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HomeMy WebLinkAboutCC Resolution 13584 (Grand Jury Response; Health Care Benefits)RESOLUTION NO. 13584 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN RAFAEL APPROVING AND AUTHORIZING THE MAYOR TO EXECUTE THE CITY OF SAN RAFAEL RESPONSE TO THE 2012-2013 MARIN COUNTY CIVIL GRAND JURY REPORT ENTITLED "MARIN'S RETIREMENT HEALTH CARE BENEFITS: THE MONEY ISN'T THERE" WHEREAS, pursuant to Penal Code section 933, a public agency which receives a Grand Jury Report addressing aspects of the public agency's operations, must comment on the Report's findings and recommendations contained in the Report in writing within ninety (90) days to the Presiding Judge of the Superior Court with a copy to the Foreperson of the Grand Jury; and WHEREAS, Penal Code section 933 specifically requires that the "governing body" of the public agency provide said response and, in order to lawfully comply, the governing body must consider and adopt the response at a noticed public meeting pursuant to the Brown Act; and WHEREAS, the City Council of the City of San Rafael has received and reviewed the 2012-2013 Marin County Grand Jury Report, dated May 21, 2013, entitled "Marin's Retirement Health Care Benefits: The Money Isn't There" and has agendized it at this meeting for a response. NOW, THEREFORE, BE IT RESOLVED, that the City Council of the City of San Rafael hereby: 1. Approves and authorizes the Mayor to execute the City of San Rafael's response to the 2012-2013 Marin County Grand Jury Report entitled "Marie's Retirement Health Care Benefits: The Money Isn't There," copy attached hereto. 2. Directs the City Clerk to forward the City's Grand Jury Report response to the Presiding Judge of the Marin County Superior Court and to the Foreperson of the Marin County Grand Jury. I, Esther Beirne, Clerk of the City of San Rafael, hereby certify that the foregoing Resolution was duly and regularly introduced and adopted at a regular meeting of the San Rafael City Council held on the 5th day of August 2013, by the following vote to wit: AYES: Councilmembers NOES: Councilmembers Colin, Connolly & Vice -Mayor Heller None ABSENT: Councilmembers; McCullough & Mayor Phillips ESTHER BEIRNE, City Clerk RESPONSE TO GRAND JURY REPORT FORM Report Title: Marin's Retirement Health Care Benefits: The Money Isn't There Report Date: May 21, 2013 Public Release Date: June 3, 2013 Response By: City of San Rafael FINDINGS • We agree with the findings numbered: F4, F6, F8, F9 ■ We disagree with wholly or partially with the findings numbered: F1-3, F5. FT F10 RECOMMENDATIONS ■ Recommendations numbered: R1-5 have been implemented. ■ Recommendations numbered: R6 have not yet been implemented, but will be implemented in the future. ■ Recommendations numbered: require further analysis. See attached explanations. ■ Recommendations numbered: will not be implemented because it is not warranted or are not reasonable. ATTEST::M- Esther Beirne, City Clerk Number of pages attached: 4 Signed: Y q. PHILLIPS, Mayor ATTACHMENT 1 RESPONSE OF THE CITY OF SAN RAFAEL TO GRAND JURY REPORT "MARIN'S RETIREMENT HEALTH CARE BENEFITS: THE MONEY ISN'T THERE" EXPLANTIONS REGARDING FINDINGS AND RECOMMENDATIONS Finding F1. We find that many of Marin's local governments and special districts are failing to pre -fund future costs for retired employees by making investments to cover promised benefits for active employees. This jeopardizes the certainty that retiree health care benefits promised to current employees will be paid. Response: We agree that many jurisdictions do not pre -fund future costs by making investments to cover promised benefits. However, it is not clear whether or not a particular jurisdiction's funding practices and policies would jeopardize benefits being paid as it would vary based on their unique circumstances. The City of San Rafael began setting aside funds for the purpose of pre - funding retiree health costs over a decade ago, and is currently fully funding its retiree health costs through the use of a Section 115 Integral Part Trust. Finding F2. The failure of the majority of entities studied in this investigation to begin an investment program to provide a portion of the needed funds to pay for retiree health care benefits leads to generation shifting of the payment responsibility. Thus it appears to be, at the least unethical, and even a breach of fiduciary responsibility. Response: We agree that the "pay go" approach can lead to generation shifting of the payment responsibility. However, it is not clear whether or not a particular jurisdiction's funding practices and policies would be inappropriate as it would vary based on their unique circumstances. The City of San Rafael is fully funding our retiree health costs through the use of a Section 115 Integral Part Trust and is, therefore, not shifting retiree benefit costs unreasonably into the future. Finding F3. The extreme 30 -year amortization period used by most entities minimizes the annual cost of funding the liability gap and further defers to future generations the compensation owed to present employees who provide services to present taxpayers and customers. Shorter amortization periods should be required for reasons of equity and to ensure that the promised benefits will be provided. Response: We agree that a longer amortization period reduces the annual cost of funding and defers costs but cannot pre -determine the appropriate amortization period length for other jurisdictions which should be based on their unique circumstances. As for San Rafael, the City is currently using a 23 -year fixed (closed) period in order to mitigate such an impact, Finding F4. By capping retiree health care benefits, the City of San Rafael has reasonable certainty as to what those costs are. Other entities studied here that promise to pay for future retiree health care with uncertain and likely rapidly increasing costs are accepting an unknown and potentially very costly risk. Response: We agree that benefits that are not capped provide less certainty to future costs. The City of San Rafael chose to cap its retiree health care benefits in order to increase the certainty of its commitments, This action contributed to a significant reduction in the actuarial liability. Finding F5. Because a few Marin County cities and other entities studied provide very limited benefits yet still appear able to meet community service needs, and because providing such benefits is increasingly rare in the private sector, such benefits appear to be unnecessary for attracting and retaining employees. Accordingly, for active and newly hired employees, the benefits should be trimmed and costs should be shared between the employees and their employer. Response: Health benefits continue to play a role in attracting and retaining employees. We disagree that benefits 'appear to be unnecessary" because they are of greater or lesser importance based on an individual employee's or applicant's unique circumstances. As for San Rafael, retiree health benefits have been capped, the benefit levels have recently been reduced to the lowest level allowed starting in 2009, and costs are shared between the employees and their employer. Finding F6. Marin entities using "Pay -Go" funding are paying only the current year health care benefits of those already retired. This ignores the reasonably known rising costs to cover future retirees who are already heading for retirement. Some actuarial valuation reports the Grand Jury studied provide those future "Pay -Go" estimates year -by -year, so they should be readily available from the actuary's valuations. Estimates of those annual costs for each of the next 10 years should be provided to the public so that those who will incur the costs can know those costs. Response: The City of San Rafael does not use "Pay -Go" funding and instead is fully funding our retiree health costs through the use of a Section 115 Integral Part Trust. Regarding transparency to the public, the City supports maximum transparency on both pension and OPER-related issues. The City Council has recently directed staff to increase transparency of pension and OPER finances and City initiatives through use of a pensionlOPEB-specific page on the City's website Finding F7. Employers studied for this report should include an age -60, or even later, date for retiree health care benefits to commence in future negotiations with employees and their representatives. Response: The City of San Rafael does not have direct knowledge of the legal abilities and constraints of various health care systems that differ from our own system and retirement age is only one of many factors that should be considered in an appropriate benefit. As for San Rafael, the minimum age of retirement has recently been increased for certain employees and the recent California Public Employees' Pension Reform Act (PEPRA) has also changed retirement ages which are often used for retiree health eligibility. Finding F8. The results of retiree health care actuarial cost analyses are summarized if at all only in obscure notes to annual financial statements. The public is entitled to more readily accessible explanation of these costs because the public will bear those costs. Response: The City of San Rafael supports maximum transparency on both pension and OPEB- related issues. The City Council has recently directed staff to increase transparency of pension and OPEB finances and City initiatives through use of a pension/OPER-specific page on the City's website. Finding F9. There is a wide range of retiree health care benefits offered among the entities studied in this investigation. No clear explanation for the range from minimal to extremely generous is readily available. Those entities that are promising relatively generous benefits should provide clear justifications to their citizens and customers. Response: The City of San Rafael agrees that there is a wide range of benefits offered among the entities in the investigation and that individual jurisdictions are responsible for providing justifications to their citizens and customers. Finding F10. Most of the entities the Grand Jury investigated are using fairly reasonable discount rates of 4% - 5% per year to bring back to today in actuarial valuations the future annual costs of retiree health care benefits. However, some are using higher and highly questionable rate assumptions that are not justified by the investments (if any) that they have made to grow and