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Extracted from Consolidated Report

This investigation was originally published as part of a larger consolidated report containing multiple investigations. View the consolidated PDF for the complete document.

Mendocino County Grand Jury • 2002-2003

Employees Retirement Association

13 pages
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Note: Missing finding numbers detected: F12

Findings 12 findings

F1 Page 87
The Association reimburses the County for costs incurred in the administration of the retirement system. Reimbursement of 1/3 of the salary and benefits of the County Treasurer as Retirement Administrator suggests that the treasurer allocates about 1/3 of his time in this role.
F2 Page 87
The projected/requested county budget growth for retirement system activities in the 2002-2003 budget year although large on a percentage basis, seems appropriate when related to a relatively small budget base and the need for additional staffing.
F3 Page 87
The Association Board routinely retains outside counsel for assistance regarding disability retirement applications and litigation resulting from decisions about applications. Further, County Counsel provides “ongoing legal advisory services” and may represent the Association in other lawsuits. The Association does not retain outside and independent legal counsel for operational and business issues.
F4 Page 87
Association Resolution 1999/2000-2 establishes general investment objectives, qualitative guidelines, and parameters for the allocation of assets of the Employees Retirement Association. The Retirement Board has broad discretion over investments, and regularly relies on outside advisors as to specific investments. Investment portfolio performance appears to be within reasonable norms. There is no prohibition of investing in derivatives, although both futures and options are prohibited. Direct real estate investment is also not prohibited. Additionally, although the resolution does provides for a quarterly comparison of “results and risk” of investment managers, there is no apparent provision for the analysis and comparison of both direct and indirect investment expenses.
F5 Page 88
Health insurance benefits for retired employees will continue to be funded by the basic plan until the Associations health care reserves have been totally used, and, “earnings on investments are not in excess of required transfers of earnings to retirement reserve accounts”. Effective September 1, 1998, the County of Mendocino assumed responsibility for the funding of health care premiums once the above reserves are depleted.
F6 Page 88
The key financial “road map” for those responsible for the successful operation of the Retirement Association is provided by the Association’s Actuaries. The data developed by the Actuaries, and presented in their annual Actuarial Reports, should be driving the many decisions necessary to maintain the financial health of the Association.
F7 Page 88
The assets of the Mendocino County Employees’ Retirement Association funds as of June 30, 2001 alternately were: Financial Statement $147,373,404 Report to Plan Participants (By Treasurer) $169,949,917 Actuarial Report (As of 7/1/01) $157,545,000 The variance between the Financial Statement and the Actuarial Report is explained by the actuarial process of “smoothing” investment gains and losses. The 88 difference between the Financial Statement and the Annual Report to Plan Participants is explained by the fact that equities are carried “at cost” in the Report to Participants as opposed to “market” by the Financial Statement. The “at cost” numbers will tend to be more favorable in a declining equity market, and less so in an advancing equity marketplace. The Grand Jury also notes the difference between the “net market value” of assets related in the financial statement, and that related in the most recent Actuarial Report ($151,671,408). NOTE: The actuarial technique of “smoothing” is described in the June 30, 2001 Actuarial Report ( ) as a method wherein “realized and unrealized gains and losses are spread over five years, i.e. only 20% is recognized in any one year.” This is designed to level or “smooth” results and reduce the volatility of realized and unrealized gains and losses in order to be able to achieve a more rational planning process.
F8 Page 89
