Orange County City Pension Liabilities - Budget Transparency Critically Needed*

– OC cities have large unfunded pension liabilities both in terms of absolute dollar value and on a per capita basis and as a percentage of city General Fund revenues. The City partially disagrees with the finding. The City agrees that many Orange County cities have large unfunded pension liabilities in terms of absolute dollar value. A reason for the Grand Jury's investigation into city pension liabilities includes the ability of Orange County cities to recover from their unfunded liabilities. To assist in making this determination, the Grand Jury applied two assessments: Per Capita Assessment and 200 Civic Center • Mission Viejo, California 92691 949-470-3059 FAX 949-581-3528 http://www.cityofmissionviejo.org O Glenda Sanders, Presiding Judge of the Superior Court September 19, 2014 Assessment as a Percent of General Fund Revenues. Of those 10 cities analyzed, for the Per Capita Assessment the Grand Jury's own report states "No city on the list stands apart as having an overwhelming liability when measured using this metric." For the Assessment as a Percent of General Fund Revenues, the Grand Jury's own report states "...there is not any city in the list that stands apart as having an overwhelming liability when measured using this metric." The ranges, as reported by the Grand Jury, for these two assessments are: Table 1: Results of Grand Jury Assessments Assessment Low High Per Capita $1,214.79 $3,153.79 Percent of General Fund Revenue 107.5% 237.0% Based on this data and the Grand Jury's own conclusions, as long as a city is within or below the ranges for these assessments, then those cities would not have an overwhelming liability when measured using these metrics and are in a reasonable position to manage their unfunded liabilities and successfully pay them down either through Annual Required Contributions ("ARC") or other additional payments as determined by each individual agency. The Grand Jury's report states that their assessments were done on only 10 cities "because unfunded pension liabilities for those cities which outsource fire and/or police services to OCFA and OCSD are not available". This City would argue that contracting agencies are not directly responsible for any portion of the Orange County Sheriff's Department ("OCSD") and Orange County Fire Authority ("OCFA") unfunded liabilities. If the City were to elect to contract with another agency for police services, this City argues that the County of Orange would not send the City an invoice for some prorated share of the OCSD unfunded liability. There is no statutory law or common law that exists at this time that obligates a contracting agency to assume the unfunded liabilities of another agency. An OCSD contact agency's responsibility is limited to paying the "full cost" of the ARC for staff resources utilized by the agency for each contract year. Thus, while a contract agency has an annual cost of service, a portion of which is utilized by OCSD to pay their ARC, contract agencies do not have ownership of any part of the unfunded liability of OCSD. While the relationship with OCFA is different, the argument is the same; the unfunded liabilities of OCFA are not the direct responsibility of the member agencies and it would be inappropriate to assign a portion of that liability to member agencies. If members of the public are interested in pension and unfunded liability information for the County of Orange or OCFA, that information is publicly available through those agencies as well as OCERS. Since it is the City's position that a contract agencies unfunded liabilities are only those related to their own employees, by applying the same Grand Jury Assessments to the remaining cities, the results are as follows: September 19, 2014 Glenda Sanders, Presiding Judge of the Superior Court Table 2: Assessment Results for Contract Cities Total General Fund Assumed Revenues | UAL as a Percent City Per Capita Population City Total UAL for Current of General Fund UAL (1/1/13) Adopted Revenues Budget(2013-14) $ $ $ 3.95% Aliso Viejo 49,533 12 586,580 14,834,715 Buena Park 54,297,950 148.37% 80,560,951 82,035 982 116.04% 32,145,105 48,602 661 27,701,827 Cypress 98 3,333,724 28,680,025 11.62% Dana Point 33,902 98.05% 141,532,791 231,363 612 144,349,304 Irvine 2,721,662 89 14.47% Laguna Hills 30,737 18,814,973 5,016,471 78 13.90% 64,138 36,092,814 Laguna Niguel 410,802 25 4,378,276 9.38% Laguna Woods 16,519 3,853,959 49 Lake Forest 78,723 35,882,100 10.74% 14,817,978 La Palma 15,836 936 8,351,900 177.42% 13,106,234 112.58% Los Alamitos 11,639 1,126 11,641,602 17,364,881 183 50,740,225 34.22% 94,799 Mission Viejo 32,523,942 51,900 627 106.88% Placentia 30,429,745 25 RSM 1,205,233 48,606 15,842,952 7.61% 1,359,666 2.70% 64,615 21 50,383,370 San Clemente 23,117,356 82.35% Seal Beach 943 28,071,000 24,514 4,192,825 108 14,013,231 29.92% Stanton 38,808 48,308,273 78,071 619 47,764,400 101.14% Tustin 1,080,127 Villa Park 5,907 183 2,599,400 41.55% 83,743,371 918 198.50% 91,272 42,187,351 Westminster 254 16,886,032 29,438,943 57.36% Yorba Linda 66,512 NOTES: Excludes La Habra and San Juan Capistrano since UAL information is not complete; Budget information for Laguna Wood is for FY 2012-13. Total UAL as reported in Table 4 of the Grand Jury Report City population as reported by the State of California Department of Finance on May 1, 2014 Revenue information obtained from each agency's adopted budget Comparing these results with the results of the Grand Jury in Table 1, the following is noted: All 21 contract cities fall below the Grand Jury range for per capita UAL, with eight of those cities falling below $100 per capita. 15 of the 21 contract cities fall below the Grand Jury range for UAL as a percent of General Fund • revenue, with the remaining six falling within the range.

