Mendocino County Grand Jury
• 2009-2010
• Agency Response
Response to:
AND THE VOTE GOES TO...
Response Form Grand Jury Report Title: Unfunded Liability-our Children's Inheritance Report Dated: Jun 3, 2010 Response*
⚠️ Translation Notice: This content has been automatically translated. The original English text is the official version. Translation may contain errors.
⚠️ Este contenido ha sido traducido automáticamente. El texto original en inglés es la versión oficial. La traducción puede contener errores.
Note: Missing finding numbers detected: F6, F13
Findings and Recommendations 19 findings
F1
In 1996 the County authorized issuance of $30.7 million in POB. Agree.
No recommendations for this finding
F2
In 1998 the BOS created a two-tier employee health care system. Employees hired after 1998 no longer receive retiree health benefits. Partially agree. The Association believes the Grand Jury is referring to Resolution 98-147 which, in part, stated that only those employees hired before September 1, 1998, and with a minimum of ten (10) years of service with Mendocino County would be eligible for retiree health care as described in the resolution. Active employee health care was unaffected.
No recommendations for this finding
F3
In 2002 a second POB was issued for approximately $92 million, at a time when interest rates were favorable, which included the defeasance of one half of the $31 million POB issued in 1996. Partially agree. The issuance of POBs in December 2002, in the amount of $91,945,000 were used in part to fund an escrow account to defease one half (1/2) of the outstanding principle of 1996 POBs at the earliest allowable date. The outstanding principle was $23,795,000, and the proceeds used to prefund the defeasance of the 1996 POBs amounted to approximately $13,220,000.
No recommendations for this finding
F4
From 2004 through 2006 MCERA diverted over $9.6 million from the County pension fund to pay retiree healthcare costs. This was a questionable action; MCERA devised this as a way to solve funding issues for a shortfall in retiree health care. It may have been in conflict with California Government codes §31584 and §31587.] Partially disagree. From 2004 to 2006 MCERA used a portion of the County's Annual Required Contribution (ARC) to the pension fund to pay for costs of retiree health care. The use of County contributions was done in consultation with the Association's actuaries, Buck Consultants, and was presented to the Board of Retirement as being compliant with the California Employees' Retirement Law of 1937 and the IRS code. The Association does not believe that the action was in conflict with Government Code sections 31584 or 31587. In addition, in fiscal year 2005/06, the County reserves were restored in full. The Board of Supervisors was informed that the County reserves were restored in an open session presentation on February 2, 2006. In June of 2010, the Board of Retirement adopted a new Interest Crediting and Undistributed Earnings policy which changed the method by which excess earnings will be calculated in the future. Along with the change of policy, the Board of Retirement asked staff to determine the most appropriate method of removing $9.6 million in Accrued Actuarial Unrecorded Earnings from MCERA's assets; the excess earnings that financed the repayment of County reserves and Retiree Health Insurance reserves. We expect that to be addressed in July 2010.
Related Recommendations (1)
R4
the MCERA Board and Administrator closely monitor the impact of the retirement fund on the County budget, rather than comparing the performance with other counties. (All
F5
In 2008 the MCERA Board took the action of hiring its own manager independent of the BOS. Disagree. MCERA's hiring of a manager was preceded by a study requested by the Board of Supervisors regarding the advantages and disadvantages of having an independent retirement system. In addition, given that the Retirement Administrator is a County employee, the position and salary must be approved by the Board of Supervisors (Government Code 31522.2). Although the Board of Retirement is the appointing authority, hiring a Retirement Administrator was agreed upon by both the Board of Retirement and Board of Supervisors. Prior to hiring a Retirement Administrator, the system was managed by the Treasurer, which is an independent elected officer. In 2009 the MCERA Board projected a $66.9 million UAAL. This amount has been disputed by citizens who argue that using the market value of holdings makes the UAAL twice as much. Agree. The Board of Retirement must contract with an actuary to perform an actuarial valuation no less than every three years (Government Code section 31453). MCERA conducts an actuarial valuation every year. The actuarial calculations for determining Unfunded Accrued Actuarial Liability (UAAL) are consistent with actuarial standards and industry practices. Voter approved Proposition 162, established that the Board of Retirement is solely responsible for conferring with the actuary to establish the practices and underlying assumptions of the valuation. Proposition 162 also directs that due diligence be taken to ensure that the valuation process is free from political influences.
