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 website should have a search engine and a single search on the word "budget" should immediately link to the current budget. Response: This recommendation has been implemented. For many years, the City has posted its current and recent prior year budgets on the City's website. The links to the City's budgets are accessible by accessing either the Finance Department's home page or the City's Transparency in Government page. Further, the budgets are immediately accessible through a single search on the search engine embedded into the City's website. Response to Orange County City Pension Liabilities – Budget Transparency Critically Needed August 6, 2014

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. Response: The City's budget document includes revenues and expenditures for the two prior fiscal years, the current fiscal year and the projected fiscal year. The recommendation to include at least five years of projected revenues and expenditures at the same level of detail and use the same line item structure as information for the current budget will be implemented with the fiscal year 2015/2016 budget.

R3

Each city's budget should show separate line items for predicted employee and predicted employer contributions for the city pension systems. Response: This recommendation will be implemented. The City's budget currently reports separate line items for the City's contribution towards the employer share of pension costs as well as the City's contribution towards the employee share of pension costs. Since the City currently does not pay any of the employee's contribution the line item for each department is zero. The City's budget does not currently report the pension contributions paid directly by employees. In addition to paying the full employee contribution, most employees also pay 3% of the employer's contribution as cost sharing; therefore, the total amount budgeted for the employer's contribution is net of the 3% employee cost- sharing contribution. For fiscal year 2015/2016 the City's budget document will show separate line items for predicted employee and employer contributions so the reader will know how much the employees actually contribute and what the City contributes for pension 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. Response: This recommendation has been implemented.

R5

Each city using CalPERS for one of 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 systems based on these ARCs. A discussion of the risks associated with these CalPERS projections should also be provided by the city. Response: The City will implement this recommendation for the fiscal year 2015/2016 budget. Response to Orange County City Pension Liabilities – Budget Transparency Critically Needed August 6, 2014

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. Response: A portion of this recommendation will be implemented, while another portion will not be implemented. The City currently outsources fire services to OCFA. We will provide projected costs of service at least five years into the future, beginning with the fiscal year 2015/2016 budget. Under the terms of our agreement with OCFA, Tustin (and other cities that contract for services with OCFA) is not responsible for any unfunded pension liabilities associated with OCERS, however, should OCFA provide the City with information regarding OCFA's unfunded liabilities, we can include this information in the City's budget.

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. Response: This recommendation has been implemented. For the last several years, CalPERS has published their Annual Valuation Reports on their website at www.calpers.ca.gov. Reports can be found by searching for "annual valuation report" or "actuarial report" from the CalPERS home page. The City thanks the members of the Grand Jury for their efforts in investigating this issue. If you have any questions regarding this letter, please feel free to contact Pamela Arends-King, Director of Finance/City Treasurer, at (714) 573-3061 or [email protected]. Sincerely, Mayor EAM:PAK:la