County of Mendocino Post Office Box 629

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  Mendocino County Grand Jury 2005-2—6 Page 9 of 15 Mendocino County is not alone in facing the issue of affordability of its pension plans; there is now a considerable national debate going on about this problem. Issued in order to pay current obligations and expenses, the POB must be paid. The current obligation is the present value of future promised retirement payments. In accounting, this is a very real current expense that is no different from salaries or office equipment. Publication of County pension fund numbers are not conveniently summarized in one document but are found in portions of several documents. The reasons for separating the calculations of County and MCERA operations may be sound accounting, but their financial results should be combined and made available for easier public understanding. Appendix C, Table 1 presents important numbers supplied by county officials for the Grand Jury’s oversight. The charts shown in Figures 1, 2 and 3 depict some of this data as well. Responses Required: Mendocino County Board of Supervisors (All Findings and Recommendations) CEO, Mendocino County (All Findings and Recommendations) Mendocino County Auditor/Controller (All Findings and Recommendations) Mendocino County Treasurer/Tax Collector (All Findings and Recommendations) Mendocino County Employee Retirement Association (All Findings and Recommendations) Mendocino County Department of Human Resources (Findings 5, 6, 11, 16, 17, Recommendation 4) Appendix A – Definitions Makeup of the Mendocino County Employee Retirement Association (MCERA) Board -- four non-County government individuals appointed by the Board of Supervisors (which has the option of appointing one of its own), two members of the Retirement Association elected by general members, one retired member elected by retirement members, one Safety member elected by Safety members, and one ex-officio, who is the Retirement Administrator/County Treasurer. AAL (Actuarial Accrued Liability) – the portion, as determined by a particular cost method, of the total present value of benefits (the plan's current and expected benefits payments plus administrative expenses) that is attributable to past service credit. Imagine a planned schedule of future payments for every covered employee, and then back-calculate the present value of all those monthly checks when added together. This gives the Actuarial Accrued Liability (AAL) for the MCERA pension plan. It is called Actuarial because it incorporates statistical employee lifetimes and averages of financial performance in this calculation. The liabilities that MCERA has are the value of all the pension promises made to employees and Mendocino County Grand Jury 2005-2—6 Page 10 of 15 to current retirees. Its result is in present dollars. The AAL for Mendocino County as of June 30, 2005 was $289,467,000.6 VA (Valuation Assets) – equal to the actual pension reserves held by MCERA. As of June 30, 2005, the valuation assets were $253,487,000.6 (UAAL) Unfunded Actuarial Accrued Liability – the difference between a fund's Actuarial Accrued Liability (AAL) and its current assets. If a fund's Actuarial Accrued Liability (AAL) exceeds its current assets, then the fund has a shortfall that is known as an Unfunded Actuarial Accrued Liability (UAAL). This shortfall is the difference between what the fund has on hand (on the books) right now and what is expected to be needed to pay current and future benefits. As of June 30, 2005, Mendocino County had a UAAL of $35,980,000.6 AAL - VA = UAAL $289,467,000 - $253,487,000 = $35,980,000. In other words, the UAAL is the shortfall the fund would face if its assets were liquidated and the present value of the benefits was paid today. Although the UAAL represents a shortfall in assets relative to liabilities, it does not represent a cash loss because, in reality, the fund is not liquidating nor are all benefits and costs due today. The UAAL is calculated yearly and reported