HomeMy WebLinkAboutCC Resolution 13225 (Grand Jury Response; Public Sector Pensions)RESOLUTION NO. 13225
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 2010-2011 MARIN COUNTY GRAND
JURY REPORT ENTITLED "PUBLIC SECTOR PENSIONS:
A PERSPECTIVE."
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
2010-2011 Marin County Grand Jury Report, dated May 31, 2011, entitled "Public Sector Pensions:
A Perspective" 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 2010-2011 Marin County Grand Jury Report entitled "Public Sector Pensions: A Perspective,"
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.
1, 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 15'h day of August, 2011, by the following vote to wit:
AYES: Councilmembers: Brockbank, Connolly, Heller. Levine & Mayor Boro
NOES: Councilmembers: None
ABSENT: Councilmembers: None
ESTHER C. BEIRNE, City Clerk
Report Title: PUBLIC SECTOR PENSIONS: A PERSPECTIVE
Report Date: May 31, 2011
Release Date: June 7, 2011
Response By: City Council of the City of San Rafael
Title: Mayor and City Council
FINDINGS:
• We agree with the findings numbered N/A
• We disagree wholly or partially with the findings numbered N/A
RECOMMENDATIONS:
• Recommendations numbered N/A have been implemented.
(Attach a summary describing the implemented actions.)
• Recommendations numbered N/A have not yet been implemented, but will be
implemented in the future.
(Attach a timeframe for the implementation.)
• Recommendations numbered N/A requires further analysis.
• Recommendations numbered R7 will not be implemented because they are not
warranted or are not reasonable.
DATED: Signed:
ALBERT i ORO, Mayor
ATTEST:
Esther Beirne. City Clerk
Number of oases attached: I
ATTACHMENT "A"
RESPONSE OF THE CITY OF SAN RAFAEL TO GRAND JURY REPORT,
"PtTBLIC SECTOR PENSIONS: A PERSPECTIVE",
Recommendation R7. Plan Sponsors, not MCERA, should have the responsibility and
authority to award any payments to retirees that are in excess of retiree contractual
entitlements. Support legislative changes needed to move responsibility to Plan Sponsors.
Response: The City of San Rafael has repeatedly opposed excess payments to retirees. The
City Manager sent a letter to the Retirement Administrator in October 2009 and again in October
2010 (attached) opposing the granting of "ad hoc supplemental cost of living adjustments" or
other ancillary benefits. The stated reasons for opposition included: the high cost of providing
the ad hoc COLA, the decline and continued instability of investment returns, and the lack of
adequate reserves. Instead, the City recommended that any excess earnings be applied to the
employer liability to improve "the system's ability to reach a fully funded status."
The City understands that the authority to award ad hoc payments rests with MCERA and that
MCERA is limited by existing law, such as the County Employee' Retirement Law of 1937 and
their own current policies. The City of San Rafael has provided input to those policies and
would expect to provide input should the policies be up for revision in the future. Rather than
shifting the responsibility to administer this one section of the retirement program, the City would
be willing to support legislative changes that would additionally require City approval for any
excess payments. Therefore, this specific recommendation will not be implemented by the City
of San Rafael.
CITY OF SAN RAFAEL
L Z161111 I I Z les".1 4 18,1111111,11111 1111 ' i 11 ;:iir, � 11 ll�11' li 111�� 1 0 M
INSTRUCTIONS: USE THIS FORM WITH EACH SUBMITTAL OF A CONTRACT, AGREEMENT,
ORDINANCE OR RESOLUTION BEFORE APPROVAL BY COUNCIL / AGENCY.
SRRA / SRCC AGENDA ITEM NO. 41
FROM:
Jim Schutz
MS
August 9, 2011
DATE OF MEETING: 08/15/11
TITLE OF DOCUMENT: Consideration of a Resolution (A#*iahMet*Ay-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 2010-
2011 Marin County Grand Jury Report Entitled "Public Sector Pensions: A Perspective."
Deparfrifent Head (signature)
(LOWER HALF OF FORM FOR APPROVALS ONLY)
APPROVED AS COUNCIL AGENCY
AGE 1`41DA ITEM:
City,M anager (signature)
NOT APPROVED
APPROVED AS TO FORM:
- -j-
City Attorney (signature)
Date: June 7, 2011
San Rafael City Council
Clo Albert J. Boro, Mayor
1400 Fifth Avenue
San Rafael, CA 94901-1943
Marin County Civil Gran fury
Re: Grand Jury Report: Public Sector Pensions: A Perspective
Report Date: May 31, 2011
Dear Mayor Boro,
Enclosed please find a copy of the above report.
The Grand Jury requests that you respond in writing to the Findings and Recommendations contained in the report
pursuant to Penal Code Section 933.05 (copy enclosed). The Penal Code is specific as to the format of responses. The
enclosed Response to Grand ditry Report Form should be used.
Governing bodies should be aware that the comment or response from the governing body must be conducted in
accordance with Penal Code section 933 (c) and subject to the notice, agenda, and open meeting requirements of the
Ralph M. Brown Act. The Brown Act requires that any action of a public entity governing board occur only at a noticed
and agendized meeting.
The Penal Code is also specific about the deadline for responses. You are required to submit your response to the Grand
Jury within 90 days of the report date:
1 hard copy to: The Honorable Judge Terrence Boren
Marin County Superior Court
P.O. Box 4988
San Rafael, CA 94913-4988
1 hard copy to: Fred P. Cushing, Foreperson
Marin County Civil Grand Jury
3501 Civic Center Drive, Room #275
San Rafael, CA 94903
Responses are public records. The clerk of the public agency affected must maintain a copy of your response. Should
you have any questions, please contact me at 415-499-6132 or at the above address.
Sincerey
Fred P. Cushing, Foreperson
'10101,2011 .ilarirt Counts' Civil Grand ,htr1•
Enclosures: Penal Code Sec. 933.05; Response Forn
3541 Chic CenterDric e Room 2iS, Stn Rafael, Cil 94903 1"el 415-499-6132
2010-2011 MARI/I COUNTY CIVIL GRAND BURY
Puhlicfector Pensions:
A Perspective
Report Date — May 31, 2011
Public Release Date — ,dune 7, 2011 4
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Public Sector Pensions: A Perspective
SUMMARY
N,Iarin County Civil Grand Jury=
During the financial fiasco of 2008 and 2009, the Marin County Employees' Retirement
Association's (MCERA) net assets held in trust for pension benefits declined by
$386,542,100, a 25.5% drop, due to investment losses. Employer pension costs have
increased dramatically, with, for example, San Rafael now paying 50% of payroll, or nearly
20% of General Fund revenue, just to fund its annual pension obligation. Rapid increases in
pension costs are disruptive and result in government lay-offs and reductions in services.
The increased cost to employers of pension plans, as a percentage of payroll, coupled with a
concurrent loss of income, has caused the County of Marin and the City of San Rafael to take
aggressive action to balance their budgets. Although it is tempting to suggest that the cause
of the budget problem is high total employee compensation, that is not the acute problem.
Employer negotiations with labor determine employee total compensation amount and
pension plan provisions. However, the acute problem is unpredictable, rapid variation in
compensation — caused at this time by increasing pension costs. Such pension plan cost
volatility can be caused, for example, by improving pian benefits with retroactive crediting of
prior service and by investment market fluctuations.
MCERA is an independent agency and not under the control of the County. It provides
administrative and investment functions for pension plans that are designed to accumulate
sufficient funds during an employee's working career to pay the employee's pension during
retirement. Both employers and employees contribute to the cost of pensions. MCERA
invests the contributions. Typically, investment earnings fund about 60% of the ultimate
pension payout with only the remaining 40% being directly funded by employer and
employee contributions.
MCERA decisions can dramatically affect investment earnings rates and their volatility.
Prior to 1966, California public sector pension funds were generally invested in relatively
stable assets such as bonds. California voters then approved Propositions that permitted
increased investment risk-taking.
Additionally, MCERA can decide to make payments to retirees that are permitted by
retirement law but not specifically- included in their retirement plans. Due to actual inflation
exceeding plan limitations on cost of living adjustments, some MCERA retirees have lost
purchasing power. Prior to 2009, the MCERA Board made supplemental purchasing power
protection payments on an ad hoc basis to those retirees. In 2010, the Board enacted policies
to provide guidance for future action. Supplemental payments reduce plan assets. when
plans are underfunded, employers must make increased payments into the pension plans —
ultimately at expense of the taxpayers.
5/31 /201 1 Marin County Civil Grand Jury Page 1 of 25
Public Sector Pensions: A Perspective
Despite the financial consequences of MCERA decisions, the public has shown little interest
in its operations. MCERA should encourage public involvement by increasing visibility into
its operations. Making information more readily accessible on its website and increasing the
public -friendliness of its meetings would encourage public participation.
This report focuses primarily on three issues:
• the effect of volatility in investment returns on pension plan costs and government
budgets, and measures that would reduce that effect,
• supplemental payments (those not specifically provided in the terms of the
employee's retirement plan), and
• public visibility into MCERA.
BACKGROUND
At its board meeting on October 13, 2010, the Marin County Employees' Retirement
Association (MCERA) approved' two new policies: the Interest Crediting policy and the
Unrestricted Earnings policy. That approval was over the written objections of both the
Marin County Administrator and the San Rafael City Manager, and over the strong oral
objections of the Marin County Administrator made at the October 13 meeting.
