HomeMy WebLinkAboutItem 4.10 - Proposed Response to Santa Clara County Civil Grand Jury Report An Analysis of Pension and Other Post Employment Benefits DATE: September 11, 2012 4.10
CATEGORY: Consent
COUNCIL
REPORT DEFT.: City Manager's Office
TITLE: Proposed Response to Santa Clara
County Civil Grand Jury Report,An
—:: Analysis of Pension and Other Post
On of MOUNTAIN VOW Employment Benefits
RECOMMENDATION
Approve the proposed response to the Santa Clara County Civil Grand Jury Report, An
Analysis of Pension and Other Post Employment Benefits.
BACKGROUND
The Fiscal Year 2011-12 Santa Clara County Civil Grand Jury issued a report entitled An
Analysis of Pension and Other Post Employment Benefits on June 13, 2012. The report
broadly addressed local government funding of pension and other postemployment
benefits such as retiree health-care costs. The report is provided as Attachment 1. The
City of Mountain View is required by State law to respond to the findings and
recommendations in this report by September 14, 2012. A proposed response is
included as Attachment 2.
Some of the topics addressed in the Grand Jury report have since been addressed in
pension reform legislation approved by the State Legislature on August 31. Staff is
assessing the impacts of the new legislation on Mountain View and will provide an
update to the Council in the near future.
ANALYSIS
The Fiscal Year 2011-12 Santa Clara County Civil Grand Jury examined the funding
status of pension and other postemployment benefits for all cities, towns, and the
County of Santa Clara in an effort to address the question: "Is the cost of providing
pension and other postemployment benefits interfering with the delivery of essential
City services and is the ultimate cost to the taxpayers a bearable burden?" The Grand
Jury concluded that:
Proposed Response to Santa Clara County Civil Grand Jury Report,
An Analysis of Pension and Other Post Employment Benefits
September 11,2012
Page 2 of 3
"until significant modifications are enacted, there is no doubt that the
escalating cost of providing Benefits at the current level is interfering with the
delivery of essential City services and the ultimate cost to the taxpayers is an
unbearable burden. These costs are already impacting delivery of essential
services as demonstrated by San Jose reducing police and fire department
staffing levels, closing libraries or not opening those newly built, curtailing
hours of community centers, and not repairing pot-holed city streets. Other
cities in the County are likely to face similar challenges as long as high cost
benefit plans face an underfunding liability. Understanding how Cities
created this problem through unfunded retroactive benefit enhancements,
compounded by poor return on investment, helps taxpayers understand that
the problem will not go away on its own."
It is true that retirement-related benefits costs have grown for the City of Mountain
View as well as for other communities in the County over the last decade. However, as
the report notes, to a greater extent than other agencies in the County, the City of
Mountain View has taken steps to address the fiscal impact associated with pension and
other postemployment benefits. These steps include:
1. Negotiating with employee organizations to ensure that employees pay both the
"normal" employee pension contribution as well as a portion of the employer
pension contribution, with employees now paying between 9.5 percent and 15.4
percent of their salary toward pension benefits, and employees agreeing to
increased contributions over the next two years.
2. Significant City prefunding of anticipated retiree health costs.
3. Negotiation of modifications to the City's retirees' health program to include a
defined contribution option for nonsafety employees in order to manage future
costs.
4. Negotiation of a short-term, and potentially ongoing, public safety employee
contribution toward retirees' health costs.
5. Working with employee groups to reduce liabilities associated with accrued leave
benefits.
While the issues raised by the Grand Jury are valid, by continuing to adhere to
conservative financial management policies and by working in partnership with our
bargaining groups, Mountain View has been successful in in addressing the short- and
Proposed Response to Santa Clara County Civil Grand Jury Report,
An Analysis of Pension and Other Post Employment Benefits
September 11,2012
Page 3 of 3
long-term costs associated with these benefits. As a result, Mountain View has not
experienced the same impact to public services as has occurred in some communities.
City staff will continue to assess costs associated with pension and other
postemployment benefits in order to ensure that City service levels can be maintained
in the future.
FISCAL IMPACT
There is no fiscal impact associated with preparing the response to the Grand Jury
report.
ALTERNATIVES
Modify the proposed response to the Santa Clara County Civil Grand Jury Report, An
Analysis of Pension and Other Post Employment Benefits, and approve the modified
response.
PUBLIC NOTICING—Agenda posting.
Prepared by: Approved by:
Melissa Stevenson Dile Daniel H. Rich
Assistant City Manager City Manager
MSD/7/CAM
602-09-11-12M-E
Attachments: 1. Santa Clara County Civil Grand Jury Report,An Analysis of Pension
and Other Post Employment Benefits
2. Proposed Response to Santa Clara County Civil Grand Jury Report,
An Analysis of Pension and Other Post Employment Benefits
Attachment 1
h 2011-2012 SANTA CLAR REPORT
AN ANALYSIS OF PENSION AND OTHER POST
EMPLOYMENT BENEFITS
Issue
After reviewing the Comprehensive Annual Financial Reports (CAFRs) of all cities,
towns and the County of Santa Clara (hereafter referred to as City or Citiest), the Grand
Jury was struck by the extent that the pensions and Other Post Employment Benefits
(OPEB) (collectively "Benefits") were underfunded. Subsequently, the Grand Jury
sought to answer the following question: "Is the cost of providing pension and other
post employment benefits interfering with the delivery of essential City services and is
the ultimate cost to the taxpayers a bearable burden?"
Introduction
The Grand Jury developed a survey to gather information from the Cities and the
County The Survey and responses are important to this report and the Grand Jury
encourages readers to read the Survey questionnaire provided in Appendix A before
continuing. Due to the technical complexity of this report, the Grand Jury has provided a
glossary of the terminology used throughout this report (Appendix B). Acronyms are
also included in the glossary.
CaIPERS2 requires Cities to contribute sufficient funds, held in trust, to pay for pension
benefits as they are earned. This helps to ensure sufficient funding is in place to
provide the promised pension benefits. This trust money is invested and expected to
return a long-range investment return as high as 7.50% (after expenses). It is these
investment earnings that are expected to pay for as much as 70%4 of the cost of
pension benefits.
1 Cities as defined in this report include: Santa Clara County; the cities of Campbell, Cupertino, Gilroy,
Los Altos, Milpitas, Monte Sereno, Morgan Hill, Mountain View, Palo Alto, San Jose, Santa Clara,
Saratoga, Sunnyvale; and the towns of Los Altos Hills and Los Gatos,
2 The California Public Employees'Retirement System (CaLPERS) is an agency in the California
executive branch that manages pension and health benefits for California public employees, retirees, and
their families!
CaIPERS recently reduced this rate from 7.75%.
° Expected to decline as investment yield declines.
1
According to interviews, historically high investment earnings in the early 1990s
spawned the belief that expensive pension enhancements could be granted and paid for
by the excess investment earnings without compromising the Cities' ability to afford
other services. Once these pension enhancements are granted to an employee, they
generally cannot be retracted unless a substantially comparable replacement is offered,
a concept referred to as vested rights. Cities reported that they felt compelled to
enhance benefits to attract and retain the best work force possible.
In addition to pensions, employers provide OPEB consisting primarily of health care
benefits. Unlike pension funding requirements, there is no requirement for Cities to pre-
fund the cost of OPEB benefits. As a result, most Cities have not funded OPEB
benefits and have accrued large OPEB debts. Escalating health care costs, the largest
component of OPEB, compound this debt problem.
As a result of an economic downturn, the average investment rate of return (investment
earnings) for the last ten years is considerably below what experts and Cities agree is
the still optimistic assumed rate of 7.5%. This return on investment (ROI) leads to an
increase in the Cities' annual payment into the pension fund to make up the difference.
The rising costs of pension and OPEB (collectively hereinafter referred to as Benefits),
combined with the downturn of the economy have resulted in very large budget
shortfalls. These must be paid by current and future tax revenue, which is limited.
Thus, according to interviews, paying for these rising costs will come at the expense of
other City services.
With this in mind, the Grand Jury assessed the viability and sustainability of Cities'
public employee Benefits. This assessment sought to answer the following questions:
• What are the costs of public employee Benefits and who pays for them?
• Will Cities' projected revenues keep up with projected expense of Benefits?
• What is being done and what can be done to control Benefit costs?
• Why are public employee Benefits different from those in the private sector?
Background
Several cities have declared bankruptcy. While the reasons for bankruptcy vary from
one municipality to another, and include lower tax revenues and decreased home
values, one common reason cited is large unfunded liability associated with providing
pension and healthcare benefits to its public employees. Locally, the City of Vallejo
declared bankruptcy in 2009 after failing to negotiate pay cuts in the face of $195 million
in unfunded pension obligations. Stockton is falling into bankruptcy with less than 70
2
cents set aside for every dollar of pension benefits its workers are owed. A recent
Stanford University study regarding public pension funds statewide emphasizes this
predicament: "public pension shortfalls of $379 billion or $30,500 per household" exist
statewide6 contributing to the downgrading of California's bond rating. San Jose is
proposing pension reform and considering higher taxes resulting from ten consecutive
years of budget shortfalls. The full effect of these unsustainable costs is yet to come.
Methodology
The scope of the Grand Jury's investigation was limited to the Cities. Special districts
and other agencies were excluded from this investigation. The following resources were
used to gather and evaluate the data contained in this report:
• City CAFRs; particularly notes to financial statements concerning Benefits (see
Appendix A)
• Results obtained from a survey created by the Grand Jury and distributed to the
Cities (see Appendix B for the complete survey)
• Interviews conducted with one or more of the following persons from the Cities:
Financial Manager, Chief Finance Officer, City Manager, Retirements Service
Director, and Human Resource Manager. All interviews were conducted
following receipt and evaluation of a survey, affording the opportunity to seek
clarification and elaboration on survey responses as necessary.
• Interviews with CaIPERS actuaries and CaIPERS consultants
• Other documents listed in Appendix A.
