Pensions in Santa Barbara County Require Vigilance Balancing Promises and Maintaining Services

Conclusions 2

• CL1
  Section 115 Trusts, Pension Obligation Bonds, and Pension Reserve Funds can be effective mechanisms to protect cities from dramatic impacts to the financial markets or declines in General Fund revenues.
• CL2
  The 2021 Santa Barbara County Grand Jury determined that while no current problems or undue risks exist and that none of the cities or the County are in imminent danger of being unable to meet their pension obligations, there still exists a need to remain vigilant and to prepare for unforeseen changes that could affect their future ability to fund their pension obligations in a timely manner. FINDINGS AND RECOMMENDATIONS Finding 1a The cities of Buellton, Carpinteria, Goleta, Guadalupe, Solvang and the County of Santa Barbara are at less potential pension plan solvency risk. Finding 1b The cities of Lompoc, Santa Barbara and Santa Maria are at higher potential pension plan solvency risk. 2021 Santa Barbara County Grand Jury 7 Finding 1c Unfunded Accrued Liabilities have risen for all cities since 2016, and with the announced change in the Discount Rate, are expected to rise further, which could impact the cities’ ability to deliver expected services to residents. Recommendation 1 That each city council and the Santa Barbara County Board of Supervisors develop and publish a comprehensive plan by June 30, 2022, addressing their pension plans and how they intend to properly assure future obligations are paid when due, without impacting the timely delivery of essential and promised services to residents. Finding 2 Section 115 Trusts, Pension Obligation Bonds, and Pension Reserve Funds can be effective mechanisms to protect cities from dramatic impacts to the financial markets or declines in General Fund revenues. Recommendation 2 That each city council and the Santa Barbara County Board of Supervisors study and determine by June 30, 2022, whether a Section 115 Trust, Pension Obligation Bond, or Pension Reserve Fund would be an effective hedge against risks to their pension plans for their city. REQUEST FOR RESPONSE Pursuant to California Penal Code Section 933 and 933.05, the Santa Barbara County Grand Jury requests each entity or individual named below to respond to the enumerated findings and recommendations within the specified statutory time limit: Responses to Findings shall be either:  Agree  Disagree wholly  Disagree partially with an explanation Responses to Recommendations shall be one of the following:  Has been implemented, with brief summary of implementation actions taken  Will be implemented, with an implementation schedule  Requires further analysis, with analysis completion date of no more than six months after the publication of the report  Will not be implemented, with an explanation of why Santa Barbara County Board of Supervisors – 90 Days Findings 1a, 2 Recommendation 1, 2 2021 Santa Barbara County Grand Jury 8 City of Buellton – 90 Days Findings 1a, 1c, 2 Recommendation 1, 2 City of Carpinteria – 90 Days Findings 1a, 1c, 2 Recommendation 1, 2 City of Goleta – 90 Days Findings 1a, 1c, 2 Recommendation 1, 2 City of Guadalupe – 90 Days Findings 1a, 1c, 2 Recommendation 1, 2 City of Lompoc – 90 Days Findings 1b, 1c, 2 Recommendation 1, 2 City of Santa Barbara – 90 Days Findings 1b, 1c, 2 Recommendation 1, 2 City of Santa Maria – 90 Days Findings 1b, 1c, 2 Recommendation 1, 2 City of Solvang – 90 Days Findings 1a, 1c, 2 Recommendation 1, 2 2021 Santa Barbara County Grand Jury 9 APPENDIX A