The MCERA Board action, and its reporting in the local press, drew the attention of the
Grand Jury. The Grand Jury decided to improve its understanding of MCERA and to look
into the pension 'issue. We quickly learned that substantial MCERA investment losses in
2008 and 2009 resulted in significantly increased underfunding of MCERA pension plans,
and that resultant rising pension costs were creating budget problems for Sponsors.'
METHODOLOGY
The Grand Jury interviewed County and San Rafael officials, academics, MCERA board
members, staff and consultants, and other interested parties. We reviewed MCERA and
County documents, Marin Independent Journal and other press articles, the California
Constitution and State law, County Board of Supervisors resolutions, and various reports on
pensions. We attended MCERA Board and Committee meetings.
Our investigation provided insight into many controversial aspects of public employee
pension plans. While our investigation was underway, the Little Hoover Commission
published Public Pensions.for Retireiiient Securitv.3 That report recommends changes to
reduce future pension liabilities for current public workers, to introduce hybrid (both defined
benefit and defined contribution) plans, to realign pension benefits and expectations to ensure
pension plans are sustainable, and to provide improved public transparency and
accountability. Anyone interested in public pensions should read that report.
In April 2010, The Stanford Research Institute for Economic Policy published Guing_for-
Broke: Reforming Calijbi-nix`s Public EmploYee Peiision Ststeiiis, and in November 2010, it
' Minute,. Regular Hoard Meeting,Oetober 13.2+t1il. pg 5.
2 Spon or,. Lmployer Groups, and Enipiotcr_, all refer in ,lightly different «ay, to cntpi iters and grouping, of emple\ers ti hose emplo\ee,'
retirement assets are administered ht NICERA.
Little Hooter Commns,ion. Puhlic Pen,tom for Retirement Security, Februarn 2011, at ailable at
hnp: stn a Hic ca.v*. t ,wdie• 2o-1 report -'1`14 htn;i
5,31i2011 Marin County Civil Grand Jury Page 2 of 25
Public Sector Pensions: A Perspective
published The Funding Status of Independent Public Enph�vee Pension Sivems in
California. 4 These reports recommend use of a zero -risk interest rate to compute the present
value of pension obligations, which would result in a substantial increase in pension plan
liabilities. The Marin County Council of Mayors & Councilmembers created an ad hoc
committee on Pension and Other Postemployment Benefits Reform to study and report on the
effect on Marin cities and special districts of pensions, retiree healthcare pians, and other
postemployment benefits.
These reports have provided and will provide many helpful recommendations. The Grand
Jury contemplated expanding this report to include the entire subject of pension reform and
aspects of MCERA governance. However, we concluded, especially given the extensive
efforts of others, that such an expansion would be a bridge too far.
DISCUSSION
MCERA was formed July 1, 19.50, by the Marin County Board of Supervisors' adoption of
the County Employees' Retirement Law of 19375 (the CERL or the '37 Act, California
Government Code Section 31450 et seq.) pursuant to a vote of the people of Marin County.
On July 1, 1977, the City of San Rafael, the San Rafael Redevelopment Agency, and the
Novato Fire Protection District also became participants in the programa' MCERA is a cost
sharing, multiple -employer, defined benefit plan, public employee retirement system. It
covers employees of more than one employer and pools administrative and investment
functions as a common investment and administrative agent for each employer.
MCERA is governed by its Board of Retirement as required by California Government Code
Section 31520.1. It is an independent governmental entity separate and distinct from the
County of Marin. The Board of Retirement has nine members. Two are elected by County
miscellaneous members, one by County safety members, and one by County retirees. Four
are appointed by the County Board of Supervisors. The County Director of Finance is an ex -
officio member. The elected and appointed members serve three-year terms. MCERA
management is responsible for maintaining appropriate controls and preparing financial
statements.
Although MCERA is not under the control of the County Board of Supervisors or of its other
Sponsors, the Board of Supervisors must adopt provisions of the "37 Act before they become
applicable to the retirement plans administered by MCERA. The MCERA Plan Document
contains all Board of Supervisors actions related to MCERA operations.
MCERA provides pension plan administration for three main employer groups, the County of
Marin, the City of San Rafael, and the Novato Fire Protection District. The County of Marin
employer group includes the County, LAFCO, Marin County Courts, Marin/Sonoma
Mosquito and Vector Control District, Marin City Community Service District, Southern
Marin Fire District, and Tamalpais Community Service District. The City of San Rafael
includes the City and the San Rafael Redevelopment Agency.
4 Both reports are a%atlable at hvr: sierr.,tanfi•rd_du rulsanhs. et r 1 b r
s See MCERA's website under Laws S Regulations for a cop} of the 3 ; .kct
r See the RICLR,1 Financtai Statements with Independent :auditors Report for the Fiscal Years Ended June,!). _20l0 and =0x19 t,,r ad iitional
detai:s.
5i31,12011 Marin County Civil Grand Jury Page 3 of 25
Public Sector Pensions: A Perspective
The MCERA Board of Retirement oversees and guides the Plan subject to the following
basic fiduciary responsibilities: 7
• Solely in the interest of, and for the exclusive purpose of, providing benefits to
participants and their beneficiaries, minimizing contributions thereto, and defraying
reasonable expenses of administering the Plan.
• Invest and manage Fund assets as a prudent investor would, by considering the
purposes, terms, distribution requirements, and other circumstances of the Fund. In
satisfying this standard of care, the trustees shall exercise reasonable care, skill, and
caution.
• Diversify the investments of the Plan to minimize the risk of loss and to maximize the
rate of return, unless under the circumstances it is clearly prudent not to do so.
Diversification is applicable to the deployment of the assets as a whole.
In 1992, California voters added additional guidance to the first bullet above when they
approved Proposition 162, "The Pension Protection Act", which contained "A retirement
board's duty to its participants and their beneficiaries shall take precedence over any other
duty."
Pension Plan Basics
MCERA's pension plans are designed to accumulate sufficient funds during an employee's
working career to pay the employee's pension during retirement. Actuaries compute the
required contribution using the Entry Age Normal methods The computation produces a
Normal Cost — the amount that must be contributed each year, from the member's plan entry
date until the end of his or her projected working life — in order to be able to fund each
member's pension benefits. The required contribution amount depends upon the actuarial
assumptions for investment rate of return, inflation rate, and other items. Both employers
and employees contribute to the cost of pensions.
MCERA invests the contributions. Typically, investment earnings fund about 60% of the
ultimate pension payout with the remaining 40% being directly funded by employer and
employee contributions.9 If investments fail to produce the expected rate of return, or if
emplovers change pension plans to pay greater benefits than originally intended, then the
pension plans will be underfunded. MCERA Employer Groups are currently only funded to
the following levels: County, 72.6%; Novato Fire, 77.1%; and San Rafael, 62.9%.1Q The
employers are required to make additional contributions to their pension plans (Unfunded
Amortization in Table 1) to correct the underfunding.
MCERA In%estnient Polic, Statement. Februan _'Of,'-,
` MCERA Actuarial Re\ iew and Anah sis as of June 30. 2-110. Section 1.'
y Little Hno� er Conunis<ion Report. Puhirc P<rts;.>r,.s_,+<,r Rrnr<rnerrt S<-currn. Feb _u` 1. pu Iii
1 i W ERA Actuarial Reti ieu and Anal\ sis as of June 3(1. '1)10. Table 3.3
5131 "2011 Marin County Civil Grand Jury Page 4 of 25
Employer
Group
Marin County
San Rafael
Novato Fire
Public Sector Pensions: A Perspective
Total
Pension
Cost
(e=c+d)
33.49%
60.92%
57.02%
MCERA computes the amount of a new retiree's pension from pension plan rules and
employment history. The 2004-2005 Marin County Civil Grand Jury 14 explained the public
sector defined benefit pension plan payout formula as follows:
"In the public sector, employers usually provide pensions using a standard type of formula
expressed as a percent of pay (i.e., the benefit factor) for each year of service, multiplied
by the employee's final average pay, payable at a stipulated retirement age. For example,
commencing at age 55, under a common public sector pian, a retiree might be provided
with 2% of his final average pay for each year of service. Under such a plan a retiree with
30 years of service could retire at 55 with a benefit of 60% of final pay."
Of course, there are additional details, not the least of which is the adjustment made if the
employee retires before or after the retirement age stipulated in the plan. MCERA provides
extensive information on the details of its pians on its website. 15 Although primarily
intended to inform employees and retirees, the information is also useful to other interested
parties.
Pension Plan Cost and its Volatility
Total Compensation
In considering the effect of public pensions on government budgets, it is tempting to suggest
that the issue is actually the total cost of public sector employee compensation and that such
compensation is greater than in the private sector. A very experienced politician and fortner
CalPERS Board Member explained the situation thusly "The deal used to be that civil
servants were paid less than private sector workers in exchange for an understanding that
they had job security for life. But we politicians, pushed by our friends in labor, gradually
expanded pay and benefits to private -sector levels while keeping the job protections and
1 Ibid.']'able 3.r
- lbA fable 35
13 In addition. in FY201 l the Count, ii ill pad Sb.^34,435 to service its Pen,ion obligation Bond.. of l�hich 5845.000 n ill be principal and the
remainder interest.