fund the future benefits. The result is to understate the total funding needed today and in future years, to pay for those future benefits. Response: The City has not researched the actuarial assumptions of other Marin local governments beyond what is contained in the Grand Jury report. Whether or not a particular jurisdiction's assumptions are appropriate would be based on their unique circumstances. As for San Rafael, the City is fully funding our retiree health costs through the use of a Section 115 Integral Part Trust which invests the funds over a very long period of time using assumptions similar to a pension fund. The rate assumptions used in the City's OPEB actuarial valuations are consistent with the investment return targets used by the entity managing the investments. Prior to June 25, 2013, this was MCERA; since that time it has been CaIPERS. Recommendation R1. Begin setting aside in separate investment accounts, if it is not already doing so, each year's funds for amortizing its retiree health care benefits' UAAL, in addition to its "Pay -Go" funding of those benefits for present retirees Response: The City of San Rafael has already implemented this recommendation through the trust and the budgetary decisions of the City Council. Exhibit 6 on page 15 of the Grand Jury report illustrates that the City of San Rafael has the highest funded ratio of all studied jurisdictions. Recommendation R2. Begin a program to lower the amortization period for funding its retiree health care benefits UAAL from as much as 30 years presently, to approach (within 10 years). the commonly used 17 -year amortization period for retiree pension funding. Response: The City of San Rafael already uses an amortization period that is less than 30 years. The City is currently using a 23 -year fixed (closed) period. The City will review the amortization period on a regular basis through each OPEB actuarial valuation. Recommendation R3. Negotiate caps on the amounts it commits to pay existing and new employees for retiree health care benefits. Response: Already implemented. The City of San Rafael has already capped retiree health care benefits, the benefit levels have recently been reduced to the lowest level permitted by law starting in 2009, and costs are shared between the employees and their employer. Recommendation R4. Negotiate a higher retirement age than the currently applicable age for the commencement of retiree health care benefits. Response: Already implemented. The minimum age of retirement has recently been increased for certain City of San Rafael employees and the recent California Public Employees' Pension Reform Act (PEPRA) has also changed retirement ages which are often used for retiree health eligibility. Recommendation R5. Require active employees to make a contribution towards the cost of their retiree health care benefit. Response: Already implemented. All active employees hired after the City's significant retiree health changes beginning in 2009 receive a minimal retiree health benefit and therefore must fund the remainder of the premium upon retirement. Recommendation R6. Place a link on its website to provide the latest actuarial valuation of its AAL, its UAAL, its consequent percent funded, its discount rate (annual percentage) used to determine these values, and a projection of outlays ("Pay -Go") for retiree health care benefits for each of the current and subsequent 10 years. Response: Will be implemented in the Fall 2013. The City of San Rafael supports maximum transparency on both pension and OPEB-related issues. The City Council has recently directed staff to increase transparency of pension and OPEB finances and City initiatives through use of a pension/OPEB-specific page on the City's website. Marin County Civil Grand Jury MARIN'S RETIREE HEALTH CARE BENEFITS: THE MONEY ISN'T THERE SUMMARY Much has been written about government pensions but there is another retirement benefit, retiree health care, which is large and mostly unfunded. Currently, most government entities pay for both retired and current employees on a "pay-as-you-go" or "Pay -Go" basis, meaning that the cost comes out of the current operating budget. Only the current year's medical insurance costs for retirees are paid under this approach. As more employees retire, this burden will eat into the funds needed to sustain the present level of service. This Grand Jury investigated government entities' provisions to meet growing retiree medical health care costs for current employees and for those already retired. We reviewed the most recent actuarial valuations and financial statements that we were provided and found that with few (but important) exceptions, local Marin entities are failing to recognize a looming financial burden. This burden upon future generations of citizens (and customers, in the case of some special districts) will come about as a result of not implementing reduced retiree health care benefits, or from not funding them earlier (pre-fianding), or both. Our investigation discloses that the 40 government entities (the County, cities and towns, special districts and school districts) we surveyed have a collective liability of about $577 Million but have set aside only about $55 Million. Taxpayers and customers thus face future increased costs of $522 Million or nearly 91n,i> of the liability to pay for the benefits that have been promised but have not yet been provided for, If each service provider put aside a portion ofthe anticipated future retirement health care costs, the money invested today will earn a return, thereby reducing payments that taxpayers and customers would be required to make in the future, when retirees receive their promised health care benefits. Of all the entities studied, the County has by fear the largest unfi.anded liability, for meeting retiree health care benefits. At the end of its 2011 fiscal Year, the County was short about $293 rnillion (or about $2,627 per county household). Of the 40 entities the Grand Jury studied. only 12 have funded more than 511,1) of the liability presently owed for filture benefits. Twenty-six of the forty have made no funding at all for those promised benefits. N1 ay 2?, 2013 Niarin Civil Grand Jury l'a`c 4 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There This report includes information about the household liability for unfunded retiree health care benefits for all 40 entities studied., so that interested people can tally the amounts of their household's resultant liability. Failure to invest now to cover retiree benefits that employees have already earned is ethically questionable, and jeopardizes the likelihood that the promised benefits can or even will be provided. If the benefits are to be provided by future large diversions of funds away from other services,, then the public is entitled to an explanation. Because the future payments will be so much larger than they are currently, employers are being less than honest with: 1) existing employees about the possibility of being unable to fund the benefits, and 2) taxpayers and Special District customers who will experience higher taxes and service rates, reduced future services, or both when the increasing annual payments must be made. What this means in simple terms is that if the liability problem is not addressed within the next few years, each Marin County household will be assessed significant additional taxes or will see a dramatic reduction in services. The Grand Jury recommends that each Marin County local government, special district and school district: • Negotiate caps on the amounts it commits to pay existing and new employees for retiree health care benefits. • If not already doing so, initiate annual finding of this benefit over and above the pay-as-you-go amount. • Negotiate a higher initial retirement age than the currently applicable age for the commencement of retiree health care benefits. • Require active employees to make contributions towards the cost of their retiree health care benefits. • Lower the amortization period for funding Its retiree health care benefits liabilities from as much as the present 30 years, to approach (within 10 years) the I commonly used 17 -year amortization period for retiree pension funding. • Provide a link on its website to information listing the values of critical actuarial assumptions that determine the liability for funding retiree health care beriefits. • Include on its website the latest values for unfunded retiree health care liabilities, and the percentage of total retiree health care liabilities that has been funded. BACKGROUND Retiree Health Care Benefits Are Costly and the Costs are Rising Because of widespread public coverage of concerns about public sector penSIOTIS, this Grand Jury determined to investigate the less prominently covered matter of other post - Merin County Civil Grand Jury Pate 2of 0 d av 22. 2(?(: 3 Marin's Retirement Heath Care Benefits: The Money Isn't There employment benefits (OPEBs) offered in Marin to employees of local governments, special districts and school districts. OPEBs are primarily health care payments and other related benefits promised to employees who meet specified periods of service and age at retirement. Although generally not as costly as promised pensions, retiree health care benefits costs can be substantial. They impose significant on-going government financial liabilities that, in fairness to future generations of taxpayers and customers served by special districts, should be paid for during today's employment, and not be left for payment during retirement at a cost to fixture taxpayers, customers and ratepayers. A major difference between pensions and retiree health care benefits is that pension benefits have historically been paid from trust funds that receive periodic contributions and have the ability to generate investment earnings. In contrast, the Grand Jury found that most Marin local government and other entities we studied manage their retiree health care plans by funding only current annual payments for those already retired tinder "Pay -Go" funding. That is, the plans commonly provide little or no contribution to fund the promised payments for present employees' benefits to be paid when they reach retirement, nor do they provide funds for the future health care benefits of those already retired. This failure to pre -fiend places a burden on fiiture taxpayers to pay for rising costs at the expense of other reduced services. Like many California local governments, Marin County, cities and towns, school districts and many special districts promise employees retiree health care benefits. The Grand Jury found, however, that only a shrinking minority of private sector entities offer such retiree health care benefits. Those private -sector firms that do provide such retiree benefits increasingly- cap or otherwise limit the benefits they promise to provide. t Health care costs continue to increase faster than general inflation, and this trend is forecast to continue. This is reflected in all of the actuarial valuation studies we reviewed. Additionally, retirees and their covered dependents are living longer.' For example, about ten years ago, Chevron decided to provide no more than a fixed total dollar amount annually to fund all retirees' health care costs, increasing that fixed dollar amount by no more than 41','e/Year. This places a "cap" on what Chevron might incur to provide the benefits to retirees. Bank of America novo provides retirees a flat 5100 per month, and both Wells Fargo and AAA stopped retiree health care benefits to new employees several years ago. general Electric Corp reports in its recent 2012 Annual Report to Shareowners that it will close its post -age -tis retiree medical plans to salaried and retired salaried employees who are not enrolled in the plan as of"January 1. 