No recommendations for this finding
F7
In 2009 the State of California instructed public entities to follow GASB standards to include UAAL as a foot note in their financial statements. This may increase the interest charges on borrowed funds. Neither agree nor disagree. The County should respond to this finding as it is within the Board of Supervisors legal authority.
No recommendations for this finding
F8
The County is one of few 1937 Act Counties in the State where the "excess earnings" from investments have continued to be used to provide health insurance funding for retirees. This fund is projected to be depleted by the first quarter of 2011. Agree. Through the late 1990s, our best data show that the majority of retirement systems still used excess earnings for retiree health care. Those systems that continue to use excess earnings for retiree health care are beginning to sunset their programs or ensure that pension reserves are funded to a particular level (90% to 100%) prior to using excess earnings for retiree health care.
No recommendations for this finding
F9
The MCERA Board has produced reports which demonstrate their investments have performed at or above the level of peer counties. Agree.
No recommendations for this finding
F10
Mendocino County uses financial fund advisors to project investment performance over time. Investment returns on assets have been projected at 8% through 2026, when economic experts have said that the 30-year rolling average for a stock-bond portfolio is 4.4%. Partially disagree. Mendocino County has contracts with Callan Associates as its investment consultant and Buck Consultants as its actuary. Both the investment consultant and actuary project return on investments over time, with the actuary using a much longer time horizon. Buck defended using an 8% return on investments in its most recent experience study (2005 to 2008), and reviewed the return assumption prior to their most recent valuation. Callan Associates projected a 7.8% return over the next ten years given a specific asset allocation model. The Association does not know the source of data used for the second half of the statement above, and therefore is unable to comment on its accuracy.
No recommendations for this finding
F11
Other entities have questioned the assumptions and data used by MCERA's contracted actuary. Neither agree nor disagree. The "other entities" are not named. MCERA is aware of one other retirement system and one retiree group that have questioned the work products of our actuary in their jurisdictions. As part of its regular due diligence, MCERA has initiated a Request for Proposal (RFP) to audit our actuary. The audit scope is very detailed, including a replication of the June 30, 2009 actuarial valuation, as well as a written and verbal presentation regarding methodologies and calculations performed by our actuary.
No recommendations for this finding
F12
An approved industry process called "smoothing" is also used to level financial changes over time. Using this process helps the County avoid dramatic annual changes in their share of payment toward the retirement fund, making the budget projections more predictable. Normally, the actuaries "smooth" investment gains and losses over five years. Agree. 13.In 2008 changes in GASB reporting standards §43 and §45 required that all State and local government entities disclose future retirement health care obligations and resources for this obligation. The County's unfunded liability for health care is currently about $130 million. Disagree. The most recent actuarial study conducted by the County is not current, and precedes at least two actions of the Board of Supervisors to reduce and/or eliminate future retiree health care liabilities. It is our understanding from County sources that Fitch Ratings recently has concurred that the GASB 43/45 liability for Mendocino County is now zero ($0).
No recommendations for this finding
F14
In 1998 when the BOS ceased offering retiree health benefits for new employees they did not address the insufficiency of funds for health benefits already given to employees. Neither agree nor disagree. The County should respond to this finding as it is within the Board of Supervisors legal authority.
No recommendations for this finding
F15
Funding for the retiree health plan was to come from excess earnings form retirement systems investments. The County states that excess earnings have been calculated on an annual basis. Critics have noted that when UAAL is considered, excess earnings have never occurred. Partially disagree. Critics have argued that excess earnings cannot exist if there is an unfunded liability in the pension fund. The Board of Retirement adopted an Interest Crediting and Undistributed Earnings policy in June 2010 that requires all excess earnings to be used to pay down UAAL before being used for any other legal purpose. The law is very clear, though, that excess earnings is calculated on a fiscal year basis.
