City of Santa Maria*

In Lompoc, Santa Maria and the City of Santa Barbara, solvency risks are high in the pre-PEPRA plans that have most of the Actuarial Liabilities in the Municipal plans. City Response to Finding 3: Disagree Partially. The City agrees that its current funding ratios in non-PEPRA plans are lower than the City would like. However, a funding ratio is a measure at a point in time and in and of itself is not a predictor of a plan's solvency. Rather, a lower funding ratio is a signal that action may need to be taken to improve the ratio in the long term. The use of the funding ratio as the predictor of whether the City will be able to pay retirement benefits is misleading because a current funding ratio does not take into consideration actions that CalPERS and the City are taking to address the decline in funded status of its plans. For example, CaIPERS lowering the discount rate from 7.5 percent to 7 percent reduces, in the long run, a plan's dependence on investment returns. Although lowering the discount rate increased the City's required contributions and is posing to the City significant challenges in paying for those escalating costs over the next five (5) years, the City recognizes that those increases are needed to improve funded status of all retirement plans. The City created second level (Tier II) pension plans back in 2011 for fire, police and miscellaneous groups. Tier II plans have a lower benefit level than Tier I plans and over 41 113 time, will reduce the benefits paid out of the plan. Again, in the long term, these lower level benefit plans will help improve the funding status of all plans.

Liquidity risks in Santa Maria are lower than in Lompoc and the City of Santa Barbara, in that Santa Maria projects no years of negative cash flows. However, Santa Maria would have negative cash flow if CalPERS investment returns fall below their actuarial values. Managing that liquidity risk requires that Santa Maria maintain high total employer contributions to its pension plans until at least 2034. City Response to Finding 6: Disagree Partially. The City agrees that positive annual cash flow (annual contributions greater than benefits paid out) is preferred and over time that simply must occur in order for a pension plan to fund retirement benefits. However, the Grand Jury's analysis is based on annual cash flows rather than cumulative cash flows. In addition, the Grand Jury's analysis assumes that the City has and will not take action to improve its financial position. As stated in response 2 above, the City was proactive in addressing mounting pension costs when it created second level (Tier II) pension plans back in 2011. Since Tier II plans have a lower benefit level than Tier I plans, over time Tier II plans will reduce the benefits paid out and improve cash flow. The City has and will continue to explore ways to reduce costs and increase revenues to minimize the number of years with negative cash flows.

The City of Santa Maria faces greater pension risk because of its comparatively low General Fund revenue per capita, which is less than 50 percent of that of the City of Santa Barbara and less than 67 percent of that of Lompoc. Santa Maria has taken steps to end employer contributions in lieu of employee contributions in its pension plans; this step moves some of the burden of repaying its unfunded pension liabilities from the City to its active employees. City Response to Finding 7: Disagree Partially. The City agrees that greater revenues per capita would improve the City's ability to pay required pension contributions and lower the City's pension risk. The City acknowledges that General Fund revenue per capita is lower than that of the cities of Santa Barbara and Lompoc. However, the Grand Jury's assumption that the City of Santa Maria's pension risk is higher because of their lower General Fund revenue per capita is misleading because it does not take all factors into account. For example the Grand Jury's analysis does not take into account that Santa Maria has (both currently and historically) a much lower number of employee-to-population ratio than Santa Barbara, San Luis Obispo, and Lompoc. In fact, Santa Maria's employee-to-population ratio at 4.76 (per 1,000 residents) is almost half that of Santa Barbara's ratio of 9.26, San Luis Obispo's 8.93 and Lompoc's 8.14. Another factor not considered by the Grand Jury, is that not all pension costs are (nor can they be) funded by General Fund revenues. For instance, employees in the Utilities Department are funded by Water Resources and Solid Waste funds - both of which are Enterprise Funds that by law cannot be comingled with the General Fund. Lastly, the Grand Jury's analysis does not take into consideration new or significant changes to sources of revenues. For instance, large new retail developments, such as Enos Ranch -4 15 84 whose multiple tenants began opening in September 2017, is increasing the City's sales tax revenue and is expected to continue to provide a steady revenue stream. While the City recognizes that the revenue increase from Enos Ranch is not enough to fund the increases in pension obligations, the increase in revenue helps the City pay for pension and other operating costs.

The 12 PEPRA plans in the cities of the County of Santa Barbara have a funded ratio of 0.90 and the 20 non-PEPRA plans have a funded ratio of 0.68. This is a small, but positive, sign that the PEPRA law is having the intended effect of strengthening the security of pension benefits in the County. City Response to Finding 8: Agree.

Funded ratios of the municipal pension systems in Santa Barbara County are sensitive to the discount rate applied by CaIPERS. A cut in that rate to 6 percent, from the 2018-19 rate of 7 percent, would push the funded ratios of several municipal systems close to 0.5 and might impose further increases in the employer's contributions in Lompoc, in the City of Santa Barbara and in Santa Maria. City Response to Finding 9: Disagree Partially. There is no question that if CalPERS lowers the discount rate, it will increase the City's contribution rates and lower plans' funded status. However, historically, CalPERS has phased-in changes in actuarial assumptions that significantly affect agencies' rates. This method has allowed more time to address the increase in required contributions. The Grand Jury's conclusion assumes that CalPERS will deviate from taking a phased-in approach and reduce the discount rate to 6 percent in one year or short period of time. In reality, CalPERS Risk Mitigation Plan calls for the discount rate to be lowered from 7.0 percent to 6.5 percent over a period of approximately 20 years (beginning with actuarial valuations of the fiscal year ending June 30, 2019). Assuming CalPERS uses the same strategy to further reduce the discount rate to 6.0 percent, agencies will have more time to adjust for the increases in contribution rates.

It is unlikely that the largest municipal plans - Lompoc Safety; City of Santa Barbara Miscellaneous; City of Santa Barbara Fire; City of Santa Barbara Police; and City of Santa Maria Miscellaneous - can apply the revised CalPERS amortization schedule of 20 years to all their unfunded liabilities without higher new employer's contributions. Such new contributions would be particularly problematic in Lompoc and in the City of Santa Barbara given the high employer's contribution rates that already apply in those cities. City Response to Finding 10: Agree