by MCERA. In accordance with the funding agreement between the County and the Employees' Retirement Association, the County is required to amortize the portion of the UAAL that is in excess of the target balance equal to 10% of the total AAL. The County is required to fund any excess UAAL under the terms of the funding agreement. Smoothing -- the difference between the expected and actual investment returns, after expenses, spread over five years (only 20% is recognized for any one year). This method took effect as of June 30, 2005. AVA (Actuarial Value of Assets) – the smoothed value of assets. These assets are called Actuarial Value of Assets because they are calculated from the present market or paper value by a 5-year smoothing process intended to average out yearly investment return variations. Note that the AVA is in current dollars. As of June 30, 2005, the Actuarial Value of Assets was $273,884,295.7 POB (Pension Obligation Bonds) – bonds that may be issued by state or local governments to reduce their UAAL as a part of an overall strategy for managing pension costs. From a purely financial perspective, issuing pension obligation bonds can reduce expenses and even produce savings for a government if the interest rate paid on the bonds is less than the rate of return earned on proceeds placed in the pension plan. 6 Mendocino County Employees' Retirement Association - Report on the Actuarial Valuation as of June 30, 2005 Page 4 6 Mendocino County Employees' Retirement Association - Report on the Actuarial Valuation as of June 30, 2005 Page 4 7 Mendocino County Employees' Retirement Association - Report on the Actuarial Valuation as of June 30, 2005 Page 31 Mendocino County Grand Jury 2005-2—6 Page 11 of 15 Pension Obligation Bonds must be issued on a taxable basis because current federal tax law restricts the investment of the proceeds of tax-exempt bonds in higher-yielding taxable securities. Pension Obligation Bonds are a legal debt of the County, and have required payment schedules for principal and interest. Governments issuing pension obligation bonds must be aware of the risks involved with these instruments and must manage these risks. Appendix B – Pension Obligation Bond Details On December 19, 1996, Mendocino County issued $30,720,000 in Taxable Pension Obligation Bonds (POB). Payments were due July 1st in estimated annual principal installments of $1,655,000, increasing to $4,770,000 in the year 2009, at variable interest rates with interest payable semiannually on July 1st and January 1st at rates ranging from 5.54% to 6.97%. Final maturity would have been July 1, 2009. By 2002, the increase in AAL and a reduced VA resulted in a UAAL of $68,768,000. When interest rates were low, the County on December 12, 2002 issued $91,945,000 in Taxable Pension Obligation Bonds Refunding, Series 2002 to allow the County to fund the residual portion of its UAAL toward retirement benefits for County employees. The amount being funded with proceeds of the 2002 Bonds equals the present value of the payments the County would otherwise be required to make to amortize the current UAAL, discounted at the Retirement Association's actuarially assumed earnings rate of 8%. Estimated annual principal installments are due on July 1 of each year, starting at $885,000 and increasing to $7,560,000 in the year 2026, with variable interest rates with interest payable semiannually on July 1st and January 1st at rates ranging from 2.07% to 5.00%. Final maturity is July 1, 2026. This bond issue includes proceeds sufficient to defease approximately 50% of each maturity of the $23,795,000 outstanding principal amount of the original 1996 taxable Pension Obligation Bonds. The amount of principal defeased was $11,245,000 and the interest was $3,911,938, totaling $15,156,938. By refunding and defeasing the 1996 bonds, the County has restructured the amortization schedule of its outstanding debt so as to achieve a more level annual debt service pattern.8 8 Mendocino County Final Budget for Fiscal Year 2004-2005 Page 471 