14 Mann Gunn Ci%.l Grind Jun. Itte $lu,.ted Rt;iremetu Plans of Afarir Countt, ft, C <tws and Tontts.'~I:ti9. 'ilii{
htto �N \ co nnann.ca.us dents GO ni rin c\,rir _' )14ui RenretnentRcr rt Finai.edf
1.5 See hit[,: t k, co tnarin ca.us dent. RI main Publications vub, tnatn.cfm
5;'31i2011 Marin County Civil Grand Jury Page 5 of 25
Table 1
Current Average Pension Plan Contribution
Rates
Percent of Payroll
Employer
Unfunded Total
Employee
Normal Cost
Amortization Employer
Contribution 1' -
Contribution I I
(a)
(b) (c = a + b)
(d)
7.82%
16.01% 23.83 %13
9.66%
12.82%
37.18 % 50.00 04o
10.92%
19.21 %
24.45% 43.66%
13.36%
Total
Pension
Cost
(e=c+d)
33.49%
60.92%
57.02%
MCERA computes the amount of a new retiree's pension from pension plan rules and
employment history. The 2004-2005 Marin County Civil Grand Jury 14 explained the public
sector defined benefit pension plan payout formula as follows:
"In the public sector, employers usually provide pensions using a standard type of formula
expressed as a percent of pay (i.e., the benefit factor) for each year of service, multiplied
by the employee's final average pay, payable at a stipulated retirement age. For example,
commencing at age 55, under a common public sector pian, a retiree might be provided
with 2% of his final average pay for each year of service. Under such a plan a retiree with
30 years of service could retire at 55 with a benefit of 60% of final pay."
Of course, there are additional details, not the least of which is the adjustment made if the
employee retires before or after the retirement age stipulated in the plan. MCERA provides
extensive information on the details of its pians on its website. 15 Although primarily
intended to inform employees and retirees, the information is also useful to other interested
parties.
Pension Plan Cost and its Volatility
Total Compensation
In considering the effect of public pensions on government budgets, it is tempting to suggest
that the issue is actually the total cost of public sector employee compensation and that such
compensation is greater than in the private sector. A very experienced politician and fortner
CalPERS Board Member explained the situation thusly "The deal used to be that civil
servants were paid less than private sector workers in exchange for an understanding that
they had job security for life. But we politicians, pushed by our friends in labor, gradually
expanded pay and benefits to private -sector levels while keeping the job protections and
1 Ibid.']'able 3.r
- lbA fable 35
13 In addition. in FY201 l the Count, ii ill pad Sb.^34,435 to service its Pen,ion obligation Bond.. of l�hich 5845.000 n ill be principal and the
remainder interest.
14 Mann Gunn Ci%.l Grind Jun. Itte $lu,.ted Rt;iremetu Plans of Afarir Countt, ft, C <tws and Tontts.'~I:ti9. 'ilii{
htto �N \ co nnann.ca.us dents GO ni rin c\,rir _' )14ui RenretnentRcr rt Finai.edf
1.5 See hit[,: t k, co tnarin ca.us dent. RI main Publications vub, tnatn.cfm
5;'31i2011 Marin County Civil Grand Jury Page 5 of 25
Public Sector Pensions: A Perspective
layering on incredibly generous retirement packages that pay ex -workers almost as much as
current workers." 16
A California Department of Personnel Administration survey, 17 updated October 7, 2010,
shows State administrative and office employees' salaries leading their private sector
equivalents by up to 10% and trade and support services employees' salaries leading their
private sector equivalents by 4% to 24%. However, executive and managerial employees'
and medical and related employees' salaries lag their private sector equivalents. The survey
also says that local public sector (counties, cities and towns, and special districts) employees
are even better compensated than State employees in all but one of the 41 benchmark classes
surveyed. Others, who have not distinguished between employee classifications, have
reported that local public sector employee salaries are roughly equivalent to those of private
sector employees.
The Marin County Board of Supervisors, in their response to the Grand Jury's May 9, 2005,
report said "Taking into account that most private sector pensions are in addition to Social
Security, whereas the County's is in lieu of Social Security, we estimate that the average
County pension is approximately 22% higher than the average private pension (using the
Grand Jury's example)." If salaries are equivalent, then total County compensation,
including pensions, is greater on average than private sector compensation.
However, total compensation costs can be accommodated in government long-term plans.
The correct level of total compensation must be adequate to attract and keep the quality
personnel needed to competently conduct the government's business. That total cost is not
the primary cause of the current, unplanned government budget difficulties. That cause is
year-to-year volatility in government income and in the cost of total employee compensation,
including, in particular, variation in pension costs. The difficulties are widespread and not
limited to Marin County. For example, the San Francisco Controllers' Office reports
"Employer contributions to the pension system are projected to be a significant driver of
benefit cost growth over the next five years as the City pays into the pension fund to recover
from investment losses suffered during the economic downturn. The total employer
contribution for the City will grow from $360 million in FY 2010-11 to $721 million in FY
2015-16." 18
The Effect of Pension Cost Volatilitv on Budgets
The County states in its financial report 19 "Public pensions are also a significant factor
contributing to the projected budget shortfall. Equity market losses through June 30, 2009 in
Marin County Employee Retirement Association (MCERA) investment assets have created a
30% increase next year in the employer pension contribution — or approximately an $8
million increase in General Fund costs in FY 2010-11. Even with recent stock market gains,
pension contributions are expected to increase in the next several years as asset gains and
losses are typically smoothed to control rate volatility."
I6 San Francisco Chronicle. Januan 3. 2010, as reported in the Little hoofer Commission Report
i ' California Department of Personnel Administration, Total Compensation Sun ey - Salaries, updated October 7. 20 10 at 2:26 PM,
downloaded April 3, ^UI I from littn: uilti.dna.ca.gei tes-200, salanc,Etm
IS Countn and City of San Francisco. California, File -fear Financial Plan. Fiscal Years 2011-12 through 2015-16, page IU.
I �UountA of Barin Annual Financial Report for the Fiscai Year Ended June 3ti. 'iJ 1 1. pg 20.
htto: �NkXs.co marin.ca.us dent. AC '.Hain finance docs financial ream I-)NlarinFinmate.ndf
5,31/2011 Marin County Civil Grand Jury Page 6 of 25
Public Sector Pensions: A Perspective
The County also states in its Long -Term Restructuring Plan20 `-At current levels, public
pension systems are not financially sustainable without reform. Factors contributing to this
conclusion include current economic and investment climates, pension changes in the private
sector, longer life expectancies, and an aging workforce. Under current actuarial
assumptions, it is projected that the County of Marin will experience an approximately 40%
increase in employer pension contribution rates in FY 2010-11, due largely to a 17% decline
in the Marin County Employees' Retirement Association (MCERA) investment earnings
through June 2009. This represents an increased General Fund cost of approximately $11.4
million next fiscal year, the most significant component of the County's estimated $15
million structural gap for FY 2010-11. Employer costs will continue to rise in subsequent
years barring a significant rebound in investment earnings. The chart below illustrates the
impact of the MCERA projected increase in County employer rates as a percentage of pay,
and the County's increased funding requirements over a five-year period, based upon
investment earnings through June 2009:"
Figure 1
County Pension Cost Increases
Current Expectation Based on 2010 Information
35.0%
33.7%
As our pension cost as a percentage of payroll increases...+(j
31.4%
30.0%
••' /
$55.2
•
26.4% • •'
/�$ 50.7
'
25.0%
'��• -
23.4% 23.5%
••••
/ • / A$43.2
'+$28.4M
20.0%
/
••••
- — . — — - Z'
+$23.91V1
16.4°10•••
�' $38.2 $38.4
d
+$16AM
15.0%
+$11.4M cost +$11.6M
(40% increase)
$26'8
4f
...our employer cost increases as well (millions of dollars)
10.0%
IV
FY 09-10
FY 10-11 FY 11-12 FY 12-13
FY 13-14
FY 14-15
- > Pension
Cost as % of Payroll -Lr - Employer Contribution to Pensions ($ Millions)
Although the impact of pension cost on the County budget is significant, interested citizens
will not easily be able to learn that cost by reviewing County financial documents. A portion
of the County's cost is related to payment of principal and interest on its 2003 Pension
Obligation Bonds, issued to pay down its Unfunded Actuarial Accrued Liability (UAAL.)
related to the bursting of the stock market Tech Bubble (2000-2002). The Grand Jury has not
found a single County document that fully discloses all of its pension costs and their changes
over time. That information should be available in a single document.
MCERA and its actuary use techniques to smooth the effects of any variation between the
actual investment rate of return and its assumed average. First, the difference is incorporated
," County of Marm (.un_ -Tenn Rear, tunng Plan: A Blueprint f«r Financial SuctainabiIit,-. Januan 12. _Ulu
5,131,2011 Marin County Civil Grand Jury Page 7 of 25
Public Sector Pensions: A Perspective
(smoothed) into the calculation of UAAL over five years, with only 20% of the difference
being incorporated (smoothed) into the calculation each year. Then the UAAL is amortized
over several years.21 The dramatic results shown above are after such smoothing. To show
the smoothing process, the current status of smoothing is shown in Table 2 below. A net
market loss of $178,335,390 awaits smoothing into the actuarial value of plan assets and the
UAAL, assuring that pension costs will be impacting budgets for years.
