Agenda Item B.6
CPMS CONSENT CALENDAR
Meeting Date: February 15, 2022
TO: Mayor and Councilmembers
FROM: Michelle Greene, City Manager
CONTACT: Luke Rioux, Finance Director
SUBJECT: Response to 2020-21 Santa Barbara County Civil Grand Jury Report Titled “Pensions in Santa Barbara County Require Vigilance”
RECOMMENDATION:
A. Review staff’s recommended responses to the Santa Barbara County Civil Grand Jury (Grand Jury) Report r egarding – “Pensions in Santa Barbara County Require Vigilance”; and
B. Authorize the City Manager to sign and transmit the City’s Response to the Presiding Judge of the Superior Court, a copy to the current impaneled Grand Jury, and to file a copy with the City Clerk’s Office.
BACKGROUND:
On November 30, 2021, the City received the Santa Barbara County Civil Grand Jury (Grand Jury) report entitled “Pensions in Santa Barbara County Require Vigilance, Balancing Promises and Maintaining Services” (Attachment 1). The subject of this investigation was a follow-up to the 2017 -18 investigative report that looked at the pension plans of Santa Barbara County and the eight incorporated cities within the County . Its purpose was to determine how the eight cities and the County have progressed.
California Penal Code 933the states “no later than 90 days after the grand jury submits a final report on the operations of any public agency subject to its reviewing authority, the governing body of the public agency shall comment to the presiding judge of the superior court on the findings and recommendations pertaining to matters under the control of governing body” and further states ‘‘All of these comments and reports shall forthwith be submitted to the presiding judge of the superior court who impaneled the grand jury." The City of Goleta Received the Grand Jury report on November 30, 2021. Therefore, the City Council is required to respond to this report by February 28, 2022.
1 Meeting Date: February 15, 2022
DISCUSSION:
The Grand Jury conducted a follow up investigation to the 2017-18 Grand Jury “Pensions in Santa Barbara County” report to determine how the eight cities and the County have progressed. Based on the Grand Jury’s investigation, interviews, and reviews of eac h plan’s actuarial valuation report and the most recent audited financials for each city and the County, the Jury classified the cities’ and the County’s pension solvency risk into two categories: 1) those that the Grand Jury believes are at less risk of having problems with meeting their pension obligations , and, 2) those that continue to have higher potential risk.
Cities and the County the Grand Jury considers at less potential pension plan solvency risk include:
Buellton
Carpinteria
Goleta
Guadalupe
Solvang
County of Santa Barbara
Cities the Grand Jury considers at higher potential pension plan solvency risk include:
Lompoc
Santa Barbara
Santa Maria
The Grand Jury does not think that any of the cities or the County are in imminent danger of insolvency related to their pension obligations and stated the cities and the County can always take additional steps to further reduce the risk that pension obligations would impair their ability to provide all intended services on a timely basis. They acknowledge that some cities are taking those additional steps. The Grand Jury reported that the cities and the County could implement available mechanisms to help protect the entities from significant increases in future amounts to be paid, or from future reductions in revenues, which could impair the ability of the cities or the County to make the future payments timely, without cutting services provided to residents. Those mechanisms include creating a Section 115 Pension Trust, issuing Pension Obligation Bonds, and establishing a Pension Reserve Fund. It should be noted that t he City has created a Section 115 Pension Trust and has held funds related to pension liabilities as part of its reserve funds.
Additionally, the Grand Jury reported that while all the cities and the County take their obligations seriously and understand the need to fulfill those obligations without impacting delivery of essential and promised services to their resident, including analyzing and discussing pensions annually, none of the cities or the County have a written plan addressing the risks of pension plan insolvency. A written plan would allow the residents to better understand how the cities and the County are addressing these issues and would serve as a guide to those implementing new policies.
2 Meeting Date: February 15, 2022
In conclusion, the Grand Jury determined that while no current problems or undue risks exist, nor is any city or the County in imminent danger of being unable to meet their pension obligations, there still exists a need to remain vi gilant and to prepare for unforeseen changes that could affect their future ability to fund their pension obligations in a timely manner.
The Grand Jury report listed three findings (Findings 1 a, 1c and 2) and two recommendations (Recommendations 1 and 2) that require a response from the City. A draft response letter to the Grand Jury is attached (Attachment 2).
The two recommendations in the report require the following:
1) The City develop and publish a comprehensive plan by June 30, 2022 addressing pension plans and how they intend to properly assure future obligations are paid when due, without impacting the timely delivery of essential and promised services to residents.
2) The City study and determine by June 30, 2022 whether a Section 115 Trust, Pension Obligation Bond, or Pension Reserve Fund would be an effective hedge against risks to their pension plans for their city.
For recommendation 1, staff plans to provide additional information on a comprehensive plan addressing the risks of pension plan insolvency to the Finance Committee and the City Council in conjunction with the Fiscal Year 22/23 mid-cycle budget process.
For recommendation 2, the City has already implemented this recommendation since adopting and establishing its Section 115 Trust on June 16, 2020. Part of the process included evaluating the other available options.
Council is asked to review the draft response and authorize the City Manager to sign the response letter and transm it it to the Honorable Gustavo Lavayen , Superior Court Presiding Judge.