Report Conventions
The Grand Jury did not extrapolate, derivate or convert the data provided by the Cities
in response to the survey. When the Grand Jury had questions, or found
inconsistencies in the data provided, every effort was made to resolve the issues
through interviews, email and phone conversations.
All dollar figures are expressed in actuarial valuation units,' not market value, unless
otherwise stated. The glossary in Appendix C provides definitions of the terminology
used throughout this report. Acronyms are also included in the glossary.
"Untouchable pensions may be tested in California,' Mary Williams Walsh, New York Times, March 16,
2012.
6 http://siepr.stanford.edu/system/files/shared/Nation%20Statewide%20Report%20v081.pdf
7 See Appendix C Glossary for definition.
3
Discussion
This discussion consists of three primary sections:
• Understanding CaIPERS presents and discusses the basic concepts of
CaIPERS public pension benefits to lay a foundation for a more detailed look at
City-provided Benefits.
• Key Survey Results discusses those survey results found to be most relevant to
answering the Grand Jury questions.
• San Jose's Plan is discussed separately because San Jose is the only city to
not use CaIPERS.
Understanding CaIPERS
Because all Cities except San Josee participate in CaIPERS for pension and many use
CaIPERS for OPEB as well, it is vital to understand the following key concepts:
• Basic Pension Plan Formulas
• Annual Required Contribution (ARC)
• CaIPERS Menu Options
• Assumed or expected Return on Investment (ROI)
• Unfunded Liability.
Basic Pension Plan Formulas
Employees belong to one of two different groups: Miscellaneous (MISC) or Public
Safety,9 each having defined plans. Table 1 lists all first tier'0 CaIPERS plans utilized
by Cities. Note that the plan names include the pension earned per year and the
retirement age at which full benefits are received.
9 Excluding the San Jose Mayor and Council Member plan.
°Police and Fire personnel.
10 See Appendix C Glossary for definition.
4
Tablet: First Tier CaIPERS Plans Used by the Cities
s Plans Public Safety Plans
Plan Name Number of Cities Plan Name Number doff Cities
Participating Participating.::
2.0%@55 4 3.0%@50 1111
2.5%@55 5 3.0%@55 1
2.7%@55 7
For all plans the pension benefit formula contains the same three primary components
multiplied together as shown here:
Pension = Earned Benefit Rate x Years of Service x Salary
Earned Benefit Rate: This is the percent of salary earned per year of service as
indicated by the plan name. Retirement before age 55 for MISC employees and before
age 50 for most Public Safety employees results in the Earned Benefit Rate being
reduced (per CaIPERS' table). For example, a MISC employee in the 2.0%@55 plan
who retires at age 50 gets an earned benefit rate of 1.42612 per year of service rather
than 2.0. Similarly, participants of the 2.5%@55 plan as well as the 2.7%@55 plan
receive an earned benefit rate of 2.0 at age 50. Interestingly, the earned benefit rate for
members of the 2.0%@55 plan continue to rise until the age 63 where it plateaus at
2.41813 percent per year of service. This contrasts with the other two MISC plans that
plateau at age 55 at 2.5% and 2.7% respectively. (For a more detailed delineation of
earned benefit rates, see www.calpers.ca.00v).
Years of Service: This is self explanatory except to point out CaIPERS supports
reciprocity, which means that employees can transfer from one CaIPERS-covered
agency (City) or any other public agency that has established reciprocity with CaIPERS,
to another such agency without forfeiture of earned pension (as is usually the case in
the private sector).14 Thus, an employee may work 10 years each for three different
cities and earn the same pension benefits as otherwise would have been earned if they
had worked for 30 years at a single city. But because each of the three cities pays only
its one-third share of the earned pension, statistically, this employee appears as three
employees earning a more modest pension from each city.
" Some Cities contract for police and fire. Gilroy police and fire belong to separate Public Safety plans.
12 From CaIPERS Benefit FactorsTable, page 22, Local Miscellaneous Benefits
13 From CaIPERS Benefit FactorsTable, page 22, Local Miscellaneous Benefits
14 Reciprocity agreements may also exist between other pension plan providers.
5
Salary: CaIPERS has guidelines defining what wages and reimbursements qualify for
the purposes of determining pension. For a detailed discussion, go to
www.calpers.ca.gov. Generally, salary can either be the average highest salary over a
three-year period, or a highest single 12-month salary can be used, depending on the
plan adopted by the City. Using the highest 12-month salary (rather than highest 36-
month average salary in the pension formula shown above) is an example of what is
known as a "Class 1" benefit enhancement that is more expensive to provide.
It is noted here that Public Safety plan participants have a 90% maximum salary cap
that can be earned at onset of retirement. There is no corresponding limit placed on
plan participants. In both cases however, the Grand Jury learned that large pensions
(expressed as a percent of salary) serve as a deterrent to prolonging employment
because one can retire at close to full pay. Subsequent discussions on Employer Paid
Member Contribution (EPMC) and Cost-of-Living Allowances (COLA) will show how
pensions can actually exceed salary, leading to the paradox of employees losing
income if they continue to work as a public employee rather than retire.
ARC: What is it and How is it Determined?
The ARC is the annual actuarially determined amount that must be paid to ensure there
will be enough money to pay for all promised Benefits. As shown below, the pension
ARC consists of three principle components added together:
ARC = Employee Contribution + Normal Cost+ Past Service Cost
It should be noted that generally the Normal Cost and Past Service Cost, in accordance
with labor contracts, are paid for by the Cities—through tax revenue—and sometimes
are supplemented by an employee contribution.
Employee Contribution: From the perspective of CaIPERS, this is a fixed percent
and, as the name would suggest, was intended to be paid by the employees in much
the same way as most private workers pay a portion of their own Social Security
benefits. For all City employees, the Employee Contribution is either 7%, 8% or 9% of
an employee's salary, depending in which plan the employee participates. It is
important to note, however, that in practice, most Cities pay some portion of this cost on
behalf of the employees.
Normal Cost: Less the employee contribution, if made, this is the amount required to
pay for the benefits that were earned in the prior year for the (expected) life of the
employee in retirement. This is determined through rigorous actuarial valuations taking
many variables into account, including retirement age, life expectancy, and probability of
disability. Normal Cost tracks very closely with the degree of Benefits being offered.
That is to say, discrete cost increases occur to this component of the ARC with each
benefit enhancement proportional to the cost of the benefit. Without benefit
enhancements, Normal Cost remains relatively flat over time.
6
Past Service Cost: Whenever the plan assets (all previously paid ARCs), including
ROI, become insufficient to pay the actuarial accrued cost of benefits, an unfunded
liability1s exists. This deficit must be made up in the form of Past Service Cost. This
component of the ARC is largely proportional to unfunded liability, increasing as the
unfunded liability goes up to begin paying down the debt. For many Cities surveyed,
Past Service Cost is approaching and in some cases already exceeds Normal Cost.
Later, this report will discuss the three most often cited reasons for unfunded liability:
market losses (ROI lower than the assumed rate), retroactive benefit enhancements,
and other accumulated actuarial assumption changes (e.g., longer life expectancy,
demographic changes).
CaIPERS Menu Options
Each CaPPERS plan has numerous benefits that are inherent to the plan itself.16 In
addition to these benefits, CaIPERS offers a wide range of menu options that can be
thought of as upgrades or enhancements to the base plan. They are too numerous to
list but include the following:
• Annual cost-of-living allowance (COLA) increase
• Employer-paid member contribution (EMPC)
• Credit for unused sick leave
• Improved industrial and non-industrial disability
• Special death benefits
• Survivor benefits
• Various military and public service credits.
Each enhancement selected results in quantifiably larger ARC payments. One cannot
conclude from the plan name that it is necessarily more or less generous than another
plan of a different name. For this reason, the Grand Jury's investigation concerned
itself not with the issue of what specific Benefits were being provided but rather what
was the total cost of providing the Benefits expressed as a percent of payroll. Cities and
CaIPERS experts agreed this is a sound methodology for comparing cities of different
sizes.
i5 See Appendix C Glossary for definition.
16 For a more detailed discussion of menu options, go to www.calpers.ca.gov.
7
Sensitivity to Expected ROI
All Cities and all CaIPERS representatives interviewed consistently told us that
somewhere between 65% and 70% of the money to pay for Benefits comes from the
ROI of previously accumulated ARC payments. This cannot be emphasized enough.
The Cities spoke to their burden in struggling to meet ARC obligations in light of budget
constraints, but these ARC payments cover only about 30% of the amount necessary to
cover the cost of providing these Benefits. A critical actuarial assumption is the
expected ROI, which is currently assumed to be 7450% after expenses for pension. The
actual average ROI over the last ten years has been 6.1% as depicted in Figure 1. The
result of this underperformance is higher unfunded liabilities, lower funded ratios, and
larger ARC payments (in particular, the Past Service Cost component of the ARC as
discussed above). Discussion of San Jose's ROI included in this figure is deferred until
later.
I,. 120
100 _....
80 — -- — —Actuarial Assumption
Cumulative
60 _..... -..
SonloseSatety Cumulative
Percent 40 _.. •�f
----SaNOSeFedcrated Cumulative
20 41.1 , 1 , — —CaIPERS Cumulative
•.,,,•• I
- -DIIA Cumulative
20
-40
M1eO,t0 o''ti 0.5 0'1 h o`o`° \
17 '0 ,0 10 ,10 10 10 1
,10 ,10
Figure 1: Actual Return on Investment Compared to Assumed and Dow Jones"
CaIPERS lowered the assumed ROI from 7.75% to 7.5% at a March 14, 2012 meeting.
Last year this same recommendation was rejected. This year, a 0.5% change was
recommended and only a 0.25% change was approved. Table 2 below is excerpted
from "Pension Math: How California's Retirement Spending is Squeezing the State
Budget" written by Joe Nation from Stanford Institute for Economic Policy Research.
i7 DJIA is calendar year and other data are fiscal year
8
Table 2: CaIPERS Return on Investment Analysis
Investment rate
probability of meeting CalPERtJupded
o{7e3tt�Uti :rate ratio
9.5% 21.7% 95.1%
7.75% 42.1% 73.5
7.1% 50.7% 66.7%
6.2% 62.6% 58.3%
4.5% 80.9% 45.1%
Two key points in Table 2 are:
• According to this analysis, there is only a 42.1% chance of meeting or exceeding
an assumed investment rate of 7.75% as highlighted in the table. It should be
noted that the ROI assumption was recently reduced to 7.5%.