Table 2
How Earnings are Smoothed to Compute Actuarial Values''
Year
Expected
Actual Return
Additional
Percentage
Dollars Still
12.4
Return
16.01
Earnings
Still to be
to be
10.59
25.17
37.18
Total Contribution
Smoothed In
Smoothed In
2007
104,877,553
232,824,722
127,947,169
20%
25,589,434
2008
123,698,715
(102,239,271)
(225,937,986)
40%
(90,375,195)
2009
112,984,849
(279,024,409)
(196,004,629)23 (
60%
(117,602,778)
2010
87,150,105
92,216,541
5,066,436
80%
4,053,149
Benefit Increases
Granting a pension plan benefit increase without concurrently paying the cost of its
retroactive component, as San Rafael did in 2004, can cause self-inflicted variation. When
pension increases are granted to employees nearing retirement, the funds needed to pay their
additional cost cannot be accumulated through periodic pension plan contributions prior to
the employees' retirement. Those costs become a part of the employer's Unfunded Actuarial
Accrued Liability (UAAL). They are then amortized (paid by the employer or, with luck, by
excess investment earnings) over several years as noted above. Table 3 below shows San
Rafael's contribution history.
Table 3
City of San Rafael Employer Pension Plan Cost
Percentage of total payrol124
The change in San Rafael's Unfunded Actuarial Accrued Liability between 2002 and 2003
resulted from both investment losses and the 2004 benefit increase for Police and
21 Currently 1 %ears: however, to tmprotie generational equith, it is anticipated that the amorttratnm period on the non -extraordinary portion
of the unfunded tiabilm w ould stay at 17 years for fiti e years, and then decrease by one ti ear per }ear until a period of 10 years is achieved.
This change will increase year-to-year vnlatilit% in employer contribution rate.
MCERA Actuarial Review and Anal sis as of June 30, 2010. Section 2?.
-3 For=Uo4, 50°„ of the los, on the market value of assets (5195.0041 h29} was amortized as a separate base, anti this portion of the loss was
therefore excluded from the actuarial smoothing procedure.
='f 'I1e UAAL is as of June 30 of the near shota u: however. the contribution rates apply to the folloNN ing fiscal %ear.
-5 _'002 and 2003 information from MCERA City of San Rafael Annual Actuarial Valuation, June 30. 2003. pg ii
'b MCLR� Actuarial Res ielN and Anai sis as of June 31;.'00', Tables 3." and 3. 10
ibid, Tables 3.5 and 1.1U
5,31/2011 Marin County Civil Grand Jury Page 8 of 25
200225
2003
200726
201027
Normal Cost
12.4
14.19
16.01
12.82
Amortization of UAAL
(1.05)
10.59
25.17
37.18
Total Contribution
11.35
24.78
41.18
50.00
Amount of UAAL
($3,445,000)
$34,212,721
$89,463,204
$146,389,231
The change in San Rafael's Unfunded Actuarial Accrued Liability between 2002 and 2003
resulted from both investment losses and the 2004 benefit increase for Police and
21 Currently 1 %ears: however, to tmprotie generational equith, it is anticipated that the amorttratnm period on the non -extraordinary portion
of the unfunded tiabilm w ould stay at 17 years for fiti e years, and then decrease by one ti ear per }ear until a period of 10 years is achieved.
This change will increase year-to-year vnlatilit% in employer contribution rate.
MCERA Actuarial Review and Anal sis as of June 30, 2010. Section 2?.
-3 For=Uo4, 50°„ of the los, on the market value of assets (5195.0041 h29} was amortized as a separate base, anti this portion of the loss was
therefore excluded from the actuarial smoothing procedure.
='f 'I1e UAAL is as of June 30 of the near shota u: however. the contribution rates apply to the folloNN ing fiscal %ear.
-5 _'002 and 2003 information from MCERA City of San Rafael Annual Actuarial Valuation, June 30. 2003. pg ii
'b MCLR� Actuarial Res ielN and Anai sis as of June 31;.'00', Tables 3." and 3. 10
ibid, Tables 3.5 and 1.1U
5,31/2011 Marin County Civil Grand Jury Page 8 of 25
Public Sector Pensions: A Perspective
Miscellaneous members. The unfunded cost of the benefit increase was $18.5 million. That
forward transfer of cost to future generations raises a generational equity issue.
Smoothing investment losses of $13.1 million into the UAAL also contributed to the total
increase. When San Rafael was granting the benefit increase, MCERA had an additional
$171.8 million of investment losses awaiting smoothing in over five years and allocation to
Sponsors, including San Rafael, through 2007.28
Chanes in the Law
Prior to 1966, the State Constitution generally prohibited public pension and retirement funds
such as MCERA from investing in stock of companies or corporations. In that year, voter
approval of Proposition 1 amended the Constitution to authorize the legislature to enact a law
permitting investment of up to 25% of the assets of the fund in common stock and not more
than 5% of the assets in preferred stock.29 In 1984, voter approval of Proposition 21 deleted
the constitutional provisions specifying percentage and type of stocks and corporations in
which public pension funds may invest. It also empowered the legislature to authorize any
investment of a public retirement system's funds, subject to specified standards of fiduciary
responsibility. 30
Those constitutional changes and related legislative action resulted in a shift of pension plan
assets from low volatility bonds to higher volatility stocks. Held to maturity, government
bonds are a near -risk-free investment. They pay a stable and predictable interest rate.
Unfortunately, that interest rate is well below the historic, long-term, total return available
from stocks. A lower rate of investment return would require a higher contribution by
employers and employees to produce the same pension payments.
Reachiniz for Yield
The unfunded amortization amounts listed in Table 1 above are an indication of the effect of
investment return volatility on annual pension plan cost. In an ideal, predictable world, only
the relatively stable Employer Normal Cost and Employee Contribution would be required to
fully fund the employee's pension at the time the employee retires. Reality is obviously
different. The primary cause of volatility in defined benefit pension plan annual cost is
volatility in investment return. As previously mentioned, investment earnings typically
provide about 60% of pension fund revenue.
MCERA adopted its Investment Policy Statement in February 2009.31 That extensive
statement sets forth principles for management of their large investment fund. The MCERA
policy is not overly conservative; it does not focus investments on fixed income securities
and does not require a passive, index -based investment approach.
It is a common truism that asset class investment return is correlated with investment risk.
The common proxy for investment risk is volatility. The details depend to some extent on
MCERA Cite of San Rafael Actuarial Rei iet3 And Analvsia. June 30. 2003. p-, 19
29 Ila:tir,g, Lai+ Trbran. UniversitN of California. IIa:.tin«, College of the La%G. Prop,,<nion 1. Public Rcnrenient Funds abbreviated Listing
30 ibid. Proposition 21, Public Pe n�ion Fund Invcstmcnt�
31 ,sl( FRA Im estntent Pohci Statement, Februan 3o09
5'31,12011 Marin County Civil Grand Jury Page 9 of 25
Public Sector Pensions: A Perspective
the time period studied; however, there are general principles. Table 4, columns (a) and (b),
presents risk -return information from Going for Broke: Reforfning California 's State Pension
Svstem.32 As can be seen, equities have historically returned 9.26%, well in excess of the
3.7% available from U.S. Treasury Bills. However, in most years the Treasury Bill return
can be expected to vary only between 0.7% and 6.7%, whereas the return on equities can be
expected to vary between a loss of 11.07% and a gain of 29.59%. Table 4, column (d),
shows how the asset classes can be expected to perform as compared to the required rate of
return of 7.75% assumed for actuarial calculations. The wide variation in expected probable
results demonstrates that employer budgets will continue to be significantly impacted by their
pension plans, leading to the conclusion that the plans are not sustainable in their current
form. The magnitude of this problem is further discussed below.
Table 4
Risk Return Profiles
Asset Class
Historic
Historic
Required
Probable Result
Investment
Rate of
Standard
Rate of
vs. Required RoR
Return
Deviation
Return
60.5%
69.7%
(a)
(b)
(c)
(d = a - c ± b)
U.S. Treasury Bills
3.7%
3.0%
7.75%
-1.05%; -7.05%
Investment Grade Corporate Bonds
7.25%
4.23%
7.75%
3.73%; -4.73%
Equities (S&P 500)
9.26%
20.33%
7.75%
21.84% ; -18.82%
Private Equity (Cambridge Index)
12.16%
12.46%
7.75%
16.87%; -8.05%
Venture Capital (Cambridge Index)
17.83%
29.99%
7.75%
40.07% ; -19.91%
The current MCERA Investment Policy Statement was adopted in February, 2009. In 2007,
as the market decline of 2008 and 2009 approached, the MCERA asset allocation was more
aggressive than current policy guidance. Table 5 below provides a comparison.
Table 5
MCERA Asset Allocation
NICERA"s aggressive 2007 asset allocation left it more exposed to losses from market
volatility than it could have been. Compliance with the Investment Policy Statement should
limit future exposure to that risk. Table 4 and Table 5 data suggests that MCERA should be
able to earn its current assumed Valuation Rate under its current Investment Policy.
Stanford In,titute for Ecornomic Research. Going for Broke: Reforming California's State Pension Sfstem. May I', :20D). pg _25
,3 The allocation to Prix -ate ]✓quit} is relatively new. NWERA expects it a ill take a few ears to identify and fund investment opportunities.
5i3112011 Marin County Civil Grand Jury Page 10 of 25
Current
June 30, 2010
June 30, 2007
Investment
Actual
Actual
Policy
Stock (Equities)
54.0%
60.5%
69.7%
Fixed Income
26.0%
28.4%
18.1%
Real Estate
12.0%
10.4%
12.2%
Private Equity
8.0%33
0.7%
0%
NICERA"s aggressive 2007 asset allocation left it more exposed to losses from market
volatility than it could have been. Compliance with the Investment Policy Statement should
limit future exposure to that risk. Table 4 and Table 5 data suggests that MCERA should be
able to earn its current assumed Valuation Rate under its current Investment Policy.
