Orange County's $4.5 Billion Unfunded Liability & Retirement Plans*

The County, in part, is responsible for the unfunded pension liabilities to increase from a surplus of $130,000 in 2000 to $4.5 billion as of December 2012. This represents an increase of more than 4,500% since year 2000. Response: Disagrees partially with the finding. While benefit changes between 2001 and 2004 contributed to the increased Unfunded Actuarial Accrued Liability (UAAL) at that time, "great recession" market losses and actuarial assumption changes are the principal causes of the increased UAAL between 2000 and 2012. Please refer to the following link to "The Evolution of OCERS Unfunded Actuarial Accrued Liability" posted on OCERS' website, which details the development of the unfunded pension liability. http://www.ocers.org/pdf/finance/actuarial/evolution of ocers uaal.pdf

The County should have developed a plan to curb the growth in unfunded pension liability independent of OCERS. Agrees with the finding. The County already executed a plan to curb the growth Response: in UAAL by implementing a hybrid retirement plan prior to implementation of the Public Employees Pension Reform Act (PEPRA) in 2013. The County's hybrid plan (1.62\% \ @ 65) is the lowest plan within the State, to control and reduce the growth of the unfunded pension liability.

The County and OCERS have taken recent actions to control and slightly reduce the unfunded liabilities by 11% from $4.5 billion in 2012 to $3.8 billion in 2015, but the County could be more aggressive. Response: Agrees with the finding. The County and OCERS have effectively managed the unfunded liability as the percent funded is within the median range of California peer governmental units, as identified in the report (pages 4 and 7). The County will continue to review annually, through the Strategic Financial Plan, if it is economically and operationally feasible to take specific steps to further reduce the unfunded liability.

Issuing short term Pension Obligation Bonds (7 of past 10 years) to achieve taxpayer's savings of over $100 million during the past decade was a good decision by the County. Agrees with the finding. Response:

OCERS Board of Retirement made a solid financial decision to reduce the amortization period of the UAAL from 30 years down to its current period of 20 years, resulting in increased annual payments from the County. Response: Agrees with the finding. The County agrees that the decision by the OCERS Board of Retirement to reduce the amortization period of the UAAL from 30 years to 20 years was a sound financial decision, as it ensures a more timely payment of the UAAL, eliminating an additional ten years of interest payments. Simply due to timing, with the bulk of the County's 30-year amortized UAAL already having reached slightly below the 20 year mark, the restart of the amortization period at 20 years lead to a modest initial decrease in the County's contribution payments. However, any UAAL that may arise in the future from actuarial assumption changes will now be funded over a 20-year period, instead of the prior policy's 30-year amortization schedule.

Passage of the state Public Employees' Pension Reform Act of 2013 should improve the financial stability of the County's retirement system. Response: Agrees with the finding.

The State and local governments have the ability to implement Defined Contribution Plans, or hybrid plans, instead of the traditional Defined Benefit Plan. Much of the private sector has transitioned to the Defined Contribution Plans such as 401K plans and more than 30 jurisdictions in California use Defined Contribution Retirement Plans, including Orange County. Disagrees partially with the finding. The County has already implemented a Response: hybrid plan, which combines a defined benefit plan (1.62% @ 65) administered by OCERS and a defined contribution plan administered by a third party administrator. The hybrid plan does not conflict with the California Employees Retirement Law of 1937 (CERL). The County does not have the authority to close the defined benefit plan to new members. A legislative change would be required for a County operating under CERL to close its defined benefit plan to new members and current members would be prevented from moving from a defined benefit plan to a defined contribution plan due to California vested rights law.

County employees are not treated equally as relates to retirement benefits. Orange County utilizes and contributes to several Defined Contribution Plans as supplemental retirement plans to OCERS and one of the plans is restricted to "select" employees and all elected County officials. Additionally, the County has eight non-County employees in the exclusive 401(a) plan. Agrees with the finding. As noted in the report ( ), the 401 (a) Defined Response: Contribution Plan is a component of the compensation package provided to certain eligible classifications within the County, which is consistent with CERL. Additionally, based on bargaining with various labor unions, County employees may be entitled to differing Defined Benefit and Defined Contribution Plans for retirement benefits.

Orange County has not designated unfunded liability reduction as a priority either by action or in its Strategic Financial Plan. Disagrees partially with the finding. The County has supported actions taken by Response: the OCERS Board to amend actuarial assumptions, to ensure a sound, well-funded retirement system. The County has also demonstrated support through Board of Supervisors appointments to the OCERS Board that are consistent with the County's philosophy of prudent fiscal stewardship. The County's annual Strategic Financial Plan and budget processes are essential tools that prioritize budget stabilization and strategically plan to address the County's current and future needs. Ensuring a sound, well-funded retirement system is a critical component of the existing County finance processes. RECOMMENDATIONS AND RESPONSES: The County should encourage the OCERS Board of Retirement to maintain