FISCAL IMPACTS:
There are no direct fiscal impacts to the drafting, approval and transmission of the response to the Grand Jury’s findings and recommendations.
ALTERNATIVES:
Responses are required by Penal Code 933.05. Therefore, there is no alternative to responding to the Grand Jury’s report but altered responses can be requested of staff so long as responses can be submitted to the Grand Jury by the February 28, 2022 deadline.
3 Meeting Date: February 15, 2022
Reviewed By: Legal Review By: Approved By:
___________________ ___________________ _________________ Kristine Schmidt Megan Garibaldi Michelle Greene
Assistant City Manager City Attorney City Manager
ATTACHMENTS:
1. Grand Jury Report Dated November 30, 2021
2. Draft Response Letter to the Grand Jury
4 ATTACHMENT 1
Grand Jury Report Dated November 30, 2021
5 DocuSign Envelope ID: 3999C1A5-949C-44DA-8110-63075B3E8E6C 6 2021 Santa Barbara County Grand Jury 1
PENSIONS IN SANTA BARBARA COUNTY REQUIRE VIGILANCE
Balancing Promises and Maintaining Services
SUMMARY
The 2021 Santa Barbara County Grand Jury (Jury) conducted a follow -up investigation to the 2017-18 Grand Jury “Pen sions in Santa Barbara County” report to determine how the eight cities and the County have progressed.
In 2017 -18, the Santa Barbara County Grand Jury issued an investigative report that looked at the pension plans of Santa Barbara County (County) and the eight incorporated cities within the County.
That report found there were substantial liquidity and solvency risks to the sustainability of many of the public defined benefit pension plans in the County and that if there are additional fiscal shocks, such as a fall in tax revenue s or a period of low returns on pension assets held by the California Public Employee Retirement System (CalPERS) and County of Santa Barbara Employee Retirement System (SBCERS), then other actions may be required.
Salaries and benefits, including pension costs, are the largest annual operating expenditure s of the County and its eight cities. The unfunded pension liabilities for future payments to current and former staff are also a significant portion of each of their balance sheets, totaling $1.8 billion. Pensions and the related liabilities are a significant part of the operating costs of all local governments. The Jury was told that governments often cannot provide the same level of wages and benefits to attract and retain talented and capable staff as “for profit” organizations because of the need to balance providing required services to its residents against the burden of taxation or fees charged to those residents.
Pensions, the Jury learned, provide a way for local governments to attract capable staff while deferring some of the costs to the taxpayers to the future. Pensions are an attractive benefit for many as they assure staff of income streams after retirement.
The County and cities need to make sure they are prepared to fund future pension obligations when due, without disrupting critical services or over-burdening their residents with extra fees and taxes.
The Jury discovered that, while risk s continue to exist , especially for those cities that are suffering financial challenges, there are no immediate threats and that , with proper attention , all cities and the County should be able to deliver the necessary services to its residents and meet its pension obligations as they become due.
INTRODUCTION
The County of Santa Barbara and the eight incorporated cities within the County had unfunded pension liabilities of $1.8 billion as of June 3 0, 2020. These obligations are the calculated net present value of payments due over an extended period of years and l ike most U.S. cities represent the largest liability on the County’s and the eight cities’ General Fund Balance Sheets . Financial markets are not always predictable. For example, in early 2020, the United States was experiencing a record-breaking economy and stock markets were at all -time highs until the COVID -19 pandemic struck , and the financial markets contracted and drastically decreased in value. That decline was short-lived but underscores the reality that volatility in the markets can occur without warning and that the County and the eight cities need to be prepared for future significant negative impacts to the markets.
The 2017-18 Santa Barbara County Jury issued a report about the nine principal public pension systems in Santa Barbara County (County.) Those pension systems include the County of Santa Barbara Employee Retirement System, and those managed by the California Public Employee Retirement DocuSign Envelope ID: 3999C1A5-949C-44DA-8110-63075B3E8E6C 7 2021 Santa Barbara County Grand Jury 2
System for the eight cities of Buellton, Carpinteria, Goleta, Guadalupe, Lompoc, Santa Maria, the City of Santa Barbara and Solvang. The 2017 -18 Jury found the highest risks in the plans of Lompoc, the City of Santa Barbara, and Santa Maria, which are the largest in the County. It found moderate risks in Guadalupe and Solvang. It found minimal to moderate risks in Buellton , Carpinteria and Goleta. Risks in SBCERS were moderate and well managed.
California is one of the most expensive states to live in , and Santa Barbara County is one the most expensive counties. Across the board, the cost of living in cities in the County is significantly higher than the national average. 1 The County and its cities must compete for qualified employees. To attract an appropriate workforce, the County and its cities cannot always pa y salaries comparable to other employment opportunities candidates may be considering . As a result, they have followed a practice that most governmental organizations use to augment current compensation - a Defined Benefit Pension Plan. In a Defined Benefit Pension Plan the employer promises a specified pension payment upon retirement that is predetermined by a formula based on the employee's earnings his tory, tenure of service, and age.
