Fire El Dorado County Fire Protection District Board of Directors Response the Grand Jury Report West Slope Fire*

Long term fiscal sustainability of fire protection on the West Slope of the County is highly questionable. Respondent agrees with finding. However detailed analysis and historical reference in accordance with statutory changes must be understood. The same thinking which caused this problem requires different thinking and actions to solve the problem. Understanding the historical legislative mistakes will enable them to be corrected going forward. Historical and financial background information for response to the Grand Jury Report, "West Slope Fire Protection Update" By: Paul Dutch, Division Chief While the background to the "West Slope Fire Protection Update" briefly touched upon the post- proposition 13 environment, the report omitted important elements of public sector finance that are critical in understanding both how, and why municipalities throughout California have continued to remain financially challenged for over 40 years after the implementation of Proposition 13. Unfortunately, an inaccurate insight into any problem, will only lead to an inaccurate oversight for the solution. Given the current availability of widely accessible historical information and data, our efforts should seek reform that stabilizes the issues, rather than a remedy that masks the origins. It remains without question that Proposition 13 impacted both local and county governments, by creating narrow corridors for revenue and expenditure relationships in public sector finance. Prior to the implementation of Prop. 13, there was a significant history that had been shaping the political- economic contours in California for nearly 70 years, that unfortunately was not included in the Grand Jury report. It is important to acknowledge this history, because at the very least it provides context and a historical perspective into the fiscal challenges that are faced today. Local governments have had a challenging history with the State of California regarding the sanctity of revenues, and the independent ability to levy taxes to provide services within their respective areas of government and communities. These contested relationships would evolve into advocacy and reform efforts in the early 1900's that would eventually lead to two legal principles being established in California¹. These principles are the: Home rule power Separation of Sources Act of 1910 The combination of home rule power and the Separation of Sources Act of 1910 would help to shape boundaries and fiscal authority for local government in the State of California. Fundamental elements of the Separation of Sources Act of 1910 that are germane to taxing authority, not only allowed local government revenues to remain in alignment with the needs and desires of their communities; most importantly, it established the principle of separate revenue sources between the state and local governments in California. The Separation of Sources Act of 1910 is a significant factor in the post- Proposition 13 environment for local and county governments; when viewed in combination with the implementation of Assembly Bill 8 in 1979 (AB 8)2; both changes significantly altered the exclusive control of property tax at the local level, and placed property tax allocation back into the hands of state control. This decoupling, essentially removed the Separation of Sources doctrine and home rule at the local level that had been in effect for nearly 70 years.3 The Separation of Sources Act of 1910 determined that secured property taxes would be utilized as a local government revenue source. The revenue derived from property taxes was intended to be utilized for critical local government needs, in areas such as law enforcement, fire protection, libraries, parks, and hospitals. Secured property taxes would be used as the largest and most essential source of local government control and funding from 1910 - 1978, until the implementation of Proposition 13 and Assembly Bill 8. Through the implementation of Proposition 13 and Assembly Bill 8, a paradigm shift would emerge where local government revenue control of secured property taxes, would shift into the hands of the state. This change would have a profound impact on local government fiscal stability. Most importantly, this alteration of control over property taxes has laid the groundwork for systemic fiscal policies that have allowed the State of California to utilize local government revenue sources as a fiscal shock absorber, in an effort to maintain fiscal sustainability for the state during economically vulnerable times. Rather than implement fiscal policies that protected and respected the autonomy of all forms of government and their respective areas of revenue needs that were best suited for their communities and constituencies, in a complete departure of the Separation of Sources Act, the State of California instead chose to use local government revenue to absorb losses in a post-prop. 13 environments. The progeny of Prop. 13 and AB 8 that began to emerge in the 1990's, have helped to reveal an even more devastating relationship within public sector finance; that being the challenges that exist when a local government has their revenue removed from their balance sheets by the State of California. This ¹ See: The State-Local Fiscal Relationship in California: A Changing Balance of Pow e r • • • J. Fred Silva Elisa Barbour ² See: Understanding California's property tax: Legislative Analyst's Office 2012 ³ See: The Origin & Devolution of Local Revenue