- OC cities' unfunded pension liabilities have been increasing on a year over year basis over the past several years as a result of the 2007-2009 Great Recession and as key actuarial assumptions have been changed by CalPERS and OCERS. September 19, 2014 Glenda Sanders, Presiding Judge of the Superior Court The City agrees with the finding.

- There are risks to OC cities of changes to key actuarial assumptions including revisions downward of expected returns on investment and the likely move by pension funds to using more realistic mortality assumptions, which would increase unfunded liabilities. The City agrees with the finding. However, in order to ensure the viability of the retirement system, assumption changes are necessary from time to time to accurately reflect the actual experience of the retirement system.

- Locating city budget information on a city web site is not always straightforward and prior year budgets are sometimes not posted by a city. The City agrees with the finding as it pertains to itself.

- City budgets posted online project revenues and expenditures for at most one or two years into the future and sometimes do not show prior year data. The City disagrees with the finding as it pertains to itself. While the City did not review other agencies budgets after reading the Grand Jury report, the City of Mission Viejo does report multi-year information in the Master Financial Plan section of the City's budget. The information includes actual historical information for 6 years, current year amended budget, two years of proposed budget information and five years of projected future year information. A summary in table format begins on of the City's 2013-15 Budget and Master website following link. located the city's using the Plan document, on Financial http://cityofmissionviejo.org/DepartmentPage.aspx?id=98

- City budgets often lack footnotes explaining key assumptions, risks, and unusual changes in budgeted amounts or revenues and expenditures. The City disagrees with the finding as it pertains to itself. While the City did not review other agencies budgets after reading the Grand Jury report, the City of Mission Viejo does provide text on assumptions, changes in budgeted amounts and other items of note for both revenues and expenditures under the revenue section starting on , expenditure section starting on and again in the Master Financial Plan section starting on of the 2013-15 Budget and Master Financial Plan document.

- City budgets sometimes do not provide trend data on the accumulation/drawdown of reserves and lack details on the city's plan for the size of its reserves or their intended uses. The City disagrees with the finding as it pertains to itself. While the City did not review other agencies budgets after reading the Grand Jury report, the City of Mission Viejo does provide information of its discretionary reserves on pages 12, 16 and 18 of the 2013-15 Budget and Master Financial Plan document. This information September 19, 2014 Glenda Sanders, Presiding Judge of the Superior Court reflects the projected changes to reserves during the two year budget cycle and seven year trend data. The reserves policy is also located in the Appendices starting on .

- Cities can control most future expenditures by increasing or decreasing budgets for those expenditures as funds are available. However, increases to annual required contributions to their pension systems are imposed externally, change unpredictably, and when they occur, are ramped up over two to five years. The City partially disagrees with the finding. The City agrees that increases to the ARC are imposed externally by CalPERS and due to the most recent smoothing policy changes by the CalPERS Board, rates used to calculate the ARC will "ramp up" up to five years when there are changes to smoothing policies, assumptions or investment losses; however, the City does not necessarily agree that these changes are unpredictable. CalPERS notifies agencies when policy changes or assumption changes are planned to be proposed and what kind of effect agencies should anticipate from these changes. As an example, the new mortality assumptions that were approved earlier this year were communicated to agencies about a year before they were brought to the Board for discussion and the actual changes to rates will not occur for another two years. As for the smoothing changes, these were also communicated almost a year in advance and the Chief Actuary put on several presentations on the topic leading up to the CalPERS Board meetings and sought feedback from agencies on the various alternatives. Unpredictable is unforeseen and sudden. The process of changing mortality assumptions and smoothing policies was not sudden. It is also well known that CalPERS reviews actuarial assumptions every few years and agencies are aware of this when forecasting their budgets.

- City budgets posted online do not explicitly show the link between planned city pension expenditures and pension system actuarial reports and those reports' annual required contributions. Risks associated with predictions of future annual required pension contributions based on risk assessment data provided by their pension systems and/or based on their own analysis are not discussed. The City agrees with the finding as it pertains to itself.

- Pension costs for New (Post-PEPRA) employees will be substantially lower than for Legacy employees, but only a small percentage of current employees, typically only a few percent of total employees, are New. Substantially reduced pension costs for cities as a result of pension reform will not be realized for one or more decades. The City agrees with the finding.

- CalPERS Annual Valuation Reports for Miscellaneous and Safety City employees are available to the public online for a very small number of cities. The City disagrees with the finding. Public agency CalPERS Annual Valuation Reports are available to the the following link CalPERS website at on-line the public on http://www.calpers.ca.gov/index.jsp?bc=/about/forms-pubs/calpers-reports/actuarial-reports/home.xml. September 19, 2014 Glenda Sanders, Presiding Judge of the Superior Court

- OCERS provides pension plans for OCFA and OCSD employees, but there is no way to trace through publically available sources OCERS unfunded pension liabilities to the city budgets which outsource to OCFA and OCSD for fire and police services. The City agrees with the finding; however, as previously discussed, the City argues that the unfunded pension liabilities of OCFA and OCSD are not the direct responsibility of contract cities and should not be reported by contract cities.