No recommendations for this finding
F16
The economic downturn which began in the fall of 2008 has compounded fiscal problems for cities and counties. Major cuts from the State have severely restricted County funds. Neither agree nor disagree. The County should respond to this finding as it is within the Board of Supervisors legal authority.
No recommendations for this finding
F17
Investment funds have not fully recovered from the 2008 stock market downturn. Critics have projected it would take an increase of 17% per year for eight years to grow the MCERA investments back to cover the recent losses. Critics see this as an unrealistic expectation. Partially disagree. Investment funds for pensions systems nationally have not fully recovered from the 2008 stock market downturn. We have no basis from which to evaluate the critics' analysis. The Board of Retirement members are fiduciaries of the pension fund and must invest as a "prudent" person; seeking qualified experts to advise them (Government Code Section 31595).
No recommendations for this finding
F18
Revenues from property and sales taxes are decreasing. Neither agree nor disagree. The County should respond to this finding as it is within the Board of Supervisors legal authority.
No recommendations for this finding
F19
Individual health care and retirement payroll contributions are increasing, while positions are being eliminated due to budgetary shortfall. Neither agree nor disagree. The County should respond to this finding as it is within the Board of Supervisors legal authority.
No recommendations for this finding
F20
For the first time, the number of retired County employees is expected to be greater than the number of current County employees, due to layoffs. Neither agree nor disagree. The County should respond to this finding as it is within the Board of Supervisors legal authority.
No recommendations for this finding
F21
Prior GJ pension fund reports have been ignored by the BOS, evidenced by the fact that they have not adjusted the debt repayment. Disagree. The finding is unclear, in that it references the "BOS" and not the Association. The Association, to the best of its knowledge, has always responded to Grand Jury findings and
No recommendations for this finding
Comments 4
-
CO1the MCERA Board and Administrator closely monitor the impact of the retirement fund on the County budget, rather than comparing the performance with other counties. (All Findings)
-
CO2the MCERA conduct a review of excess earnings; develop a policy that articulates the definition of excess earnings and plans for future allocation. (Findings 4, 6-8, 10-12, 15, 17)
-
CO3the MCERA Board monitor and study the issues and solutions developed by other counties. (Findings 7-20), e.g.: clearly state the Retirement Fund's financial position regularly and, when • necessary project the amount needed for recovery and develop a plan, design a two tier retirement plan for employees. Other counties are developing a • "401-K" type plan. Existing employee plans have been frozen with future contributions put into a "401-K" type plan. The County could make a small percentage matching contribution, no defined benefit plans for new employees, reducing the amount of benefits paid by the County, reduce the pension plans for all employees, enabling them to retire earlier and allowing new employees to start at lower salary and benefit levels, and/or delay pension payment until the employee reaches age 65, reduce staff levels, consolidate functions, and review salaries, freeing money to • pay down debt, · closer monitoring of investment risk, · full disclosure of unfunded liability, no payment be given an employee who opts out of the health plan. •
-
CO4Recommendation has been implemented. In June, 2010, the Board adopted a revised Interest Crediting and Undistributed Earnings policy. The policy clearly defines excess earnings and the hierarchy in which they will be applied in the future. 7. the MCERA Board monitor and study the issues and solutions developed by other counties. (Findings 7-20), e.g.: clearly state the Retirement Fund's financial position regularly and, when • necessary project the amount needed for recovery and develop a plan, design a two tier retirement plan for employees. Other counties are developing a • "401-K" type plan. Existing employee plans have been frozen with future contributions put into a "401-K" type plan. The County could make a small percentage matching contribution, no defined benefit plans for new employees, reducing the amount of benefits paid by the County, reduce the pension plans for all employees, enabling them to retire earlier and allowing new employees to start at lower salary and benefit levels, and/or delay pension payment until the employee reaches age 65, reduce staff levels, consolidate functions, and review salaries, freeing money to • pay down debt, · closer monitoring of investment risk, · full disclosure of unfunded liability, no payment be given an employee who opts out of the health plan. •
* This report's PDF did not contain easily extractable text and required Optical Character Recognition (OCR) for analysis. There may be minor errors in the extracted findings and recommendations due to OCR limitations with scanned documents.