San Mateo County Grand Jury
• 2017-2018
County Pension Costs – Hard Choices Paying Off Issue | Summary | Glossary | Background | Discussion | Findings
⚠️ 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.
Findings and Recommendations 21 findings
F1
As of June 30, 2017, SamCERA’s Funded Ratio (Total Plan Assets/Total Plan Liabilities) was 84.3 percent. By comparison, the average Funded Ratio of cities in San Mateo County was 70.5 percent and the average of CalPERS agencies statewide was just 68 percent.
No recommendations for this finding
F2
As of June 30, 2017, SamCERA had a significant system-wide Unfunded Liability of $743 million, while the County portion constituted a significant Unfunded Liability of $707.1 million.
Related Recommendations (1)
R1
The Grand Jury recommends that the County Board of Supervisors continue to implement its MOU with SamCERA to eliminate its Unfunded Liability by the end of FY 2022-2023, provided that actuarial assumptions are met.
F3
In FY 2016-2017, the County’s Normal Cost payments to SamCERA were $51 million, while its payments to SamCERA of principal and interest on the Unfunded Liability (“Amortization Cost”) came to $108 million. In addition, the County made supplemental payments to SamCERA of nearly $34 million to pay down the Unfunded Liability. The County’s total payments of $192 million represented about 18 percent of total General Fund spending and 39 percent of its total covered payroll costs in FY 2016-2017.
No recommendations for this finding
F4
The County’s payment of Amortization Cost diverts money that could otherwise be used to pay for public services that it provides.
No recommendations for this finding
F5
In 2013, the County approved a Memorandum of Understanding (MOU) with SamCERA that would result in the County eliminating its Unfunded Liability by FY 2022-2023, if actuarial assumptions are met. The County’s participation is not mandatory, but it has implemented the MOU on schedule. Currently, SamCERA projects that the County will eliminate its Unfunded Liability on schedule.
Related Recommendations (1)
R1
The Grand Jury recommends that the County Board of Supervisors continue to implement its MOU with SamCERA to eliminate its Unfunded Liability by the end of FY 2022-2023, provided that actuarial assumptions are met.
F6
The MOU provides that the County will make annual supplemental contributions totaling $140 million over the 10-year term of the MOU to pay down its Unfunded Liability. Further, the County will maintain a high payroll contribution rate (later determined to be 37.4 percent), even as Annual Required Contributions (ARC) are expected to fall, as the Unfunded Liability declines. Maintaining a contribution rate that is higher than needed to pay the ARC generates additional supplemental contributions.
No recommendations for this finding
F7
The MOU provides that SamCERA will place supplemental contributions from the County into a Supplemental Contributions Account, such that the funds apply to the benefit of the County’s plan, rather than the SamCERA system as a whole.
No recommendations for this finding
F8
The County anticipates savings of over $304 million in interest expense as a result of paying down its Unfunded Liability ahead of the schedule provided in the Amortization Period. The County further anticipates that, once the Unfunded Liability is paid off, it will save up to $100 million per year in Amortization Costs and supplemental contributions. However, if the County commits these expected savings to other budgetary purposes, it will be more difficult for the County to meet Unfunded Liabilities in future years, if SamCERA’s current actuarial assumptions prove to be too optimistic.
Related Recommendations (1)
R3
Due to uncertainties regarding future pension liabilities, especially returns on investments, the Grand Jury recommends that the County Board of Supervisors, in budgeting for years beyond FY 2022-2023, ensure that the anticipated savings that accrue from eliminating the need to pay down an Unfunded Liability are not irrevocably committed to other budgetary purposes, such as operational or other ongoing expenses.
F9
In 2003 and 2005, the County adopted enhanced pension benefit formulas that were applied retroactively to all employees. Since neither the County nor its employees had made Normal Cost contributions to pay for the enhanced benefits, the County’s Unfunded Liability immediately increased. In 2011, the County reversed its previous action and returned to the original benefit formula. However, this only applied to new hires. In 2013, SamCERA implemented new reduced pension formulas required under the California Public Employees’ Pension Reform Act.
No recommendations for this finding
F10
Since 2014, the County has eliminated its prior practice of paying a portion of the employees’ share of Normal Cost, known as the “employer pickup.”
No recommendations for this finding
F11
Since 2014, the County has changed its prior practice of paying the entire cost of annual COLA increases for retirees. It now requires that all employees pay 50 percent of the future cost of this benefit as part of their payroll deduction for Normal Costs.