Stanford In,titute for Ecornomic Research. Going for Broke: Reforming California's State Pension Sfstem. May I', :20D). pg _25
,3 The allocation to Prix -ate ]✓quit} is relatively new. NWERA expects it a ill take a few ears to identify and fund investment opportunities.
5i3112011 Marin County Civil Grand Jury Page 10 of 25
Public Sector Pensions: A Perspective
Management of Risk — Making Pension Plans Sustainable
In addition to reducing asset allocation risk, there are many possible ways for MCERA and
its Sponsors to reduce pension plan cost volatility. Some are discussed by the Little Hoover
Commission, the Stanford Research Institute for Economic Policy, The Marin County
Council of Mayors and Councilmembers, and California's Governor. Others are discussed in
grand jury reports and in the press. In Marin, the risk is great. The County, for example, has
(June 30, 2010) an actuarial accrued pension liability (the amount it is currently committed to
pay for all earned pensions) of $1,402,400,000 and an annual total budget on the order of
$440,000,000. Even expected small changes in pension pian funding needs can consume a
substantial portion of the County's total budget. For example, a 5% loss in a fully funded
pian would equal about 16% of the County's total budget. Even given the actuarial
techniques used to smooth the loss, that risk is not sustainable.
Eliminating retroactive pension plan benefit increases, such as San Rafael granted in 2004,
can eliminate their substantial and sudden impact on pension plan liabilities. As noted
previously, pension plans are designed to accumulate sufficient funds during an employee's
working career to pay the employee's pension during retirement. When pension benefits are
increased, current pension law grants the increase to all employees, including those nearing
retirement. It is not possible to accumulate the needed funds during the remaining career of
an employee nearing retirement. The result is a transfer of that liability to the employer, and
therefore to future generations, by creation of an unfunded pension liability. Under the 12 -
point pension reform plan put forward by Governor Brown on March 31 of this year, all
California public agencies would be prohibited from granting any retroactive pension benefit
increases, such as benefit formula improvements that credit prior service. The 12 -point pian
provides a way to grant pension increases earned from future service without incurring the
large, immediate cost a retroactive inerease.34
Increasing reliance on defined contribution and hybrid plans would reduce employer
volatility risk, but transfer it to employees. A defined contribution plan is one to which
employers make a defined (specified in labor agreements) periodic contribution during the
employee's term of employment to provide a lump sum retirement benefit or an annuity at
the time of retirement. A hybrid plan, as the name implies, uses both defined benefit and
defined contribution plans to provide a blended (hybrid) source of retirement income.
For example, Marin Energy Authority (MEA) employees participate in a defined contribution
benefit plan — perhaps a first for a public agency in Marin County. They also participate in
Social Security and have an employee savings plan. They do not have a defined benefit plan.
MEA designed its retirement program to provide a "three -legged -stool" assurance for
retirement income. That metaphor is intended to convey the idea that private pensions,
individual savings and investments, and Social Security are needed to provide stable income
security in retirement. 3' MEA will contribute 10% of salary to their employees' pension plan
and will pay the employer's share into Social Security. The resultant employer cost is greater
than the Normal Cost of Marin County's defined benefit plan for miscellaneous employees,
"I K\ I i 14777, March 29. 20I i, An act to anictid or repeal sections of the Education and Go%emmert Code,
Sec: Social Securitl uebsitc: httn:n n}c.=<a: *e G histon stool.html
5/31,"2011 Marin County Civil Grand Jury Page 11 of 25
Public Sector Pensions: A Perspective
however, the resultant risk to MEA is reduced by the assurance that payments resulting from
future Unfunded Actuarial Accrued Liability will not be required.
Hybrid pension plans include both defined benefit and defined contribution components.
Adoption of such plans, either on an employee choice basis or as a required part of a new
employee's pension, may provide a reasonable path from the current total reliance on defined
benefit plans to a future, sustainable pension system. The risk -return information in Table 4
above suggests that a younger employee, with the time needed to ride out market variation,
would benefit from initially building assets by investing in equities, converting to a less risky
asset allocation as the employee approaches retirement.
Orange County has adopted a hybrid plan for newly hired workers.36 It combines
contributions by the county and its employees with both a traditional defined -benefit pension
and individual defined contribution accounts. The employee can take the individual account
with him from job to job. The plan maintains a strong traditional pension, but it reduces the
requisite contribution for both the county and its employees. It also redirects a portion of that
money into the defined -contribution part of the plan where the money can grow over time.
As an alternative to adopting hybrid plans, adopting a defined benefit plan with shared
responsibility for variation in investment returns could be considered. The California
Legislative Analyst's Office discussion of that concept37 suggests that employees should
share in decreases and increases in the cost of the pension system, depending on investment
performance. That would be accomplished through employee contributions that vary in the
same manner as employer rates. The California State Association of Counties believes38 that
"the equitable sharing of pension costs and risks promotes shared responsibility for the
financial health of pension systems and reduces the incentive for either employees or
employers to advocate changes that result in disproportionate costs to the other party, while
diminishing the exclusive impact on employers for costs resulting from increases in unfunded
liability." The League of California Cities believes39 "When employer contribution rates
exceed `normal costs' threshold, employees should be expected to take some of the financial
responsibility for those excess increases." Such a sharing would better align the interests of
employers and employees and the MCERA Board's fiduciary responsibilities during
discussion of plan changes, of supplemental payments, of the assumed average rate of
investment return, and of other issues.
Over -funded plans create risk to the pension system because the money in over -funded plans
tends to `burn a hole in people's pockets'. Employers have considered withdrawing excess
funds to pay operating costs or to pay down debt. More commonly, employers have
suspended contributions to over -funded plans. Employers have agreed with labor to increase
pension benefits, sometimes in return for lower salary increases. All of these actions suggest
a failure to understand that investment return is expected to vary from the assumed average
rate of return used in actuarial calculations. Plans are expected to be over -funded when
actual returns have been in excess of the assumed return and to be underfunded when they
36 Wall Street Journal. Orange Count's Public Pension Compromise. Januan 15. 2011
3? The 2005-06 Budget: Per pectives and Issues. a Report From the Legislative Analyst's Office to the Joint Legislative Budget Committee
38 CSAC Guiding Principles for 2005-200t, Pension Reform, reported in California Retirement Dialogue 2010. Comparison Public Pension
Principles, Office of Policy and Program De\ elopment
;,_4 League of California Cities: A Framework for Public Pension Reform. 2005-06. reported in California Retirement Dialogue
Comparison Public Pension Principles. Office of Policy and Program Development
513l/2011 Marin County Civil Grand Jury Page 12 of 25
Public Sector Pensions: A Perspective
have not. If the assumed average rate of return is correct, then the plan will, over time, return
to its expected results.
The Employers and MCERA have a variety of options available to them to reduce the risk
associated with volatile investment returns. Under the current system, all downside
investment risk is transferred to the employers. That has caused and can be expected to
continue to cause stress on government budgets and either increases in taxation or loss of
services to the public with related reduction in workforce. Working with employees and their
representatives, viable options must be selected and implemented to ensure the sustainability
of pension plans. The `do nothing' option is not viable. MCERA and its Employers need to
agree and document what action will be taken when pension pians appear to be over -funded.
Components of that agreement might include:
Employers either would continue to make Normal Cost contributions or would place
an equal amount into a pension stabilization or reserve fund that could only be used
to pay down URAL in future underfunded years.40
Employees would continue to make their contributions.
MCERA would apply a more conservative asset allocation, reducing risk and
stabilizing the plan.
Changes in the law may be required to provide needed risk management solutions to the
above concerns and to provide appropriate pension plan options to local governments and
pension boards. The '37 Act limits local choices; however, it has been amended extensively
over the years and can be amended again. The County's Legislative Program,41 which
provides policy direction from the Board of Supervisors on matters of interest, says:
"Support efforts to implement pension reform in California. Consistent with the
'CSAC42 Guiding Principles for Pension Reform,' work to amend any legislation to
address local concerns. Reforms should include a statewide formula cap on benefits of
2% at 50 for public safety and 2% at 60 for miscellaneous - with any excess to be funded
by employee contributions; require that 'final compensation' be calculated using the
highest consecutive three-year average salary, and based upon base -salary only; restrict
'safety employee' eligibility to police and fire employees; utilize rate stabilization 'best
practices,' such as five-year rate smoothing; reform disability retirement; and protect
local control and flexibility. In addition, support efforts to provide under the '37 Act
more options for local solutions to consider lower-cost pension alternatives."
The County should convert the laudable goals of the above statement into action, either
through CSAC or otherwise, to effect meaningful change in the "37 Act.
lu See Nosato Citizen., Budget Committee. Report on Non ato Pension policy. May '. 2007. an excellent report. especially considering that it
iN as issued prior to the pension plan lasses of'200S and 200Q.
41 Count\ of 14larin. 'ul 1 Federal & State l.eetslati%e Progtants S policy Guidelines. Adopted December 7. _2010_ pg
42 California State Association of Counties
5i31i2011 Marin County Civil Grand Jury Page 13 of 25
Public Sector Pensions: A Perspective
Cost of Living Adjustments
Many, but not all,43 public sector pension plans contain automatic cost of living adjustment
(COLA) provisions. All plans administered by MCERA contain such provisions and almost
all retirees benefit from them.44 All of the plans also contain a limitation on the maximum
annual COLA that can be granted to a retiree, thereby limiting plan benefits and plan costs.45
The MCERA actuary explains it as follows:46
"A "Standard" cost -of -living -adjustment (COLA) is determined annually based on
increase in the Consumer Price Index for All Urban Consumers in the San Francisco -
Oakland -San Jose area and is applied on April 1 of each year. However, the Standard
COLA cannot exceed a maximum percentage increase in any given year, with the
maximum percentage determined based on the CERL Code section applicable to the
employment group."