Authority by Michael Coleman and Michael G. Colantuono deprivation of revenue has exposed the fiscal and operational dichotomy of having to provide a level of service to their respective communities, while simultaneously having to service unfunded pension and healthcare liabilities for their active and retired employees. The first example of this emergence can be found during the Education Revenue Augmentation Funding (ERAF) shifts that happened in FY 1992-93 and again in FY 1993-94. These shifts from local and county revenue streams were put in place by the State of California to fund the educational system throughout the state. These shifts are commonly referred to as ERAF I and ERAF II. The El Dorado County Fire Protection District currently has roughly $1.1M of revenue removed from its District on an annual basis due to ERAF shifts. No subsequent revenue augmentation has been received by the El Dorado County Fire Protection District from Proposition 172 funds. During the passage of Proposition 13 and AB 8, Proposition 8 in 1978 also took effect. Proposition 8 allows for temporary reductions in assessed values, to be reassessed at market value if there is a decline in property value below the original acquisition price of the property.⁵ The majority of local fire districts in El Dorado County experienced an immensely slow recovery process from the "Great Recession", due to the features of Proposition 8. Real estate values simply do not have the elasticity and rebound effects of sales and income taxes. Another change that has also impacted all levels of government, but specifically those that have had their revenue removed with no subsequent augmentation, is the paradigm shift in public sector pension costs. Due to the recommendations provided in GASB No. 67 & 68, in 2015 CalPERS began a "fixed 30- year amortization" of all unfunded pension liabilities. Prior to this implementation, CalPERS utilized a "rolling" amortization which allowed employer pension costs to remain relatively stable vis-à-vis their respective payroll. This has increased employer annual pension costs immensely since its implementation. When this shift is analyzed through the lens of a local government entity that has had their revenue(s) removed or limited by larger sectors of government, we can begin to understand how the systemic effects of Prop. 13 and its progeny have placed a destabilizing fiscal vice grip around local government(s) within the State of California. With the information provided thus far, we can begin to visualize and understand how these fiscal policies have had unintended consequences that have altered not only local government finance, but most importantly, how fiscal responsibility still remains at the local level, even though the State of California now has not only fiscal control of the distribution of that revenue, but has also used their fiscal control for the removal of that revenue as well. More specifically, the State of California has a need for local government revenue, but no need for the local government liabilities that have their origins within that revenue. ⁴ See: Property Tax Revenue Decline in the State of California and the revenue decline in the State of California and the Implications: An Examination of Selected Local Governments in the State of California Ryan M. Mauldin University of Kentucky ⁵ See: Decline in value – Proposition 8, California State Board of Equalization A similar revenue reconfiguration has taken place between local fire protection districts and the County of El Dorado. In the early 1970's the County of El Dorado created the County Service Area 7 (CSA 7), in an effort to establish a "fire-based" EMS system, where ambulances would be staffed with Firefighter/Paramedics throughout the county. Although the transporting Fire Districts staffed and provided the service, the County of El Dorado provided the funding and considered all employees who worked on the ambulances to in fact be "County" employees, not "Fire District" employees. This designation would change in 1997 when the Joint Powers Authority (JPA) was created to oversee the ambulance operations on the western slope of El Dorado County. During this transition, the employees that were once considered "County" employees were <i>now</i> considered to be "Fire District" employees. While this reconfiguration may appear harmless at first glance, the question should be asked: "Who inherited the employee unfunded pension liabilities?" If your answer is the Fire Districts, your answer would be correct. How can this happen? That is a good question; more importantly, it is an excellent observation. Being able to observe the pattern of larger governments being able to remove or deprive smaller governments of their revenue, while simultaneously leaving them saddled with the debt, is exactly why the Fire Districts in this county, and many municipalities around the state are in their current financial predicaments. It is often inferred that local government cannot manage their fiscal affairs, so a larger governmental entity like the county or state must be the answer. If this were not the answer, would the discourse be the same? More specifically, if the actual cost to provide service is comparable or even less expensive when provided by local governments, would the same studies and suggestions be recommended? Moving forward, what is a barometer that we can use to determine the actual costs of "doing business"? Is it the revenue that a level of government receives? No. If it is not the revenue, then what is it? The debt. More specifically, the pension costs per