• Dropping down to a more conservative 6.2% investment rate (still higher than the
6.1% average for the last ten years) is recommended by many leading
economists and recognized financial experts. The corresponding funded ratio
reduction would result in increases to unfunded liabilities and significantly higher
ARC costs.
Sunnyvale projects this modest CaIPERS-approved reduction of 0.25% in assumed ROI
will increase its ARC by 2.3% of payroll for MISC employees and 3.8% of payroll for
Public Safety employees, totaling nearly a $3M increase per year in ARC payments. As
shown in Table 3, Sunnyvale's pension cost was just over $25M. So, a $3M increase
represents a 12% increase. CaIPERS and pension experts we spoke with asserted that
the cost of each additional 0.25% reduction in assumed ROI is not linear and warned
extrapolating this cost increase would result in underestimating the total cost impact.
Unfunded Liability & Funded Ratio
Unfunded Liability is the unfunded obligation for prior benefits, measured as the
difference between the accrued liability and plan assets. When using the actuarial value
of plan assets, it is also referred to as the Unfunded Actuarial Accrued Liability (UAAL).
In everyday language, it is the difference between the cost of the benefits already
earned and the amount currently paid; it is the amount due.
la As of June 30, 2011
9
Table 3: Unfunded liability for pension and OPEB for all large cities
shows the total for these nine cities is nearly $7B
Debt per
:6Y 2010 Unfunded Liabilities(Not in Risk Pool)" Resident
City Pension OPEB Total
Santa Clara County $1,455,835,322 $1,300,000,000 $2,755,835,322 $1,547
Cupertino $18,581,728 $18,069,366 $36,651,094 $629
Gilroy $35,100,000 $4,900,000 $40,000,000 $819
Milpitas $70,166,975 $31,230,798 $101,397773 $1,518
Mountain View $104,121,296 $29,396,467 $133,517,763 $1,803
Palo Alto $153,941,000 $105,045,000 $258,986,000 $4,021
San Jose20 $1,434,696,471 $1,706,081,881 $3,140,778,352 $3,320
Santa Clara $223,667,947 $23,855,000 $247,522,947 $2,125
Sunnyvale $149,300,000 $92,800,000 $242,100,000 $1,728
Total $3,645,410,739 $3,311,378,512 $6,956,789,251
The Funded ratio is the market value of assets at a specified date, over the accrued
actuarial liability as of the same date. While technically accurate, these definitions
provide no insight into the causes of what have become large unfunded liabilities and
correspondingly low-funded ratios. The Grand Jury learned from CaIPERS that the
three primary reasons for unfunded liabilities are the following:
• 70% of the unfunded liabilities is attributable to market performance
• 15% of the unfunded liabilities is attributable to retroactive benefit enhancements
• 15% of the unfunded liabilities is attributable to other actuarial assumption
changes.
The percentages shown above are "rule of thumb" values according to the CaIPERS
representatives; individual City percentages will vary.
Key Survey Results
With the basic concepts of public pension benefits understood, the Grand Jury prepared
a survey to gather information from the Cities. Survey responses and all supplemental
data provided by the Cities were analyzed to answer the following questions:
19 Numbers reflect data provided in survey responses.
20 Excluding Mayor and Council Member Plan.
10
• What is the total amount of unfunded liabilities?
• What is the total cost each year to provide Benefits and at what rate is the cost
going up per year?
• Why are OPEB funded ratios so low?
• When were Benefit enhancements enacted and how do they impact unfunded
liability?
• What progress is being made to control escalating costs?
• Why are public Benefits so different from private sector Benefits?
• Do vacation, holiday and sick leave policies in the public sector differ from those
that are commonly found in the private sector?
Unfunded Liability (Large Debts)
Table 3 tabulates the unfunded liability for both pension and OPEB for all large cities not
belonging to a risk pool and shows the total unfunded liability for these nine cities is
nearly $7B. Cities having fewer than 100 employees in a given pension plan (Campbell,
Los Altos, Los Altos Hills, Los Gatos, Monte Sereno, Morgan Hill, and Saratoga) are not
included because they belong either entirely or in part to a risk pool. CaIPERS currently
does not provide this information to the Cities in the risk pool. Los Gatos and Morgan
Hill, for instance, do not know their portion of a $3,515,314,403 unfunded liability
associated with the Public Safety risk pool to which they belong. While Monte Sereno
and Los Altos Hills did offer an approximation of their portion of the risk pool liability,
CaIPERS representatives recommended against using the estimation and as a result
are not included in Table 3. The Grand Jury has learned the Government Accounting
Standard Board (GASB) is considering a policy change to require the Cities in the risk
pool21 to report individual unfunded liability. Many Cities surveyed focused primarily on
minimizing the ARC payments, the short-term cost due, as opposed to addressing the
larger, endemic problem of its unfunded liability. This is problematic because minimizing
ARC payments today at the expense of addressing the growing unfunded liability
means shifting the costs to the future, hoping market improvements will solve the
problem. If the market does not improve, taxpayers may face increased taxes or
reduced services in the future.
Using 2010 census data obtained from http://www.sccgov.orq together with the data in
Table 3, it is possible to estimate the amount owed by each resident to pay down
current Benefit debts in the Cities. For example, each resident of San Jose owes
$3,320 to the city. As residents of the County, they also owe an additional $1,547 to the
21 See Appendix C Glossary for definition.
11
County 22 But while this would pay down the current debt and significantly reduce ARC
payments, it does not guarantee staying out of debt going forward.
High Cost of Benefits (ARC) . . . and Getting Higher
The accumulated City cost of providing annual Benefits in FY2010 was $667,215,205
as shown in Table 4. While it is useful to know the annual cost of providing Benefits it is
not possible to judge whether or not any City is paying a disproportionate cost due to
the size variance of the Cites (large Cities are expected to pay more because they have
more employees). For this reason, the Grand Jury chose to compare the Cities by
expressing the ARC as a percent of payroll. Cities and pension experts agreed the
Grand Jury's method of making this calculation was correct. That said, the same values
shown in Table 4 are also shown in Figure 2 expressed as percent of payroll separating
pension, OPEB and Social Security as applicable.
Table 4: Countywide total cost of providing annual Benefits in FY2010 is$667,215,205
Social Securityu c
C1ry r Pension Cost" a
OPEB cosy- Cost - °< Total
;.0
Santa Clara County $235,630,042 $90,000,000 $65,136,430 $390,766,472
Campbell $2,728,302 $206,220 $2,934,522
Cupertino $1,841,350 $7,616,760 $9,458,110
Gilroy $4,900,000 $186,334 $5,086,334
Los Altos $1,842,949 $19,505 $1,862,454
Los Altos Hills $190,021 $203,000 $393,021
Los Gatos $2,958,209 $949,845 $3,908,054
Milpitas $7,164,473 $3,356,836 $10,521,309
Monte Sereno $125,713 $0 $37,863 $163,576
Morgan Hill $2,763,818 $15,119 $2,778,937
Mountain View $8,929,685 $4,376,387 $13,306,072
Palo Alto $19,964,080 $9,019,000 $28,983,080
San Jose $106,881,000 $34,147,000 $141,028,000
Santa Clara $20,257,754 $2,115,643 $3,494,639 $25,868,036
Saratoga $917,228 NA $917,228
Sunnyvale $25,300,000 $3,940,000 $29,240,000
Total $442,394,624 $156,151,649 $68,668,932 $667,215,205
22 Note these figures are per resident, not per household, and exclude an additional state pension liability
all California residents bear,which is outside the scope of this report.
23 Many Cities, but not all, provided separable"sidefund'expenditures from ARC.
24 May include money spent over and above ARC payment.
25 Only MISC employees in Santa Clara County, Monte Sereno and Santa Clara participate in Social
Security.
12
As shown in Figure 2, the cities of Campbell, Los Altos, Monte Sereno, Morgan Hill and
Saratoga pay less than 20% of payroll towards Benefits while the remaining cities pay
more than 20%. Cupertino, Palo Alto and Sunnyvale pay in excess of 30% of payroll
towards Benefits. The survey results further indicated that Mountain View is noteworthy
because it offers similar plans as Cupertino, Palo Alto and Sunnyvale but at lower cost
to the city through cost sharing with employees who pay the entire employee
contribution (8% for MISC and 9% for Public Safety) plus some negotiated portion of
that city's cost in the range of 1.5% to 6.8% depending on job type. Cupertino, Palo
Alto and Sunnyvale in contrast to Mountain View, pay some portion of the employee
contribution with Sunnyvale contributing the most (7% of the required 8% for MISC
employees and 8% of the 9% for Public Safety employees).
Santoro x.Cfi . .r
san lose . 5,
AA,i k'lYi,
gale n:to x`r nr xn xn ,a=.sa
asan-I II . F`
en:r„r e_r.efit
MonP)prCOJ ,
. _Eml sxo.r p
Nt■Pin= r t a 93i' tHG •i.Cl ores aenem
ars Cato a is.;:..
Sa Sta qae CUr!v ''R
[LW S.D] _U.O li9U EO.CL 2i00 ]9:00 SiW 8C p0
Percent of Payroll
Figure 2: FY 2010 Benefit Ranking by Percent of Payroll
13
Comparing the Sunnyvale pension costs expressed in percent of payroll to Mountain
View (same plans) demonstrates that employee contributions toward the cost of
pensions is just as effective at keeping the cost under control as curtailing the level of
pension benefits being offered. Mountain View actually compares favorably to other
cities offering lower benefits. Table 5 summarizes the Cities' plan(s) and the amount
contributed by employees.
For those Cities that elected to participate in Social Security (MISC employees in the
City of Santa Clara, Santa Clara County and Monte Sereno), the cost to the city has
been added to reflect the total amount the city is paying toward employee Benefits.
