Plumas County and Unfunded Pension Liability: Deer in the Headlights?*

R1

The Board of Supervisors, by September 30, 2020, confirm that it has available to it sufficient subject matter expertise and resources in respect of pension liability matters and, if not, that it authorize the retention of such expertise.

R2

The Board of Supervisors, by September 30, 2020, appoint an ad hoc pension advisory committee ("pension committee"), including relevant County officials, as well as members of the public and current and former County employees, to investigate and report back on the County's pension liability problem and its various facets, and propose one or more multi-year mitigation plans.

R3

The Board of Supervisors, by September 30, 2020, request the pension committee to deliver to it by April 6, 2021 a detailed report containing the results of the committee's review.

R4

The Board of Supervisors, by June 1, 2021, hold an open meeting to receive and discuss the findings and proposals of the pension committee.

R5

The Board of Supervisors, by September 7, 2021, adopt a practical and effective, comprehensive policy and 10-year plan for remediation of unfunded accrued pension liabilities.

R6

The Board of Supervisors, by September 10 of each year, beginning in 2021 and continuing through at least 2025, provide up-to-date annual reports to the public regarding the status of Plumas County's unfunded accrued pension liabilities and efforts to better manage those liabilities, reflecting the most recent CalPERS Actuarial Valuation Reports and County financial statements. REQUIRED RESPONSES Pursuant to Penal Code section 933.05, the following responses are required: From the following Plumas County governing bodies ( ): • Board of Supervisors: F-1 through F-8, and R-1 through R-6 INVITED RESPONSES The Grand Jury invites the following responses: From the following Plumas County officials (requested ): County Administrator: F-1 through F-8 • Auditor/Controller: F-1 through F-8 GLOSSARY Inevitably, any substantive discussion of public employee pension liabilities requires the use of technical and trade terms. While this report has attempted to limit that usage, in the interest of reaching a broader potential audience, it does reference the following: Accrued pension liability: The total dollar amount needed as of a valuation date to fund all pension benefits already earned by eligible County employees and former employees. Actuarial method (or CalPERS method): The method of determining accrued pension liability and normal cost, based on certain actuarial assumptions, including a discount rate equal to the anticipated return on pension assets. Actuarial Valuation Report: A statement issued annually by CalPERS in respect of each member plan, setting forth the assets and accrued pension liabilities of the plan, minimum required contributions for the employer (including the UAL Payment and normal cost), and providing certain actuarial information in relation thereto. CalPERS: California Public Employees' Retirement System. CalPERS members: All public employees, and former public employees, eligible to participate in one or more pension plans administered by CalPERS. California rule: A rule of law, established in California Supreme Court decisions, holding that public employee pension rights are a form of deferred compensation, the rights to which arise upon the commencement of employment, and which are protected from impairment under the constitutional contracts clause. Chapter 9 bankruptcy: Proceedings under Chapter 9 of the Federal Bankruptcy Code, applicable to counties, cities and certain other local governmental agencies, as bankruptcy debtors. Classic plans: Public employee pension plans held by persons who joined CalPERS prior to January 1, 2013. County: The County of Plumas. Defined benefit plan (or pension plan): An employer-offered plan that provides lifetime pension payments to retirees, determined according to the employee's length of service, age of retirement and a determined base salary. Discount rate: The rate of interest used to reduce (or discount) a stream of future payments to present value terms. Fiscal year: For Plumas County and other California counties, July 1 to June 30 of each calendar year. Funded ratio: The ratio of a fund's assets to its accrued pension liabilities. A ratio of more than 100% indicates that the fund has more assets than liabilities; one that is less than 100% indicates that it has fewer assets than liabilities. GASB: Governmental Accounting Standards Board, the entity setting accounting standards for most governmental entities. General fund: The chief operating fund of the