FOR THE COUNCIL MEETING OF JANUARY 18, 2022
COUNCIL AGENDA REPORT
TO: City Council
FROM: City Manager
SUBJECT: RESPONSES TO 2021 SANTA BARBARA COUNTY GRAND JURY REPORT — PENSIONS IN SANTA BARBARA COUNTY REQUIRE
VIGILANCE
RECOMMENDATION:
That the City Council:
1. Review staff's recommended responses to the 2021 Santa Barbara County Grand Jury (Grand Jury) Report titled — "Pensions in Santa Barbara County Require Vigilance"; and
2. Authorize the Mayor to sign and transmit the City's Response to the Presiding Judge of the Superior Court with a copy to the current impaneled Civil Grand Jury and file a copy with the City Clerk's office.
BACKGROUND:
On November 30, 2021, the City received the 2021 Santa Barbara County Grand Jury report titled Pensions in Santa Barbara Country Require Vigilance (Attachment A). The City Council is required to respond to this report within 90 days of receiving it, which provides the City Council until February 28, 2022, to reply to the Grand Jury.
DISCUSSION:
On November 30, 2021, the 2021 Santa Barbara County Grand Jury issued a report about Pensions in Santa Barbara County. In particular, this report focuses on their 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.
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 revenues or a period of low returns on pension assets held by the California Public Employee Retirement System (CaIPERS) and County of Santa Barbara Employee Retirement System (SBCERS), then other actions may be required.
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.
The Pensions in Santa Barbara County Require Vigilance report has two Findings and two Recommendations of which a response is required from the City on Findings 1b, 1c, and 2, and Recommendations 1, and 2. A draft response letter to the Grand Jury is attached (Attachment B).
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
Furthermore, 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
Alternatives:
California Penal Code 933(c) 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." Responses are prescribed per Penal Code 933.05.
Fiscal Considerations:
There are no additional fiscal impacts on the response or implementation of the recommendations.
JAS LL
City Manager
Attachment A: Grand Jury Report Dated November 19, 2021 Attachment B: Draft response letter to the Grand Jury
2 DocuSign Envelope ID: EA6E37A2-4088-4220-9988-F31083297C72
COUNTY COURTHOUSE
1100 ANACAPA STREET e
SANTA BARBARA, CA 93101
November 30, 2021
Mr. Jason Stilwell
Santa Maria City Manager
110 East Cook Street
Santa Maria, CA 93454
Dear Mr. Stilwell,
GRAND JURY
SANTA BARBARA COUNTY
(805) 568-2291
SBCC,Jra`SBCOURTS.ORG
HTTP://WWW.SBCGJ.ORG
On behalf of the 2021Santa Barbara County Grand Jury, I am attaching a copy of our report for your review and response.
PENSIONS IN SANTA BARBARA
COUNTY REQUIRE VIGILANCE
The Grand Jury, County Counsel and the Presiding Judge have approved this report. California Penal Code §933.05 requires the following:
• You are receiving this report two working days prior to its release to the public; you shall not disclose this report prior to its public release.
• You must respond to each Finding and Recommendation in this report as indicated. • You must submit your original response to the Presiding Judge. • If you are an elected county officer or agency head, the response time is no later than 60 days from the date of receipt of the report.
If you are the goveming body of a public agency subject to the reviewing authority of the Grand Jury, the response time is no later than 90 days of receipt of the report.
If your response to a Recommendation is, "Requires Further Analysis," you must provide an analysis completion schedule which shall not exceed six months from the report publication date.
Your response will be posted on the Grand Jury website: www.sbcgiesbcgi.orq . Please forward a copy of Your response to: Presiding Judge Gustavo Lavayen
312 East Cook Street
Santa Maria, California 93454
Please also forward a copy of your response to the Santa Barbara County Grand Jury at:
shcgi(g shcourts.nrn
Respectfully yours,
_ant& Cap -
Pamela Olsen
Foreperson
2021 Santa Barbara County Grand Jury
CDocuslgned by:
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DocuSign Envelope ID: EA6E37A2-4088-4220-9988-F31083297C72
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 "Pensions 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 revenues or a period of low returns on pension assets held by the Califomia 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 expenditures 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 risks 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 30, 2020. These obligations are the calculated net present value of payments due over an extended period of years and like 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 Califomia Public Employee Retirement 2021 Santa Barbara County Grand Jury
DocuSign Envelope ID: EA6E37A2-4066-0220-9988-F31083297C72 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.' The County and its cities must compete for qualified employees. To attract an appropriate workforce, the County and its cities cannot always pay 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 history, 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 CaIPER$ 2 The eight cities of Santa Barbara County are members of CaIPERS. In addition to the eight cities, close to 2,900 California public employers participate in Ca!PERS.3 As of June 30, 2020, CaIPERS managed $392.5 billion in assets,4 making it the largest public pension fund in the nation.; 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 funds Accrued Liability is net present value of the total dollars needed as of the valuation date to fund all benefits eamed in the past.