The survey responses conveyed how much pension and OPEB were expected to rise
during the next five to ten years. Most Cities responded using projections from the
latest actuarial valuations, which estimate contributions as a percentage of payroll
rather than in dollars. In the case of pension, these valuations are performed by
CaIPERS and in the case of OPEB, the valuations are performed by an actuary firm
under contract to the City. All Cities' Benefits costs are trending up, in spite of optimistic
assumptions regarding the ROI that has been shown to be of paramount importance.
Projected San Jose cost increases are discussed separately in subsequent sections.
Unfunded Retroactive Pension Benefit Enhancements
When a City amends its contract with labor unions to increase the pension formula (e.g.,
2% @ 55 to 2.5% @ 55) the increased benefits apply retroactively to all prior years of
service. The retroactive application of the increase results in an increase in the
unfunded liability and requires an increase in ARC payments by the City. The reason for
the increase in ARC payments can be illustrated by this example:
Assume an employee has worked for twenty-five years and has paid into the
system all those years. The City leaders now approve a retroactive benefit
enhancement without funding the retroactive period. Immediately the
employee and employer have effectively underpaid for the enhanced
unfunded benefits portion for the previous twenty-five years. The difference
between what was actually paid and what should have been paid to provide
the enhanced benefit adds to unfunded liability, which increases ARC
payments. This is now a new liability to the taxpayer.
In question three of the Grand Jury questionnaire (Appendix B), Cities were asked to list
any significant pension benefit changes that have been made over the past ten years.
Table 5 summarizes the responses received by the Grand Jury. As the table shows,
most Cities have increased pension benefits within the last ten years. When asked how
much these benefit increases changed Unfunded Liability, most cities provided the
CaIPERS provided answer of 15%. However, Cupertino stated that benefit changes are
responsible for 26% of their Unfunded Liability and the City of Santa Clara cited 24.6%.
14
Table 5: Pension Benefit Plan Changes
1st Tier Plan and Tier Plan
Employee Paid Employee
Name of City/County
Year Contribution Plan year Paid
of Original Plan Benefit Increase Fy 3011(Per Name Adopted Contributio
increa urvey
se Responses)
County of Santa Clara 2007 MISC 2%@55 MISC to 2.511P55 5%3.931 to 5% None
Public Safety to
County of Santa Clara 2001 Public Safety 2%@50 3%@50 0.5 to 9% None
MISC
Campbell 2002 MISC 2%@55 MISC to 5%2525 7% 2%@60 2011 7%
Public
Public Safety to Safety
Campbell 2001 Public Safety 2%@50 3%@50 8% 2%@50 2010 9%
Cupertino 2007 MISC 2%@55 MISC to 2.7%@55 2% None
Gilroy 2006 MISC 2%@55 MISC to 2.5%@55 8% None
Police
Gilroy 2002 Police 2%@50 Police to 3%@50 9% 2%@50 2011 9%
Fire
Gilroy 2007 Fire 2%@50 Fire to 3%@55 9% 2%@55 2011 7%
Los Altos 2004 MISC 2%@55 MISC to 2.7%@55 1% None
Public Safety to
Los Altos 2003 Public Safety 2%@50 3%@50 1% None
•
MISC
Los Altos Hills' MISC 2%@55 None 0% 2%@60 2011 7%
Los Gatos 2008 MISC 2%@55 MISC to 2.5%@55 8% 2%@60 2012 7%
Public Safety Public Safety to
Los Gatos 2001 2.5%@55 3%@60 9% None
Milpitas 2002 MISC 2%@55 MISC to 1.7%(655 8% 2%@60 2011 9%
Public Safety to
Milpitas 2000 Public Safety 2%@50 3%@50 9% None
No pension
Monte Serena' MISC 2%@55 benefit changes 0% None
Morgan Hill 2006 MISC 2%@55 MISC to 2.5%/655 1-8% None
Public Safety
increase I
Morgan Hill 2002 Public Safety 2%@50 3%@50 9% None
MISC increase to
Mountain View 2007 MISC 2%@55 2.7%@55 8%+ None
Public Safety
increase to
Mountain View 2001 Public Safety 2%@50 3%@50 9%+ None
MISC increase to
Palo Alto 2007 MISC 2%@55 2.7%@55 2%-5.7% 2%@60 20101 2%
Public Safety
increase to
Palo Alto 2002 Federated 3%@50 0%9% None
San lose Federated 25%@55 4.68% None
San lose Public Safety 3%@50 10.50% None
MISC increase to
Santa Clara 2006 MISC 2%@55 2.7%@55 8% None
Public Safety to
Santa Clara 2000 Public Safety 2%@50 3%@50 9%11.25% None
No pension
Saratoga' 2%@SS benefit changes 7% I None
MISC increase to
Sunnyvale 2007 MISC 2%@55 2.7%@55 1% None
Public Safety
increase to
Sunnyvale 2001 Public Safety 2%@50 3%@50 1%-3% None
•These cities contract out for public safety services,avoiding a direct benefit liability.
15
Cities told the Grand Jury that as recently as 2003, and in 2007 for Campbell and Los
Altos Hills, their plans were over funded. Assuming this trend would continue, Cities
thought they could enhance Benefits without significantly increasing their costs.
Analysis was performed to prove the enhancements could be funded. In hindsight, this
did not prove to be the case because the analysis assumed the optimistic ROI would be
achieved.
The County and a few of the cities attempted to recover some of the increased cost by
increasing the employee paid contributions and by eliminating previously enhanced
menu options. The Grand Jury learned that in some cases adequate funding was not in
place to pay for the enhanced pension benefits at the time they were granted. Without
solid plans to fund increases in pension benefit plans, Cities pushed the impact of these
increases to future generations of taxpayers.
Nearly every City demonstrated an historical pattern of granting unfunded benefit
enhancements as discussed here. This practice is beginning to change with the
adoption by a few cities of second tier26 plans that extend retirement age and reduce
Benefit costs.
Table 5 shows that eight cities have adopted second tier plans. Other Cities may be in
the process of adopting second tier plans but cannot report this fact because of ongoing
union negotiations. Note that all new second tier plans continue to be the defined
benefit type; none have adopted any form of defined contribution elements. While the
creation of second tier plans will reduce the cost of providing pension benefits 27 these
savings will not materialize for many years. All risks associated with market losses
remain with the Cities, and ultimately the taxpayers. Increasing employee contribution
rates, subject to labor agreements, is the most effective method of controlling cost in the
shortest amount of time.
Low OPEB Funded Ratios
As shown in Table 6, OPEB-funded ratios are low. These OPEB low-funded ratios and
corresponding high unfunded liabilities are of concern to the Grand Jury. Cities are
required to "pay forward"28 for pensions, but not for OPEB. As a result, many cities only
pay the minimum required to cover the current annual OPEB cost; no extra is paid to
defray the cost of all current employees when they retire. The Cities referred to this as
the "pay-as-you-go" strategy and results in very low-funded ratios—even zero percent.
This strategy has resulted in San Jose's OPEB being $1,706,081,881 underfunded
(refer back to Figure 2 for a comparison of San Jose's underfunded status relative to
other cities and the County)
26 See Appendix C Glossary for definition.
27 At the time of this report, the Grand Jury is not aware that Cities are considering OPEB changes in
second tier plans.
28 See Appendix C Glossary for definition.
16
Table 6: OPEB Funded Ratio
FY 2010'00E61
City Funded
Ratio"
Santa Clara County 10.10%
Campbell 4.00%
Cupertino30 0%
Gilroy 0%
Los Altos 0%
Los Altos Hills 23.40%
Los Gatos 2.70%
Milpitas 24.13%
Monte Sereno 0%
Morgan Hill 0%
Mountain View 55.90%
Palo Alto 19.00%
San Jose31 12.00%/6.00%
Santa Clara 22.80%
Saratoga N/A
Sunnyvale32 0%
Mountain View, Sunnyvale and Cupertino are commended for having begun to
implement a "pay forward" strategy, which demonstrates fiscal responsibility. One San
Jose public official interviewed stated that the reason San Jose was not fully funding
OPEB is that it could not be done without significant curtailment of services, effectively
shifting the burden of payment to future generations.
Public Benefit Comparison to Private Sector Benefits
To put pubic employee Benefits into perspective, consider the average pension for
Public Safety employees in Palo Alto retiring between the ages of 51 and 54 with 30
years of service is $108,000. In Sunnyvale, the same employee receives almost
$102,000 per year. The most common pension plans offered to public employees who
spend their entire career in the public sector not only discourage employees from
29 Some 2010 data is derived from 2009 Actuarial Valuations
3° In 2010 and 2011 the city made payments of nearly$6.5M in excess of ARC to bring this up to 35.6%
31 San Jose has separate OPEB funds for its employees
32 In 2011 the city paid $32M in excess of ARC but impact on funded ratio has not yet been determined
via actuarial evaluation
17
continuing to work beyond the age of 50 or 55, they penalize them for doing so. The
CaIPERS reported average pension of under $30,000 per year is misleading because it
fails to recognize persons who receive multiple pensions. The Grand Jury learned that
some employees actually earn more in retirement than they did while employed.
Further, the ratio of active employees to retirees was found to be three to two.33 With
budget constraints leading to staffing reductions and as the baby boom generation
approaches retirement age, this ratio is expected to continue downward, placing
additional financial burdens on the Cities.
Public benefits are overwhelmingly of the defined benefit type (refer to Appendix C for
the differences between defined benefits and defined contributions). While some
private sector companies continue to offer defined benefits, the clear trend in the private
sector is to transition away from defined benefits in favor of defined contributions,
thereby transferring the risks associated with market performance from the employer to
the employee. An additional advantage of the defined contribution is that it leads to less
volatile City budgets over time because the cost of providing benefits is constant, not
varying over time to compensate for market performance.