2015. 'rhose plans currently apply to 205,000 retirees and dependents, GE is essentially terminating those benefits as of I 'U20 15 for employees born after V1,11 950, .. The Society of Actuaries issued a report in September, "201"2 ("Mortality lnnprovenaent Scale BB Report") which concludes that longer life --spans than previously used Should be reflected in actuarial studies in the future. This will increase the cost for retiree health care plan benefits above that for pre4 ions valuations such as those studied for this (.irund Jury report. Marin C ouuitv's demographics and life-styles alto tend to resuih in still urcat,_r len.-th-of life compared to broader t(YeugrapHeal- av�eragd s. May 22, 20t3 Marin Cottrtty Civil Grand Jury Page 3 of 30 Retirement Heath Care Benefits: The Money Isn't There Further adding to f ature costs is the fact that the numbers of local government employees who will be entering retirement in the future are projected to exceed those now in retirement. Accordingly, costs for Marin local government retiree health care benefits will increase substantially. Paying for these growing retiree health care costs will take increasing portions of current operating budgets. The public that will ultimately bear the costs generally does not readily understand this impact partly because of limited and somewhat hard -to -find financial disclosure. Most local government entities have only recently begun to disclose their retiree health care financial liabilities. The limited information provided is usually found only in relatively obscure notes to financial statements. Information is Now Available that Wasn't Previously Two recent Marin County Civil Grand Juries issued reports that included some focus on retiree health care benefits. The 2004-5 Grand Jury's report, "The Bloated Retirement Plans of Marin County, Its Cities and Towns (Revised)," primarily focused on pensions. It noted that criteria for estimating the firture cost for retirees' health care benefits provided by local governments had not been generally determined. Therefore, it estimated that liability only for the County, and not for other Marin local governments or public entities. The 2004-5 Grand Jury's report noted that guidelines calling for such retiree health care benefit calculations and for their public reporting had just been issued' at the time of its report. Moreover, the new standards promulgated by the Governmental Accounting Standards Board (GASB) were not due to be implemented until Discal Years ending after June 2009. The 2006-7 Marin Civil Grand Jury's report: "Retiree Health Care Costs: I Think I'm Gonna Be Sick," focused on whether retiree health care benefits were irrevocable legal obligations of"local government Page 5 of the report asks whether they are "...a vested right for active or retirement workers" Can they be taken away or changed?" Finding 12 of that Grand Jury's report concluded, among its other findings, that there is a potential conflict of interest for public employees who manage the retiree health care benefits they provide, because those public employees "...may be eligible to receive the health care benefits they manage." That Grand Jury, like the 2004-5 Grand Jury, also lacked any reported data about the extent of local -government -provided retiree health care costs and the capability to pay them. The :agency that issues accounting and financial reporting guidelines for local governments is the Governmental Aci.ounting Standards Board ((_aASB). GASB issued its retiree health care cost reporting requirements in 2004 (GASB Statement 45 or GASB 'I'hc Bloated Retirement Plan, of klarin County, Its Cities and Tt sms (Revised), May 9, 2005; REITIRFI" HEALTH CARE C OSTS: I T[If K I'M GONNA BE SIC=K_ March 11), 200'. Gover. mental AccomAiny Standards Board Statement No 45. AccouritirL) and Fitian iaal Reporting for I'4r;t-emn} n rr,Ut<t L cnc#its C_ tlacr Thar P .nsior:s. Jrie 2004. Nlay 22, 2011 Marin Count3 Cie it Grand Jure Pagc, 4 of ,'0 Marin's Retirement Heath Care Benefits- The Money Isn't There 45 - See Glossary), with implementation for entities like those in Marin generally to commence as of the 2009 Fiscal Year end. Thereafter, updated reports are required every 3 years for most Marin local governments and special districts and every 2 years for larger -employee jurisdictions like the County. Because GASB 45 financial reporting standards have now taken effect, and thus, some data are now available for analysis, this Grand Jury decided to investigate Marin's County, towns and cities, some special districts and the largest school districts. For the entities studied, our investigation focused on understanding the: • Likely future obligations to provide retiree health care benefits • Likely funding approaches to pay for those benefits • Potential impact on budgets and set -vices from paying those benefits • Efforts taken and planned to reduce the rising costs of those benefits APPROACH The Grand Jury reviewed the 2004-5 and the 2006-7 Grand Jury reports that concern Marin retiree health care benefits. We also reviewed the responses to those reports. A more recent June 22, 2011 report by the Marin County Council of Mayors and Council Members, titled: '"Marin County Local Government Reform of Pensions and Other Post - Employment Benefits," provided useful information, including some data on cities and towns' initial disclosure of financial liability for future retirees' health care benefits, pursuant to GASB 45 requirements. We reviewed the retiree health care benefit accounting and financial standards now called for by the Governmental Accounting Standards Board. Specifically, we reviewed GASB 45, and various summaries and analyses of that Statement. We researched and reviewed other California County Civil Grand Jury reports on retiree health care benefits. Local newspaper reports on the subject also provided useful perspective. We reviewed various think-tank and academic research reports on the nation's retiree health care benefits' looming unfunded liabilities, and similarly focused governmental studies and reports. (See Bibliography for a partial listing.) Our understanding also benefited frorn the recently released "Report for the State of California," valuing the liabilities for the State's retiree health care benefits as administered by the California Public Erriployees Retirement System (Ca1PERS) and the California Department of Human Resources (Ca1HR).5To understand the nomenclature and importance of I terms reported in local government financial reports, we reviewed Ma v 2-1, 2t`13 klatin Coant,, Civil Grand Jury Page of'30 Marin's Retirement Heath Care Benefits: The Money Isn't There those reports that now present GASB 45 required funding status, and related GASB 45 compliance. Grand Jury representatives monitored the County's October 2, 2012 workshop at which County Administrative Office (CAO) personnel presented a proposal to pre -fund for the first time a small portion of the County's large ($383 Million as of 7/1/2012) completely unfunded retiree health care liability." The proposal presented at the workshop was to fund both pensions and retiree health care with $23 Million each, from available "one- time funds." We also reviewed the subsequent CAO proposal to reduce that initially proposed retiree health care benefit pre -funding and instead, to reallocate the reduction to increase the pension -funding amount. Members of the Grand Jury monitored the Board of Supervisors' February 5, 2013 meeting at which the County's retiree health care pre - funding amount and mechanisms were authorized at $14 Million rather than the original $23 Million. We reviewed the actuarial firm's reports for the County's retiree health care benefits. 7 We followed this with two interviews with a representative of that firm. We also reviewed the most recent report of the County's pension benefit actuary.' That report covers all of the entities that are part of the Marin County Employees' Retirement Association (MCERA). These include the County, the City of San Rafael, the Novato Fire Protection District, and some other local government entities. Grand Jury members attended MC'ERA's October 2012 annual Investment Committee workshop. Our focus was to acquire filrther understanding of finding and actuarial issues, which have common application to pension and retiree health care benefit matters. With an understanding of the issues, relevant financial reporting, and the mathematics of local government retiree health care benefit costs and funding matters, the Grand Jury prepared a list of data needed to evaluate Marin entities' steps to provide for the cost of those benefits. The resultant survey was sent to representatives of the County, its 1 l cities STATE, OF CALIFORNIA RETIREE FIF.ALTFI BENUFITS PROURA;vL CiASB NOS 43 :4ND 45 ACTUARIAL. VALUATION RLPORT AS OF JUNE aft, 2011. Clabriel Raeder S.Ziith & (-'ompanv. C'onsultarnts and Actuaries. February" 21, 2013. 6 -€laal-wnrkshcp inducted discus>>ion ofo similar Man to f,11-ther fund Counl Erni)loy",c• Pcrsions, -�thnch are funded at about the 751!,;, level (or about (t3;,,. on .t mors: complete basis that inciudcs the County's Pension Obligation Bonds' outstanding principal of about S1!.