The level of the Associations assets is more significant when compared to the Actuarial Accrued Liability (AAL), and the resultant “Unfunded Actuarial Accrued Liability” (UAAL). This (UAAL) represents the shortfall between the benefits already earned by plan participants (Actuarial Accrued Liability or AAL), and the “present value” of the Associations assets (or Actuarial Value of Assets). The following numbers were obtained from the June 30, 2001 Actuarial Report. This is the most recent data available. Actuarial Actuarial Actuarial Unfunded Funded Valuation Value of Accrued AAL Ratio Date Asset Liability (UAAL) (AAL) 7/1/93 $ 72,062,000 $105,866,000 $33,804,000 68.1% 7/1/94 $ 75,976,000 $112,535,000 $36,559,000 67.5% 7/1/95 $ 79,322,000 $121,027,000 $41,705,000 65.5% 7/1/96 $ 84,992,000 $130,036,000 $45,044,000 65.4% 7/1/97 $124,286,000 $140,783,000 $16,497,000 88.3% 7/1/98 $134,836,000 $154,263,000 $19,427,000 87.4% 7/1/99 $142,775,000 $173,250,000 $30,475,000 82.4% 7/1/00 $150,056,000 $185,423,000 $35,367,000 80.9% 7/1/01 $157,545,000 $204,699,000 $47,154,000 77.0%
F9 Page 90
The reduction in UAAL reflected on 7/1/97 (and the attendant increase of assets) was due to the issuance of $30,720,000 Pension Obligation Bond in late 1996, the proceeds of which were given to the Association by the County in order to reduce the UAAL.
F10 Page 90
Under the 1996 ”Funding Agreement” between the County and the Retirement Association, payments by the County toward the remaining UAAL were suspended based upon the proceeds of the Pension Obligation Bond being the “actuarial equivalent of the County’s otherwise monthly payments owed to the Association for the (Suspension Period)”. An initial schedule of estimated UAAL balances, which if exceeded by 5% in subsequent actuarial valuations, compels the County “to begin funding the 90 incremental increase in the UAAL balance on a current basis without regard to the Suspension Period”.
F11 Page 91
The Unfunded Actuarial Accrued Liability is troublesome both in terms of it’s growing magnitude as well as the complexity of the forces that have created it. Indications are, that the UAAL as of June 30, 2002 will be approximately $72,500,000. If this trend continues unabated in 2003 and 2004, one cannot help but project that the County and the Association are potentially facing a staggering shortfall. 12.There appear to be many reasons for the growing UAAL. Unfortunately, the factors are complex, and are not necessarily common to each annual period. The entire process is made even more difficult by the need to project ultimate costs, (benefits), as far as 60 to 70 years in the future. The factors that seem to be driving the increasing UAAL include: * Capital losses (on equities) and less than expected dividends for the most recent several years. * Larger than expected salary increases. * New benefit levels * Lengthening life expectancy tables (1999) * The funding of health care benefits from the retirement funds. * Failure to fully retire the 1996-1997 level of UAAL with the 1996 Pension Obligation Bond, and subsequent inability to amortize the remaining balance. * And, one cannot escape the obvious conclusion, that, for whatever reasons, contributions have not kept pace with the factors that have driven up the Actuarial Accrued Liability, (ultimate benefit cost). 91
F13 Page 92
In order to compare the level of funding of the Mendocino County Employees Retirement Association with other 1937 Act Counties, we include the following most recent table of “1937 Act Counties” funding levels obtained from the California State Controllers Office, “Public Retirement Systems Annual Report” dated April 30, 2002. While the data is several years old, it does provide a sense of just how Mendocino compares with other counties. (A funded ratio of 100% means that all of the Acutarial Acrued Liability are covered by the assets of the fund.) FISCAL YEARS ENDING 7/1/98 & 7/1/99 COUNTY FUNDED RATIO A/0 7/1/98 FUNDED RATIO A/O 7/1/99 Alameda (A/O 12/31/98) 108.30 Contra Costa (A/O 12/31/98) 80.50 Fresno 106.40 Imperial 126.50 Kern 102.00 Los Angeles 99.50 Marin 96.30 Mendocino (A/O 6/30/98) 87.40 82.40 (A/O 6/30/99) Merced 78.20 Orange (A/O 12/31/98) 95.20 Sacramento 107.90 San Bernardino 116.10 108.30 San Diego 105.90 San Joaquin (A/0 12/31/97) 104.90 92 San Luis Obispo (A/0 1/1/98) 97.10 San Mateo 89.90 92.00 Santa Barbara (A/ 12/31/98) 98.70 Sonoma (A/O 1/1/97) 100.00 98.70 (A/O 1/1/99) Stanislaus 105.80 Tulare 102.10 104.80 Ventura 115.00 123.00 Average (Unweighted) 101.13 101.53 Note: The most recent funded level percentage for Mendocino (as per item 7. above) is 77.0% as of July 1, 2001.

Recommendations 1