The COLA cost can be a substantial component of the total employer cost (normal cost plus
unfunded amortization) of a pension plan. The most recent available data47 is set forth
below.
Table 6
COLA Limits and Contribution
Employer Group
COLA contribution as percent of
total employer contribution
Annual COLA Maximum
Supplemental Cost of Living Adjustments
Marin County
San Rafael
Novato Fire
20.5%
29.9%
46.3%
2%48
3%
4%
It is possible, over time, for retirees to lose purchasing power due to increases in cost of
living in excess of the pension plan contractual caps. The MCERA actuary continues the
above explanation:
"Because the Standard COLA amount granted may be less than the increase in the CPI
due to these limitations, the purchasing power provided by the original retirement benefit
plus the Standard COLA may decrease over time if the CPI grows faster than the
limitations.
Under section 31874.3, the Board of Retirement is authorized to provide a supplemental
COLA increase on a one-time only or permanent basis to those members who have lost at
least 20% of their original purchasing power."
43 ne Sonoma County plans do not, for example.
44 W'hen COLA provisions were added to the plans, about a dozen emploi ees objected to pat ing the incremental cost. Those employee:; opted
out and do not recci4 e either regular or ad lioc COLA adjustments.
4 MC ERA pennon plan annual maximum percentage increases (.lune 30. 2009):
-t'U - County and Courts Tier 1. Special Districts. and Novato Fire Protection District
3°0 - Cin of San Ralael
„ - County and Courts Tier' d 3 (most Count} plan employees)
4o Graham Schmidt. F.FI actuaries, to Jeff Wickman. hICLR 4.October _8,'01 u, MCMV files
4' MCFRa Actuarial ReN iew and anal\ sis as of Jrme 30, 2008, Table 3.6,
4S County employees have differing COLA limits: limn eier. most are now subject to a _°� maximum.
5!31!2011 Marin County Civil Grand Jury Page 14 of 25
Public Sector Pensions: A Perspective
The supplemental COLA would return retirees to 80% purchasing power parity, not to 100%.
We will summarize how the process works.
Interest Crediting and Unrestricted Earnings
The MCERA Board's current economic assumptionS49 provide an assumed rate of investment
return (sometimes referred to as the interest rate or the Valuation Rate) of 7.75% per year.
The Valuation Rate includes a `real rate of return' of 4.25% per year and inflation of 3.5%
per year. Plan Sponsor assets are blended for investment. Semiannually, each Employer
Group is credited with interest at the Valuation Rate (approximately 3.8% per half-year).
Adjustments are made to account for variance between the Valuation Rate and actual
investment performance. The entire process of Interest Crediting is set forth in MCERA
policy.50
If actual investment returns are adequate to permit crediting each Employer Group's reserves
with interest at the Valuation Rate (without the need to create offsetting `contra accounts'
which hold negative balances) with assets left over, then a contingency reserve is filled. If
the contingency reserve can be filled to at least I% of Employer Group assets, then any
additional funds can be credited to Undistributed Earnings Reserves and `excess' or
Unrestricted Earnings become available under MCERA policies. It is possible, under
applicable accounting and actuarial practice, to fill the reserve accounts even though the
plans remain underfunded.
The `37 Act creates the concept of `excess earnings', defining them to be earnings in excess
of the assumed annual average actuarial rate of return on investments. From an actuarial
perspective, there is no such thing as excess earnings. The assumed rate of return is an
average — the actual rate of return in some years will be higher and in some years lower. The
effect of `excess earnings' is to set a maximum on the return, potentially ensuring that the
assumed rate of return, which is an average, will never be achieved. The amount of `excess
earnings' can be adjusted up or down by changing the assumed average actuarial rate of
return on investments.
Extracting and paraphrasing from the Kroll Report,51 the concept of excess earnings rests on
a potentially dangerous conceptual error. Excess earnings are not truly `excess'. If an
actuary bases the actuarial calculations on an assumed average rate of investment return, then
so-called excess earnings (returns exceeding this assumed average in any particular year) are
necessary to offset returns in below-average years. In this way, the desired average can be
achieved over the long term. For example, if investment returns consistently alternate
between years with 9% returns and years with 7% returns, and if the assumed average return
is 8°'0, then there are no truly `excess' earnings at all, since the 9% years are needed to offset
the 7% years.
`t`' 11te MCERA Policy Regarding Adoption of Fconomic Assumptions. Amended February 9. 2011, located here
httr' a ln.co.r, a r..c.t.us dents RT train LANVS RFGL'Lt'l IONS Y lice° 't1Re=ardor<.",>_'[t:ldonti n°._'t-ot'.,'r)-lctuanai"-:_'ttEc<. notn:c
0Assumouons" o?+tIOl l -1 C-oOxdf
50 MCERA Interest Crediting Policy. Adopted October 13. 201 U. located here:
ht1 : -- .' , k , nt.tnn -,a us dents RT main LAWS RLGL LATIONS Interest".,3r {
— _ -..
51 Report of the .audit Committee of the City o£San Diego In\ estigat;en into the San Diego City Fmployees' Retirement S\ stern and the Cit}
of San Diego Sewer Rate Structure. August ti. 3i oo_ Section IV Violations of Lalz
5/31,2011 Marin County Civil Grand Jury Page 15 of 25
Public Sector Pensions: A Perspective
The foregoing notwithstanding, the MCERA Board may consider three possible uses for
Unrestricted Earnings, as provided in the Unrestricted Earnings policy. They are: 5'
"A. If at least one percent (1%) of MCERA's total retirement system assets are
collectively maintained in the Employee Group Statutory Contingency Reserves and the
overall funded status of the plan is 80% or greater, the Board may consider a transfer to a
non -valuation reserve or designation to pay an ad hoc supplemental COLA as permitted
by law. Ideally, before transferring any assets to such non -valuation reserve, the overall
funded status of the plan should be approximately 100%.
B. Transfer to a reserve or designation for other uses as permitted by law.
C. Continue to maintain the funds in the Unrestricted Earnings valuation reserve."
Paragraph A permits payment of a supplemental COLA only when each Employer Group is
more than 80% funded (ideally approximately 100% funded). If MCERA investment results
meet current actuarial assumptions, 80% funding will only be achieved after 2020.53
However, the 80%1100% restriction does not appear to apply to paragraph B actions.
Implementation of the Supplemental COLA
The supplemental ad hoc COLAs paid prior to 2009 were paid to retirees who retired in the
1970s and 1980s. In 2010, granting a one-time only supplemental COLA would have
provided a supplemental benefit to 58 Marin County retirees in the total amount of $83,528
and to 47 San Rafael retirees in the total amount of $158,935. The estimated present value of
providing a permanent supplemental COLA to those retirees was approximately $1.8
million.54 No Novato Fire retirees would have been eligible to receive a supplemental
COLA in 2010. The benefit would have been paid to all retirees who had lost 20% or more
of their initial purchasing power — it is not means tested.
The annual amount of the payment was decreasing yearly due to inflation below COLA caps
and the passing of recipients. However, our national economy is currently in a delicate
condition and there is debate over the expected effect of stimulus spending and high federal
deficits on future inflation. If inflation were to return to historic experience,55 or if the
inflation fears of some economists are realized, then recent retirees would soon find
themselves with a COLA Bank in excess of 20% and eligible for supplemental ad hoc COLA
consideration. Employees who retired in 1990 on a 2% COLA cap plan now have about 15%
in their COLA bank. Only an additional 5% would be required. The increased cost to the
plan could become significant.
Unless the plan is more than 100% funded, paying an ad hoc supplemental COLA or
transferring funds for other uses permitted by law will directly result in increased required
employer contributions to the plan. Such action will have an immediate impact on employer
budgets. Although MCERA has the sole and exclusive fiduciary responsibility over the
52 MCERA Unrestricted Earnings Policy Amended Februan Q. 2011.
53 MCERA Actuarial Re%iew and Analysis as of June 10, 2010. pgs 8, 1?. and 18.
54 F.FI Actuaries letter to MCERA dated October 2S, 2010
55 The CPI All Urban Consumers, San Francisco -Oakland -San Jose. tt as 37.7 in 19'0. 50.4 in 1950, 132,1 in 191)0, and —7.5 in 2010, an
at era<ae annual increase of 4.6 from 1970-:0W, of'3.5°U from 1980- 'Olt), and of -2.81,, from 1990-20101
5131/2011 Marin County Civil Grand Jury Page 16 of 25
Public Sector Pensions: A Perspective
assets of the public pension or retirement system,56 it is less than clear that it should have the
authority to expend employer and taxpayer funds. However, under the '37 Act the MCERA
Board decides whether to make such transfers and not the employers. Marin residents,
including those living on limited means, are exposed to risk of reduced government services,
increased taxation, and reduced living standards in support of a payment that is neither means
tested nor controlled by their elected representatives. In a budget -constrained environment,
our elected representatives should decide how limited monetary resources are to be
expended.