No recommendations for this finding
F12
During the FY 2007-2017 period, the County kept salary increases to an average annual rate of 2.87 percent, well below the rates of increase assumed by SamCERA. This resulted in a cumulative reduction in Unfunded Liability of $154.7 million. However, in the most recent years within the period, FY 2014-2017, the trend showed an increase in Unfunded Liability attributable to salary increases that exceeded SamCERA’s assumptions.
Related Recommendations (1)
R2
The Grand Jury recommends that the County Board of Supervisors keep overall salary increases at or below the actuarial rates assumed by SamCERA.
F13
In 2010, the County had 5,327 current employee members of SamCERA. By 2013, this had declined to 4,650 current members before rising back up to 5,080 in 2017.
No recommendations for this finding
F14
SamCERA uses a 15-year layered Amortization Period to determine payments on the Unfunded Liability. That is a shorter period than used by some other pension systems, such as CalPERS. It results in higher employer contributions during the Amortization Period but will ultimately reduce the total interest expense.
No recommendations for this finding
F15
SamCERA conducts Triennial Experience Studies to monitor its demographic actuarial assumptions, including member life-expectancy. Economic assumptions, including the assumed Return on Investment of its plan assets are reviewed annually.
Related Recommendations (1)
R4
The Grand Jury recommends that the SamCERA Board of Retirement continue to conduct Triennial Experience Studies to address potential demographic changes and continue to conduct annual economic analyses to assess its economic assumptions, including Return on Investment.
F16
Based on its latest Triennial Experience Study in 2017, SamCERA has made a change in the mortality assumption that predicts how long members are currently living and adds a projection scale that reflects the gradual year-to-year improvement in mortality that is expected to occur in the future. The new mortality assumption results in a significant increase of Normal Cost contributions equal to 2.19 percent of payroll.
No recommendations for this finding
F17
SamCERA has lowered its assumed Return on Investment (ROI) on plan assets in a series of steps since 2005. The assumed ROI for FY 2017-18 is 6.75 percent. That is more conservative than most other public pension systems, such as CalPERS, which is currently at 7.5 percent. (The CalPERS Board has since approved lowering the ROI in steps to 7.0 percent by FY 2020-2021).
No recommendations for this finding
F18
Historically, ROI is the biggest source of funding for SamCERA’s pension benefits, comprising approximately 57 percent of total revenues. Contributions by the County provided 29 percent and contributions by employees provided 14 percent of total revenues. As assumed ROI is lowered, Normal Cost increases, so contributions by the County and employees must be increased.
No recommendations for this finding
F19
SamCERA has changed its allocation of assets in different types of investments over time. It has gradually reduced the share of investments in public equities (public stocks) to just 43 percent (as of June 30, 2017) and has diversified its portfolio by increasing the share invested in other asset categories.
No recommendations for this finding
F20
An independent 2018 analysis by Roeder Financial ranks SamCERA third best among California pension plans, based on “funding assumptions.” Since the only plans ranked higher than SamCERA were the CalPERS – Legislative (closed) and CalPERS Judges System II, 1, 3 plans, SamCERA has the highest ranking among its peer public pension plans for public agencies.
No recommendations for this finding
F21
ROI can be estimated but not guaranteed. Financial markets have proven to be highly volatile. This makes long-term financial planning difficult.
No recommendations for this finding
Conclusions 1
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CL1 Page 14The Grand Jury commends the County Board of Supervisors and the SamCERA Board of Retirement for their foresight and their decisive actions noted in this report. SamCERA is now rated one of the top pension systems in the state, based on their conservative assumptions. The County’s most recent Funded Ratio of 84.3 percent leaves room for improvement but is well above the average Funded Ratio for public entities in California. However, given the volatility in financial markets and ongoing demographic changes, the County and SamCERA must continue to monitor the performance of the pension system and act accordingly. 66 SamCERA 2005 CAFR p. 33. 67 Milliman, June 30, 2017 Actuarial Valuation San Mateo County Employees’ Retirement Association Exhibit 13, p. 58. Note that Milliman uses terminology employed by SamCERA. “Unfunded Actuarial Accrued Liabilities (UAAL)” for Unfunded Liability for Funding Purposes and “Actuarial Value of Valuation Assets” and “Actuarial Accrued Liabilities” as the factors comprising the Funded Ratio.
No Responses Found 2
Government entities assigned to respond to this report. No response documents have been linked in our database.
County of San Mateo
Agency
San Mateo County Board of Supervisors
Elected County Office