County. Miscellaneous plans: Classic or PEPRA plans relating to CalPERS members who are not under Safety plans or the Peace Officer plan. Market method: The method of determining accrued pension liability, based on market assumptions, including a discount rate equal to a risk-free rate of return. Net pension liability: An accounting term used in GASB Standard No. 68, but essentially the same as unfunded accrued pension liability, using the actuarial method. Normal cost: The annual cost of service accrual for the upcoming fiscal year for the pension entitlements of active employees. Other Post-Employment Benefits (OPEB): Medical, dental and vision benefits provided on a post-employment basis to eligible employees and former employees of the County. PARS trust: A Section 115 trust, administered by the Public Agency Retirement Services (PARS), used to prefund pension benefit payments. Peace Officer plan: The classic plan held by one or more former employees in the County District Attorney's office. PEPRA: The California Public Employees' Pension Reform Act of 2013. PEPRA plans: Public employee pension plans held by persons who joined CalPERS on or after January 1, 2013. Present value: The current value of future payments or receipts, calculated using a discount rate. Safety plans: Classic and PEPRA plans held by persons engaged or formerly engaged in law enforcement or fire suppression. UAL Payment: A payment assessed annually by CalPERS of certain employers, reflecting the amortized portion of unfunded pension liability, with certain adjustments made, as described in the relevant Actuarial Valuation Report. Unfunded accrued pension liability: The amount of accrued pension liability for a given plan or plans that is in excess of the amount of assets held by such plan (or all such plans). BIBLIOGRAPHY Websites CalMatters: www.calmatters.org CalPERS: www.calpers.ca.org GASB: www.gasb.org Government Finance Officers Association: www.gfoa.org League of California Cities: www.cacities.org National Conference on Public Employee Retirement Systems: www.ncpers.org Pension Tracker: www.pensiontracker.org The Pew Charitable Trust: www.pewtrusts.org Public Agency Retirement Services (PARS): www.pars.org Public Policy Institute of California: www.ppic.org U.S. Bureau of Labor Statistics: www.bls.gov U.S. Census Bureau: www.census.gov Studies and Analyses Congressional Budget Office, The Budget and Economic Outlook: 2020 to 2030 (2020) ("CBO Outlook") Hoops and Smith, "State and Local Pension Funding in the Enhanced Financial Accounts", FEDS Note (2016). Nation, Joseph, "Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030", Rand Education Working Paper (2018) ("Pension Math") Pew Charitable Trusts, "State Pension Funds Reduce Assumed Rates of Return", Issue Brief (December 19, 2019). Wilshire Associates, "2018 Wilshire Consulting Report on City & County Retirement Systems: Funding Levels and Asset Allocation", (Sept. 2018) Plumas County Public Documents CalPERS, "Actuarial Valuation as of June 30, 2018 for the Miscellaneous Plan of Plumas County," (2019) CalPERS, "Actuarial Valuation as of June 30, 2016 for the Miscellaneous Plan of Plumas County," (2017) CalPERS, "Actuarial Valuation as of June 30, 2018 for the Safety County Police Officer Plan of Plumas County," (2019) CalPERS, "Actuarial Valuation as of June 30, 2016 for the Safety County Police Officer Plan of Plumas County," (2017) CalPERS, "Actuarial Valuation as of June 30, 2018 for the PEPRA Safety Sheriff Plan of Plumas County," (2019) CalPERS, "Actuarial Valuation as of June 30, 2016 for the PEPRA Safety Sheriff Plan of Plumas County," (2017) CalPERS, "Actuarial Valuation as of June 30, 2018 for the Safety Sheriff Plan of Plumas County," (2019) CalPERS, "Actuarial Valuation as of June 30, 2016 for the Safety Sheriff Plan of Plumas County," (2017) County of Plumas, "2019- 20 Budget," (2019) County of Plumas, California, "Financial Statements together with Independent Auditor's Report for the Year Ended June 30, 2018," (2019) County of Plumas, California, "Financial Statements together with Independent Auditor's Report for the Year Ended June 30, 2017," (2018) County of Plumas, California, "Financial Statements together with Independent Auditor's Report for the Year Ended June 30, 2016," (2017) Memorandum of Understanding between the County of Plumas and Confidential Employees Association (July 1, 2018- June 30, 2021 Memorandum of Understanding between County of Plumas and International Union of Operating Engineers, Local 3, Crafts & Trades (July 1, 2018- June 30, 2020) Memorandum of Understanding between County of Plumas and International Union of Operating Engineers, Local 