Determining in any meaningful way what might be considered "standard" private sector
benefits for the purposes of comparing to public sector was clearly outside the scope of
this investigation. That said, Bureau of Labor Statistics surveys show the majority of
private pensions include participation in Social Security and a defined contribution plan
such as a 401k. The employee and employer each contribute 6.2% of salary (currently
up to $110,100 in salary) per year, to pay for Social Security benefits.
While the particulars of 401k plans vary widely, the surveys show that the majority of
employees receive some form of matched savings plan described as follows. For every
dollar the employee contributes to their own 401k, the employer will contribute some
amount: 50 cents or less for most employees. Employees may be limited to the amount
they can contribute and employers limit the amount they contribute by specifying that
employer contributions cannot exceed a set percent of salary: four percent or less for
most employees. As described, the majority of private sector employees contribute
more than 50% of the total cost toward their own pensions (exactly 50% in the case of
Social Security and greater than 50% of the 401k since an employer only contributes a
portion of every dollar the employee contributes). Using 65 as a traditional retirement
age, the differences between public and private benefits are summarized in Table 7.
The Grand Jury reviewed the survey results and observed the following for all first tier
plan employees:
• All Public Safety employees, except Gilroy fire,34 qualify for full retirement
benefits no later than age fifty (assuming at least five years of service)
33 Half the Cities surveyed currently have more retirees than employees.
30 Gilroy fire receives the same at age fifty-five rather than age fifty.
18
• All Public Safety employees, except Gilroy fire,35 with thirty years of service credit
receive no less than 90% of their salary in retirement, not considering annual
COLA increases
• All MISC employees qualify for retirement benefits no later than age fifty-five
(assuming at least five years of service)
Table 7: Sample comparison of MISC Public versus Private Benefits"
Attributes T*4' Public" =Yx4 s Private1s
Percent of salary contributed by employee 7-8% 14- 16%
toward Benefits
Age pension may be drawn without an age- 55 65
related reduction in eligible amount
Employee contribution for every dollar of 50¢39 $1.40d0
employer contribution
Retirement Income expressed as a percent of 87.5% 66%41
salary (assuming the retiree reaches full plan
benefit age and works 35 or 45 years,
respectively)
Who bears the risk if market underperforms? Taxpayer Employee
Is subsidized retiree healthcare available? Generally Yes Generally No
• The majority42 of MISC employees who work 35 years receive 87.5% of their
salary in retirement before annual COLA increases.
38 Gilroy fire receives the same benefits at thirty-five years service rather than thirty years.
38 The table is intended for comparison; it is not representative of all situations.
3' Represented by participant in 2.5%@55.
38 Represented by participant in Social Security and 401k Savings plan where employee contributes 8%
salary and employer matches 50 cents per dollar.
39 Based on CaIPERS data for 2011. Actual varies by city; can be as high as 50C or as low as 5C.
d0 Based on the Bureau of Labor statistics.
41 This number assumes a$750K in retirement savings.
42 Los Altos Hills, Monte Sereno and Saratoga are exceptions receiving 70% of salary.
19
In consideration of these statistics, and as shown in Table 7, the Grand Jury concludes:
• Full pension is attained at an earlier age in the public sector than in the private
sector— some by ten years or more
• Pension earned, expressed as a percentage of salary, is greater in the public
sector than in the private sector even after adjustment to account for non-
participation in Social Security
• Employees in the public sector contribute less towards their pension plans than
their private-sector counterparts
• Taxpayers in the public sector bear the risk of ROI and actuarial assumptions
associated with the pension plan, whereas employees in the private sector bear
the risk of market performance.
The Grand Jury acknowledges wages and salaries are a large portion of Cities'
budgets, and when salaries escalate this further exacerbates budget shortfalls. It may
be asserted that public sector salaries are lower than their private sector counterparts,
thus, justifying more generous public benefits. Readers can explore whether this
assertion is true by accessing publically available salary data.
Accrued Sick Leave Can Be Reimbursed
In general, the survey revealed no significant differences between the Cities in regard to
holiday, vacation and sick leave policies. However, it is noted that all Cities surveyed
except Gilroy, Monte Sereno, and Sunnyvale either reimburse for accrued unused sick
time or permit it to be converted into service time for purposes of determining pension.
Often reimbursement is at discounted rates and other times the amount of sick time that
can be accrued is capped. Gilroy, Monte Sereno and Sunnyvale responded "No" to the
survey question asking if accrued sick time is paid upon retirement, without proffering
whether or not it could be converted into service time. However, the Grand Jury learned
that sick time conversion to service credit is a common CaIPERS benefit for all
members of risk pools.
The survey revealed that the City of Santa Clara grants fire personnel on 24-hour shifts
288 hours of sick leave per year. Up to 96 hours per year can be accrued and paid
(discounted to 75% of their hourly wage equivalent) for employees with 25 or more
years of service.
San Jose's Plan
San Jose is the only city that does not use CaIPERS to provide pension benefits (with
the exception of the Mayor and Council members who get benefits in accordance with
CaIPERS 2%@55 plan). San Jose public employees have two independent plans:
Federated and Public Safety. Federated Plan members are equivalent to those in a
CaIPERS Miscellaneous Plan. Public Safety members (police and fire) in San Jose are
20
identical to Public Safety members in other Cities. The San Jose Federated and Public
Safety plans share commonality with CaIPERS 2.5%@55 and 3.0%@50 respectively
with the following key differences:
• COLA is a guaranteed 3% compared to CaIPERS' not-to-exceed 2%
• Employee-to-employer contribution ratio of three to eight (3:8)
• Money is invested and managed by the two governing Boards (the Federated
Plan Retirement Board and the Public Safety Retirement Board) rather than
by CaIPERS, and San Jose performs its actuarial valuations independent of
CaIPERS
• San Jose participates in a Supplemental Retiree Benefit Reserve (SRBR)
program.
Each of the major differences cited above is discussed in more detail below.
3% Guaranteed COLA
San Jose provides a guaranteed 3% COLA increase every year compared to a
CaIPERS base COLA which is not to exceed an accumulated 2% per year".43 The
Grand Jury is unable to quantify the additional cost of increasing COLA. As mentioned
previously, CaIPERS does provide menu options for increased COLA (including 3%),
but no other Cities have opted for this increase, citing cost as a reason.
Three-to-Eight (3:8) Employee Contribution Ratio
For every eight dollars San Jose spends on the Normal Cost of providing benefits
(excluding the Past Service Cost portion of benefits that the employer pays entirely44)
employees contribute $3-dollars. This differs substantially from CaIPERS, which sets
employee contribution as a percent of salary between 7% and 9% depending on the
plan. As noted in Table 5, many Cities pay much of the employee contribution on behalf
of the employees, further complicating any comparison. As noted in Methodology, the
Grand Jury is reluctant to interpolate the data provided. The San Jose survey response
shows that Federated employees pay 4.68% (of payroll) toward pension, which
compares to CaIPERS' MISC plan at 8%. San Jose's Public Safety employees pay
approximately 10.5% (of payroll) toward pension, which compares to CaIPERS' Public
Safety plan at 9%.
43 As a function of inflation, CaIPERS COLA has a clause protecting retirees from losing more than 20%
of their buying power in retirement which could result in increases greater than 2%. When CPI is less
than the 2% promised, CaIPERS COLA also entails "banking' of COLA as unneeded credits that can be
applied when CPI is greater than 2%. This results in annual COLA increase in excess of 2%when the
CPI exceeds 2%.
44 The ratio of Past Service Cost to Normal Cost(expressed in Percent Payroll)for Federated and Public
Safety are: 15.58/12.76 and 22/27 respectively
21
From a cost perspective, there is insufficient data to determine if the 3:8 ratio results in
net savings or increased cost to San Jose, compared to the CaIPERS plan. However,
excluding Past Service Cost from any form of employee cost sharing does result in San
Jose paying a higher portion of the cost of providing Benefits.
Self-Managed Investing
The Federated and Public Safety Boards independently manage approximately $2B in
assets each (approximately $4B total). Both currently assume a 7.5% ROI, similar to
the recently adopted CaIPERS ROI. As with CaIPERS, these investment returns are
expected to pay the majority of the costs for providing benefits. It is critical, therefore, to
compare the actual investment performance to what is actuarially assumed, and it is
useful to compare San Jose's investment performance to CaIPERS.
As was shown in Figure 1, both Federated and Public Safety ROI for the last ten years
has been below the actuarial assumptions but slightly better than what CaPPERS did in
the same time period. San Jose did not provide ROI data for 2011. The DJIA is shown
in the figure for comparison purposes and is intended to show that both San Jose and
CaIPERS outperformed the general market (represented by DJIA) by a wide margin, yet
still fell below the optimistic actuarial assumptions so critical to economic viability.
The largest advantage of managing one's own plans would seem to be the added
flexibility it affords the city in tailoring retirement formulas to meet the needs and means
of the city. Although there is little evidence the city is using this advantage in the current
first tier plans (as noted, San Jose plans are both very similar to CaIPERS plans
offered), this advantage may be utilized if and when second tier plans are developed.
Supplemental Retiree Benefit Reserve ISRBR)
Recall from Table 3 that the combined pension unfunded liability for both the Federated
Plan and the Public Safety Plan is $1,434,696,471. As has already been discussed
and demonstrated, the largest single contributor to this is when the achieved ROI falls
short of the actuarially assumed ROI. With this in mind, it is difficult to comprehend how
responsible financial management would allow withdrawal of any portion of excess ROI
whenever the market actually does out-perform the expected rate to be used to pay
dividends in the form of an additional "thirteenth checki4 to retirees. But this is exactly
what the SRBR does. In the case of the Federated Plan, the market must only exceed
the expected rate in a single year to permit withdrawal of a portion of the excess ROI for
that year. For the same thing to happen in the Public Safety plan, the running five-year
average must exceed the expected return rate to permit withdrawal.
45 Generally, a windfall dividend payment.
22
It should be noted that San Jose has temporarily suspended the SRBR payouts.
Although San Jose has suspended payouts, the funds remain in the account and San
Jose has not used the payout to pay down its underfunded liability. In fact, the
suspension merely delays eventual payment to retirees in the form of even larger
"thirteenth checks." A better use for these excess funds might be to retain them to pay
down the underfunded Benefits, as long as an underfunded liability exists.