Counties and cities have the option to administer their pension plans, but the costs and risks associated with doing so make using an outside administrator more attractive. In California, most counties and cities that have decided not to administer their own pension plans use CalPERS.2 The eight cities of Santa Barbara County are members of CalPERS. In addition to the eight cities, close to 2,900 California public employers participate in CalPERS.3 As of June 30, 2020, CalPERS managed $392.5 billion in assets,4 making it the largest public pension fund in the nation. 3 These assets are used to help cover the cost of future payments due current and former employers for services previously rendered. As of June 30, 2020, the assets under management represented 70.6 percent of the Accrued
Liability due members of the pension fund.5 Accrued Liability is net present value of the total dollars needed as of the valuation date to fund all benefits earned in the past.
In addition to using investment returns, CalPERS uses contributions from employers and members to fund payments of member benefits. Per CalPERS, as of June 30, 2020, funding for retirement benefits was broken down as follows: investment returns (55 percent), employer contributions ( 32 percent) and employee contributions (13 percent).6
Each year, employers within the CalPERS pension fund are required to make contributions to the fund.
These contributions are made up of two components, the Employer Normal Cost and a payment that represents amortization of the Unfunded Accrued Liability (UAL.) The Employer Normal Cost represents the pension amount earned by active employees for services expected to be provided for the upcoming fiscal year and is paid at 100 percent. The UAL is total Actuarial Accrued Liabilities minus assets available to pay benefits earned. Rather than requiring employers to pay the entire amount of the UAL, the annual payment is an amortized amount needed to fund the liability over an extended period for past service credit earned by members. In addition to these required payments, employers also have the option to make additional payments to pay down the UAL early.
1 Salary.com https://www.salary.com/research/cost-of-living/ca (last reviewed September 21, 2021) 2 https://www.calpers.ca.gov/page/about/organization/calpers-story (last reviewed September 21, 2021) 3 https://www.calpers.ca.gov/docs/forms-publications/facts-about.pdf (last reviewed September 21, 2021) 4 https://www.calpers.ca.gov/docs/forms-publications/facts-investment-pension-funding.pdf (last reviewed September 21, 2021)
5 https://www.calpers.ca.gov/docs/forms-publications/facts-investment-pension-funding.pdf (last reviewed September 21, 2021)
6 https://www.calpers.ca.gov/page/newsroom/calpers-news/2021/calpers-strong-preliminary-fiscal-year-investment-return- trigger-discount-rate-reduction
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CalPERS had net investment returns of 8.5 percent for the ten-year period ending June 30, 20 20.
Managed assets grew from $237 billion to $392.5 billion. During that period, the annual net investment returns ranged from a low of .01 percent to a high of 21.7 percent.
Discount Rate is the rate of return used to discount future cash flows back to their present value. Prior to 2008 , CalPERS was using a Discount R ate of 7.75 percent . Using too high a D iscount Rate can understate the amount currently due for future payments. This can occur if the actual return on invested assets is less than the Discount Rate used and did occur in 2008 and 2009. Using the 7.75 percent Discount Rate, managed assets were shown to exceed the Actuarial Liability as of June 30, 2007. In 2008, the Great Recession began and, while the Actuarial Liability continued to grow, managed assets lost significant value. Just two years later, as of June 30, 2009, managed assets were only 61 percent of the Actuarial Liability.
In 2012 , the State of California passed AB 340 and AB 197, which enacted the California Public Employees’ Pension Reform Act of 2013 (PEPRA) and were intended to help blunt the rise of pension debt counties and cities were facing due to the recession . PEPRA went into effect on January 1, 2013, and made several significant positive changes in California pension systems. Employees hired prior to PEPRA are members of plans which are referred to as Classic plans . Those employees retain the benefits promised under their existing plans. For employees hired after PEPRA went into effect, the plans typically set a new maximum ben efit, increased the retirement age at which members became eligible, set a cap on the amount used to calculate an employee’s benefit base, and forbade the practice of “Employer Paid Member Contributions” for new PEPRA members. Since its enactment, the PEPRA law has succeeded in reducing future liabilities in pension plans.
Actuarial valuations reports are prepared for all members of the CalPERS pension fund each year.
These actuarial reports, which are typically released 14 months after the end of the reporting period, are based on several assumptions, including expected investment return and payroll growth, eligibility for the types of benefits provided, and mortality rates of retirees. Based upon actuarial valuation , the annual employer contribution rates are adjusted, as needed. Since 2016 these valuations are based on an investment return assumption of 7.0 percent. For 2021, and subsequent periods, the Discount Rate used to calculate employer contributions will be dropped to 6.8 percent,6 which will have the effect of raising the estimated future liabilities under the pension fund.
Unlike the eight cities, the County of Santa Barbara and its employees are not members of CalPERS.
Instead, the County administers its own retirement funds through SBCERS, which was established on January 1, 1944. It provides service retirement, disability, death, and survivor benefits for employees of the County of Santa Barbara, the Santa Barbara County Superior Court, and ten special districts.7 As of June 30, 2020, SBC ERS managed nearly $3.2 billion in assets. This am ount represents approximately 74 percent of the Accrued Liability due current and former employees who are members of SBCERS, which covers 10,777 current and former employees , including 4,322 who are currently receiving benefits. 8 Like CalPERS, SBCERS funds payments of member benefits through a combination of member and employer contributions and investment income.