Public Visibility Into MCERA
MCERA is a major public entity when measured financially. As of June 30, 2010, it
managed assets with a market value of $1.21 billion, had an Actuarial Accrued Liability for
payment of earned pensions of $1.93 billion, and had an Unfunded Actuarial Accrued
Liability of $561 million. MCERA's Board and Committee meetings are subject to the
Brown Act and open to the public. Their documents are subject to the Public Records Act.
However, it is unusual for a member of the public who does not have a personal interest in an
agenda item to attend a meeting. Despite its economic importance and its impact on public
budgets with resultant loss of jobs and reduction in services, the public seems to have little
interest in what MCERA does or even to know that there is a pension fund manager other
than CalPERS. MCERA's Board of Retirement and staff labor, for the most part, in
obscurity.
MCERA maintains a good website with information on their activities.57 That site contains
agendas for Board and Committee meetings, excellent minutes of those meetings, various
publications (mostly for employees and retirees, but the information is useful to anyone
interested in MCERA), a list of their consultants and investment managers, copies of their
bylaws and policies, and a copy of the '37 Act. However, the financial information is sparse,
consisting only of Condensed Annual Financial Statements (Annual Reports).
In support of the County's mission to encourage meaningful participation in the governance
of the County by a1154, and in furtherance of the County's strategy to continue its efforts to
redesign and reconfigure its website to modernize its "look and feel" and enable the public to
use County's website as a primary source for information, services, and engagement with
their County government,59 the Grand Jury recommends that MCERA make current and
historic copies of its important documents directly available to the public on its website:
Annual Actuarial Review and Analysis reports provide an excellent overview of the
status of MCERA's pension plans and extensive detailed support data.
Complete Financial Statements. The Condensed Annual Financial Statements
available on the website provide good information; however, the complete financial
statements, which are only available in the Retirement Office for review, should be
available on-line.
S
California Constitution. Article 16. Seaton 1 ".(a)
5' hum: ++.tucera ori=+t bleb points to httn: t+++++ co.marin.e.t.u_ retire
59 Marin Count+ Rtission Statement
59 C ount� of Marin Long* 1'enu Restructuring Plan. January 12. 2ol(1. pg 37
5,13112011 Marin County Civil Grand Jury Page 17 of 25
Public Sector Pensions: A Perspective
• Plan Document, which defines the MCERA pension plan pursuant to Internal
Revenue Service requirements.
In addition, MCERA should provide the public with the information needed to understand
and validate MCERA's actuarial assumptions, especially its assumed 7.75% (4.25% above
inflation) rate of return on investment. This assumption is critical to the actuarial calculation
of MCERA's funding needs. If it is higher than actual future performance, Unfunded
Actuarial Accrued Liability will increase, as will the need for employer contributions to make
up for the underperformance. If it is lower than actual future performance, Normal Cost
payments will be excessive. Annual historical asset class investment return and asset
distribution could provide useful information to evaluate MCERA's probable future
performance and to demonstrate that MCERA's approach to fund management outperforms
less costly index investing.
Board meetings break after the first hour for closed session consideration of specific
employee items. Meeting attendees are left waiting, often for more than an hour, for the
board meeting to reconvene. Increased use of time -certain agenda items would make board
meetings more public -friendly.
We have discussed many of the visibility recommendations with senior MCERA
management, who indicate they are in the process of improving public access to information.
Conclusion
The County, San Rafael and Novato Fire pension plans are passing through troubled times.
The pension plans are managed in accordance with the California's County Employees'
Retirement Law of 1937 by the Marin County Employees' Retirement Association, an
independent agency which is not under the control of the County Board of Supervisors or of
the other plan Sponsors. The pension plans of all MCERA's Sponsors are significantly
underfunded, primarily due to investment losses. MCERA currently has reserves with a
market value of only $1.21 billion under management. The present value of benefits for
members is $1.93 billion.
These are large numbers, especially compared to the annual budgets of the plan Sponsors.
Rapid increases in pension costs are disruptive and can result in government lay-offs and
reductions in services. Even expected small annual percentage changes in the value of
MCERA's assets can have a large impact on Sponsor budgets. Extraordinary losses in value,
such as those incurred between late 2007 and early 2009, can have a drastic effect, especially
if accompanied by a loss of Sponsor revenue.
At current levels, public pension systems are not financially sustainable without reform.
Investment volatility, changes in private sector pensions, and changes in employee
demographics contribute to the lack of sustainability. Changes in the pension system that
reduce employer risk will improve employer ability to manage budgets and to provide
services to the public. however, any such changes must be fair to employees and negotiated
with their representatives. This report considers available options that could improve pension
plan performance and fairness to all parties.
5/31;2011 Marin County Civil Grand Jury Page 18 of 25
Public Sector Pensions: A Perspective
Limiting maximum annual cost of living increases exposes retirees to the risk of loss of
purchasing power. The MCERA Unrestricted Earnings policy provides its Board with the
option to make additional payments to retirees from "excess earnings," the exercise of which
will result directly in an increase in required Sponsor contributions. The Sponsors have no
control over the Board's exercise of its options. The concept of "excess earnings" rests on a
potentially dangerous conceptual error. Earnings in excess of the assumed average rate of
return in some years are needed to offset returns below the assumed average in other years.
MCERA is an important public agency which should provide improved public access to its
documents and to the information needed to understand and validate its actuarial
assumptions. It should work to improve the public -friendliness of its meetings.
W�W
The Grand Jury finds that:
Fl: Changes to the '37 Act may be required to implement meaningful pension reform.
F2: The County's Federal & State Legislative Programs & Policy Guidelines document
includes support for pension reform in California.
F3: The primary contribution of employee compensation to current budget difficulty is not
the amount the employee is paid, it is the volatility of the cost of benefits.
F4: Defined benefit pension plans transfer the cost of all unfunded liability resulting from
plan benefit increases and from investment volatility to employer budgets. Sharing that risk
through use of defined contribution plans, hybrid plans, shared responsibility for contribution
increases or decreases, or otherwise would help employers to manage their budgets, to
provide consistent services to citizens, and to provide stable employment for their workforce.
F5: Granting pension increases with a retroactive component to employees near retirement is
very costly. It causes sudden increases in unfunded liabilities and in employer cost and raises
generational equity issues.
F6: The total cost to Sponsors of pensions, including the cost of Pension Obligation Bonds,
and the annual change in that cost, is not easily discovered in public documents.
F7: The lack of a policy to guide action when pension pians are over -funded can result in
decisions that cause future underfunding.
F9: MCERA now has an Investment Policy Statement to guide its effort to maximize yield
while limiting volatility. As the market decline of 2008 and 2009 approached, MCERA had
about 70% of its funds invested in equities, well in excess of its new Investment Policy
Statement guidelines.
F10: MCERA documents readily available to the public, including the historic investment
performance information provided in its annual Actuarial Reviews, do not include an in-
depth comparison of its investment performance to appropriate investment industry
5i31;2011 Merin County Civil Grand Jury Page 19 of 25
Public Sector Pensions: A Perspective
standards. The data is not adequate to demonstrate that the current Valuation Rate is
consistent with MCERA historic performance.
F11: Limiting maximum annual cost of living increases exposes retirees to loss of purchasing
power. The MCERA Unrestricted Earnings policy provides its Board with the option to
make additional payments to retirees from "excess earnings", the exercise of which will
result directly in an increase in required Sponsor contributions. The Sponsors have no
control over the Board's exercise of its options.
F12: MCERA has a substantial influence on Sponsor budgets, but the public pays little
attention to its operation.
F13: Improving public availability of information could result in increased public
attentiveness.
RECOMMENDATIONS
The Grand Jury recommends that:
RI: The County expand the pension provision in its Federal & State Legislative Programs &
Policy Guidelines (Legislative Program) to include support for an appropriate sharing
between government and labor of the risk of pension plan cost variation.
R2: The County expand its Legislative Program to specifically support generational equity
by prohibiting any retroactive pension benefit increases that create an unfunded pension
liability.
R3: The County re -affirm its commitment to the pension reform provision in its Legislative
Program and work to convert its laudable goals into action, either by working through the
California State Association of Counties or otherwise, to effect meaningful change in the '37
Act.
R4: MCERA improve documentation of investment performance, thereby providing clear
information to the public and the MCERA Board on any variation between the performance
of MCERA investments and (i) actuarial assumed of rate of return and inflation, and (ii)
index -based expectations for an equivalent asset mix.
R5: MCERA use a Valuation Rate consistent with its documented, demonstrated historical
performance as adjusted for current asset allocation.
R6: MCERA develop a proposal for consideration by its Sponsors and implementation to
reduce the risk inherent in over -funded pension plans.
R7: Plan Sponsors, not MCERA, should have the responsibility and authority to award any
payments to retirees that are in excess of retiree contractual entitlements. Support legislative
changes needed to move responsibility to plan Sponsors.
513112011 Marin County Civil Grand Jury Page 20 of 25
Public Sector Pensions: A Perspective
R8: MCERA should encourage public involvement by increasing visibility into its
operations.
REQUEST FOR RESPONSES
Pursuant to Penal Code Section 933.05, the Grand Jury requests responses from the following
governing bodies:
■ Marin County Board of Supervisors: Rl, R2, R3, and R7
in Marin County Employees Retirement Association Board of Retirement: All Findings
and R4 through R8
■ San Rafael City Council: R7
Governing bodies indicated above should be aware that the comment or response of the
governing body must be conducted in accordance with Penal Code Section 933 (c) and
subject to the notice, agenda and open meeting requirements of the Ralph M. Brown Act.