In addition to using investment returns, Ca1PERS uses contributions from employers and members to fund payments of member benefits. Per CaIPERS, 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 CaIPERS 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.
Salary.com https://www.salarv.com/research/cost-of-living/ca (last reviewed September 21, 2021) 2 https://www.calpers.ca.eov/page/about/organization/calpers-story (last reviewed September 21, 2021) https://wwwcalpers.ca.gov/docs/forms-publications/facts-about.pdf(last reviewed September 21, 2021) " https://www.calpers.ca.gov/docs/forms-publications/ facts- investm ent-pension-fund ng.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- tri gger-d i scount-rate-red ucti o n
2021 Santa Barbara County Grand Jury 2
DocuSign Envelope ID: EA6E37A2-40BB-4220-9988-F31083297C72 1 CaIPERS had net investment retums of 8.5 percent for the ten-year period ending June 30, 2020.
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 Rate of 7.75 percent. Using too high a Discount Rate can understate the amount currently due for future payments. This can occur if the actual retum 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 Califomia 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 benefit, 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 CaIPERS 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 retum 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.
As of June 30, 2020, SBCERS managed nearly $3.2 billion in assets. This amount 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 sets 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, the 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 https://www.sbcers.ore/about-us/
8 https://www.sbcers.org/wp-content/uploads/2020-Annual-Report-Web-Version.pdf 2021 Santa Barbara County Grand Jury 3
DocuSign Envelope ID: EA6E37A2-40BB4220-9988-F31083297C72 now sits at 7 percent.9 Like plans within the CaIPERS pension fund, the SBCERS pension fund is subject to PEPRA.
Unfunded pension liabilities, as calculated by CaIPERS 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 liability 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 CaIPERS 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 CaIPERS 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 CaIPERS 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 sufficient 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 Trusts - 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 pension 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 POBs 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 investments. 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 costs. 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.ore/wp-content/uploads/Preliminary-Investment-Return-6-30-2021.pdf 2021 Santa Barbara County Grand Jury 4
DocuSign Envelope ID: EA6E37A2-40884220-9988-F31083297C72 J
METHODOLOGY
To carry out its analysis, the Jury:
• Reviewed the 2019 and 2020 CaIPERS valuation reports for the 32 plans'° within the eight cities, plus related data in the public domain and as provided by the cities' plan administrators' 1; • Reviewed 2020 SBCERS Annual Reports and data provided by SBCERSi°; • Reviewed "The California State 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 CaIPERS, 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 Unfunded Accrued Liability in the 32 pension plans of the cities within the county are in Classic plans. Even though PEPRA plans began 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 12 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 Revenues, they also represent higher percentages of those amounts and suggest higher risk. 1° 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
2021 Santa Barbara County Grand Jury 5
DocuSign Envelope ID: EA6E37A2-40BB-4220-9988-F31083297C72 Table 113
Public Pension Status, Santa Barbara County and 8 Cities, 2020 2093
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
5305.15
80.7%
$ 1,105,343
133%
3.34%
Guadalupe
7,783
$ 16,925,088
$ 4,224,747
$542.82
75.0%
$ 627,352
231%
1038%
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
68.596
$ 20,753,973
40.1%
23.46%
Solvang
5,839
5 19,743,790
$ 5,201,465
5890.81
73.76 $ 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%
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 their 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 CaIPERS, 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-AVR-Revised 20210224s.pdf. 2021 Santa Barbara County Grand Jury 6
DocuSign Envelope ID: EA6E37A2-4066-4220-9988-F31083297C72 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 Pension 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 be used to offset pension costs 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, but 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 within a couple of years at the most. The Jury learned that in Guadalupe there has been significant new housing 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 cities 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 la
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.