The Board of SBCERS se ts the assumptions to be used to determine the funding requirements of the pension fund each year. One key assumption is the Discount Rate. To be more in line with actual results, t he SBCERS Board has lowered the Discount Rate used to determine the Actuarial Accrued Liability several times. In 2007 it was lowered to 7.75 percent, and after several interim adjustments, it
7 https://www.sbcers.org/about-us/
8 https://www.sbcers.org/wp-content/uploads/2020-Annual-Report-Web-Version.pdf DocuSign Envelope ID: 3999C1A5-949C-44DA-8110-63075B3E8E6C 9 2021 Santa Barbara County Grand Jury 4
now sits at 7 percent.9 Like plans within the CalPERS pension fund , the SBCERS pension fund is subject to PEPRA.
Unfunded pension liabilities, as calculated by CalPERS and SBCERS, are paid by the employer over an extended period, much like a mortgage would be. The amount of Unfunded Accrued Actuarial Liability to be paid in future periods is listed as a liability on each of the cities’ and the County’s financial statements. That liabili ty is shown at the estimated net present value of the expected future payments, based upon an assumed rate of return on investment assets managed by CalPERS or SBCERS. Like all estimates, the amounts shown are only as good as the assumptions used to calculate them. One important assumption is the Discount Rate used to calculate the liability. If future CalPERS or SBCERS investment earnings consistently fall short of the Discount Rate used to calculate the UAL, the amount owed by the cities or County could be significantly higher. If CalPERS or SBCERS actual investment returns are higher than the Discount Rate used to calculate the UAL, as they have been for most years the past decade, the amounts to be funded by the cities or County would be less.
While CalPERS and SBCERS have, to date, adequately managed the assets under management for the cities and the County, there are no guarantees that investment returns will be s ufficient to cover all obligations, or that other factors might occur that would negatively impact the cities or the County and their ability to meet all obligations on a timely basis. There are mechanisms available to protect the cities and the County from significant increases in future amounts to be paid, or from reductions in revenues, which could impair the ability of the cities or the County to make the future payments timely, without cutting services provided to residents. These mechanisms include:
Section 115 Pension T rusts - A Section 115 Pension Trust , which derives its name from the code section within the United States Internal Revenue Code, may be used to segregate funds from an entity’s general fund for the purpose of funding future obligations, and recently has been used more frequently to set aside funds to meet future pensio n contributions or liabilities that would otherwise create strains on current operational budgets. Monies in a Section 115 Trust can be invested and can potentially earn a higher rate of return than the growth of future pension obligations. One limitation on Section 115 funds is that they are irrevocably committed for the purpose stated in the trust and may not be retrieved or used for other purposes.
Pension Obligation Bonds – A Pension Obligation Bond (POB) is a bond issued by a city or county that is repaid from future returns on the investments made using the proceeds of the bond, or from future revenues of the issuing entity. The basic principle of PO Bs relies on the expectation that the rate to borrow the money is less than the assumed expected return from an investment portfolio. The expected benefits to the entity are that the annual costs of funding the pension liability are offset in some part by the net proceeds of the investment s. This takes pressure off the entity to completely fund the pension obligations from annual revenues. A risk does exist in that the investments created with the borrowed funds may not perform well and the revenues are not sufficient to cover the bond cost s. In that case the entity would be required to use funds from other sources, which could impact the level of services provided by the entity. It is imperative that the entity get the lowest possible interest rate to mitigate risk, and with interest rates at record lows,
many entities are looking to POBs to protect them
from future fluctuations in pension costs.
Pension Reserve Fund - One other option used by some entities is to create a Pension Reserve Fund within their budget that is funded in years when excess monies are available. This concept has the benefit in that should there arise a need to use the funds for other purposes , they could be redirected to the alternative use.
9 https://www.sbcers.org/wp-content/uploads/Preliminary-Investment-Return-6-30-2021.pdf DocuSign Envelope ID: 3999C1A5-949C-44DA-8110-63075B3E8E6C 10 2021 Santa Barbara County Grand Jury 5
METHODOLOGY
To carry out its analysis, the Jury:
Reviewed the 20 19 and 20 20 CalPERS valuation reports for the 3 2 plans10 within the eight cities, plus related data in the public domain and as provided by the cities’ plan administrators11; Reviewed 2020 SBCERS Annual Reports and data provided by SBCERS10; Reviewed “The California Sta te Auditor’s Fiscal Health Analysis of the State’s Over 470 Cities,”12 which showed California cities that could be facing fiscal challenges by assessing their levels of risk using various financial indicators; Reviewed audited financial reports of the County and of the eight cities for various years plus related data in the public domain and as provided by the County and the eight cities; and Interviewed individuals with administrative responsibilities for the pension plans from the County and the eight cities and representatives from SBCERS and CalPERS.
Based on the information in the documents reviewed and from the interviews with various officials of the eight cities, the County, SBCERS and CalPERS , the Jury constructed a model to assist it in analyzing the current financial position of each of the 32 plans. The Jury also reviewed the relationship of the pension liabilities to their respective General Funds and annual operating revenues, the current and future burden to the residents of the County and the eight cities, and the years the unfunded liabilities are expected to be paid off.
