Orange County City Pension Liabilities; Budget Transparency Critically Needed*

R1

Each city should post its current and at least three most recent prior year budgets on the city's website, 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. (F.1) (F.4) The recommendation has been implemented and has been the City's practice for years. At this time, the City has 10-years of budgets posted on its website. This information is easily accessible either on an easy to view tab on the front page or via the search engine. (F.4)

R2

Each city's budget information should contain not only this year/next year budget 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. (F.1) (F.2) (F.3) (F.5) (F.8) (F.10) The Strategic Business Plan, which is included in the City of Irvine's Budget, provides five years of projected General Fund revenue and expenditure data in substantially the same level of detail as the current budget. The expenditure forecast is detailed between salaries and benefits, contracts and supplies, and significant transfers-out to other The Honorable Glenda Sanders August 28, 2014 funds. As a result, the City of Irvine's budget presentation already addresses the Grand Jury's concerns with respect to this recommendation. The City of Irvine is proud of its Budget document and has worked hard to improve its quality over time to make it the highly effective planning and communication tool it is today. The City of Irvine's Budget has repeatedly been recognized with the "Distinguished Budget Presentation" award from the Government Finance Officers Association (GFOA). To receive this award, a governmental agency must publish a budget document that meets specific criteria for effectiveness as a policy document, operations guide, financial plan and communications device. These criteria, which can be found on www.gfoa.org, reflect the guidelines established by the National Advisory Council on State and Local Budgeting and the GFOA's best practices on budgeting.

R3

Each city's budget should show separate line items for predicted employee and predicted employer contributions for the city pension systems. (F.8) (F.9) Over the last several years the City negotiated with its employees to assume their share of CalPERS pension costs. As a result, these costs are now paid by employees, not the City, and therefore are not budgeted. Employer pension costs, however, are a component of salaries and benefits and are not broken-out separately in the summary level budget. The 2015-16 Budget will include additional information within the Strategic Business Plan Section specifying predicted employer contributions for the City's retirement plans as a distinct component of overall salary and benefit costs.

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. (F.7) The recommendation has already been implemented. As previously noted, the Irvine City Council, in 2013, established a plan to accelerate payment of its unfunded pension liability utilizing reserve funding. A policy outlining the parameters of the new plan was included in the fiscal year 2014-15 Budget, supplementing policies already in place addressing the City's Contingency Reserve Fund and Asset Management Plan Fund. These policies include a discussion of the intended use of such reserves and the City's policy for the target size of the City's Contingency Reserve Fund. The City also provides three-year trend information on the accumulation/drawdown of these reserve funds within the Budget Summary section of its Budget document by providing the actual fund balances for last year, estimated fund balances for the current year and projected fund balances at the end of next year. Revenue and expenditure detail is also provided for each fund.

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 The Honorable Glenda Sanders August 28, 2014 systems based on these ARCs. A discussion of the risks associated with these CalPERS projections should also be provided by the city. (F.1) (F.2) (F.8) (F.9) Communicating information on the status of its pension plans is important to the City. First, the City of Irvine has already been working to develop a pension scorecard that will be presented annually to the public to communicate the City's progress in reducing its unfunded pension liability. This scorecard will provide an elevated level of attention to the important topic of pension funding. The presentation is expected to occur this winter and will show the savings and other ongoing impacts of the City's plan to accelerate payment of its unfunded pension liability. Second, the City's Comprehensive Annual Financial Report includes extensive information on the City's pension plans, as required by governmental accounting standards. Lastly, the City will implement the Grand Jury's specific suggestions on this topic in its fiscal year 2015-16 Budget. This will be accomplished by inserting a brief discussion within the Strategic Business Plan chapter of its annual Budget document to address these issues.

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 provided in budgeted expenditures for outsourced services. A discussion of the risks associated with these projections should also be provided by the agencies and incorporated in the city's budgets. (F.6) (F.12) The recommendation will not be implemented as it is not applicable to the City of Irvine and is therefore not warranted. First, while the City outsources fire services to OCFA, it is not a contract city but a Structural Fire Fund City. Therefore the City does not directly budget the actual cost of these services as is discussed within the recommendation and in fact, the City of Irvine is a fiscal donor agency. The cost of Irvine fire services is instead a component of the property tax payments of its residents and business owners. Second, liabilities and debt of the Fire Authority are that of the Fire Authority and not of the City of Irvine. In June 2014, the OCFA Board of Directors requested a legal opinion from the Agency's legal counsel regarding the liability of member agencies for OCFA pension obligations. The written opinion concluded that under law and the Joint Powers Agreement, member agencies do not have liability for OCFA's pension obligations. The OCFA Joint Powers Agreement notes in Article VI, Section 3 (Liabilities): "Except as otherwise provided herein, the debts, liabilities and obligations of the Authority shall be the debts, liabilities and obligations of the Authority alone and not the parties of this Agreement." The Honorable Glenda Sanders August 28, 2014

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. (F.11) The recommendation will not be implemented as it is not warranted. CalPERS posts three years of the City of Irvine's Safety and Miscellaneous Actuarial Valuations on its website. Reports are available on the CalPERS website as they are public documents. Please see most recent reports posted at http://www.calpers.ca.gov/index.jsp?bc=/about/forms-pubs/calpers-reports/actuarial- reports/browse-results.xml&strCatId=2&q=irvine-city. Please contact me or City Manager Sean Joyce at (949)724-6249 if you have questions or if we can provide additional information. Sincerely, Steven S. Choi, Ph.D. Mayor Irvine City Council CC: Sean Joyce, City Manager Ken Brown, Director of Administrative Services