employee. Why look at the pension costs per employee? As the post-Prop. 13 challenges continue to mature and manifest; the present-day underpinnings of local government fiscal challenges are due to the amortization of unfunded pension liabilities coupled with a deprivation/removal of revenue(s) by larger governmental entities. Pension costs are the catalyst for agencies and municipalities seeking larger revenue streams, as their current revenue is essentially being eroded by annual pension cost increases. It may not appear this way when certain actuarial valuations are observed, however, there is necessary information that needs to enter our discussions to reveal what is happening. Let us look at the following comparisons which includes local, county, and state employees: El Dorado Lake Valley Agency Georgetown County of State of County Fire Fire Protection Fire Protection El Dorado California Protection District District "Safety" District "Firefighters and Peace Officers" Employer 60.78% 43.32% 44.54% 45.26% 47.198% pension costs of "Classic" employees (FY 19/20) With a side by side comparison, it appears that a County level of government and the State of California are in fact a comparable, or less expensive business model in comparison to local governmental entities such as the ones illustrated above. However, we will need to dive deeper into each actuarial statement to show that there is an allowance that is made for larger forms of government that is not permissible for smaller forms of government. The actuarial explanation as to why this is happening, has to do with the "size of the risk pool" that an agency/municipality belongs to. This explanation does not change the fact that both employers have "Classic" and "PEPRA" employees within their ranks. The same delineation that was made for smaller governmental agencies could also be made for larger governmental agencies...but it is not. To create more meaningful and authentic dialogue, we must know not only our true cost, but also the costs that are not being included in the conversations. It is not difficult to extract this information from the actuarial data, we just need to know what questions to ask to frame the conversations...... Question: What is the difference between a "PEPRA" employee and a "Classic" employee? Answer: "PEPRA" (Public Employee Pension Reform Act of 2013) identifies all public employees that were hired after January 1, 2013. All "PEPRA" employees were put into a separate pension plan. Most safety "PEPRA" employees are now utilizing the 2.7%@57 retirement formula. All "Classic" employees are public employees with a hire date prior to January 1, 2013. Most "Classic" safety employees are in a 3%@50 retirement formula. Question: Based off of the previous comparison, it seems that the El Dorado County Fire Protection Districts' retirement costs for their "Classics", are roughly a third more expensive than the other comparisons which also include county and state government comparisons. Haven't all levels of government had retirements since the introduction of "PEPRA" employees? Answer: Employers with less than 100 employees get a separate actuarial valuation for their "PEPRA" and "Classic" employees. The "PEPRA" employees have not been in the system very long, so their plans have not begun to show the maturity or funding shortfalls that the "Classic" plans illustrate. More specifically the unfunded liabilities for "PEPRA" employees are virtually non-existent at this time in comparison to the "Classic" employees. Question: Is the total employer pension cost a reflection of the maturity of that plan, more specifically how many employees have retired from that agency/municipality? Answer: Yes Question: If the County of El Dorado and the State of California have also had many retirements since the implementation of PEPRA in 2013.... are they "blending" both their "Classic" employees and "PEPRA" employees together? Answer: Yes Question: Is that why their costs appear to be comparable or lower than local government? Answer: Yes Question: So employers with more than 100 employees can blend their "PEPRA" and "Classic" employees, and in turn show a lower than actual true pension cost for their "Classic" active/retired employees, but employers with less than 100 employees in the State of California cannot do this? Answer: Yes Question: So if "PEPRA" costs so far are virtually non-existent due to their relative recent implementation, then the agencies/municipalities that are blending both "PEPRA" and "Classic" employees are actually artificially suppressing the true costs and true annual employer pension growth of their "Classic" employees/retirees, because as "Classics" retire, "PEPRA" employees are just replacing them on the balance sheet. There is a decrease in the "Normal Cost", but not in the growth of the unfunded pension liability costs per "Classic" employee/retiree? Answer: Correct Question: Should elected officials and taxpayers know this information? Answer: Yes Question: Would another way to frame this be, "Viewed inversely, PEPRA employees that work for employers with more than 100 employees are being charged nearly 3.5 times their actual costs in an effort to cover funding shortfalls for "Classic" employees/retirees?" Answer: Yes Question: Is there a way to extract this information from the County and State government actuarial valuation statement and recalculate the true costs of their "Classic" employees? Answer: Yes Question: How would one go about doing this? Answer: Within each valuation statement for employers with over 100 employees, there is an "Appendix