}iS Million). Count) cif iMarin Retiree Ile.altheare Plan. Actuarial Valuation as of Jul) 1, 20H I . For Fiscal Ycars 21011;'12 R 201213 GASB 45. J`anuarv-2.012). Bartel Associates. I.LC. Marin Co.trtty E'niplo ccs` Rtrircrncnt Association. Actu:irial Rcview and Analysis as ofJt;t� 3(1, 201'.. NYarch 0 20!2. EFi Actuaries MaN 22. 2013 Marin County Civil Grand .h.try Page 0 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There and towns and the now -separate 'twin Cities Police Authority`, 14 county special districts, and the College of Marin and the 12 largest count), school districts. The survey responses and farther follow-up data gave the Grand Jury Information about how well local governments are prepared to fulfill the promised employees' health care benefits upon retirement. The responses also disclosed that in the future most of the public entities surveyed will have a much higher number of retirees than those currently receiving retiree health care benefits, and money has not been adequately set aside to grow with time to fund those costs. The data in the following exhibits are based on the latest GASB 45 actuarial valuations and the latest financial statements that we were provided. The significant potential impact of an expanding eligible retiree population is illustrated in Exhibit 1. ('The data for all of this report's exhibits have been provided by responses to survey requests from all 40 entities studied, their financial statements, budget statements, and responses to follow -ftp questions. The Grand Jury acknowledges and appreciates their cooperation). Exhibit I shows, for example, that San Rafael Elementary School District has about 72 retirees now receiving health care benefits. But there are currently 335 employees who may eventually retire and become eligible for those benefits upon retirement. The future costs of such benefits, after allowing for reasonable assumptions of employees not continuing with the district to qualify for those benefits, wilt require substantial future outlays by the school district to fund those benefits. Actuarial calculations determine how much should be invested today in order to grow and pay for those future benefits. The higher the multiples in Exhibit 1, the higher the likely future cost and consequent need to invest today to pay for them. Hceatisc Other police departments are included in t" -n, and cities, the SpUn-off Lark -spur and Corte- %,rladera PD,, were irduded vvith the rcii,xris, cities and ociiinty Data w,'.n-e not a,ailable tW the no -,A, 3 -cities Central Marin Polji.:c " ulhotity; San Ansch-ro's Police Departnient data ,vere still included with the City of ;an Ansehi-,o in Oil- data used in our stud , I Marin Cou my C i,, i I Grand Jury I Marin's Retirement Heath Care Benefits: The Money Isn't There Exhibit 1: } Many More Employees- Will, Moue Into Retirement- i . tV(arin County Local Governments, -Special Districts and School Districts (Source: Retiree Health Care Actuarial Valuation Reports) Future Retirees Actives Retirees Potential Count Count Multiple Novato Sanitary District 20 24 0.83 Ross Valley Fire Department 28 29 0.97 Novato Fire Protection District 80 79 1.01 Town of Corte Madera 48 46 1.04 Southern Marin Fire Protection District 32 29 1.10 City of San Rafael 361 308 1.17 Kentfield Fire Protection District 13 11 1.18 Las Gallinas Valley Sanitary District 18 15 1.20 Central Marin Sanitary Agency 39 31 1.26 County of Marin 1813 1397 1.30 Twin Cities Police Department 42 32 1.31 City of larkspur S4 39 1.38 Marin Municipal Water District 253 169 1.50 Tiburon Fire Protection District 24 15 1.60 North Marin Water District S3 32 1.66 City of Novato 209 124 1.69 Town of San Ansel mo S3 30 1.77 City of Sausalito 82 37 2.22 San Rafael High School Dist 234 105 2.23 Marinwood Community Service District 22 9 2.44 Sanitary District #1 (Ross Valley) 23 9 2.56 Sewerage Agency of Southern Marin 13 5 2.60 Ross School District 45 17 2.65 j Marin Sonoma Mosquito and Vector Control 35 13 2.69 Dixie School District i 177 63 2.81 Ross Valley School District 205 65 3.15 City of Mill Valley 143 41 3.49 City of Belvedere 22 6 3.67 1 Town of Tiburon 35 9 3.89 Town of Fairfax 29 7 4.14 i San Rafael Elementary School Drst 335 72 4.65 j Larkspur-: orte Madera School District 33 7 4,71 - ,),vn of Ross 26 5 5.20 Real School District 152 T7 5 6.s Mill Valley 5choo; District 287 41 7.006 fentfic,.Ad Schoc1 D€str;ct 99 i.l 9.90 f Tama€pais Union High Schooi Distr .t 406 34 11.94 Mat- 22, 201 3 :Marin Cowity Cie -ii Grand Jury pag" 8 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There For a further perspective, the Grand .fury looked at the most recent general budget outlays for the government entities surveyed and compared the amount of unfunded retiree health care liabilities to those budgets. To provide an understandable measure of the unfunded liabilities we found, we developed a metric to tie the liabilities to those who ultimately should bear them. That is, we related the county and local government unfunded liabilities to the households served. (Household data are from the U.S. Commerce Department's Census Bureau statistics). We related the special district unfimded liabilities to the customers (generally households) they serve. We also related the school district unfunded liabilities to the households in their respective communities. We note that these debts are additive, in that the recipients ofcounty and local government services are often also customers of water districts, sewage -treatment, sanitation, and fire protection districts, and are local school district taxpayers. When accumulated this way, the magnitude of these debts is significant. The per -household liabilities for each City/Town, Special District and School we surveyed are shown in Exhibits 2 -- 4. Exhibit 2: Marin's Retiree Health Care Unfunded Liabilities for Local Governments: Dollars per Household $4,000 $3,500 &' .. . . ... ... - $3,000 $2,500 . _... $2,000 r kbps $1,500 .gwd ... „r Mill Valley 01 Corte Madera County of Marin N' Sausalito y L rk May 22, 2013, Marin County Civil Grand .fury° Nwe 9 of 10 a spur 'U San Rafael Tiburon Tvrin Cities Police -. .-.-. Ross o Belvedere San Anselmo syr, Fairfax Novato May 22, 2013, Marin County Civil Grand .fury° Nwe 9 of 10 Marin's Retirement Heath Care Benefits: The Monev Isn't There Exhibit 3 Exhibit 5 is an illustration of Jicrw these costs can be added tip for a typical Matin household.: klav 2121., '11013 Marin Covink, Civil Grand hury Page 10 o f 10 Marin's Retiree Health Care Unfunded Liabilities For Special Districts ,,4 Marinwood Community Service Dollars per Household District tO Novato Fire Protection District $3,000 - --- --- k Marin Municipal Water District 3, W Tiburon Fire Protection District $2,500 s',Ross Valley Fire District $2,000 *Southern Marin Fire Protection District V Sewerage Agency of Southern Marin $1,500 Novato Sanitary District Z Kentfield Fire Protection District $1,0 Las Gallinas Valley Sanitary District North Marin Water District $S 00 a5. 9'4 , Me, 1! 1 Central Marin Sanitation Agency -X, Marin Sonoma Mosquito and Vector Control ,,,Sanitary District #1 (Ross Valley) Exhibit 4 Marin's Retiree Health Care Unfunded Liabilities For School Districts Dollars per Household �` Ross School District $3,000 '6 Shoreline School Diqtrirt W Reed illnion school District $2;500 N KeotCeo School District 4.in R.)farl 1`tv Comentary Scf?LolDi<trict $2,000 Valley S,ir.cal Di,,irtJ Raf .7ei Citv Hig.(hool Dktri,t 4 OfNi,. School District Tarn a'.1pa's union .sch"ol D!stri,t .y M,10 `l0 al rhoo! Distnct Mat inCommi snity College Cistric- Att, 1 _q 1 Lljrk,n,t Cc.%,t,, ^V-dei2 Scn,,6 Dl,>=P`ct Exhibit 5 is an illustration of Jicrw these costs can be added tip for a typical Matin household.: klav 2121., '11013 Marin Covink, Civil Grand hury Page 10 o f 10 Exhibit 5: Matin's Retirement Heath Care Benefits: The Money Isn't There Marin County $2,627 per household (ph) MMWD NMWD $ 589 ph $115 ph My City or Town Special Districts School Districts My City or Town Special Districts School Districts To illustrate more hilly, Appendix A presents the separate per -household costs of each entity we surveyed. This information cart be used to determine the full impact each household will bear either by increased taxes or decreased services if this situation is not addressed. DISCUSSION What Has Been Promised? The governments of Nilarin County, its 11 towns and cities, many of its Special Districts and its school districts all offer employees some form of retirement health care benefits. The benefits generally cover a portion, or even all of the cost of specified health care insurance, in some cases including spouses and dependents. They also often cover some of their dental care insurance,. Such benefits are generally provided for the life of the retired employee and that of the spouse during that employee's retirement, and often for the surviving spouse. When covered retirees reach 'Medicare -eligibility age, the benefit costs generally decrease to reflect resultant reduced health care insurance costs, but the benefits continue thereafter, at the lower post -Medicare levels. Because of increasing life expectancy, ftinding needs today are very significant. ,May 22, 20t3 Mai -in County Civil Grand Jury Page 11 of30 Marin's Retirement Heath Care Benefits: The Money Isn't There The stated justification for offering this retirement benefit is the need to attract and retain employees, and thus be competitive with other jurisdictions. Accordingly, it is considered a portion of compensation. The Grand Jury notes, however, that private sector retiree health care coverage is increasingly rare, in contrast to the nearly 100% coverage provided by Marin's local governments, school districts and special districts. According to the Kaiser Family Foundation's Employer Health Benefits 2012 Annual Survey'`', only 25% of U.S. firms with more than 200 employees that provided health care benefits for active employees, also offered retired employees health care benefits. This most recent Kaiser finding of 251/'0 coverage notes that the private sector continues to eliminate employee health care benefits: Kaiser reports that the benefit offering has declined to 25% from Kaiser's previous showing of 66°10 back in 1988, and 32% in 2005. The Kaiser Survey also reports that at only 2511� coverage, these 200+ employee firms are "much more likely than