Why Such Variance with Estimated Future Benefit Costs?
Much has been written regarding the predicted ARC cost for San Jose in FY 2015/2016.
Published estimates vary in the range of$400M to as much as $650M. The latter figure
represents a more than doubling of the current ARC of $245M per year—a rate of
increase not seen in any of the other Cities.
The Grand Jury interviewed several key personnel associated closely with these
predictions to determine why there is so much variability in the estimates. In particular,
the Grand Jury wanted to answer the following questions:
• Were these predictions based on sound, factual data?
• Does $650M represent a worst case number or could it be higher?
The Grand Jury learned that a large set of assumptions factor into any actuarial
valuation and many of these assumptions have complex interdependencies with one
another. The actuarial valuation itself is a rigorous, precise mathematical calculation
based upon these assumptions.
The ARC value can vary, from 400M to $650M or higher, when assumptions are
adjusted. Just two of those actuarial assumption changes, by themselves, account for
$120M of the $250M difference between the high and low estimate. These two
assumption changes are:
• Longer life expectancy of Public Safety employees46 than previously assumed
• Lower ROI rate.
Key personnel associated with making actuarial predictions gave an example where
increasing the life expectancy of police and fire to be closer to the life expectancy of
miscellaneous employees would increase the cost by approximately $40M. This is a
reasonable assumption change to consider since it reflects demographic changes that
CaIPERS also has begun to reflect. In another assumption query, if the ROI were
46 CaIPERS has been recognizing this trend and several Cities cited this as being a contributor to
unfunded liability
23
lowered by a whole percentage point to 6.5%, more in line with actual ROI for the last
ten years, this would contribute an additional $80M to the cost of ARC. Importantly, the
rationale for exploring a lower ROI was not to bring it into agreement with recent
earnings history, but to move San Jose's portfolio from one of high risk and high
volatility to a position of low risk and low volatility.
The $650M per year cost estimate is not a worst case number. Pension experts the
Grand Jury interviewed stated that other actuarial assumption changes, within reason
and easily justified, would result in ARC costs even higher than $650M per year. The
Grand Jury understands that exploring these actuarial assumptions is justified. They
help bring attention to the severity of the Benefits crisis and abate the trend of pushing
financial problems to future generations of taxpayers.
Conclusions
Very optimistic actuarial assumptions result in lower ARC costs, leading to insufficient
funding and causing unfunded liabilities. The most critical of these is the ROI, which is
generally assumed to be 7.5%47. The actual ROI for the last ten years has been 6.1%.
This underperformance is the largest contributor to the Cities' combined unfunded
liability of over $7B. Future taxpayers are responsible for paying benefits that are being
earned and collected today. Lowering the expected ROI—as recommended by leading
economists and recognized financial experts—significantly increases ARC and further
exacerbates attainment of balanced budgets. Public employee Benefits, especially after
being enhanced retroactively, have been shown to be more generous than those found
in the private sector and at an earlier retirement age. The amount a public employee
contributes toward benefits is shown to generally be less than an employee in the
private sector. As a result of lower public employee contribution rates toward their
retirement, increasingly large ARC costs must be funded by taxpayer dollars. Ignoring
this largesse will result in increased taxes combined with reduced services.
Average pensions are often cited in the range of $30,000, but these statistics can be
misleading. For instance, they include persons whose careers lasted five years or part-
time employees with longer service periods. Likewise, it can include employees who
work an entire career in the public sector but for different public entities over the course
of their careers. Each city that the employee worked for pays only its pro-rated portion
of the retirees pension. Thus, the employee's actual pension is larger than the portion
attributable to each public entity.
Tier 2 plans that Cities are implementing offer a modest reduction to the future liability,
but do not significantly impact the unfunded liability in the short term. To address the
short-term cost of the public Benefit crisis, possible solutions may be found in two
"'Some OPEB ROI are at lower values.
24
elements of private sector benefits. The first is the need to reduce the level of benefits
to be more comparable to those found in the private sector, inclusive of extending
retirement age. Second, public employees must contribute a greater share towards
their Benefits, particularly those employees who receive enhanced Benefits. Such
solutions will reduce the burden the unfunded Benefits have placed upon current and
future taxpayers.
As to the question of defined benefits versus defined contributions, public Benefits
continue to be based on a defined benefit model versus the defined contribution model
that private industry has moved toward. The defined contribution model works well in
the public sector. It offers a working solution to the public sector as a means of
reducing the risk of high-cost defined benefit plans. Benefit plans are heavily
subsidized by pubic sector employers compared to the contributions of private sector
employers.
The Grand Jury concludes that until significant modifications are enacted, there is no
doubt that the escalating cost of providing Benefits at the current level is interfering with
the delivery of essential City services and the ultimate cost to the taxpayers is an
unbearable burden. These costs are already impacting delivery of essential services as
demonstrated by San Jose reducing police and fire department staffing levels, closing
libraries or not opening those newly built, curtailing hours of community centers, and not
repairing pot-holed city streets. Other cities in the County are likely to face similar
challenges as long as high cost benefit plans face an underfunding liability.
Understanding how Cities created this problem through unfunded retroactive benefit
enhancements, compounded by poor ROI, helps taxpayers understand that the problem
will not go away on its own.
25
Findings and Recommendations
When the term Cities is used below, it includes the following: Santa Clara County; the
cities of Campbell, Cupertino, Gilroy, Los Altos, Milpitas, Monte Sereno, Morgan Hill,
Mountain View, Palo Alto, San Jose , Santa Clara, Saratoga, Sunnyvale; and the towns
of Los Altos Hills and Los Gatos.
Finding 1
Public sector employees are eligible for retirement at least 10 years earlier than is
common for private sector employees.
Recommendation 1
The Cities should adopt pension plans to extend the retirement age beyond current
retirement plan ages.
Finding 2
Campbell, Gilroy, Los Altos Hills, Los Gatos, Milpitas and Palo Alto have adopted
second tier plans that offer reduced Benefits, which help reduce future costs, but further
changes are needed to address today's unfunded liability. Santa Clara County and the
cities of Cupertino, Los Altos, Monte Sereno, Morgan Hill, Mountain View, San Jose,
Santa Clara, Saratoga and Sunnyvale have not adopted second tier plans.
Recommendation 2A
Santa Clara County and the cities of Cupertino, Los Altos, Monte Sereno, Morgan Hill,
Mountain View, San Jose, Santa Clara, Saratoga and Sunnyvale should work to
implement second tier plans.
Recommendation 2B
For Gilroy, Los Gatos, Milpitas and Palo Alto, which have not implemented second tier
plans for MISC and Public Safety second tier plans should be implemented for both
plans.
Recommendation 2C
All Cities' new tier of plans should close the unfunded liability burden they have pushed
to future generations. The new tier should include raising the retirement age, increasing
employee contributions, and adopting pension plan caps that ensure pensions do not
exceed salary at retirement.
26
Finding 3
Retroactive Benefit enhancements were enacted by Cities using overly optimistic ROI
and actuarial assumptions without adequate funding in place to pay for them.
Recommendation 3
The Cities should adopt policies that do not permit Benefit enhancements unless
sufficient monies are deposited, such as in an irrevocable trust, concurrent with
enacting the enhancement, to prevent an increase in unfunded liability.
Finding 4
The Cities are making an overly generous contribution toward the cost of providing
Benefits.
Recommendation 4A
The Cities should require all employees to pay the maximum employee contribution rate
of a given plan.
Recommendation 4B
The Cities should require employees to pay some portion of the Past Service Cost
associated with the unfunded liability, in proportion to the Benefits being offered.
Finding 5
The Cities are not fully funding OPEB benefits as evidenced by large unfunded liabilities
and small funded ratios.
Recommendation 5
The Cities, should immediately work toward implementing policy changes and adopting
measures aimed at making full OPEB ARC payments as soon as possible.
Finding 6
The City of San Jose permits the transfer of pension trust fund money, when ROI
exceeds expectations, to the SRBR, despite the fact that the pension trust funds are
underfunded.
27
Recommendation 6
The City of San Jose should eliminate the SRBR program or amend the SRBR program
to prevent withdrawal of pension trust money whenever the pension-funded ratio is less
than 100%.
Finding 7
The Cities' defined benefit pension plan costs are volatile. Defined contribution plan
costs are predictable and therefore more manageable by the Cities.
Recommendation 7
The Cities should transition from defined benefit plans to defined contribution plans as
the new tier plans are implemented.
28
Appendix A: Documents Reviewed
Report
Report Name Date Document Source
Santa Clara County Comprehensive Annual Financial Report(CAFR) 30-Jun-10 www.sccgov org/
Santa Clara County Comprehensive Annual Financial Report(CAFR) 30-Jun-11 www.sccgov.org/
City of Campbell CAFR 30-Jun-10 www.cicampbell.ca.us/
City of Campbell CAFR 30-Jun-11 www.ci.campbell.ca.us/
City of Cupertino CAFR 30-Jun-10 cupertina.org/
City of Cupertino CAFR 30-Jun-11 ww ertina.argi
City of Gilroy CAFR 30-Jun-10 www.citvofgilray.org/
City of Gilroy CAFR 30-Jun-11 www.cityofgilroy.org/
City of Los Altos CAFR 30-Jun-10 www.cflos-altos.ca.us/
City of Los Altos CAFR 30-Jun-11 www.ci.los-altos.ca.us/
Town of Los Altos Hills CAFR 30-Jun-10 ww.losaltoshills.ca.g0v[
Town of Los Gatos CAFR 30-Jun-10 www.town.los-gatos.ca.gl
City of Milpitas CAFR 30-Jun-10 miloitas.ca.gov/
City of Monte Sereno CAFR 30-Jun-10 Monte Serena city hall
City of Morgan Hill CAFR 30-Jun-10 www.morgan cagov/
City of Morgan Hill CAFR 30-Jun-11 www.morgan-hill ca.gov/
City of Mountain View CAFR 30-Jun-10 www.ci.mtnview.ca.us/
City of Mountain View CAFR 30-Jun-11 www.ci.mtnvlew-ca.us/
City of Palo Alto CAFR(Revised December 21,2010) 30-Jun-10 www.cityofpaloalto-orr/
City of San Jose CAFR 30-Jun-10 www.sanioseca.gov/
City of Santa Clara CAFR 30-Jun-10 www.santaclaraca.gov/
City of Saratoga CAFR 30-Jun-10 wwwsarato:a-ca.us
City of Sunnyvale CAFR 30-Jun-10 www.sunnyvale.ca.gov/
Pension Sustainability:Rising Pension Costs Threaten the City's Ability
to Maintain Service Levels-Alternatives For A Sustainable Future 29-Sep-10 wwwsanioseca.gov/auditor
Cities Must Rein in Unsustainable Employee Costs(Santa Clara http://www.scscourcorg/court divisions/civil/cpi/grand lury.