California Penal Code Section 933 (c) states that "...the governing body of the public agency
shall comment to the presiding judge on the findings and recommendations pertaining to
matters under the control of the governing body." Further, the Ralph M. Brown Act requires
that any action of a public entity governing board occur only at a noticed and agendized
public meeting.
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. The California State Legislature has stated that it intends the provisions
of Penal Code Section 929 prohibiting disclosure of witness identities to encourage full candor in testimony in Civil
Grand Jury investigations by protecting the privacy and confidentiality of those who participate in any Civil Grand Jury
investigation.
5131!2011 Marin County Civil Grand Jury Page 21 of 25
Public Sector Pensions: A Perspective
GLOSSARY
As used in this report, the following terms have the meaning set forth.
'37 Act: County Employees' Retirement Law of 1937, California Government Code Section
31450 et seq.
Active Employee or Active Member: A member of a pension system who is accruing benefits
through current employment.
Actuarial Assumptions: Assumptions made about certain events that will affect pension costs.
Assumptions generally can be broken down into two categories: demographic and economic.
Demographic assumptions include such things as mortality, disability and retirement rates.
Economic assumptions include investment return, salary growth and inflation.
Actuarial Valuation: The determination of the normal cost, actuarial accrued liability,
actuarial value of assets and actuarial present values for a pension plan. These valuations are
performed annually or when an employer is contemplating a benefit change. The valuations
compare the assets to the accrued liability for each plan, and determine the employer
contribution rate for the coming year. Actuaries use each employer's schedule of benefits,
membership data and a set of actuarial assumptions (for example, life expectancy, inflation
rates, etc.) to estimate the cost of benefits.
Actuarial Value of Assets: The actuarial value of assets used for funding purposes is obtained
through an asset smoothing technique where investment gains and losses are partially
incorporated in the year they are incurred, with the remainder smoothed in over subsequent
years. This method helps to dampen large fluctuations in the employer contribution rate.
Actuarial Accrued Liabilitv (AAL): The AAL is the total amount (reduced to present value
using an assumed rate of return) that is owed under existing agreements to retirees and to
current employees based on service rendered to date) who can be expected to retire with a
vested pension. It is the amount of money that needs to be invested today so that the
principal together with the income it is expected to earn is sufficient to pay these obligations
as they come due. Calculating the AAL requires numerous judgments. Using the best
available information as of a given date, a reasonable estimate can be made.
Actuarial Present Value of Benefits: The actuarial present value of benefits is the Actuarial
Accrued Liability plus actuarial present value of future Normal Costs. The actuarial present
value of benefits is also the actuarial present value of all future benefits expected to be paid
to the Plan's current members, whether accrued on the valuation data or after.
Actuarial Funding Police: The plan's actuarial funding policy is the scheduled program of
accumulating assets to fund the plan's obligations, typically, but not necessarily, as a level
percentage of payroll. The funding policy includes: The Normal Cost, and Amortization of
the Unfunded or Overfunded Actuarial Accrued Liability (whichever is applicable).
Assumed Rate of Return: An estimate of the annual rate of investment return to be generated
by the fund. This amount is approved by the governing body of the retirement system and has
5131/2011 Marin County Civil Grand Jury Page 22 of 25
Public Sector Pensions: A Perspective
a significant impact on the actuary's estimate of the cost of funding a defined benefit pension
plan.
CERL: County Employees' Retirement Law of 1937, California Government Code Section
31450 et seq.
COLA: See Cost of Living Adjustment.
COLA Barak: An account in which that portion of any annual increase in Consumer Price
Index which is in excess of retirement plan annual COLA adjustment limitations is
accumulated and from which incremental annual COLA adjustments can be made in years
when the increase in Consumer Price Index is less than the retirement plan annual COLA
adjustment limitations.
Contra account: An account on the balance sheet that offsets the balance of a related and
corresponding account.
Cost of Living Adjustment: 100% of Consumer Price Index change up to 2/3/4% annually
with banking of any excess. MCERA assumed annual rates of increase are 1.9%, 2.7% and
3.2%, respectively.
Defined -Benefit Plan: A plan designed to provide eligible participants with a specified
lifetime benefit at retirement. The benefit is based upon three factors: a percentage rate based
on the member's age at retirement and benefit formula applicable to the member, the
member's length of credited service and the member's final compensation. The plans are
funded by member contributions, employer contributions and income earned from investment
of accumulated contributions.
Defined -Contribution Plan: A type of savings plan that allows participants to make pre-tax
contributions that accumulate tax-free. Contributions, plus any earnings, are not subject to
state or federal taxes until withdrawn, in most cases after retirement. The amount paid is
determined by the amount of contributions made and the rate of return on the investments
chosen.
Emplover. The entity that employs or employed a Member (or employed the individual that
earned the benefits now being received by a beneficiary).
Employer Contribution: The amount contributed to the pension plan by the employer, which
is the sum of the Employer's Normal Cost and the amortization of the Unfunded Actuarial
Accrued Liability.
Employer Group: A group of employers that are treated together for certain purposes. Marin
County, San Rafael, and Novato Fire.
Ernplo.vee: An Active Employee
Employee Contribution: The amount contributed to the pension plan by the employee.
5131/2011 Marin County Civil Grand Jury Page 23 of 25
Public Sector Pensions: A Perspective
Entry Age Normal method: Under this method, the employer contribution rate provides for
current cost (normal cost) plus a level percentage of payroll to amortize the unfunded
actuarial accrued liability (UAAL). As of June 30, 2011, the amortization period is 17 years
for all groups, with the exception that 50% of the market investment loss for FY2009 is being
amortized over a 30 year closed period as a level percentage of pay.
Excess earnings: A concept created by the `37 Act, which defines them to be earnings in
excess of the assumed annual average actuarial rate of return on investments. From an
actuarial perspective, there is no such thing as excess earnings.
Funded Ratio or Status: A ratio of the value of benefits members have earned compared to
the value of the retirement system's assets. The funded ratio or status provides a measure of
how well funded or "on track" a plan is with respect to assets vs. accrued liabilities. The
funded ratio can be calculated by dividing the actuarial value of assets by the accrued
liabilities, or by dividing the market vale of assets by the accrued liabilities.
Inactive Member: A member not currently working for a covered employer, but has member
contributions on account.
Interest Crediting policy: An MCERA policy adopted on October 13, 2010. This policy
establishes MCERA's methodology to (i) credit interest (investment earnings) to certain
MCERA reserves in compliance with the '37 Act, (ii) track and attempt to correct any
"deficiencies in interest earnings in other years" that MCERA may experience, and (iii)
establish a non -valuation contingency reserve.
MCERA: Marin County Employees' Retirement Association
Member: An employee who qualifies for membership in a pension system and whose
employer has become obligated to pay contributions into the pension fund. Also describes
retirees, survivors, beneficiaries or anyone receiving a benefit. An Active, Inactive or
Retired Member.
Miscellaneous Member or Employee: Any of the vast majority of occupations not designated
as a "safety member."
Normal Cost: The annual cost of service accrual for the upcoming fiscal year for active
employees. The annual Normal Cost is calculated as the amount necessary to fund each
Member's benefits from that Member's Plan entry date to the end of his or her projected working
life. The employer normal represents the cost of the additional benefits earned each year by
active members.
Normal Retirement Age: The age established in a plan's provisions when members become
eligible for full benefits.
Present value: The value today of the value of a future asset or liability, computed using
periodic interest rate and the number of periods. For a single future value (FV), interest rate
(i), and number of periods (n), the present value (PV) is computed as PV=FV,'(1
5/31,2011 Marin County Civil Grand Jury Page 24 of 25
Public Sector Pensions: A Perspective
Present Value of Benefits: The total dollars needed as of the valuation date to fund all
benefits earned in the past or expected to be earned in the future for current members.
Real rate of return: The actual rate of return less the rate of inflation.
Retired Member: A member currently receiving a benefit. Also known as an annuitant,
which can be a retiree, beneficiary or survivor who is receiving a benefit.
Safety Member: A safety member is defined by statute or by plan provisions, and generally
refers to an employee working in a job related to preserving the public's safety, such as a
firefighter or law enforcement officer.
Smoothing: A technique used to partially incorporate investment gains and losses in the year
they are incurred, with the remainder smoothed in over subsequent years. This method helps
to dampen large fluctuations in the employer contribution rate. The actuarial value of assets
used for funding purposes is calculated through asset smoothing.
Sponsor: Employers and Employer Groups that participate in MCERA pension plans.
URAL: See Unfunded Actuarial Accrued Liability
Unfunded Actuarial Accrued Liability (URAL): The amount by which the actuarial accrued
liability exceed the actuarial value of assets; or, in other words, the present value of benefits
earned to date that are not covered by the value of assets. A plan with an actuarial value of
assets below the accrued liability is said to have an unfunded liability and must increase
contributions to get back on schedule.
Undistributed Earnings Reserves: An account in which MCERA plan assets may be placed
prior to distribution to Employer Group accounts or other disposition.
Unrestricted Earnings (policy): An MCERA policy adopted on October 13, 2010, and most
recently amended on February 9, 2011. This policy provides guidance to MCERA on when
it is appropriate to declare the existence of "excess" earnings which can be used to pay an ad
hoc supplemental COLA or for other uses permitted by law.
Valuation Rate: The Board of Retirement selected interest rate used in valuation calculations
(currently 7.75%).
5x'3112011 Marin County Civil Grand Jury Page 25 of 25