C". The "Appendix C" will give a breakdown of the employee time in service demographic, and the "average" salary. This is important, because we know that employees that were hired after 2013, are "PEPRA" employees. You simply take the number of employees with a 0-4-year time and service range and multiply it by their average salary. Now take that number and deduct it from the total payroll costs used for the actuarial valuation for that year. This new number will give you the total payroll cost for the "Classic" employees. The UAL divided by the new payroll costs that excludes the "PEPRA" employees will show you the true costs of pensions, as well as the true annual cost increases of pensions, rather than an artificially suppressed number due to the blending of both "Classics" and "PEPRA" employees. We know this number is suppressed because if a "PEPRA" safety employee had nearly 50% of their annual salary invested on an annual basis, with a 7% annual return on investment, the payout would be much higher than needed for their actual pension eligibility; so yes, "PEPRA" employees are blended to cover the funding shortfalls of "Classic" active/retired employees. The numbers used for this estimation from the actuarial valuation will be conservative, meaning they will be low because there are likely "PEPRA" employees that are also falling into the 5-9-year time in service range. That data will be hard to extract from just an actuarial statement, so it is best use the 0-4 year time range for the time being, the new estimate will be sufficient for more realistic comparisons between local, county, and state levels of government. Question: What would a recalculation of the previous comparison look like with the "PEPRA" employees extracted from the data? Answer: See below Agency El Dorado Lake Valley Georgetown County of State of County Fire Fire Protection Fire Protection El Dorado California Protection District District "Safety" "Firefighters District and Peace Officers" Employer 60.78% 43.32% 44.54% 54.44% 55.26% pension costs of "Classic" employees (FY 19/20) Question: Why is it important to show a true side by side comparison of actual "Classic" active/retired employee costs? Answer: If there is a concerted effort to consolidate/regionalize the fire protection service within EI Dorado County, a true financial risk analysis will be necessary to ensure that there is adequate funding available for this endeavor. There is a generally widely held belief that consolidation/regionalization efforts can lead to economic efficiencies. If contingent liabilities exist, they must be appropriately identified and delineated. Question: What questions should be asked during consolidation/regionalization conceptual discussions? Answer: Will the debt obligations of a local government fire protection district transfer to the County of El Dorado or the State of California, or remain at the local level? Question: If the debt obligations remain at the local level and there is no augmentation of funding provided by the County of El Dorado or the State of California, then will not funding issues continue to be a problem? Answer: Yes Conclusion: The Grand Jury gave recommendations about consolidations, and referenced examples such as the El Dorado County Sherriff's Department and Cal Fire, but did not describe the nuance and contours of public sector finance, nor the history upon how local governments have had their revenue removed and deprived by larger governmental entities. Omitting information such as this out of the discussion can only lead to recommendations that offer remedies, but not solutions. When viewed through the lens of economic history, precepts, and true comparisons, the local fire protection districts in El Dorado County are well positioned and poised to deliver service to their local communities. The fiscal challenges that create the operational challenges, have largely been out of their control. Unfortunately the Grand Jury disregards the significance of six independent consolidations of local fire protection districts over the course of two years by the El Dorado Fire Protection District from 1991 – 1993, and glosses over the last of those consolidations in 1993, with Coloma-Lotus and Northside; yet fails to make the causal connection of the ERAF funding shifts during that time frame as to why future consolidations on the boarders of the El Dorado County Fire Protection District did not continue. Did the Grand Jury consider that agencies that are geographically positioned to assist fire districts on the northern and southern boundaries of the county would have done so, had their revenue remained within their districts? The Grand Jury should reconvene and discuss the fiscal challenges that have led to the current operational challenges, and discuss the following: Where are the recommendations for more fiscal control at the county and local level, so that the County and Local Special Districts have more discretionary spending allowance? Where are the recommendations for returning control of the property tax to local governments? Where are the recommendations to reduce maintenance of effort requirements placed on the county by the State of California, to free up more discretionary spending? Where are the recommendations to have the county recognize all former CSA 7 employees as county employees and honor their unfunded pension costs, to free up additional revenue for the JPA/Fire Districts? Where are the recommendations to pursue augmentation funding from the State of California, to replenish the funding that was removed at the local levels?