3, General Unit (July 1, 2018- December 31, 2020) Memorandum of Understanding between County of Plumas and International Union of Operating Engineers, Local 3, Mid-Management & Supervisors Unit (July 1, 2018- December 31, 2020) Memorandum of Understanding between County of Plumas and Mid-Management Probation Unit (July 1, 2018- June 30, 2021) Memorandum of Understanding between County of Plumas and Probation Unit (July 1, 2018- June 30, 2021) Memorandum of Understanding between County of Plumas and Plumas County Sheriff's Employees Association Sheriffs' Mid-Management Unit (SMU) (July 1, 2018- June 30, 2021) Memorandum of Understanding between County of Plumas and Plumas County Sheriff's Employees Association Sheriffs' Department Unit (SDU) (July 1, 2018- June 30, 2021) Other, Miscellaneous County of Orange Civil Grand Jury, "$4.5 Billion Unfunded Pension Liability and Retirement Plans," Final Report (2016). County of San Mateo Civil Grand Jury, "Soaring Pension Costs—Time for Hard Choices," Final Report (2018). County of Santa Clara Civil Grand Jury, "San Jose—Unfunded Pension Liabilities—A Growing Concern", Final Report (2019). County of Shasta Civil Grand Jury, "Cities of Redding, Anderson, and Shasta Lake-Pay Now or Pay More Later," Final Report (2017). County of Sonoma Civil Grand Jury, "Sonoma County Pension Reform," Final Report (2015). END NOTES 1. The American Express Company was the first U.S. employer to offer a defined benefit plan, in 1875. See "History of PBGC", PBGC website. 2. Between 1998 and 2017, the number of Fortune 500 companies offering new hires a traditional defined benefit plan declined from 238 to 16. See Willis Towers Watson, Insider, Vol. 28, No. 2 (February 2018). 3. Typical pension terms under certain "classic" plans may be summarized as "2% at 55", which is shorthand for the following formula: At the age of 55, the employee, having a minimum number of years of service, may retire and will receive an annual benefit equal to 2% x (number of years of service) x (annual salary used to calculate benefits). For example, an individual retiring with 25 years of service and an annual salary of $60,000 would receive $30,000 per year in pension benefits. 4. A 2% per annum cost of living adjustment (COLA) is offered in most or all CalPERS plans. 5. See CalPERS website, as of 2/20/20. 6. They are also of limited duration, in that as employees retire, they cease making employee contributions. An aging workforce therefore can present a problem to employers offering defined benefit plans. 7. Mendel, Ed, "CalPERS gets candid about 'critical' decade ahead", Capitol Weekly, August 27, 2019. 8. However, in some cases, employers agree to make some or all of the employee contribution on behalf of the employee. This may be agreed as part of a labor contract negotiation, in return for lower overall salary, for example. 9. For example, CalPERS plans in the aggregate were 128% funded in 1999, in the midst of the tech market boom. That figure dropped to 87% in 2004, and as of 2018, was about 71%. (CalPERS website) 10. See Figure 2a. See also CalPERS website 11. See Actuarial Valuation Report (June 30, 2018) (Plumas County). 12. GASB Standard No. 68 also endorses using a discount rate based on the expected rate of return on plan assets. One way to think about the discount rate and its role is to recall that CalPERS must calculate the amount of funds required to have on hand at present such that when the funds are invested, the returns will ensure sufficient future funds to meet future pension payment obligations. If a lower discount rate is used (and assuming a lower investment return), then a higher amount of present funds is required to satisfy those future payment requirements. On the other hand, if a higher discount rate is used (with a higher anticipated investment rate of return), then fewer current funds are required. This aligns with present value formulas, under which future payments that are discounted using a lower discount rate will result in higher present values than will the same future payments that are discounted at a higher discount rate. In other words, if the discount rate is reduced, the corresponding present value of accrued pension liability will increase. Indeed, this relationship can be viewed as similar to a multiplier, in that relatively small changes in the discount rate can result in large changes in the present value of future pension liabilities. 