small firms (3-199 workers) to offer retiree health care benefits." In contrast with these low coverage offerings by the private sector, the Survey notes that more than 77% of the more than 19 million employees of large U.S. state and local governments were eligible for retiree health care benefits, and that the percentage is even higher for smaller governments. From the responses to our survey, we learned that there is a wide range of Marin local government retiree health care benefit offerings. The County, towns and cities tend to distinguish between eligibility and benefits for police and fire employees ("safety employees") on the one hand, and other general or miscellaneous employees. Benefits for the safety employees tend to be greater, and,'or are earned earlier in employee careers and at a more rapid pace than for other employees. We note that this distinction is similar to that for local government retiree pension vesting and benefit amounts. Local governments historically have provided more generous retirement benefits, including earlier vesting for pensions. for safety employees than for non -safety employees. We also learned that some Marin jurisdictions have modified their benefits depending upon when the employee's ser -vice commenced, and some are offering (or are considering to offer) greatly reduced or cost -shared benefits to more recently hired employees. We also note that some jurisdictions have placed limits ("caps") on the amounts thev will pay, rather than agree to pay all or a fixed percentage of whatever the prevailing future health care costs might be under specified eligible programs retirees may select. The trend has been to reduce promises for fixture retiree health care benefits for active employees, pursuant to collective bargaining negotiations where applicable, and c:orrcurrentK to seek reductions for unrepresented employees. "E?'nploycr tle.slth Bet?c#its 2012 _1ttnuiil Stine}, Section 's 1: Rctit" 1-lettlth Beiic tts Mav 22, 201 ; Maria C"otrnty Civil Grand Jury P'aae 12 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There Generous Benefits -City of Mill Valley The City of Mill Valley is an example of a local government that provides generous retiree health care benefits. Pursuant to memoranda of understanding (MOUS) with represented employee unions and other resolutions, the City provides that "Full time employees of the Management, Technical, and Confidential group with 15 years of service and a PERS [California Public Employee Retirement System] retirement from the City shall be eligible for paid medical expense reimbursement for themselves and their spouse after retirement." And the City states that "The mayimum Citv contribution will be no more than the Kaiser employee f 1 rate." Moreover, the policy states "An employee who meets the above criteria shall qualify for medical coverage for the remainder of his/her life and that of his/her spouse." For 2012, Mill Valley paid health care benefits of about S 1,1681/month for a retiree and spouse under Kaiser's relevant HMO plan. This is about $14,000 per year. (We note that when the retiree becomes eligible for Medicare. the City's payments decline, and for the same 2012 Kaiser -plan coverage, costs borne by the City drop to about $570lmonth, or about $7,000 per year, at 2012 rates.) By contrast, Mill Valley School District teachers and staff recently agreed to cap their retiree health care benefits, which reduced the school district's liability by about one- third. Marinwood Community Services District The Marinwood Community Services District (MCSD) provides fire protection to approximately 1,750 houses in Marinwood and portions of Lucas Valley. It also provides and maintains the community's much -used swimming pool and related facilities. MCSD provides health care benefits to employees (the majority of whom are fire protection employees) and their spouses. 'The benefits are provided for those who retire at age 50 with only 5years of service required for full eligibility. 'Khat relatively young eligibility age of 50 for full lifetime benefits for all employees is unique among the entities the Grand Jury studied. NICSD uses "Pay -Go" and thus only pays for retirees' health care benefits as the costs are incurred in retirement, with no ftinding for active employees' future post -employment health care benefits or for fixture years' benefits of those already retired. 'To its credit, however, MCSD is taking steps to address the Situation. According to the February 7, 2013 actuarial study of its retiree health care benefits, MCSD has lowered its benefit payments starting in fiscal Year (FY) 2013 to no more than c}Ot,(') of the CalPers Bay Area ``pre -age 65" Kaiser premium rates for all firer and axon -fire employees. And !/ICSD has set further stop -downs (for fire -employees only) to 85'% for FY 2014 and 801'4 for FY 2015. s rt -,'I( -SD has also increased the; years of service required for employees N1a inu oE.t? C on2inanits% Scr� ic4s Clisitict Actuaria I Val,uatioit: July, 2012). Mo. Ia} f eiii,;.tltan(s. May 2' 2013 Marin County Civil Grand .fur) Pa ,L 13 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There hired after July 1, 2012 to earn full retiree health care benefits to 20 years from the 5 - years for those hired before that date. The impact of these changes will gradually reduce MCSD's very high liability from what it would have been absent these changes. But even with these changes, the liability per MCSD household (about $2,750) is approximately 4 tunes that of any other Special District the Grand Jury surveyed. It is among the four highest liabilities per household of all entities the Grand Jury surveyed. And MCSD continues to fail to invest funds to pay for the benefits it has promised to present employees. The Other End of the Range -City of Novato; Dixie School District Some other Marin local governments offer similar or nearly as generous retiree health care benefits. But at the other end of the spectrum, retirees of the City of Novato received a monthly retirement health care benefit of about $112 per month (S 1,3 14 per year) for 2012. This payment amount is the minimum prescribed by the California Public Employees System (CalPERS) pursuant to CalPERS' medical insurance through the Public Employees' Medical and Hospital Care Act (PEMHCA). 12 The Dixie School District also caps its qualified retirees" health care costs at approximately $42.5imonth for a five year period and thereafter, provides retirees a mere $7.50imonth towards their health care coverage costs. Significant Movement to Control Costs -City of San Rafael 'The Grand Jury noted a substantial favorable change in the City of San Rafael's reported OPEB liability in its most recent actuarial study report compared to the previous report. In follow-up discussions with the City, we learned that in 2009 the City negotiated caps on the amounts of retiree health care benefits that it would provide to present employees. The City also instituted programs that call for contributions by active employees, and negotiated reduced annual increases in benefits when those employees retire. These changes are very significant: The cumulative effect is a reduction of approximately $21 Million in the; City's liability - a 37% reduction. 'This is equivalent to approximately $900 per San Rafael household. San Rafael, unlike most of the entities we surveyed. funds its retiree health care liabilities and not just with a Pay -Go approach. Even though it has negotiated reduced retiree health care benefits, the City's more responsible approach to fund these costs will nonetheless burden its citizens. This is because those retiree health care fundings come at the expense of a corresponding reduction in other City services. The Grand July concludes that the City of San Rafael has taken important steps to reduce its future costs of retiree, health care benefit::. We also note that the City is among a. small minority of i4larin government entities that has addressed the issue. In summarv, the Gravid Jury learned that retirees and those who will retire from Marin's local governments, special districts and school districts all receive or have been promised, PF%4JI ICA is arsthorizoI by the C aliforriia Gm, err inort Code, coirluleitcing vith sect ioat 22751. May 2 2, 2G13 Marin County Civil Grand ,fury Page 14 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There health care benefits from their pre -retirement employer. These are generally sizeable benefits. Their employers have not fiilly, or in most cases, not at all provided for their costs. We also learned that some employers offer substantially lower benefits, and yet are able to attract and retain employees. Exhibit 6: Future Retiree Health Gare Costs, Funded Amounts and % Funded Marin County Local Governments. Special Districts and School Districts NIay 2, 21 0 1 a+ Marin County Cb, Grarld .fury Page, 15 of 30 Liability Funded Amount % A; Entities With Some Funding ---From High to Low % Million Million Funded City of San Rafael $ 35.16 $ 10.86 30.9% Tiburon Fire Protection District $ 3.10 $ 0.83 26.7% Town of Fairfax $ 1.28 $ 0.25 19.8% Marin Municipal Water District $ 44.77 $ 8.67 19.4% Tamalpais Union High School District $ 6.54 $ 1.26 19.3% Central Mann Sanitary Agency $ 3.55 $ 0.68 19,1% Kentfield Fire Protection District $ 2.39 $ 0.39 16.2% City of Mill Valley $ 28.10 $ 3.62 12.9% Las Gallinas Valley Sanitary District $ 2.15 $ 027 12.5% County of Marin $ 319.30 $ 26.30 8.2% Ross Valley Fire Department $ 5.12 $ 0.31 6.1% Novato Fire Protection District $ 17.71 $ 0.95 5.4% Southern Marin Fire Protection District $ 549 $ 0.20 3.6% Town of Corte Madera $ 11.83 $ 0.04 03% Totals $ 486.46 $ 54.63 11.2% 13: Entities With Zero Funding ---From High to Low Liabilities Marin Sonoma Mosquito and Vector Control $ 12.03 0.00 0.0% City of Larkspur $ 7.49 0.00 0.0% Twin Cities Police Authority $ 7.25 0.00 0.0% City of Sausalito $ 6.63 0.00 0.0°l Novato Sanitary District $ 6.11 0.00 0.0 Marin Community College District $ 5.69 0,00 0.09 , San Rafael Elementary School Dist $ 5.46 0.00 0.0%1 San Rafael High School Dist $ 4.94 0.00 0.0°11� Marmwood Community Service District $ 4.74 0,00 0.0°i Sewerage Agency of Southern Marin $ 411 0.00 0.011/� North Marro Water District $ 307 0,00 0.0% Reed Union School District $ 3.04 000 0.0% Town of Tiburon $ 2.90 000 0.0% Mill Valley School District $ 2.16 111.00 0.0% Ross School District $ 2.14 000 0 W"I Town of San Anselmo $ 1 94 0.