Board of Supervisors Response to Contra Costa County Grand Jury Report 1603:*

The County's largest outstanding debts relate to its pension liabilities. The unfunded pension liabilities of the County (including ConFire) as calculated by the CCCERA actuaries in September 2015 total $1.155 Billion. In addition to this UAAL figure, the County (again including ConFire) has outstanding $329 Million of long-term pension obligation bonds. Response: The respondent agrees with the finding.

The County's unfunded pension liability will increase in any year in which the rate of return on the CCCERA pension fund does not reach at least 7.25%. Response: The respondent partially agrees with the finding. It should be noted that the rate of return has recently been changed to 7.00%. The rate of return on the CCCERA pension fund is one factor in determining the unfunded pension liability. It is possible for the pension fund to earn less than 7.25% and not experience an increase in unfunded liability due to changes in the other factors or policy changes; however, the statement is generally correct.

According to the most recent CCCERA actuarial report, for every 1% drop below the CCCERA assumed rate of return of 7.25% the County's unfunded pension liability will increase by a figure equal to 9.9% of the County payroll of employees enrolled in the CCCERA pension plan. Based on its current payroll of over $572 Million that means the reported return of 1.9% achieved by the CCCERA pension fund in 2015 could result in an increased County UAAL of over $300 Million before actuarial five-year smoothing adjustments are made. Response: The respondent neither agrees nor disagrees with the finding. The projection appears to be reasonable; however, Volatility Ratios are extremely complicated and therefore the respondent is unable to confidently respond to this finding.

Unlike all other elements of compensation that it negotiates with the labor organizations, the County does not negotiate the rate of pension benefits employees will earn in future salary periods. Response: The respondent partially agrees with the finding. Prior to the passage of the Public Employees' Pension Reform Act (PEPRA), the County was able to negotiate about which of the statutory pension benefit formulas available under the County Employees Retirement Law (CERL) would be available to new employees. PEPRA now specifies what the pension benefit will be for new hires, and the County cannot negotiate a different benefit. The County can and does continue to negotiate which of the statutory COLAs to the pension benefit will be applicable to new employees. In addition, the County is aware of the impact and cost of pension and negotiates wages and benefits accordingly.

The reason the County does not negotiate such pension benefits is due to a long-standing legal precedent in California, known as the California Rule, which holds that public employees are covered by an implied contract on their first day of service guaranteeing that the level of pension benefits they earn each year may not be decreased in future years unless replaced by benefits comparable in value for the employee. Response: The respondent partially agrees with the finding. The respondent understands the term "California Rule" to mean the body of case law regarding modification of pension benefits for current employees. The County must comply not only with these cases, but also with the statutory requirements of CERL and PEPRA.

The California Rule is based on a case that was decided before public employees had the right to organize and engage in collective bargaining in California. Response: The respondent partially agrees with the finding. The body of case law regarding the modification of pension benefits for current employees includes cases decided both before and after the enactment of the collective bargaining laws.

The County has not taken steps to challenge or seek legal clarification of the California Rule in a California court. Response: The respondent agrees with the finding.

Negotiating the terms of future pension benefits to be earned could result in substantial cost savings for the County if permitted by a court ruling. Response: The respondent partially agrees with the finding. The respondent notes that any changes would have to be negotiated with Labor Organizations and concessions that have a net savings would be very difficult to negotiate.

There are legal avenues open to the County to seek judicial clarification or reform of the rule without subjecting the County to major financial risks if the challenge proves unsuccessful. Response: The respondent partially agrees with the finding. While it is true that the County could seek judicial clarification, the cost of outside legal counsel to litigate this issue would be very expensive and would involve extensive amounts of attorney time.