13. The Pension Tracker website, for example, uses "market" liability and assets as descriptors, which we've chosen to describe together as the "market method". The 20-year Treasury bond has not been issued for over 30 years, although it is being reinstituted in 2020. During this time, the 20-year rate continued to be calculated, and has been used for various purposes, by interpolating the yields of the 10 and 30 year bonds. As of mid-2019, that rate was quoted as around 2.5%, on the US Treasury's website. (www.treasury.gov) More recently, it has dropped even further, to less than 2%. 14. The actuarial and market methods are in effect two different ways of looking at accrued pension liabilities. The subject is complex, but in essence, the market method is more conservative than the actuarial, and potentially more reliable in the event of severe or protracted economic downturns. CalPERS itself uses a method similar to the market method when calculating an employer's pension liability for one specific purpose-- in connection with a hypothetical termination of the contract between that employer and CalPERS. 15. This is the case for at least two reasons. First, Treasury bonds represent a sizeable part of the CalPERS investment portfolio, and therefore, reductions in the return of that component tend to lower the overall level of return on the entire portfolio. Second, Treasury bond rates express the view of the Treasury bond market (a vast global market) as to future returns on risk-free investments. Lower interest rates tend to foreshadow slower rates of economic growth, which in turn suggest lower overall returns on future investment portfolios. 16. Wilshire Associates, for example, recently forecast CalPERS to earn only 5.9% over the next 10 years, while the Pew Charitable Trust anticipates pension returns on a national basis to be a full percentage point lower than in the past. In addition, when CalPERS was considering in 2016 the reduction of the discount rate to 7%, it was reported that CalPERS consultants recommended an assumed rate of 6.2% for the next decade. See CalMatters website. Economists generally anticipate overall economic (GDP) growth rates for the next decade at levels below those of the past, with bond yields remaining considerably lower than those of the last 20 years. For example, the Congressional Budget Office projects a 1.7% real GDP growth rate from 2020 to 2030. 17. CalPERS website, as of February 21, 2020. The ten-year average annual return as of June 30, 2019 was 9.1%, but this is skewed by the fact that the beginning point was near the bottom of the 2008-09 recession and market drop. 18. The decision by CalPERS to adjust its discount rate for the future is essentially a policy decision, based on actuarial and financial input. However, it is a decision that must be made with an eye both to economic circumstances as they may drive future investment returns, and to the potential impact on public employers who must continue to service pension liabilities. Failing to reduce the discount rate when macroeconomic circumstances would otherwise suggest may create a funding shortfall in the future as a result of investment returns not reaching the needed level. On the other hand, reducing the discount rate causes the amount of unfunded accrued pension liability to increase immediately, which forces additional payment requirements on public employers, which they may not be capable of bearing. 19. The most recent round of discount rate reductions was implemented by CalPERS in a staged fashion, intended to create a smoother transition to the new, lower rates. 20. This may have been prompted in part by two or more instances in which local government agency employers defaulted in their payments to CalPERS, forcing CalPERS to reduce or suspend benefit payments to certain retirees. Two such instances that have come to the attention of the Grand Jury are (1) our neighboring city of Loyalton, and (2) the East San Gabriel Valley Human Resources consortium. In the Loyalton case, the City Council voted in 2013 to exit the CalPERS fund, in response to which CalPERS assessed it with a "termination fee" of $1.66 million. See "Huge Pension Fund Makes Example of Tiny California City", Reason website (August 25, 2017). 21. See discussion in Cal Fire Local 2881, et al v. California Public Employees' Retirement System, 435 P.3d 433 (Cal. 2019) 22. See id. Under the California rule, public employee pension rights are deemed protected against unilateral modification by the constitutional contract clause. 23. PEPRA funds were intended to be separate from classic funds. For example, employee contributions from one do not support the other. 