HomeMy WebLinkAbout45 - NB-6 - Attachment 2 - 7/1/2014DATE:
TO:
FROM:
SUBJECT:
CITY Of COSTA MESA
MAY 21., 2014
CITY COUNCIL
PENSION OVERSIGHT COMMITTEE
ATTACHMENT 2
CC: Brenda Green, City Clerk
Tom Hatch, CEO
Steve Dunivent, Finance Dir.
Kimberly Barlow, Esq.
PROPOSE ADDING THE ATTACHED FINANCIAL ANALYSIS PROVISION
TO THE MARCH 12, 2014 DRAFT CHARTER
RggoMmendat
jign -
The Pension Oversight Committee (POC) recommends (by a vote of 7 to 0) that the City
Council include a new provision, "Section 601, Eingacial Analysis' in the Charter
(Attachment 1),
Background -
The POC reviewed California Government Code Section 7507 (Attachment 2),
Section 7507 states that cities, "when considering changing retirement benefits or other
postemployment benefits shall secure the services of an actuary to provide a statement
of the actuarial impact upon future annual costs, normal costs and additional accrued
liability, before authorizing changes in Such benefits,"
Comments -
The POC believes Section 7507 is too general and has not provided ad -equate disclosure
and transparency in the past The Charter should enhance Section 7507's minimum
standards to ensure a thorough and rigorous analysis is performed for the City Council,
city management, and citizens. See further rationale in "Comments on Additional lmiaaet
Analysis„ (Attachment 3).
The POC h.opes, our recommendation will be helpful to the City Council,
--7 Z
Jeff Arthur, Chair
Pension Oversight Committee
Pension Oversight Committee / Charter— Recommend Section 6071 to City Council May 21, 2014
DRAFT CHARTER
MARCH 12, 2014
Section 600. Retirement Benefits.
On or after the effective date of this Charter, except for any increase previously
authorized in a valid and binding memorandum of understanding or contract, no
employee or officer of the City shall receive an increase in employee retirement benefits,
other post -employment benefits, employer contributions for post-retirement benefits,
including post-retirement health benefits, to be paid for by the City or for which the City
is liable without approval by a two-thirds (2/3) majority of the voters at a general
election.
PENSION OVERSIGHT COMMITTEE
RECOMMENDS
ADDING SECTION 601 TO THE DRAFT CHARTER
Section 601. Financial Analysis.
Prior to the City Council authorizing a vote by citizens under Section 600, a "statement
of the actuarial impact upon the City's future annual costs and accrued liability" of the
proposed increase in Employee Retirement Benefits shall be prepared as required by
law, including but not limited to an "additional impact analysis" of the following matters
(collectively "Financial Impact Statement"):
• Annual financial impact for 30 years and risks to the City and its General Fund.
• Any changes in unfunded liability and reasons therefor.
• Any financial impact from retroactive application of benefits.
• Impact of future retirement fund earnings calculated at one percentage point
above and below the actuarially projected earnings / discount rate.
• Present value of annual retirement benefits for a representative sample of
employee positions.
At least two weeks prior to the City Council authorizing a vote by citizens, the "Financial
Impact Statement" shall be posted and maintained through the election on the City's
web site with the ability to be copied by the public. A summary of the findings from the
Financial Impact Statement shall be made part of the City Attorney's "impartial analysis"
required by law and included in voter information documents.
Pension Oversight Committee/ Charter — Recommend Section 601 to City Council May 21, 2014
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Page I
DI'ERING'S CALIFORNIA CODES A NOTATED
Copyright (c) 2014 by Matthew Bender & Company, Inc.
a member ofthe LexisNe.xis Group.
All rights reserved.
* This clocgtnCot is current through Chapter 9 of'k**
the 2014 Regular Session of the 2013-2014 Legislature.
GOVERNMENT CODE
Title L GENERAL
Division 7. Miscei(ancous
Chapter 2 L Public Pension and Retirement Plans
Article 1, General Provisions
GO TO CALIFORNIA CODES ARCHIVE DIRECTORY
Cal Got, Code § 7507 (2014)
§ 7504. Actuarial evaluations of future annual costs; Appficabffity
(a) For the purpose of this section:
(1) "Actuary" means an actuary who is an associate or'tellvw of the Society of Actuaries.
(2) "Furore annual costs" includes,'but is not limited to. annual dollar changes, or the total dollar changes involved
when available, as well as normal cost and any change in accrued liability.
(b)
(1) Except as provided in paragraph (,2), the Legislature and local legislative bodies, including community college
district governing boards, when considering changes in retirement benefits or other postomployment benefits, shall
secure the services of an actuary to provide a statement of the actuarial impact upon future annual costs; including
normal cost and any additional ttcmated liability, before authorizing changes in public retirement plan benefits or other
postemployment benefits.
(2) The requivernents of this subdivision do not apply to:
(A) An annualincrease in it prenu[am that does not exceed 3 percent under a contract olf iftsurance.
(B) A change in postemployment benefits, other than pension benefits, mandatod by the state or federal
government or made by an insurance Carrier in connection with the renewal of a contract of insurance.