OBSERVATIONS
In Santa Barbara County , PEPRA has been effective in that pension plans created as a result of the pension reform are funded at a much higher percentage. While PEPRA has helped, that does not mean there are not some significant issues to be aware of. The largest component of the Unfu nded Accrued Liability in the 32 pension plans of the cities within the county are in Classic plans. Even though PEPRA plans bega n in 2013, as of June 30, 2020,
the total UAL for the 32 plans was over $ 631
million, of which only $ 1 million was within PEPRA plans. So, while the 1 2 PEPRA plans are funded at an average of over 90 percent, the 20 Classic plans are only funded to an average of 68.7 percent. In future years PEPRA plans will play an increasing part in controlling pension costs of the cities and the County.
Table 1 (below) highlights the overall pension liabilities for each city and the County, as well their respective populations, estimated annual employer pension contributions , and analytics of how each city’s and the County’s obligations compare to various metrics. These analyses helped the jury classify the pension solvency risk for each of the cities and the County. For example, Lompoc, the City of Santa Barbara, Santa Maria and the County have higher per capita UALs than the remaining cities, suggesting there could be a higher strain on those communities than on those with lesser per capita UALs. Also, the cities of Lompoc, Santa Barbara and Santa Maria have significantly higher Estimated Total Employer Contributions than the other cities. These factors alone may not be a warning sign, but when compared to their Projected Payrolls and to their Total General Fund Re venues, they also
represent higher percentages of those amounts and suggest higher risk.
10 See Appendix B
11 https://www.calpers.ca.gov/page/employers/actuarial-services/employer-contributions/public-agency-actuarial-valuation- reports
12 https://www.auditor.ca.gov/bsa/cities_risk_index
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Table 113
Public Pension Status, Santa Barbara County and 8 Cities, 2020
Based on the Jury’s investigation, interviews, and reviews of each plan’s actuarial valuation report and the most recent audited financials for each city and the County, the Jury classified the cities ’ and the County’s pension solvency risk into two categories : those that the Jury believes are at less risk to have problems with meeting their pension obligations and those that continue to have higher potential risk.
Cities and the County the Jury considers at less potential pension plan solvency risk include:
Buellton
Carpinteria
Goleta
Guadalupe
Solvang
County of Santa Barbara
Cities the Jury considers at higher potential pension plan solvency risk include:
Lompoc
Santa Barbara
Santa Maria
The Jury does not think that any of the cities or the County are in imminent danger of insolvency related to their pension obligations. That said, the cities and the County can always take additional steps to further reduce the risk that pension obligations would impair the ir ability to provide all intended services on a timely basis.
13 Except for the County information, all information within the table was obtained from the eight cities’ Actuarial Valuation Reports as of June 30, 2020 , prepared by CalPERS, which are available online at:
https://www.calpers.ca.gov/page/employers/actuarial-resources/public-agency-actuarial-valuation-reports. The County information was obtained from SBCERS Actuarial Valuation Report as of June 30, 2020, available online at https://www.sbcers.org/wp-content/uploads/2020-SBCERS-A VR-Revised_20210224s.pdf.
Population
Normal
Accrued
Liability
Unfunded
Actuarial
Liability
Unfunded
Actuarial
Liability
Per Capita
% Funded
(Discount
Rate - 7%)
Estimated
Total
Employer
Contribution
Estimated Total
Employer
Contribution as %
of Projected
Payroll
Estimated Total
Employer
Contribution as % of
Proj Payroll to Total
General Fund Revs
Buellton 5,102 10,618,762$ 2,678,957$ $525.08 74.8% 384,784$ 22.0% 4.27% Carpinteria 13,385 30,911,978$ 9,432,389$ $704.70 69.5% 1,086,135$ 37.4% 9.37% Goleta 30,911 21,985,402$ 4,241,195$ $305.15 80.7% 1,105,343$ 13.5% 3.34% Guadalupe 7,783 16,925,088$ 4,224,747$ $542.82 75.0% 627,352$ 23.2% 10.38% Lompoc 42,853 321,949,822$ 102,974,795$ $2,402.98 68.0% 12,649,654$ 51.4% 27.65% Santa Barbara 91,686 1,180,029,261$ 386,111,684$ $1,123.12 67.3% 47,970,234$ 51.0% 32.08% Santa Maria 107,263 507,742,152$ 160,165,144$ $3,599.67 68.5% 20,753,973$ 40.1% 23.46% Solvang 5,839 19,743,790$ 5,201,465$ $890.81 73.7% 599,751$ 35.6% 6.41% County of Santa Barbara 446,499 4,297,727,000$ 1,103,795,000$ $1,984.57 74.3% - - - Totals 6,407,633,255$ 1,778,825,376$ 72.2%
2020
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And some cities are taking those additional steps. While no city, or the County, has used a Pension Obligation Bond, the cities of Guadalupe, Lompoc and Santa Barbara have indicated that they have either investigated the idea or are planning to. A Pen sion Obligation Bond is not without risk, so it is important that each city that considers using this tool takes a careful look at its cost of borrowing, the interest rate they can obtain,
and the market outlook for debt over the life of the bond.