24. See CalPERS Actuarial Valuation Reports (Plumas County). Until recently, CalPERS used a 30 year amortization period for this purpose. It is now set at 20 years. Reducing the amortization period for UAL Payments has the result of increasing the amount of each periodic payment, but lowering the total aggregate amount of payments, as the obligation is paid off earlier and the employer therefore saves on future interest. 25. See CalPERS Actuarial Valuation Reports (Plumas County). 26. The CalPERS Actuarial Valuation Reports include the following standard disclaimer: "Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; changes in actuarial policies; and changes in plan provisions or applicable law." 27. See Mendel, Ed, "CalPERS gets candid about 'critical' decade ahead", Capitol Weekly, August 27, 2019. 28. See CalPERS, Actuarial Valuation Report (Plumas County Miscellaneous Plan), as of June 30, 2018. 29. It would of course reduce investment returns, creating greater unfunded pension liability that would need to be covered by the employer. It would also likely lead to a decision by CalPERS to further reduce the discount rate, which would in turn increase total accrued pension liability and unfunded liability numbers considerably. And, it could even impact actuarial employee assumptions, by prompting earlier (forced) retirement, leading to a declining workforce, as local governments struggle to find ways to cut their way to making ongoing pension payments. 30. The Cities of Vallejo, Stockton and San Bernardino all filed Chapter 9 bankruptcy partly in response to their unmanageable pension liabilities. The City of Stockton, for example, had seen its pension contributions rise from $6.8 million in 2002 to $41.5 million in 2017. See Public Policy Institute of California website. 31. See note 64, below. 32. Based on the employee's role, Plumas County has three types of plans: (1) Safety plans, covering employees engaged in "safety" functions (law enforcement and fire suppression); (2) Peace Officer plan, which included one or more former employees in the District Attorney's office; and (3) Miscellaneous plans, covering employees performing all other roles. The miscellaneous plan is considerably larger, in terms of number of persons covered, and potential liability, than are the "safety" and "peace officer" plans. Typical classic terms for Plumas County miscellaneous employees are "2% at 55", while PEPRA terms for miscellaneous employees are "2% at 62". For safety employees, typical retirement terms are "2% at 50" for classic plans and "2% at 57" for PEPRA plans. See Plumas County Memoranda of Understanding. See also note 3, above. 33. This report addresses solely pension liability faced by the County of Plumas. In addition, several service districts and one city (Portola) operating within Plumas County have their own pension plans with CalPERS and must address their own pension liability issues. See CalPERS website. Plumas County also offers its employees defined contribution plans. 34. See CalPERS Actuarial Valuation Reports (Plumas County) (2018). Note that employees who began their careers in other counties, or cities under classic plans carry their classic plan status to their employment in Plumas County. 35. See id. 36. See id. 37. Consistent with GASB Standard #68, the County uses "net pension liability" instead of "unfunded accrued pension liability" in its financial statements. The terms are for present purposes essentially the same, however. 38. See GFOA website. 39. The Grand Jury calculated aggregate numbers for the several plans, using a weighted average approach for the funded ratio. When viewed at the level of each individual plan, the County's Miscellaneous plan was 75.8% funded in 2011, but only 69.8% funded in 2018, a drop of nearly 6 percentage points. The Safety classic plan funded ratio decreased from 74.5% in 2011, to 71.7% in 2018, and the Peace Officer classic plan went from 68.3% funded to 57.7%. See CalPERS Plumas County Actuarial Valuation Reports (Plumas County). 40. The funded ratio determined using market assumptions is considerably lower, at approximately 40%. See CalPERS Actuarial Valuation Reports (Plumas County). See Pension Tracker website. 42. Based on U.S. Census data for households, as of 2018. 43. Although the comparison is between the total unfunded pension liability amount and the annual median household income, this does not imply that households would under any scenario be required to pay this amount each year. The purpose is simply to provide a relative scale against which to view the pension liability number. 44. See Nation, Joseph, Pension Math. 45. Figure 5 source: CalPERS Actuarial Valuation Reports (Plumas County). 46. Plumas County 2017- 2018 Financial Statements. Reserves are amounts set aside for certain contingencies, including emergencies and economic downturns. 