()0 0.0% Ross Valley School District $ 1.84 0.00 0.011/1. City of Novato $ 1.80 0-00 0.01/1 Shoreline School District $ 1.80 000 0 0""'' Kentfield School District $ 1.43 0.00 0.0% nixie School Di,,3tnct $ 1.06 0.00 O,OS', Novato Offie,4 Scheel Dit:frit;R $ 0.82 0.00 ::3.0"i:, ;'own of Ro o, $ G.53 ;.00 f) C11% ,ry .-,f Lae Kedk,. re I0.37 1.00 0 i:,°/ `;anttary District 91 (k,+: ss Valiey) L'wkspor-Cc,,ttex Madera School District $ 0.19 0.00 0 Totals: $ 89.85 0.00 O.DO Totals ---All 40 Entities Studied $ 576.31 $ 54.63 9.5% NIay 2, 21 0 1 a+ Marin County Cb, Grarld .fury Page, 15 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There For further reference, Appendix B presents the Unfunded Actuarial Accrued Liability (UAAL) for each of the 40 entities studied. What Do the Promises Cost? Exhibit 6 provides a glimpse of the retiree health care benefit costs that Marin local governments and special districts bear. As stated above, the governments generally do not pay for the benefits that their employees have earned. Rather, most of the government entities the Grand Jury surveyed are paying only for the current year's health care premiums of those employees who have already retired and are receiving the benefits previously earned from their working days---Pay-Go funding. By far the bigger retiree health care cost is that which governments have not paid: namely, the cost of benefits that have already been earned by existing, and usually much more numerous, active employees whose retirement is in the future. Governments using Pay -Go funding are also not funding payments beyond the current year for those who have already retired. What Information is Now Reported? These unpaid ---yet already employee -earned ---retiree health care benefits have recently come under the scrutiny of GASB, the accounting standards entity that sets financial reporting requirements for U.S. local governments. Probably better known by the general public is its sister entity for private sector accounting and financial reporting standards, the Financial Accounting Standards Board ---FASB. Both issue what are known as Generally Accepted Accounting Principles (GAAP) required to be followed for financial reporting. Adherence to such common principles is essential for such purposes as receiving auditor verification of financial statement adequacy ("clean audits"), and rating agency evaluation of credit -worthiness vital for debt issuance and for determining the costs of such debt.. Because; GASB 45 is now implemented, this Grand Jury was able to scrutinize conforming filings by Mann's governments for the first cycle. In some instances, we also had access to second cycle GASB 45 reports: Fiscal Year ending 2011 for the County and recent 2012 reports for some Cities, towns, schools and special districts. In compliance with GASB 45, local governments must report in their financial statements: 0 Retiree health care accrued liabilities (Actuarial Accrued Liabilities, or AAL) for future benefits, 2) "The amount of that AAL that has been funded by specifically ear -marked investments or by other assets, 30 -f he resultant unfilnded. portion (the unfunded AAL.. or (':' AL ), 41) the interest rate used to calculate those values ---analogous to the annual earnings rate that is assumed to grow invested funds to pay for the future benefits. and 5) The annual cost of currently paid benefits plus annual amortization of that AAL.. This is named the Annual Required Contribution (ARC). The last element aboN e, the ARC payment, while named Annual Required Contribution is actually not required to be made, nor is it even enforced by any institution.. regulatory May 2 2013 Marin County C.'ivil Grand Jury Page. 16 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There body, or accounting agency. 07derstw7ding this is important! 'I`he difference between this ARC' and the smaller payments under "Pay -Go" is accounted for as an obligation (like debt) to be met in the future, but has generally not been funded with invested cash by most of the entities studied by the Grand Jury. And there is a fitrther nuance: this is the liability calculated for obligations arising only since the implementation of GASB 45, not the higher obligation that would be calculated going back to the time when the employees started their employment and earning their future benefits. With each passing year the time comes one year closer to when the retiree health care benefits must be paid. Consequently, this debt rises annually absent adequate funding, or absent any reductions in the promised benefit. More details describing the mathematics of actuarial valuations and funding are shown in Appendix C. It presents information regarding the critical assumptions of discount (,or fiords earnings) rate and unfunded liability amortization periods. Illustration: The County's Retiree Health Care Obligation The County is Mann's largest local government entity. It presently provides health care benefits to about 1,400 retirees'3 who average 71 years of age, and incurs an annual Pay - Go cost of about S 12 Million to do so. This is about $8,600 per year per retiree and is capped at that amount for most employees, per negotiations with represented employee unions. In 2008, the County capped retiree health care costs at 53,000 for new employees. The County has about 1,800 current employees that would be eligible for retiree health care benefits upon retirement. According to its actuary's latest report, approximately 1,100 are within ten years of retirement eligibility and could soon add greatly to the numbers in retirement,. The County cited this looming issue in its April 2012 FY" 2012-13 Budget Hearings, when it pointed out that: The Department of Human Resources has identified that, over the next 5 years. 420.4, of the total workforce will be eli ible to retire, but 24%' will likely retire given current work patterns,�� At its March 2013 Budget Workshops for the next fiscal year, 2013-14, the County Administrator stated that the 42')/� retirement eligibility is now estimated to have increased to 50%. Either statistic -__42'>0-50% eligible or 24") or so likely ---suggests near-term swelling in retiree health care costs. This is because the ranks of those retired will grow and receive healthcare benefits. and those costs will likely not be offset by an equal reduction in health care costs for replacement active employees. ` 'These Marin County retiree healthcare data were; pro idcd in the most recent bietinial lilcniarlal studi , he Bartel Associates, Inc: -Count;, of kl.arin R tiree Healthcare Plan Actuarial Valuation as Of kkl i, 2011 For Fiscal Years 201 !112 & 201113 GASB 45 " Dated ,lanuary 2012, According to the U.S. Census Bureau, the nation's raver -65 year olds ofabout 40 million in'_0I0 is projected to grow to 54 n -i lion be 20,'0 and 70 million Iny 200 Marin is likely to expericnuc similar or cwn greater rckitive'=ro. with owing to life-style, rre.sent demographic and edtaea.tion, factors. 14ay 12. 20 13 Ntaritt County Civil (ir.tnd J!try Pale 17 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There The County's actuary, taking all of the probabilities and costs into account, estimated in its most recent (June 30, 2012) report that the County's retiree health care AAL as of July 1, 2011 was $383 Million. At the time of the actuary's valuation, the County had set aside zero funds to defray any of those earned benefits. Accordingly, the County's UAAL was that same $383 Million. With a population of about 250,000, that county liability alone is equivalent to about $1,530 per county resident, or about $3,430 per household. Fortunately, the Board of Supervisors decided to begin funding for this liability. As a result, the County funded $26.5 million in 2013 at an estimated investment rate of return of 5.5%, which was an increase over the prior estimate of 4.25%. When the County's actuary recently re -calculated the liability at this new higher discount rate and took the amount invested into account, the liability decreased to $293 million, or a decrease of 24%. For perspective, the County's $293 Million retiree health care benefit UAAL is 79% of its Fiscal Year 2012-13 general budget ---$371.7 Million. As a percent of the general budget, the County's unfunded liability is among the highest for any of the county's 11 cities and towns l' and amounts to $2,627 per household. The County's retiree health care UAAL equals about 80% of the County's retiree pension plan $370 million UAAL. However the County's unfunded retiree health care liability is far more alarming than the County's pension funding inadequacy. This is because the County's retiree health care liability is 921/'0 unfunded after the initial investment. In contrast, its pension liability is about 25% unfunded. To its credit, the County has recently recognized the dire straits of its retiree health care UAAL, and has begun what hopefully will become annual funding. However, the UAAL, balance remains startlingly high. Funds spent to reduce the U AAL, of retiree health care benefits are funds that will not be available for the services that county citizens would otherwise look to the county to provide. Absent reductions in the benefits already earned by employees and existing retirees, the result will be increasing pressures on the County to raise money front taxpayers. Potential Impact on General Budgets if the Obligations are Paid For Lxhibits 2-4, and 6 above, show the deficiency in funding retiree health care benefits for all 40 entities studied. The unfunded amounts are thus the debt that has been incurred by taxpayers and special district customers for failure to fund those obligations. For perspective, the (Mand Jury compared the unpaid retiree health care; liability of each entity studied, to its most recent general budgct. 