Several cities have either created Section 115 Trusts (Goleta), or have told the Jury they are investigating the possibility (Guadalupe, Santa Barbara, Santa Maria and Solvang). A Section 115 Trust would allow the cities to set aside funds when times are good to b e used to offset pension cost s when the need to use general funds would negatively impact the timely delivery of essential services. The downside to using a Section 115 Trust is that the funds may only be used for the specific purpose for which the trust was created.
A less restrictive way than a Section 115 Trust for cities to set aside funds for pension needs in the future would be to create a Pension Reserve Fund. This type of reserve fund allows the cities to set aside funds for specific later needs, bu t allows the flexibility to divert the funds to other uses, should the need arise. None of the cities are currently using this mechanism, and instead are relying on their general reserve funds to be available if needed. The reserve funds for the cities of Guadalupe and Lompoc are currently underfunded based upon their stated policies, but both feel recent events will help them replenish their reserves with in a couple of years at the most. The Jury learned that i n Guadalupe there has been significant new hou sing built within the city and more is under construction ,
and in Lompoc, the recent approval of Measure Q, which increases the tax on cannabis manufacturing and distribution, is expected to create between and $5 and $8 million dollars in new revenues for the next fiscal year.
The Jury learned that all the cities and the County take their pension obligations seriously and understand the need to fulfill those obligations without impacting the delivery of essential and promised services to their residents. The Jury also learned that while these issues are analyzed and discussed annually, none of the cities or the County have a written plan addressing the risks of pension plan insolvency. A written
plan would allow the residents to better understand how the ci ties and the County are addressing these issues and would serve as a guide to those implementing new policies.
CONCLUSION
The 2021 Santa Barbara County Grand Jury determined that while no current problems or undue risks exist and that none of the cities or the County are in imminent danger of being unable to meet their pension obligations, there still exists a need to remain vigilant and to prepare for unforeseen changes that could affect their future ability to fund their pension obligations in a timely manner.
FINDINGS AND RECOMMENDATIONS
Finding 1a
The cities of Buellton, Carpinteria, Goleta, Guadalupe, Solvang and the County of Santa Barbara are at less potential pension plan solvency risk.
Finding 1b
The cities of Lompoc, Santa Barbara and Santa Maria are at higher potential pension plan solvency risk.
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Finding 1c
Unfunded Accrued Liabilities have risen for all cities since 2016, and with the announced change in the Discount Rate, are expected to rise further, which could impact the cities’ abilit y to deliver expected services to residents.
Recommendation 1
That each city council and the Santa Barbara County Board of Supervisors develop and publish a comprehensive plan by June 30, 2022, addressing their pension plans and how they intend to properly assure future obligations are paid when due, without impacting the timely delivery of essential and promised services to residents.
Finding 2
Section 115 Trusts, Pension Obligation Bonds, and Pension Reserve Funds can be effective mechanisms to protect cities from dramatic impacts to the financial markets or declines in General Fund revenues.
Recommendation 2
That each city council and the Santa Barbara County Board of Supervisors study and determine by June 30, 2022, whether a Section 115 Trust, Pension Obligation Bond, or Pension Reserve Fund would be an
effective hedge against risks to their pension plans for their city.
REQUEST FOR RESPONSE
Pursuant to California Penal Code Section 933 and 933.05 , the Santa Barbara County Grand Jury requests each entity or individual named below to respond to the enumerated findings and recommendations within the specified statutory time limit:
Responses to Findings shall be either:
Agree
Disagree wholly
Disagree partially with an explanation
Responses to Recommendations shall be one of the following:
Has been implemented, with brief summary of implementation actions taken Will be implemented, with an implementation schedule
Requires further analysis, with analysis completion date of no more than six months after the publication of the report
Will not be implemented, with an explanation of why
Santa Barbara County Board of Supervisors – 90 Days
Findings 1a, 2
Recommendation 1, 2
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City of Buellton – 90 Days
Findings 1a, 1c, 2
Recommendation 1, 2
City of Carpinteria – 90 Days
Findings 1a, 1c, 2
Recommendation 1, 2
City of Goleta – 90 Days
Findings 1a, 1c, 2
Recommendation 1, 2
City of Guadalupe – 90 Days
Findings 1a, 1c, 2
Recommendation 1, 2
City of Lompoc – 90 Days
Findings 1b, 1c, 2
Recommendation 1, 2
City of Santa Barbara – 90 Days
Findings 1b, 1c, 2
Recommendation 1, 2
City of Santa Maria – 90 Days
Findings 1b, 1c, 2
Recommendation 1, 2
City of Solvang – 90 Days
Findings 1a, 1c, 2
Recommendation 1, 2
DocuSign Envelope ID: 3999C1A5-949C-44DA-8110-63075B3E8E6C 15 2021 Santa Barbara County Grand Jury 10
APPENDIX A
GLOSSARY
Accrued L iability (also called Actuarial A ccrued L iability or Entry Age Normal Accrued Liability) The total dollars needed as of the valuation date to fund all benefits earned in the past for current members.