2021 Santa Barbara County Grand Jury 7
DocuSign Envelope ID: EA6E37A2-4088-4220-9988-F31083297C72 Finding lc
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 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 la,2
Recommendation 1, 2
2021 Santa Barbara County Grand Jury 8
DocuSign Envelope ID: EA6E37A2-4088-4220-9988-F31083297C72 J
City of Buellton — 90 Days
Findings la, lc,2
Recommendation 1,2
City of Carpinteria — 90 Days
Findings 1 a, I c, 2
Recommendation 1, 2
City of Goleta — 90 Days
Findings 1 a, I c, 2
Recommendation 1, 2
City of Guadalupe — 90 Days
Findings la, l c, 2
Recommendation 1, 2
City of Lompoc — 90 Days
Findings l b, 1 c, 2
Recommendation 1, 2
City of Santa Barbara — 90 Days
Findings 1 b, I c, 2
Recommendation 1, 2
City of Santa Maria — 90 Days
Findings 1 b, lc, 2
Recommendation 1, 2
City of Solvang — 90 Days
Findings la, lc,2
Recommendation 1, 2
2021 Santa Barbara County Grand Jury 9
DocuSign Envelope ID: EA6E37A2-40BB4220-9988-F31083297C72
APPENDIX A
GLOSSARY
Accrued Liability (also called Actuarial Accrued Liability 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 CaIPERS 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 Assumption The actuarial assumption that was called "investment retum" in earlier CalPERS reports or "actuarial interest rate" in section 20014 of the California Public 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 January 1, 2013, and who was not a member of another public retirement system prior to that date, and who is not subject 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 Factor. The percentage of pay to which employee members are entitled for each year of service.
Complementary Risk Analysis. Additional risk analysis beyond what is presented in the CaIPERS 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. 2021 Santa Barbara County Grand Jury 10
DocuSign Envelope ID: EA6E37A2-4088-4220-9988-F31083297C72 Pension system. In this report, a pension system is a set of pension plans under one management; for example, the pension system of the City of Goleta consists of the Miscellaneous Plan of the City of Goleta and the PEPRA Miscellaneous Plan of the City of Goleta. 2021 Santa Barbara County Grand Jury 11
DocuSign Envelope ID: EA6E37A2-40BB4220-9988-F31083297C72
APPENDIX B
2017
City/Plan
Normal Accrued Liability
Unfunded Actuarial Liability
% Funded
(Discount Rate - 7%)
Buellton
Misc
510,117,235
52,647,138
73.8%
PepMisc.
501,527
31,819
93.7%
510,618,762
$2,678,957
74.8%
Carpinteria
MISC.
521,023,417
$5,766,390
72.6%
Safety
9,410,150
3,620,593
61.5%
PepMisc
478,411
45,406
90.5%
530,911,978
$9,432,389
69.5%
Goleta
MISC.
519,992,856
54,063,881
79.796
PepMisc.
1,992,546
177,314
91.1%
521,985,402
$4,241,195
80.7%
Guadalupe
Misc.
58,870,433
52,377,584
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
882%
516,925,088
54,224,747
75.096
Lompoc
MISC. _
5214,274,197
565,964,956
69.2%
Safety
102,425,444
36,482,292
64.4%
PepSafety/Pol
1,200,382
134,523
88.896
PepSafety/Fire
1,560,305
163,511
89.596
Police Tier 2
1,625,259
132,930
91.8%
FireTier 2
864,235
96,583
88.8%
5321,949,822
5102,974,795
68.096
Santa Barbara
Misc.
5664,902,988
5198,210,264__
70.296
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%
51,180,029,261
5386,111,684
67.3%
Santa Maria
Misc.
5271,492,921
589,892,591
66.9%
Safety Police
148,339,270
47,427,464
68.0%
Safety Fire
75,810,291
21,628,065
71.596
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%
5507,742,152
5160,165,144
68.5%
Solvang
Misc.
518,646,595
55,082,035
72.796
Safety
611,526
85,659
86.0%
PepMisc.
485,669
33,771
93.0%
519,743,790
$5,201,465
73.796
County of Santa Barbara
County of Santa Barbara
54,297,727,000
$1,103,795,000 74.3%
2021 Santa Barbara County Grand Jury 12
Santa Maria
bad
All -America City
VIII'
CITY OF SANTA MARIA
OFFICE OF THE MAYOR
AND CITY COUNCIL
110 EAST COOK STREET, ROOM 1 • SANTA MARIA, CA 93454-5190 • 805-925-0951 • FAX 805-349-0657 • www.cityofsantamaria.org January 18, 2022
Santa Barbara County Grand Jury
Presiding Judge Gustavo Lavayen
312 East Cook Street
Santa Maria, CA 93454
Honorable Judge Gustavo Lavayen,
The 2021 Santa Barbara County Grand Jury recently released its report entitled Pensions in Santa Barbara County Require Vigilance. The report includes four findings (including sub -findings) and two recommendations. The Grand Jury has requested the Santa Maria City Council respond to Findings 1 b, 1 c, 2, and Recommendations 1 and 2 within 90 days of the report issuance.
RESPONSE TO THE GRAND JURY
Finding 1 b: The cities of Lompoc, Santa Barbara, and Santa Maria are at higher potential pension plan solvency risk.