County Grand Jury Report) 30-Jun-10 shtml
Running on Empty(San Mateo County Grand Jury Report) 30-Jun-11 wwwsanmateocourtorg/court divisions/grand jury/
National Compensation Survey:Employee Benefits in Private Industry
in the Untited States,2005 1-May-07 www.bls.gov/ncs/home.htm
A Preliminary Analysis of Governor Brown's Twelve Point Pension
Reform Plan(Prepared by CaIPERS) 30-Nov-11 www.calpers-ca.gov/eip-dots/preliminary-analysis pdf
CalPers Pension Benefit Primer 1-Oct-09 www.calpersresponds.com/downloads/Pension Primer.pdf
More Pension Math:Funded Status,Benefits,and Spending Trends
for California's Largest Independent Public Employee Pension
Systems 21-Feb-12 www.cats.org/images/dynamic/articleAttachments//.pdf
Statement No.45 of the Governmental Accounting Standards Board 30-Jun-04 Santa Clara County Finance Agency
29
Appendix B: Grand Jury Survey
Instructions: Please complete the questions below. The questionnaire consists of three sections: Section 1
covers questions regarding Pension Benefits, Section 2 covers questions regarding Other Post Employment
Benefits and Section 3 covers questions regarding vacation and sick leave payout policy at time of
retirement. Insert your responses directly into this file and return it in your email reply.
Please respond by Dec 19th to this questionnaire for both the fiscal year ending 6-30-2010 and the fiscal year
ending 6-30-2011. If you have questions or require additional time, please reply via email as quickly as
possible to allow sufficient time to resolve issues. Thank you.
Section 1: PENSION
1. How many defined pension plans do you have? Please identify them by name and answer all
subsequent questions for each identified plan name.
2. Does CaIPERS administer your pension fund?If not, please identify and describe the manner in
which the pension plan is being administered.
3. Please provide a description of each defined pension plan that you provide to your employees.
• At what age is an employee eligible for a pension?
• How many years must an employee work to be vested for a pension?
• Are employees required to make contributions to their own accounts? If so,what percent of their
salary is paid toward their pension? Is there any annual or lifetime employee contribution cap?
• Does the plan include cost-of-living allowance increases post retirement?
4. For each identified plan,what percent of an employee's income is earned toward retirement each year of
employment?
• For each identified plan,is there an identified maximum salary percent cap that can be earned in
retirement?
5. Do plan participants contribute to Social Security?
6. For each identified plan,describe the formula for determining final compensation used in hctoring a
retiree's pension.Include number of months that income is averaged,whether or not overtime is included or
excluded from this calculation,and whether or not any other form of employee payments other than base
salary are included in the formula(awards,bonuses,travel compensation,etc.).
7. How much money was contributed in each of the last two fiscal years toward pensions(not
including employee contributions)?
• What percent was this of total payroll?
8. How much pension money was paid out in each of the last two fiscal years to retirees?
• How many retired employees are currently collecting benefits?
• How many active employees are there currently?
• How many employees are within five years of being eligible for retirement?
9. For each plan, please identify and quantify all significant actuarial assumptions used in evaluation of
ARC to include:
a) Amortization period
b) Investment rate of return
c) Projected salary increases
d) Overall payroll growth
e) Inflation factor
f) Smoothing duration
g) Other,if applicable
10. What is the unfunded liability of each identified plan for the fiscal years 2010 and 2011?
11. Please indicate the major reasons for the unfunded liability. For each reason provided, indicate the
approximate percentage of contribution to total unfunded liability.
12. What is the funded ratio of each identified plan for the fiscal years 2010 and 2011?
13. When was the last time the funds have been funded at the level of 100%or higher?
14. Have pension contributions ever been reduced from calculated ARC payments?
• What year was the last time this happened?
15. Please summarize any significant changes to pension benefits over the last ten years for each plan.
• For each, indicate if this was a pension benefit enhancement or reduction.
16. Please provide any evidence that indicates how projected pension costs are expected to change in
the next 5 to 10 years.(Page referencing within an included URL or separate attachment with
appropriate material is an acceptable response.)
30
Appendix B: Grand Jury Survey - continued
17. Please provide any evidence of the strategies that are in work to reduce the rate of pension
escalation.(Page referencing within an included URL or separate attachment with appropriate
material is an acceptable response.)
18. For each plan, please provide evidence as to how pension fund past performance is doing relative to
assumed performance for the last ten years.(Page referencing within an included URL or separate
attachment with appropriate material is an acceptable response.)
Section 2: OTHER POST EMPLOYMENT BENEFITS
1. How many defined benefit plans do you have?Please identify them by name and answer all
subsequent questions for each identified plan name.
2. Does CaIPERS administer your OPEB fund?If not,please identify and describe the nature of the
OPEB benefit plan being used.
3. Please provide a description of the OPEB benefits to include:
• At what age is an employee eligible for a OPEB benefits?
• How many years must an employee work to be vested for a OPEB benefits?
• Are employees required to make contributions to their own OPEB benefits? If so,how much?
• Are OPEB benefits limited to employees only or do they include additional family members?
Identify any additional family members qualifying for OPEB benefits.
4. Is OPEB generally offering health care benefits(defined benefit)or is it making contributions
(defined contribution)toward health care?
• Are there caps in what is paid?
• Who is at risk for escalating health costs;the employee or the employer?
5. How much money was contributed in each of the last two fiscal years to OPEB(not including any
employee contribution)?
• What percent of total payroll cost was this?
6. How much money was paid out in each of the last two fiscal years in OPEB benefits?
• How many retired employees are currently collecting OPEB benefits?
• How many current employees are there?(If the number of current employees is different
here than provided above,please explain the difference.)
7. Please identify and quantify all significant actuarial assumptions used in evaluation of ARC to
include:
a) Amortization period
b) Investment rate of return
c) Projected health care increases
d) Inflation factor
e) Smoothing duration
f) Other,if applicable
8. What is the OPEB unfunded liability of each identified plan for the fiscal years 2010 and 2011?
9. Please indicate the major reasons for the unfunded liability. For each reason provided,indicate the
approximate percentage of contribution to total unfunded liability.
10. What Is the funded ratio of each Identified OPEB plan for the fiscal years 2010 and 2011?
11. When was the last time the funds have been funded at the level of 100%or higher?
12. Have OPEB contributions ever been reduced from calculated ARC payments?
• What year was the last time this happened?
13. Please summarize any significant changes to OPEB benefits over the last ten years. For each,
indicate if this was a benefit enhancement or reduction.
14. Please provide any evidence that indicates how much OPEB benefit costs are expected to rise In the
next 5 to 10 years.(Page referencing within an included URL or separate attachment with
appropriate material is an acceptable response.)
15. Please provide any evidence of plans that are in work to reduce future OPEB costs?(Page
referencing within an included URL or separate attachment with appropriate material is an
acceptable response.)
16. Please provide any evidence as to how OPEB fund past performance is doing relative to assumed
performance?(Page referencing within an included URL or separate attachment with appropriate
material is an acceptable response.)
31
Appendix B: Grand Jury Survey - continued
Section 3: VACATION AND SICK LEAVE ACCRUAL POLICIES
I. Please describe vacation policy to Include:
• How many vacation days are granted at what seniority levels?
• Is there any limit to the amount of vacation time that can be accrued?
• Is unused vacation paid upon retirement?
2. Please describe sick leave policy to include:
• Is there any limit to the number of sick days allowed per year?
• Is there any limit to the amount of sick days that can be accrued?
• Are unused sick days paid upon retirement?
32
Appendix C: Glossary of Terms & Acronyms
Actuarial Assumptions: Assumptions representing expectations about future events (e.g. expected
investment returns on plan assets, member retirement and mortality rates, future salary increases, or
inflation) which are used by actuaries to calculate pension liabilities and contribution rates.
Actuarial Valuation: Technical reports conducted by actuaries that measure retirement plans' assets
and liabilities to determine funding progress. They also measure current costs and contribution
requirements to determine how much employers and employees should contribute to maintain
appropriate benefit funding progress.
Actuary: Professionals who analyze the financial consequences of risk by using mathematics, statistics,
and financial theory to study uncertain future events, particularly those of concern to insurance and
pension programs. Pension actuaries analyze probabilities related to the demographics of the members
in a pension plan (e.g., the likelihood of retirement, disability, and death) and economic factors that may
affect the value of benefits or the value of assets held in a pension plan's trust(e.g., investment return
rate, inflation rate, rate of salary increases).
Actuarial Accrued Liability(AAL): The value of benefits promised to employees and retirees for
services already provided. This concept applies to both the pension liability and retiree health care
liabilities.
Annual Required Contribution (ARC): The amount of money that actuaries calculate the employer
needs to contribute to the retirement plan during the current year for benefits to be fully funded over
time. Generally CaIPERS uses a 30 year period.
CAFR: Acronym for Comprehensive Annual Financial Report
CaIPERS: Acronym for California Public Employees' Retirement System
Defined Benefit: Promised fixed sum paid or service rendered. The assets in a defined benefit plan are
held by the employer who incurs all investments risks. See also defined contribution.