Actuarial Valuation The determination, as of a valuation date , of the Normal Cost, Accrued Liability, and related actuarial present values for a pension plan. These valuations are performed annually or when an employer is contemplating a change to their plan provisions.
Classic Member (under PEPRA) A classic member is a member who joined CalPERS or SBCERS prior to January 1, 2013, and who is not defined as a new member under PEPRA. (See definition of New Member below).
Discount Rate A ssumption The actuarial assumption that was called “investment return” in earlier CalPERS reports or “actuarial interest rate” in section 200 14 of the California P ublic Employees’ Retirement Law (PERL) (California Government Code section 20014).
Funded Status A measure of how well-funded, or how "on track," a plan or risk pool is with respect to assets versus accrued liabilities. A ratio greater than 100 percent means the plan or risk pool has more assets than liabilities and a ratio less than 100 percent means liabilities are greater than assets.
New Member (under PEPRA) A new member includes an individual who becomes a member of a public retirement system for the first time on or after J anuary 1, 2013, and who was not a member of another public retirement system prior to that date, and who is not su bject to reciprocity with another public retirement system.
Normal Cost The annual cost of service accrual for the upcoming fiscal year for active employees. The normal cost should be viewed as the long-term contribution rate.
PEPRA The California Public Employees’ Pension Reform Act of 2013.
Present Value of Benefits (PVB) The total dollars needed as of the valuation date to fund all benefits earned in the past or expected to be earned in the future for current members.
Unfunded Accrued Liability (UAL) When a plan ’s or pension fund’s value of assets is less than its accrued liability, the difference is the plan ’s or pension fund’s UAL (or unfunded liability). If the unfunded liability is positive, the plan or pension fund will have to pay contributions exceeding the Normal Cost.
OTHER TERMS
Benefit F actor. The percentage of pay to which employee members are entitled for each year of service.
Complementary Ri sk Analysis. Additional risk analysis beyond what is presented in the CalPERS Valuation Reports.
Employer Paid Member Contributions refers to the practice of pension plan employers paying some portion of an employee’s contributions in some instances.
Pension plan. In this report, a pension plan is a given package of retirement contributions and benefits, for example, the Miscellaneous Plan of the City of Goleta.
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Pension system. In this report, a pension system is a set of pension plans under one management; for example, the pension system of the C ity of Goleta consists of the Miscellaneous Plan of the City of Goleta and the PEPRA Miscellaneous Plan of the City of Goleta.
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APPENDIX B
City/Plan Normal Accrued Liability Unfunded Actuarial Liability % Funded
(Discount Rate - 7%)
Misc $10,117,235 $2,647,138 73.8%
PepMisc. 501,527 31,819 93.7%
$10,618,762 $2,678,957 74.8%
MISC. $21,023,417 $5,766,390 72.6%
Safety 9,410,150 3,620,593 61.5%
PepMisc 478,411 45,406 90.5%
$30,911,978 $9,432,389 69.5%
MISC. $19,992,856 $4,063,881 79.7%
PepMisc. 1,992,546 177,314 91.1%
$21,985,402 $4,241,195 80.7%
Misc. $8,870,433 $2,377,584 73.2%
Safety 7,275,900 1,762,414 75.8%
PepMisc. 294,000 25,168 91.4%
PepSafety/POL 430,146 53,130 87.6%
PepSafety/Fire 54,609 6,451 88.2%
$16,925,088 $4,224,747 75.0%
MISC. $214,274,197 $65,964,956 69.2%
Safety 102,425,444 36,482,292 64.4%
PepSafety/Pol 1,200,382 134,523 88.8%
PepSafety/Fire 1,560,305 163,511 89.5%
Police Tier 2 1,625,259 132,930 91.8%
FireTier 2 864,235 96,583 88.8%
$321,949,822 $102,974,795 68.0%
Misc. $664,902,988 $198,210,264 70.2%
Safety Police 304,630,107 106,270,049 65.1%
SAFETY Fire 208,650,909 81,458,677 61.0%
PepSAfety Fire 1,845,257 172,694 90.6%
$1,180,029,261 $386,111,684 67.3%
Misc. $271,492,921 $89,892,591 66.9%
Safety Police 148,339,270 47,427,464 68.0%
Safety Fire 75,810,291 21,628,065 71.5%
PepSafety Police 5,858,997 668,451 88.6%
PepSafety Fire 1,700,068 178,390 89.5%
Safety Fire Tier 2 2,104,052 187,001 91.1%
Safe Police Tier 2 2,436,553 183,182 92.5%
$507,742,152 $160,165,144 68.5%
Misc. $18,646,595 $5,082,035 72.7%
Safety 611,526 85,659 86.0%
PepMisc. 485,669 33,771 93.0%
$19,743,790 $5,201,465 73.7%
County of Santa Barbara $4,297,727,000 $1,103,795,000 74.3% Santa Maria
Solvang
County of Santa Barbara
Buellton
Carpinteria
Goleta
Guadalupe
Lompoc
Santa Barbara
2017
DocuSign Envelope ID: 3999C1A5-949C-44DA-8110-63075B3E8E6C 18 ATTACHMENT 2
Draft Response Letter to the Grand Jury
19 CITY COUNCIL
Paula Perotte
Mayor
Stuart Kasdin
Mayor Pro Tempore
Roger S. Aceves
Councilmember
James Kyriaco
Councilmember
Kyle Richards
Councilmember
CITY MANAGER
Michelle Greene
February 15, 2022
Honorable Gustavo Lavayen
Superior Court Presiding Judge
County of Santa Barbara
312 East Cook Street
Santa Maria, California 93454
RE: Response to 2020-21 Santa Barbara County Civil Grand Jury Report Titled Pensions in Santa Barbara County Require Vigilance.