'Thc following exhibits present that Marin County Citi it Grand .fury Page 18 of 30 As these Exhibits show, the unfunded retiree health care liabilities for many of Marin County's governments, Special Districts and school districts impose a significant impact on government services if and when funds are diverted to pay for what has been promised. Solutions Solutions will be painftil, especially in the likely scenario of limited revenue growth, resistance to ftirther taxation, and an economic outlook that appears to be less than robust. A combination of a reduction in promised retiree health care benefits, and accelerated funding to enhance monies available to pay those future benefits is necessary and prudent. Timing is critical. Continuing with only, Pay -Go funding will result in rising costs, primarily attributable to the influx of employees into retiree ranks. Necessary steps that should be taken by local governments are difficult. Among the painftil actions needed are to greatly reduce {that is, cap) retiree healthcare benefits for newly hired employees and to require all Cn-1plk)YCCS to make contributions tovards their retiree health care benefits. Marin Civil Grand Jury Page 1-0 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There FINDINGS F l . We find that many of Marin's local governments and special districts are failing to pre -fiord fiiture costs for retired employees by making investments to cover promised benefits for active employees. This jeopardizes the certainty that retiree health care benefits promised to current employees will be paid. F?. The failure of the majority of entities studied in this investigation to begin an investment program to provide a portion of the needed funds to pay for retiree health care benefits leads to generation shifting of the payment responsibility. Thus it appears to be, at the least unethical, and eN en a breach of fiduciary responsibility. F3. The extreme 30 -year amortization period used by most entities minimizes the annual cost of funding the liability gap and further defers to future generations the compensation owed to present employees who provide services to present taxpayers and customers. Shorter amortization periods should be required for reasons of equity and to ensure that the promised benefits will be provided. F4. By capping retiree health care benefits, the City of San Rafael has reasonable certainty as to what those costs are. Other entities studied here that promise to pay for future retiree health care with uncertain and likely rapidly increasing costs are accepting an unknown and potentially very costly risk. FS. Because a few Marin County cities and other entities studied provide very limited benefits yet still appear able to meet community service needs, and because providing such benefits is increasingly rare in the private sector, such benefits appear to be unnecessary for attracting and retaining employees. Accordingly, for active and newly hired employees, the benefits should be trimmed and costs should be shared between the employees and their employer. F6Marin entities using "Pay -Go" funding are paying only the current year health care benefits of those already retired. This ignores the reasonably known rising costs to cover future retirees who are already heading for retirement. Some actuarial valuation reports the Grand Jury studied provide those future "Pay -Go" estimates year -by -year, so they should be readily available from the actuary's valuations. Estimates of those annual costs for each of the next 10 years should be provided to the public so that those who will incur the costs can know those costs. F7. Employers studied for this report should include an age -60, or even later, (late for retiree health care benefits to commence in fixture negotiations with employees and their representatives. F8, The results of retiree health tare actuarial cost analyses are summarized if at all only' in obs(:ure notes to annual financial statements. The public is entitled to more readily- accessible explanation of these costs because the public will bear those costs. F9. There is a %vide range of retiree health care benefits offered among the entities studied in this investigation. No clear explanation for the range from minimal to NIay 22., )`)! 3 Mann Cowity Civil (Jrand Jury Page 21 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There extremely generous is readily available. Those entities that are promising relatively generous benefits should provide clear justifications to their citizens and customers. 1710. Most of the entities the Grand Jury investigated are using fairly reasonable discount rates of 4% - 5% per year to bring back to today in actuarial valuations the future annual costs of retiree health care benefits. However, some are using higher and highly questionable rate assumptions that are not justified by the investments (if any) that they have made to grow and fund the future benefits. The result is to understate the total funding needed today and in future years, to pay for those future benefits. RECOMMENDATIONS The Grand Jury recommends that each Marin County local government, special district and school district: R1. Begin setting aside in separate investment accounts, if it is not already doing so, each year's funds for amortizing its retiree health care benefits' UAAL, in addition to its "Pay -Go" funding of those benefits for present retirees. R2. Begin a program to lower the amortization period for funding its retiree health care benefits UAAL from as much as 30 years presently, to approach (within 10 years), the commonly used 17 -year amortization period for retiree pension finding. R3. Negotiate caps on the amounts it commits to pay existing and new employees for retiree health care benefits. R4. Negotiate a higher retirement age than the currently applicable age for the commencement of retiree health care benefits. R5. Require active employees to make a contribution towards the cost of their retiree health care benefit. R6. Place a link on its website to provide the latest actuarial valuation of its AAL, its UAAL, its consequent percent funded, its discount rate (annual percentage) used to determine these values, and a projection of outlays ("Pay -Go") for retiree health care benefits for each of the current and subsequent 10 years. REQUEST FOR RESPONSES Pursuant to Penal code section 933.05, the Grand ,fury requests responses as follow`: Frorn the following individuals: ■ Marin County Administrative Officer: Ii 3, F5, F'7, F8, F9, R2 through. R6. From the following governing bodies: a County of 1Vlarin Board of Supervisors: F3, F5, F7, F8, F9, R2 through R6. MaN ?2, 2013 Marin County Civil (11raiud July Page 22 oi`30 Marin's Retirement Heath Care Benefits: The Money Isn't There ■ Each of the 11 Marin City and Town Councils: City of Belvedere, Town of Corte Madera, City of Larkspur. City of Mill Valley, Town of Fairfax, City of Novato, Town of Ross, Town of San Anselmo, City of San Rafael, City of Sausalito, Town of Tiburon: All Findings F1 through F10 and all recommendations, R1 through R6. ■ The Police Council Chair, Central Marin Police Authority: All Findings F1 through Flo and all recommendations, RI through R6, ■ The School Board President for each of the 12 surveyed Marin School Districts: Dixie School District, Kentfield School District, Larkspur School District, Mill Valley School District, Novato Unified School District, Reed Union School District, Ross School District, Ross Valley School District, San Rafael Elementary School District, San Rafael City High School District, Shoreline Unified School District. Tamalpais Union High School District: All Findings F1 through F10 and all recommendations, R1 through R6. ■ President of the Marin Community College District Board of Trustees: All Findings F1 through F10 and all recommendations, Rl through R6. s The Chairman or equivalent of the Board of Directors for each of the 14 surveyed special districts: Central Marin Sanitation Agency, Kentfield Fire Protection District, Las Gallinas Valley Sanitary District, Marin Municipal Water District, Marin -Sonoma Mosquito and Vector Control District, Marinwood Community Services District, North Marin Water District, Novato Fire Protection District, Novato Sanitary District, Ross Valley Fire Department, Sanitary District #I (Ross Valley), Sewerage Agency of Southern Marin, Southern Marin Fire Protection District, Tiburon Fire Protection District : All Findings F1 through F10 and all recommendations, RI through R6. The governing bodies indicated above should be aware that the comment or response of the governing body must be conducted subject to the notice, agenda and open meeting requirements of the Brown Act. (GJ Text) 1lae 72. 2013 Marin County Civil Gran(IJ trN Page 21 ot30 Marin's Retirement Heath Care Benefits: The Money Isn't There ■ California Research Bureau: Actuarially Speaking: A Plain Language Summary of Actuarial Methods and Practices for Public Employee Pension and Other Post - Employment Benefits. Author: Grant Boyken. February 2008. www. library. ca. gov'crb/0 8/08 -003. pdf ■ County of Sacramento 2009-10 Civil Grand Jury Report: Unfunded Liabilities for Retiree Health Benefits. A School District Fiscal Time Bomb. www.sacgrandjury.org.,,'reports. ■ Kaiser Family Foundation Report: Employer Health Benefits 2012 Annual Survey. Retiree Health Care Benefits. wNN,w.ehbs.kf£org ■ Manhattan Institute for Policy Research, THE NEGLECTED FISCAL, MENACE: How to fix California's Retiree Health -Care Problem. October 2012. Stephen D. Fide, Senior Fellow. /html/`cr_73.htm ■ Pew Charitable Trust Report: A Widening Gap in Cities. Shortfalls in Funding Pensions and retiree Health Care. January 2013 ui?s ti yb.,v:.` tl.;� . ':t,. Research & Analysis. Reports ■ Society of Actuaries Mortality Improvement Report. September 2012. z,.a✓ ;:i. t",;r'r'a', 4;°;s,':1i Study... Research... BB Report ■ State of California Retiree Health Benefits Program, GASB Nos. 43 and 45 Actuarial Valuation Report as of June 30, 2012. Gabriel Roeder Smith & Company, Consultants and Actuaries, February 2l, 2013. ■ State Budget Crisis Task Force: California Report. September, 2012. Chairs: Richard Bavitch and Paul Volcker. Reports issued by the Civil Grand Jury do not identify individuals interviewed. Penal Code Section 929 requires that reports of the Grand Jury not contain the name of any person or facts leading to the identity of any person who provides information to the Civil Grand Jury. GLOSSARY - AAI., --Actuarial Accrued Liability: The Actuarial Present Value of ftiture benefits (such as retiree health care benefits) attributable to employees' (including retirees") past service. Actuary: A professional skilled in the mathematical and statistical analysis of filturc probabilities for likely f hire event outcomes, and estimating the cost today of these future outcomes. Usually is a member of society that has standards of proficiency and experience for certification of such expertise. May 22, 1/01,1 Marin County Civil Grand .