Observations 1

• OB1
  In Santa Barbara County, PEPRA has been effective in that pension plans created as a result of the pension reform are funded at a much higher percentage. While PEPRA has helped, that does not mean there are not some significant issues to be aware of. The largest component of the Unfunded Accrued Liability in the 32 pension plans of the cities within the county are in Classic plans. Even though PEPRA plans began in 2013, as of June 30, 2020, the total UAL for the 32 plans was over $631 million, of which only $1 million was within PEPRA plans. So, while the 12 PEPRA plans are funded at an average of over 90 percent, the 20 Classic plans are only funded to an average of 68.7 percent. In future years PEPRA plans will play an increasing part in controlling pension costs of the cities and the County. Table 1 (below) highlights the overall pension liabilities for each city and the County, as well their respective populations, estimated annual employer pension contributions, and analytics of how each city’s and the County’s obligations compare to various metrics. These analyses helped the jury classify the pension solvency risk for each of the cities and the County. For example, Lompoc, the City of Santa Barbara, Santa Maria and the County have higher per capita UALs than the remaining cities, suggesting there could be a higher strain on those communities than on those with lesser per capita UALs. Also, the cities of Lompoc, Santa Barbara and Santa Maria have significantly higher Estimated Total Employer Contributions than the other cities. These factors alone may not be a warning sign, but when compared to their Projected Payrolls and to their Total General Fund Revenues, they also represent higher percentages of those amounts and suggest higher risk. 10 See Appendix B 11 https://www.calpers.ca.gov/page/employers/actuarial-services/employer-contributions/public-agency-actuarial-valuation- reports 12 https://www.auditor.ca.gov/bsa/cities_risk_index 2021 Santa Barbara County Grand Jury 5 Table 113 Public Pension Status, Santa Barbara County and 8 Cities, 2020 2020 Estimated Total Estimated Total Unfunded Estimated Employer Employer Normal Unfunded Actuarial % Funded Total Contribution as % Contribution as % of Accrued Actuarial Liability (Discount Employer of Projected Proj Payroll to Total Population Liability Liability Per Capita Rate - 7%) Contribution Payroll General Fund Revs Buellton 5,102 $ 10,618,762 $ 2,678,957 $525.08 74.8% $ 384,784 22.0% 4.27% Carpinteria 13,385 $ 30,911,978 $ 9,432,389 $704.70 69.5% $ 1,086,135 37.4% 9.37% Goleta 30,911 $ 21,985,402 $ 4,241,195 $305.15 80.7% $ 1,105,343 13.5% 3.34% Guadalupe 7,783 $ 16,925,088 $ 4,224,747 $542.82 75.0% $ 627,352 23.2% 10.38% Lompoc 42,853 $ 321,949,822 $ 102,974,795 $2,402.98 68.0% $ 12,649,654 51.4% 27.65% Santa Barbara 91,686 $ 1,180,029,261 $ 386,111,684 $1,123.12 67.3% $ 47,970,234 51.0% 32.08% Santa Maria 107,263 $ 507,742,152 $ 160,165,144 $3,599.67 68.5% $ 20,753,973 40.1% 23.46% Solvang 5,839 $ 19,743,790 $ 5,201,465 $890.81 73.7% $ 599,751 35.6% 6.41% County of Santa Barbara 446,499 $ 4,297,727,000 $ 1,103,795,000 $1,984.57 74.3% - - - Totals $ 6,407,633,255 $ 1,778,825,376 72.2% Based on the Jury’s investigation, interviews, and reviews of each plan’s actuarial valuation report and the most recent audited financials for each city and the County, the Jury classified the cities’ and the County’s pension solvency risk into two categories: those that the Jury believes are at less risk to have problems with meeting their pension obligations and those that continue to have higher potential risk. Cities and the County the Jury considers at less potential pension plan solvency risk include:  Buellton  Carpinteria  Goleta  Guadalupe  Solvang  County of Santa Barbara Cities the Jury considers at higher potential pension plan solvency risk include:  Lompoc  Santa Barbara  Santa Maria The Jury does not think that any of the cities or the County are in imminent danger of insolvency related to their pension obligations. That said, the cities and the County can always take additional steps to further reduce the risk that pension obligations would impair their ability to provide all intended services on a timely basis. 13 Except for the County information, all information within the table was obtained from the eight cities’ Actuarial Valuation Reports as of June 30, 2020, prepared by CalPERS, which are available online at: https://www.calpers.ca.gov/page/employers/actuarial-resources/public-agency-actuarial-valuation-reports. The County information was obtained from SBCERS Actuarial Valuation Report as of June 30, 2020, available online at https://www.sbcers.org/wp-content/uploads/2020-SBCERS-AVR-Revised_20210224s.pdf. 2021 Santa Barbara County Grand Jury 6 And some cities are taking those additional steps. While no city, or the County, has used a Pension Obligation Bond, the cities of Guadalupe, Lompoc and Santa Barbara have indicated that they have either investigated the idea or are planning to. A Pension Obligation Bond is not without risk, so it is important that each city that considers using this tool takes a careful look at its cost of borrowing, the interest rate they can obtain, and the market outlook for debt over the life of the bond. Several cities have either created Section 115 Trusts (Goleta), or have told the Jury they are investigating the possibility (Guadalupe, Santa Barbara, Santa Maria and Solvang). A Section 115 Trust would allow the cities to set aside funds when times are good to be used to offset pension costs when the need to use general funds would negatively impact the timely delivery of essential services. The downside to using a Section 115 Trust is that the funds may only be used for the specific purpose for which the trust was created. A less restrictive way than a Section 115 Trust for cities to set aside funds for pension needs in the future would be to create a Pension Reserve Fund. This type of reserve fund allows the cities to set aside funds for specific later needs, but allows the flexibility to divert the funds to other uses, should the need arise. None of the cities are currently using this mechanism, and instead are relying on their general reserve funds to be available if needed. The reserve funds for the cities of Guadalupe and Lompoc are currently underfunded based upon their stated policies, but both feel recent events will help them replenish their reserves within a couple of years at the most. The Jury learned that in Guadalupe there has been significant new housing built within the city and more is under construction, and in Lompoc, the recent approval of Measure Q, which increases the tax on cannabis manufacturing and distribution, is expected to create between and $5 and $8 million dollars in new revenues for the next fiscal year. The Jury learned that all the cities and the County take their pension obligations seriously and understand the need to fulfill those obligations without impacting the delivery of essential and promised services to their residents. The Jury also learned that while these issues are analyzed and discussed annually, none of the cities or the County have a written plan addressing the risks of pension plan insolvency. A written plan would allow the residents to better understand how the cities and the County are addressing these issues and would serve as a guide to those implementing new policies.

Agency Responses 7

Government agencies' official responses to this report's findings and recommendations. Click on a response to see the structured breakdown.