Dear Honorable Judge Lavayen,
The 2020-21 Santa Barbara County Civil Grand Jury recently released its report entitled, Pensions in Santa Barbara County Require Vigilance.
The City of Goleta is named as an affected agency and is required to respond to the applicable findings and recommendations wi thin 90 days of the receipt of the report.
The purpose of this letter is to provide responses from the City to Findings 1a, 1c, and 2, and Recommendations 1 and 2 contained in the report dated November 30 , 20 21. The responses to the findings and recommendations are as follows:
Finding 1a:
The cities of Buellton, Carpinteria, Goleta, Guadalupe, Solvang and the County of Santa Barbara are at less potential plan solvency risk.
Response to Finding 1a: Agree.
Finding 1c:
Unfunded Accrued Liabilities have risen for all cities since 2016, and with the announced change in the Discount Rate, are expected to rise further, which could impact the cities’ ability to delivery expected services to residents.
Response to Finding 1c: Agree.
20 Santa Barbara County Grand Jury Response
February 15, 2022
The reduced discount rate of 6.8% set by the CalPERS board in November 2021 will have an impact by increasing the amount of future payments to CalPERS . However, the CalPERS investment rate of return for June 30, 2021 of 21.3% will have a positive impact on future unfunded liability payments. Other factors, including salary changes, actuarial assumptions and future investment returns will continue to have future impacts to the annual payments the City is required to make.
The City’s adopted budget will continue to ensure all required payments are adequately appropriated. The operating and capital budgets will continue to be evaluated to ensure services levels are being met. Any new or increased service levels will be supported by exploring future revenue generating solutions. The City will be utilizing its Section 115 Trust to prefund pension obligations and as a pension rate stabilization tool.
Recommendation 1:
That each city council and the Santa Barbara County Board of Su pervisors develop and publish a comprehensive plan by June 30, 2022, addressing their pension plans and how they intend to properly assure future obligations are paid when due, without impacting the timely delivery of essential and promised services to residents.
Response to Recommendation 1: Will be implemented.
During the 2022 calendar year, staff will continue its work with the Section 115 Trust and analyzing and considering various pension management strategies, including funding policies and a written plan addressing the risks of pension plan insolvency. The plan will be part of the FY 2022/23 budget process that will be adopted in June 2022.
Finding 2:
Section 115 Trusts, Pension Obligation Bonds, and Pension Reserve Funds can be effective mechanisms to protect cities from dramatic impacts to the financial markets or declines in General Fund revenues.
Response to Finding 2: Agree.
The City agrees that Section 115 Trusts and Pension Reserve Funds to be effective mechanisms to protect cities from dramatic impacts, though finds Pension Obligation Bonds to involve considerable investment risk, making this approach very speculative and not a one size fits all approach. Issuing a Penson Obligation Bond can pay down the UAL that exists at a specific point in time, but other actuarial dynamics and market performance can create a new UAL or produce a surplus. If the pension investment return rate falls below the interest rate on the bonds, the Cy would be worse off by issuing debt.
Recommendation 2:
That each city council and Santa Barbara County Board of Supervisors study and determine by June 30, 2022, whether a Section 115 Trust, Pension Obligation Bond, or 21 Santa Barbara County Grand Jury Response
February 15, 2022
Pension Reserve Fund would be an effective hedge against risks to their pension plan s for their city.
Response to Recommendation 2: Has been implemented.
The City had evaluated the available options and adopted and approved a Section 115 Pension Trust on June 16, 2020 with PARS and will be utilizing a passively managed – moderate risk portfolio. Staff found that prefunding pension obligations in a trust provided a way of committing assets with local control, including contributions, disbursement, timing amount and risk tolerance levels of investments. The City has also historically maintained a reserve account for pension liabilities and plans to continue to fund the reserve and make transfers from the reserve to the Section 115 Trust.
Conclusion
The City of Goleta appreciates the opportunity to provide detailed responses to the Grand Jury’s findings and recommendations. Addressing the unfunded liabilities of public pensions is critical. CalPERS’ decision to lower the discount rate as a way to reduce volatility presented a fiscal challenge all participating agencies. The City of Goleta is in good financial condition and has a record of sound budgeting and fiscal prudence, which, combined with the proactive steps we are taking to reduce our UAL, will allow the City to address the challenge of increasing pension costs successfully. This concludes our responses to the Grand Jury’s Report. For any additional assi stance we can provide on this, feel free to contact Luke Rioux, Finance Director at [email protected] or by phone at (805) 562-5508.
Sincerely,
Michelle Greene
City Manager
cc: Santa Barbara County Grand Jury
Digital Copy to: [email protected]
22