City Response to Finding 1 b: Disagree partially with an explanation The City acknowledges the City's normal accrued liability and unfunded accrued liability (UAL) are higher compared to many other cities in Santa Barbara County. Further, pension costs are a significant portion of the City's annual operating budget and higher costs do make it more challenging to maintain services. The City has taken many steps, starting as far back as 2011, to address rising pension costs and increase revenues to maintain essential services. The City has and will continue to make all legally required payments to CaIPERS and has budgeted for these expenditures accordingly.
Although the City's UAL per capita is higher than most smaller communities in Santa Barbara County, it is much lower than the $3,599.67 amount shown in Table 1 of the report. The correct UAL per capita amount is $1,493.20 (UAL $160,165,144 divided by 107,263 population = $1,492.20). In addition, the percent of the City's pension obligations that are funded are in line with most other cities in Santa Barbara County and many other cities throughout California.
1 The City recognizes contributions toward pension costs are about 23 percent of original estimated revenues for 2021-22 (from the 2020-22 Budget). However, this analytical measurement ignores that not all pension costs are (nor can they be) funded by General Fund revenues. For instance, employees in the Utilities Department are funded by Water Resources and Solid Waste funds — both of which are Enterprise Funds that by law cannot be commingled with the General Fund.
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 deliver expected services to residents.
City Response to Finding 1c: Agree
The City agrees that a reduction in the discount rate will have a negative impact by increasing the amount of future payments. Fortunately, the impacts from lowering the discount rate to 6.8 percent will be offset by CaIPERS 2020-21 investment return of 21.3 percent. CaIPERS amortizes investment gains (and losses) over 30 years, making it unclear if it will fully offset the impacts from lowering the discount rate. In addition, many other factors, including salary changes and increases, actuarial assumptions, and future investment returns will surely impact the annual payments the City is required to make.
As mentioned above, the City has taken many steps to reduce pension costs and enhance revenues to maintain services provided to the public. Most recently, the City conducted a city-wide comprehensive user fee study and the City Council approved fees be moderately raised with a goal of reaching full cost recovery within five years (by 2026).
Additionally, and more significantly, in November 2018, City voters approved (with 74.18 percent majority) Measure U, a one -cent local transaction and use tax to maintain essential services and, when possible, enhance services. Although neither of these revenue enhancements is specifically to pay pension costs, any additional General Fund revenues improve the City's ability to deliver 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.
City Response to Recommendation 1: Will be implemented, with an implementation schedule
On May 19, 2020, the City Council received a presentation and detailed CaIPERS Actuarial Issues Report prepared by Bartel Associates, LLC, a leading actuarial firm. The report included a historical review and discussion of the CalPERS benefits and obligations, a projection of the City's future contribution rates, and funding strategies — the same strategies identified in the Grand Jury report. City staff is using information from the Bartel report to develop a formal Pension Liability Funding Policy that will be presented to the City Council for their consideration before June 30, 2022. . . 2 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.
City Response to Finding 2: Agree
The City agrees that Section 115, Pension Obligation Bonds, and Pension Reserve Funds are viable options for planning for future economic downturns. City staff has researched each of these options and has already implemented one (see City Response to Recommendation 2).
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 Trusts, Pension Obligation Bonds, and Pension Reserve Funds would be an effective hedge against risks to their pension plans for their city.
City Response to Recommendation 2: Has been implemented, with brief summary of implementation actions taken
This recommendation has been implemented. As part of the 2018-20 Budget, the City Council authorized and directed staff to establish an "Assigned Fund Balance for Unfunded Pension Benefits" (pension reserve) account in the General Fund. Further, the City Council authorized that one-third of all General Fund revenues in excess of expenditures as of June 30th of each year be transferred to the pension reserve account.
The City Council provided this same direction in the 2020-22 Budget. The balance in the pension reserve account as of June 30, 2020, is $2.8 million and staff estimates an additional $1.8 million will be transferred for the fiscal year ending June 30, 2021.
Although the account is within the General Fund, it serves the same purpose as setting up a separate Pension Reserve Fund. In addition, as noted above, all three of these strategies were included in the comprehensive pension liability analysis report prepared by Bartel Associates, LLC and will be considered as part of the development of the City's Pension Liability Funding Policy.
The above concludes the City's response to the Grand Jury's Pensions in Santa Barbara County Require Vigilance report. The City of Santa Maria respectfully submits this response to the Grand Jury and thank you again for all your efforts associated with this 2021 Grand Jury Report.
ALICE M. PATINO
Mayor
cc: Santa Barbara County Grand Jury
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