►tarty Page 24 of ,0 Marin's Retirement Heath Care Benefits: The Money Isn't There Amortization: The process of determining the payments to pay a loan or other obligation over a series of years with (usually) equal annual payments of interest and principal, such that at the end of the term the obligation has been fully repaid. ARC or Actuarially Required Contribution: An employer's periodic required contribution to a defined benefit plan such as retiree health care benefits. It is usually determined annually. It includes payments actually made for existing retirees' benefits plus the current year's portion of an amortization of future obligations. Discount Rate: The interest rate used in actuarial calculations to bring the estimated future costs of retiree health care benefits back to the present. It should be no more than the anticipated annual earnings rate for funds invested to pay for those future benefits. GASB or Governmental Accounting Standards Board: The organization that sets standards of accounting and financial reporting for all U.S. local governments. GASB Statement 45 or GASB 45: Issued in June 2004. this Statement established accounting and reporting standards for other post -employment benefits (that is, those post -employment benefits other than pensions) offered by state and local governments. Retiree health care benefits are the major, if not exclusive, non -pension benefit affected by this statement. General Budget: The portion of the annual budget of local government entities that is of an on-going repetitive nature, essentially all expenditures other than those for capital projects and for debt service. Implicit Subsidy: Actuarial valuations for some entities studied here calculate a separate component of the AAL, which is the value for retirees of having lower insurance costs because the retirees and active employees are combined for determining the cost of health care, benefits for them as a single group. The retirees thus benefit from being in a risk pool that has more favorable medical care experience and thus, lower insurance rates than if the retirees were in a retirees -only risk group. It is possible that such an implicit subsidy may never have to be paid, but it is required to be included in the actuarial liability calculations. Pay -Go or Pay -As -You -Go: The name given to the funding of only currently -paid benefits for retirees' health care, with no additional funding of earned but not yet payable benefits for both retirees and active employees. Special District: A government entity coronion in California, that provides services it) a territory that is not completely congruent with a government Jurisdiction, Exarnples include water districts that provide service to all or portions of several cities, sevvage- treatment plants that handle sewage from several local areas, incorporated or not. fire protection districts, etc. UAAL or Unfunded Actuarial Accrued Liability: That portion of an entity's AAI. for which no funding assets have been provided. Nla.y 2.1, 2013 Marin Comity Civil (hand jury Page 25 of 30 Marin's Retirement Heath Care Benefits.- The Money Isn't There APPENDIX B May 22, 201-3 Marin County Civil Grand Jttry Ila, -e 27 ot'30 Total Unfunded Retiree Health Care Cities and Town_ U_AAL $mil 1 County of Marin $293.00 2 Mill Valley $24.48 3 San Rafael $24.30 Corte 4 Madera $11.79 5 Larkspur $7.49 6 Twin Cities Police Authority $7.25 7 Sausalito $6.63 8 Tiburon $2.90 9 San Anselmo $1.94 10 Novato $1.80 11 Fairfax $1.02 12 Ross $0.53 13 Belvedere X0.37 Total $ 383.51 Schools 1 Marin Community College District $5.69 2 San Rafael City Elementary School District $5.46 3 Tamalpais Union School District $5.28 4 San Rafael City High School District $4.94 5 Reed Union School District $3.04 6 Mill Valley School District $2.16 7 Ross School District $2.14 8 Ross Valley School District $1.84 9 Shoreline School District $1.80 10 Kentfield School District $1.43 11 Dixie School District $1.06 12 Novato Unified School District $0.82 13 Larkspur Corte Madera School District $0.19 Total $35.85 i Special -District_ s 1 Marin Municipal Water District $36.10 2 Novato Fire Protection District $16.75 3 Marin Sonoma Mosquito and Vector Control $12.03 4 Novato Sanitary District $6.11 f 5 Southern Marin Fire Protection District $5.29 j 6 Ross Valley Fire District $4.80 7 Marinwood Community Service District $4.74 8 Sewerage Agency of Southern Marin $4.11 E 9 North Marin Water District $3.07 10 Central Marin Sanitation Agency 52.87 11 Tiburon Fire Protection District 52.27 12 Kentfield Fire P,otection District $2.00 13 Las Gailinas Valley Sanitary Distr et $1.88 1 14 Sanitary District ##1 ;Ross Valley; .$0.30 Total $102.33 j 40 Grand total $521.68 May 22, 201-3 Marin County Civil Grand Jttry Ila, -e 27 ot'30 Marin's Retirement Heath Care Benefits: The Money Isn't There APPENDIX C How are OPEB Liabilities Calculated? Estimating the cost of employees' future retiree health care benefits that are earned today is complicated and involves calculations by experts known as actuaries. These calculations use estimates of the likelihood that existing employees will remain employed and will retire from the local government and receive the promised future health care benefit payments. How long such retirees will live in retirement and receive those benefits, and how- those benefit costs will rise in the future, are also estimated. If spouses are covered, retiree spouse coverage, costs, and life span are also involved. Such calculations are made feasible by using computer models, and the techniques that actuaries use are fairly standardized in their application to entities subject to GASB Statement 45. With the estimated costs of a local government's future retiree health care benefits thus determined, the actuary calculates the amount of money that would be required to be on hand today, to grow at an assumed annual compounded earnings rate over time to fully fund these future retiree benefits when they are to be paid. The assumed compound annual earnings rate (or its counterpart ---discount rate to bring each future year's future costs back to the present) is a critical component of the actuary's calculations. Results, which are the liability today to fund those future costs, can vary greatly depending on the discount rate assumed. Generally, the assumed earnings or discount rate should have some realistic relationship to what the local government might earn on moneys it invests or better still, monies that it has invested for that purpose. But we found that overly optimistic assumptions (including unjustified high discount rates) are used by some entities in reporting their provisions to pay for retiree health care. This understates the arnount of hinds calculated as needed today to fund those fixture benefits. The actuary's report determines the AAL by effectively discounting to the present each future year's nominal cost of retiree health care benefits to be borne by the local government entity. These annual future yearly costs, each discounted to the present, are accumulated and the total is the AAL. Thus, the AAL value is highly dependent upon the discount rate assumed. The standard for recognizing pension liabilities costs includes a 17 -year period for amortizing unpaid liabilities. In contrast, the, standard for amortizing unpaid retiree health care benefit costs is as high as 30 vears. The use of such a longer period ( 30 years versus 17 years) is to shift costs to future generations, and also understates the UAAL annual funding compared to a more reasonable and conservative funding period. NI ay 12, 2ti13 Nbrin County Civil ( rand Jury Page 28 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There Interest Rate (or Discount Rate) and Amortization Period are Critical For illustration, as the following chart shows, discounting $1000 to be paid 30 years from now (an amortization period often used for retiree health care benefit liability cost calculations) at 4.25%, results in a value today of about $287, but discounting it at a higher 7.5%' results in a value today of only about $114. Thus, if we assume that we need to accumulate $1000 for payment 30 years from now, we would need to invest $287 today if it would earn 4.25% compounded annually, but only $114 if it would earn 7.5°-(') compounded annually.) Funds Growth/Yr at Different Earnings Rates *Y� Dollars ry0i Y y ... ...ysdru.udrwrrr.At�' o. P Years ­«„ 7.5",,,/`�r Also, the period of time assumed to accumulate $1,000 greatly affects the amount of money that needs to be invested today, to grow and reach that $1,000. The following table shows the results of these assumptions. Using a 30 -year period to grow investments rather than only a 17 -year period for example requires a much smaller investment today to grow to the same future amount. The table below indicates that an investment today of only $114 would be needed under the rnost optimistic assumptions, compared to $493 in the most conservative case. This could lead to an overly optimistic conclusion that only 23°%0 ($114 divided by $=193) need be set-aside today to reach a future 30 -years obligation compared to a more conservative amount to grow and reach Haat objective. B en usin<o,, the 425",' assumed growth rate but still a high30-year° amortization results in setting --aside today only 58" �� ("$287i$493) of what would he required to reach that obier..tive in 17 years. Mav 22, 20 i 3 Marin COLinty Grand .fury Page 29 of 30 Marin's Retirement Heath Care Benefits: The Money Isn't There Our review discloses that the actuary calculations for the entities studied generally are using amortization periods closer to 30 years (and even the full 30 -years for some entities) than 17 years, and interest rates in the 40'0 -to 5% range ----but some entities are Still using as high as 7.51N, with no such investments to justify rates higher than 4%. Effect of Interest Rate and Amortization Period on Investments to reach $1000 4,25%/Year Inter est _Rate $ Invested today to reach $1000 In 17 Years $493 In 30 Years $287 7.5 [Year Interest_rate $ Invested today to reach $1000 In 17 Years $293 In 30 Years $114 NIay 22. 2011 Marin County Civil Orand Jury Pa�_,e 30 of 30 Initial 30 -Year Amortization Investment $ Invested today to reach $1000 in 30 Years At 4.25%/Year $287 At 7.5%/Year $114 17 -Year -Amortization $ Invested today to reach $1000 in 17 Years At 4.25%/Year $493 At 7.5%/Year $293 4,25%/Year Inter est _Rate $ Invested today to reach $1000 In 17 Years $493 In 30 Years $287 7.5 [Year Interest_rate $ Invested today to reach $1000 In 17 Years $293 In 30 Years $114 NIay 22. 2011 Marin County Civil Orand Jury Pa�_,e 30 of 30 CITY OF SAN RAFAEL