funding will probably occur. For the reasons cited above, reassessments of OPEB liabilities every two or three years, as mandated by GASB 45, are advisable. As noted above in the Findings section, the 72 agencies who responded to this survey cover a wide range of purposes and sizes. The attempt to “normalize” size by dividing dollars by numbers of employees was not especially effective, because the demographics and the nature of OPEB benefits granted by the agencies vary significantly. Assessment of each agency’s ability to meet its OPEB obligations would require extensive research and analysis. Even with the uncertainties, GASB 45 estimates serve to alert agencies to the potential effects of their OPEB policies. For example, in a Council Communication dated February 13, 2008, the managerial staff of the City of Vallejo, California (Vallejo) noted that Vallejo’s largest unfunded liability was its AAL for OPEB, in the amount of $135 million. This document also acknowledged that Vallejo had no available cash to fund (amortize) this liability.6 On May 23, 2008, Vallejo filed for bankruptcy. This is an extreme case, but it does illustrate the serious effect that OPEB obligations can have on the financial well-being of a city. 5 The County Investment Pool is managed by the County Treasurer on behalf of agencies in the county, such as special districts and school districts, which invest in the Pool. According to the County Pooled Investment Policy, “To meet the needs of liquidity and long term investing, the County has established the County Investment Pool. This fund is suitable for planned expenditures or capital funds. The securities in this pool may have longer individual maturities but will have a dollar weighted average maturity of no more than five years.” 6 http://www.ci.vallejo.ca.us/uploads/253/021308%20-%20Amended%20City%20Council%20- %20Special%20Meeting%20-%20Budget%20Workshop%20with%20Staff%20Reports.pdf 7

No Responses Found 3

Government entities assigned to respond to this report. No response documents have been linked in our database.

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