(c)
(1)
(A) With regard to local legislative bodies, including community college district governing boards, the future
costs of changes in ratiremcm bonefrts or other postemployment benefits, as determined by the actuary, shall be made
public at a public m.ectinrg at least two weeks prior to the adoption ol'any changes in ptablic retirement plan benefits or
9
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(.'of Gov Code § 7507
other postem.pIoymCru benefits. If the futLu-c costs of' IIIc chanttcs exec Cd oaa-halt,of' 1 percent oI clic future annual costs,
as dcfmcd in paragraph (2) ofsubdivision (a'), of the Oxisiing beneliG for the lc;islative body, an actuary shall be
presentto provide illfixnmtion as needed at the public m cling at which the adoption of a benefit change shall be
considered. The adoption of Lilly be1101l1 to which this section applies shall not be placed on it consent calendar.
(B) The Icquircmonts of this paragraph do not apply to:
(i) An annual increase in a inenlium that does not exceed 3 percent under a contract of insurance.
(ii) A change in postemployrnent benefits, otter than pension benefits, mandated by the state or fedcrtil
government or inade by an insurance carrier in connection with the renewal of contract of insurance.
(2) with regard to the Legislature, the fittuic costs as determined by the actuary shall be made public at the policy
and fiscal committee hearings to consider the adoption of any changes in pub,hc retirement plan benefits or other
postemptoymtent bench:-. The adoption of any benefit to whidi this section applies shall not be placed on a consent
calendar.
(d) Upon the adoption of any benefit change to which this section applies, the person with the resp'onsib1bties of a
abief' eXeCUtiVe officer in an entity providing the benefit, however that person is deno tinted, shelf acknowledge in
writing that he or she understands the current and future cost of the bene,f5t as determined by the actuary. For the
adoption of benefit changes by the state, this person shall he the Director of }hulian Resources.
(e) Therequirements of this section do not apply to a school district or a county office of education, which shall
instead comply with requirements regarding public notice oto, and future cost determination for, benefit changes that
have been enacted to regulate these entities. These requirements include, but are not limited to, those enacted by
Chapter 1213 of the Statutes of 1991 and by Chapter 52 of the Statutes of 2004.
q
DRAFT CHARTER
PENSION OVERSIGHT COMMITTEE
COMMENTS ON "ADDITIONAL IMPACT ANALYSIS"
MAY 21, 2014
Annual financial impact for 30 years and risks to the City and its General Fund.
This type of disclosure and the four that follow should be available to anyone (CEO,
Council Members, and Voters) that will be recommending and/or deciding to increase a
pension or other defined retirement benefit. Pensions are commitments (liabilities) that
can last 60 years and longer during an employee's lifetime and beyond. It is important
that the long-term actuarial costs and liabilities to the City are understood.
It is also important that the risk and potential impact of a future negative change in an
actuarial assumption or assumptions (retroactive application, earnings / discount rate,
life expectancy, length of employment, age at retirement, compensation growth rate,
inflation rate) be disclosed in a general statement by the Actuary. A future negative
change in assumptions (particularly the discount rate or retroactive application) can be
very costly to the City because (1) the City's accrued pension liability is always large due
to most employees having a long retirement benefit (can retire at age 50 or 55) at a
high percentage of their highest annual pay (up to 75% or 90%), (2) retired employees
are not responsible for sharing in the payment of unfunded liabilities, and (3) there is
generally no "cushion" or "reserve" available unless pensions happen to be over funded.
Any changes in unfunded liability and the reasons therefor.
This is a key disclosure because the unfundedop rtion of a pension liability receives no
allocation of CalPERS' investment earnings. Therefore, a separate "unfunded
contribution" must be paid by the City into the City's pension funds held by CalPERS just
to cover the lost allocation of earnings and prevent the unfunded portion from growing.
If CalPERS decides that the unfunded liability must be amortized / paid off by the City
(as it appears CalPERS has now decided) then the increased annual "unfunded
contributions" can significantly impact the City's General Fund and its ability to maintain
and operate the City.
Page 1 of 2
Pension Oversight Committee/ Charter — Recommend Section 601 to City Council May 21, 2014
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Any financial impact from retroactive application of benefits
This is a key disclosure because the California legislature could decide in the future to
eliminate the provision in PEPRA that prohibits increased retirement benefits being
retroactively applied to "prior service". The retroactive application of an increase in
pension benefits automatically and instantly results in an unfunded liability because the
additional benefits were not funded during such "prior service" by either the City or
employee. This was part of the cause of the City's $228 million unfunded pension
liability created between 1999 and 2010.
Impact of future retirement fund earnings calculated at one percentage point above and
below the actuarially projected earnings / discount rate
This is an important disclosure of risk because it shows what would happen if CalPERS
fails to achieve their "earnings / discount rate" assumption and future earnings fell
below their actuarial projection by one full percentage point (say from 7.5% to 6.5%).
The lowering of the "earnings / discount rate" by CalPERS was a major cause of the $228
million unfunded pension liability. This disclosure would also show what would happen
if CalPERS' earnings are better than projected (say from 7.5% to 8.5%). Comparing the
two possibilities would show the impact of a two percentage point change in the
projection of future earnings.
Present value of annual retirement benefits for a representative sample of employee
positions.
This is a key disclosure because it shows the present value of the retirement benefits
that selected employee positions will receive. This discloses the retirement benefits of
those employee positions for fairness, sustainability and reasonableness.
Reconciling Section 7507 with Charter Section 600 — "post -employment benefits"
Should the City Council approve the Pension Oversight Committee's recommendation
and include "Section 601" in the Charter, then the term "Employee Retirement Benefits"
should be added to Section 600 between the words "liable" and "without".
To be consistent with Government Code Section 7507, it may be preferable to change
the phrase "post-retirement" in Section 600 to "post -employment".
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Pension Oversight Committee / Charter — Recommend Section 601 to city Council May 21, 2014
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