47. See Plumas County Financial Statements. Unlike most of the State of California, Plumas County's real estate values have not yet fully recovered from the "great recession". 48. See Nation, Pension Math (2018) See Pension Tracker website. 50. When this practice began, all or almost all Plumas County employees had their pension contributions paid for them by the County. At present, five of the eight Memoranda of Understanding currently in effect continue to provide this benefit, to some extent. For the County's miscellaneous plan, CalPERS projects normal cost payments to increase from 8.044% of payroll in 2018, to 9.185% in 2021. (CalPERS Actuarial Valuation Report (Plumas County Miscellaneous Plan) (2019)) 51. For example, the City of Santa Monica reportedly created an 11-person pension advisory committee, comprised of 7 members of the public and 4 persons from the workforce 52. The primary reason for not replacing the County Administrator prior to 2019 appears to have been budgetary constraints. It is unclear to the Grand Jury why the financial analyst has not been replaced even today. 53. This step was mandated by PEPRA. 54. PARS accounts are IRC Section 115 irrevocable exclusive benefit trusts, created for the sole purpose of prefunding OPEB or pension obligations. 55. See note 50, above. 56. For example, Mariposa County, which reportedly increased its tourism tax to support pension obligations. 57. There is a relatively long list of counties and other local government agencies that have availed themselves of pension obligation bonds to help fund pension liabilities, including Sierra County, Mendocino County, Merced County, Sonoma County, and Imperial County, as well as cities, including Fresno, Oakland, Pasadena and Richmond. A discussion of the advantages and disadvantages of using debt to fund such obligations is beyond the scope of this report. 58. For example, Shasta County and Redwood City. 59. Certain local government agencies are reportedly approaching the State Controller's Office, arguing that the State should be required to reimburse prepayments made on pension liabilities, to the extent allocated to government agencies otherwise funded in part by the State. This alternative may warrant further examination by a pension advisory committee as to its viability. 60. See article, Los Angeles Times website (February 6, 2017) 61. Figure 6 source: CalPERS Actuarial Valuation Reports (Plumas County). The 2.5% discount rate resembles the rate used to develop the market method of calculating accrued pension liability. 62. CalPERS has not provided similar sensitivity analyses showing the impact of discount rate changes on UAL Payments, but it seems logical to expect that they would increase proportionately to the increases in the accrued liability numbers. 63. It is foreseeable that the County's credit rating would suffer in a severe or protracted recession. Apart from the usual factors, this would be driven in part by the anticipated increase in the County's unfunded pension liability and greater difficulty in servicing that liability in the ordinary course. For accounting purposes, unfunded pension liability is viewed as a form of debt. 64. There is no appellate-level legal precedent in California as to whether a local government may modify pension entitlements in a bankruptcy. In the Chapter 9 cases filed by the Cities of Vallejo, Stockton and San Bernardino, none of those debtors decided to attempt to alter the existing pension rights of their employees or retirees as part of their final plans. However, one bankruptcy judge did opine that the City of Stockton could reject its pension contracts with CalPERS and modify the terms of existing pensions. See In re City of Stockton, 526 B.R. 35 (Bankr. E.D. Cal. 2015). See generally Glassman, P. and Saenz, G., "A Guide to Municipal Bankruptcy for City Attorneys", League of California Cities Annual Conference (September 2018). 65. Based on the County's 2017-2018 Financial Statements, Plumas County is currently supporting $7.19 million in net OPEB liability. A detailed consideration of this liability is beyond the scope of this report. 66. This report was substantially written prior to the March 2020 coronavirus stock market crash, with final edits being made at that time. For reasons detailed in this report, these recent developments do not bode well for the pension liability prospects of Plumas County. Reports issued by the Grand Jury do not identify individuals interviewed. Penal Code section 929 requires that reports of the Grand Jury not contain the name of any person or any facts leading to the identity of any person who provides information to the Grand Jury.