http://www.co.mendocino.ca.us/auditor/budget/04-05/ Mendocino County Grand Jury 2005-2—6 Page 12 of 15 Appendix C — Financial Charts and Table Historical Change of County Debt Obligations for Retirement -- POB, UAAL, & Total Total = Unfunded Liability + POB Balance $150 $140 $130 $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 1990/1991 1991/1992 1992/1993 1993/1994 1994/1995 1995/1996 1996/1997 1997/1998 1998/1999 1999/2000 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 Mendocino County Grand Jury 2005-2—6 Page 13 of 15 snoilliM End of Fiscal Year stbeD tnemeriteR MCERA Unfunded Actuarial Accrued Liabilities (UAAL) Pension Obligation Bonds Remaining Loan Balance (POB) Total Retirement Debt Chart 1 -- Historical Change of County Debt Obligations for Retirement Yearly Change in Unfunded Actuarial Accrued Liability (UAAL) (Current Year) - (Previous Year) $30 $20 $10 $0 ($10) ($20) ($30) ($40) ($50) ($60) ($70) snoilliM 1991/1992 1992/1993 1993/1994 1994/1995 1995/1996 1996/1997 1997/1998 1998/1999 1999/2000 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 Chart 2 -- Yearly Change in Unfunded Actuarial Accrued Liability (UAAL) Historical Growth of Actuarial Accrued Liabilities (AAL) AAL = AV + UAAL $325 $300 $275 $250 $225 $200 $175 $150 $125 $100 $75 $50 $25 $0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 0/ 1/ 2/ 3/ 4/ 5/ 6/ 7/ 8/ 9/ 0/ 1/ 2/ 3/ 4/ 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 Mendocino County Grand Jury 2005-2—6 Page 14 of 15 snoilliM Fiscal Year End )LAA( seitilibaiL deurccA lairautcA latoT MCERA Unfunded Actuarial Accrued Liabilities (UAAL) Total MCERA Valuation Assets (AV) Chart 3 -- Historical Growth of Actuarial Accrued Liabilities (AAL) Historical Values of Key Retirement Funding Data A B C D E F G H I J MCERA Total MCERA Pension Total MCERA Unfunded MCERA Unfunded Actuarial Percentage of Yearly Change Obligation Bonds Ending Valuation Actuarial Actuarial Accrued Total Retirement Accrued UAAL that is in UAAL Remaining Loan Budget Year Assets Accrued Liabilities Debt Liabilities Unfunded Col-D Balance (AV) Liabilities (UAAL) (AAL) (POB) (UAAL) Retirement Retirement Retirement Calculated Calculated County Audit Retirement Audit Calculated Source: Audit Report Audit Report Audit Report Col-D/Col-B CurYr - PrvYr Report Report Col-H + Col-I 1990/1991 $85,604,000 $60,431,000 $25,173,000 29.406% 0 $25,173,000 $25,173,000 1991/1992 $94,761,000 $64,947,000 $29,814,000 31.462% $4,641,000 0 $29,814,000 $29,814,000 1992/1993 $105,866,000 $72,062,000 $33,804,000 31.931% $3,990,000 0 $33,804,000 $33,804,000 1993/1994 $112,535,000 $75,976,000 $36,559,000 32.487% $2,755,000 0 $36,559,000 $36,559,000 1994/1995 $121,027,000 $79,322,000 $41,705,000 34.459% $5,146,000 0 $41,705,000 $41,705,000 1995/1996 $130,036,000 $84,992,000 $45,044,000 34.640% $3,339,000 $30,720,000 $45,044,000 $75,764,000 1996/1997 $140,783,000 $124,286,000 $16,497,000 11.718% ($28,547,000) $30,405,000 $16,497,000 $46,902,000 1997/1998 $154,263,000 $134,836,000 $19,427,000 12.593% $2,930,000 $29,685,000 $19,427,000 $49,112,000 1998/1999 $173,250,000 $142,775,000 $30,475,000 17.590% $11,048,000 $28,780,000 $30,475,000 $59,255,000 1999/2000 $185,423,000 $150,056,000 $35,367,000 19.074% $4,892,000 $27,375,000 $35,367,000 $62,742,000 2000/2001 $204,699,000 $157,545,000 $47,154,000 23.036% $11,787,000 $25,720,000 $47,154,000 $72,874,000 2001/2002 $226,883,000 $158,115,000 $68,768,000 30.310% $21,614,000 $23,795,000 $68,768,000 $92,563,000 2002/2003 $243,342,000 $233,764,000 $9,578,000 3.936% ($59,190,000) $104,495,000 $9,578,000 $114,073,000 2003/2004 $265,141,000 $239,191,000 $25,950,000 9.787% $16,372,000 $102,270,000 $25,950,000 $128,220,000 2004/2005 $289,467,000 $253,487,000 $35,980,000 12.430% $10,030,000 $99,930,000 $35,980,000 $135,910,000 2005/2006 Data came from MCERA - Benefit Changes by Bar- $97,475,000 2006/2007 gaining Unit Presented to BOS Workshop 16 Aug 2005 $94,890,000 Table 1 – Historical Values of Key Retirement Funding Data Mendocino County Grand Jury 2005-2—6 Page 15 of 15