Defined Contribution: Contributions made by an employer to an individual employees investment
account such as a 401 k. All investment gains or losses are those of the employee, not the employer.
See also defined benefit.
Employer Paid Member Contribution (EPMC): A program whereby the city pays employee
contribution in a manner in which the amount paid is considered income for the purposes of
determining pension. As exemplified by one city, For example, an employee with a $100K income and
a 7% EPMC retires using a salary of$107K per year rather than $100K per year."
Experience Gains/Losses: Gains or losses that arise from the difference between actuarial
assumptions about the future and actual outcomes in an organization's pension plan.
First tier (1st tier) plans: Benefits promised to all employees prior to the implementation of a second
tier plan. First tier plans have generally been enhanced; contributing to the cost escalation. See also
"second tier" in the Glossary.
33
Appendix C: Glossary of Terms & Acronyms - continued
Funded Ratio: The market value of assets divided by the accrued liability. Funded ratio is a measure of
the economic soundness of a fund.
Market Gains/Losses: Gains or losses that arise from an increase or decrease in the market value of a
plan's assets, including stock, real property, and investments.
Miscellaneous (MISC) employee/plan: Public employees who are not sworn police or fire. The
term MISC generally is used to describe a pension plan. The city of San Jose refers to these employees
as belonging to a Federated plan rather than a MISC plan,
Normal Cost: That portion of the ARC (see above) which is based solely on the value of the benefits
being offered.
OPEB:Acronym for Other Post Employment Benefits. OPEB benefits are primarily health care
benefits but can include other benefits such as life insurance.
Opt In Plan: Term used to designate an employee elective benefit plan: employees choose between
maintaining current benefits but at an increased employee contribution rate or elect to receive lower
benefits and avoid increases to employee contribution rates.
Risk Pool: In 2005 CaIPERS created risk pools to aggregate small cities (generally defined as having less
than 100 employees) into large pools to eliminate statistical anomalies associated with small sample sizes
and gain reporting efficiencies.
ROI:Acronym for Return on Investment. See also Market Gains/Losses.
Public Safety Employees: Most police and fire personnel. Other public employees are generally
referred to as miscellaneous employees (see above) and may include some members of police and fire
departments.
Second tier (2nd tier) plans: Benefits promised to all employees hired after the date of implementing
a plan with reduced benefits. Second tier plans generally have reduced benefits and lower costs. See
also"first tier" in the Glossary.
Sidefund: Generally the unfunded liability that existed prior to entering a risk pool. A city is
responsible for their entire sidefund plus their portion of the risk pool. Sidefund repayment can be
accelerated. Some cities did not separate sidefund monies from ARC while others did.
Smoothing of Gains/Losses: Actuarial method of spreading, or smoothing, market gains and losses
over a period of time. The purpose of smoothing is to minimize short-term, year-to-year contribution
rate fluctuations which may result from market swings. The smoothed asset value is also known as the
actuarial value of assets.
Unfunded Liability: This is the unfunded obligation for prior benefit costs, measured as the difference
between the accrued liability and plan assets. When using the actuarial value of plan assets, it is also
referred to as the Unfunded Actuarial Accrued Liability (UAAL).
34
This report was PASSED and ADOPTED with a concurrence of at least 12 grand jurors
on this 171h day of May, 2012.
Kathryn G. Janoff
Foreperson
Alfred P. Bicho
Foreperson pro tern
James T. Messano
Secretary
•
35
Attachment 2
Proposed Response to Santa Clara County Civil Grand Jury Report,
An Analysis of Pension and Other Post Employment Benefits
The City of Mountain View has the following responses to the Findings and
Recommendations in the report, An Analysis of Pension and Other Post Employment
Benefits:
Finding 1
Public sector employees are eligible for retirement at least 10 years earlier than is common for
private sector employees.
City Response: The City of Mountain View agrees with this finding. For many
nonpublic safety job classifications, employees may retire at an earlier age than their
private-sector counterparts. However, in the case of public safety positions such as
Police and Fire, there are no comparable positions in the private sector. Additionally, it
is worth noting that retirement benefits are only one part of employee compensation.
Recommendation 1
The Cities should adopt pension plans to extend the retirement age beyond current retirement
plan ages.
City Response: This recommendation will be implemented effective January 1, 2013.
Recently approved State pension legislation has established pension formulas for new
employees which will extend retirement ages. The City of Mountain View has focused
on increased employee pension contributions rather than adopting a second tier of
benefits which could include higher retirement ages.
Finding 2
Campbell, Gilroy, Los Altos Hills, Los Gatos, Milpitas and Palo Alto have adopted second tier
plans that offer reduced Benefits, which help reduce future costs, but further changes are needed
to address today's unfunded liability. Santa Clara County and the cities of Cupertino, Los
Altos, Monte Sereno, Morgan Hill, Mountain View, San Jose, Santa Clara, Saratoga and
Sunnyvale have not adopted second tier plans.
City Response: The City of Mountain View agrees with this finding; however, while it
is true that the City of Mountain View has not adopted second-tier pension plan, this is
not the only mechanism for addressing pension liabilities.
-1-
As noted in the Grand Jury report, "Comparing the Sunnyvale pension costs expressed
in percent of payroll to Mountain View (same plans) demonstrates that employee
contributions toward the cost of pensions is just as effective at keeping the cost under
control as curtailing the level of pension benefits being offered. Mountain View
actually compares favorably to other cities offering lower benefits."
Recommendation 2A
Santa Clara County and the Cities of Cupertino, Los Altos, Monte Sereno, Morgan Hill,
Mountain View, San Jose, Santa Clara, Saratoga and Sunnyvale should work to implement
second tier plans.
City Response: This recommendation will be implemented effective January 1, 2013, as
the City implements the terms of new State pension legislation. Additionally, the City
of Mountain View has negotiated significantly greater-than-normal employee pension
contributions which are an effective tool for addressing pension liabilities.
Recommendation 2B—Does not apply to the City of Mountain View.
Recommendation 2C
All Cities' new tier of plans should close the unfunded liability burden they have pushed to
future generations. The new tier should include raising the retirement age, increasing employee
contributions, and adopting pension plan caps that ensure pensions do not exceed salary at
retirement.
City Response: This recommendation will be implemented effective January 1, 2013.
As noted in the response to Recommendation 2A, the City of Mountain View has
negotiated significantly greater-than-normal employee pension contributions in order
to address pension liabilities.
Finding 3
Retroactive Benefit enhancements were enacted by Cities using overly optimistic ROl and
actuarial assumptions without adequate finding in place to pay for them.
City Response: The City partially agrees with this funding as ROI and actuarial
assumptions have not been realized in recent years. However, the City of Mountain
View did work to ensure adequate funding existed for benefit enhancements,
negotiating with Mountain View employees to contribute toward the cost of enhanced
retirement benefits. These additional employee contributions have helped moderate
cost increases associated with lower-than-projected investment returns and longer-than-
projected retiree life spans.
-2-
Recommendation 3
The Cities should adopt policies that do not permit Benefit enhancements unless sufficient
monies are deposited, such as in an irrevocable trust, concurrent with enacting the enhancement,
to prevent an increase in unfunded liability.
City Response: The City does not anticipate any Benefit enhancements for the
foreseeable future. If this changes, the City will implement this recommendation.
Finding 4
The Cities are making an overly generous contribution toward the cost of providing Benefits.
City Response: The City of Mountain View disagrees with this finding as City
employees pay between 9.5 percent and 15.4 percent of their salary toward pension
benefits, a notably higher rate than most other public agencies.
Recommendation 4A
The Cities should require all employees to pay the maximum employee contribution rate of a
given plan.
City Response: The City of Mountain View has implemented this recommendation.
City employees pay both the maximum employee contribution rate as well as a portion
of the employer contribution rate for pension benefits.
Recommendation 4B
The Cities should require employees to pay some portion of the Past Service Cost associated with
the unfunded liability, in proportion to the Benefits being offered.
City Response: The City of Mountain View has implemented this recommendation. As
noted previously, the City of Mountain View has adopted a different strategy for
addressing costs associated with pension benefits with employees paying part of the
employer contribution for pension benefits. The employer contribution is based on
both the normal cost of benefits and the Past Service Cost.
Finding 5
The Cities are not fully funding OPEB benefits as evidenced by large unfunded liabilities and
small funded ratios.
City Response: The City of Mountain View partially agrees with this finding as the
OPEB funded ratio is indeed low for many agencies. However, the City of Mountain
View has the highest funded ratio of all agencies in the County; significantly more than
the rate of the next highest city as noted on Table 6. Additionally, the City has
negotiated with bargaining groups to reduce the costs associated with retirees' health
benefits by offering an optional defined contribution plan for miscellaneous employees,
and by negotiating employee contributions to the City's retirees' health trust. As a
result, this funded ratio is expected to increase in the future.
Recommendation 5
The Cities should immediately work toward implementing policy changes and adopting
measures aimed at making full OPEB ARC payments as soon as possible.
City Response: The City of Mountain View has implemented this recommendation and
already contributes full ARC payments.
Finding 6—Does not apply to the City of Mountain View.
Finding 7
The Cities' defined benefit pension plan costs are volatile. Defined contribution plan costs are
predictable and therefore more manageable by the Cities.
City Response: The City agrees that defined contribution plan costs are more
predictable.
Recommendation 7
The Cities should transition from defined benefit plans to defined contribution plans as the new
tier plans are implemented.
City Response: The City of Mountain View has implemented this recommendation for
OPEB, instituting a defined contribution plan option for retirees' health benefits for
nonsafety employees. As noted above, the City of Mountain View has focused on
working with bargaining groups to increase employee contributions toward pension
benefits in order to manage the City's costs associated with these benefits. Additionally,
the City of Mountain View, as a member of the California Public Employees Retirement
System (Ca1PERS), can only offer benefits as allowed under CaIPERS law. Currently, no
defined contribution plans are available to employers contracting with CaIPERS for
pension benefits.
MSD/7/MGR/602-09-11-12A-E
-4-