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Marin County Government Reform of Pensions and Post Employment Benefits
A new report entitled Marin County Local Government Reform of Pensions and Other Post-Employment Benefits - Revisiting the Problem and Scope of Local Solutions, published by the Marin County Council of Mayors and Council members. Its principle authors were Larry Chu, Larkspur City Council, and John McCauley, CPA CPCU (retired), Mill Valley City Council.
This Report is the first significant, critical analysis of the short-term and long-term financial challenges facing all cities and towns in Marin.
In its first section, Defining The Problem, the Report notes,
“When former State Senator Joe Nation made his presentation to the Committee in 2018, he estimated that up to 25% of cities could go bankrupt in the next 5 years. Even if this estimate is too high by orders of magnitude, it is apparent that many cities face a crisis.”
It is not an over-statement to define our current situation as dire. And considering the looming downturn we’re seeing in the global and national economy, it would be prudent to see this situation as one that requires our immediate attention.
This Report is a must-read for all Marin County taxpayers.
The Executive Summary is republished here in its entirety. CLICK HERE to read the full Report.
Executive Summary
This report on the reform of pensions and other post‐employment benefits (OPEBs) is commissioned by the Marin County Council of Mayors and Councilmembers (MCCMC) [1]. The MCCMC first studied this problem in June 2011, concentrating on pensions and is now revisiting the issue based on the changes in the financial, legislative, and legal environments [2].
Marin cities generally offer two promises to employees in addition to compensation: a pension and OPEBs in the form of retiree health care.
Except for San Rafael, all Marin cities participate in a state‐run pension plan in the California Public Employees’ Retirement System (CalPERS). San Rafael participates with a number of other Marin County entities in a plan run by the Marin County Employees’ Retirement Association (MCERA).
Details of how the plans work are in Appendix B of this report. Basically, it is a percentage (e.g. 2.0%‐ 3%), which varies by age, of final average pay multiplied by years of service. As a result of state legislation which went into effect in 2013, new employees have a less costly benefit promised than the older “Classic” employees.
Most public employers do not participate in federal Social Security. As with Social Security, both employers and employees contribute a percentage of salary to the pension plan. Any shortfall in assets accumulated to pay the benefit are wholly the responsibility of the employer, i.e. the cities. Cities receive a bill from CalPERS or MCERA for their share of Actuarially Determined Contributions (ADCs) each year.
According to the Bureau of Labor Statistics, traditional pension plans have become rare outside of the public sector or unions. Among all workers, only 4% have access to pension plans where investment risk remains entirely with the employer.
Another 13% have access to both a pension and Defined Contribution (DC) 401(k) type plan where some or all of the investment risk shifts to the employee. Beginning in the mid‐1980s, corporations recognized the result of higher costs associated with people living longer and the volatility of investment returns.
They started to freeze future pension benefit accruals and limited the vested benefit to that based on prior service. Many plans were then converted to a 401(k) defined contribution (DC) plan model. In the case of the 13% where workers have both a pension and DC plan, the pension element has frequently become a smaller frozen part of the total overall benefit.
In all, 51% of all workers rely on DC plans, but only 17% have some portion of retirement funded by a pension plan. In Marin, all full‐time public employees enjoy full pension plan benefits.
In 1999 when the stock market was high, pension benefits were expanded retroactively. Subsequently, the market declined, assumptions about future return were not met, and the result has been a large shortfall in accumulated assets.
Today, the Marin cities have a cumulative net pension liability to CalPERS of $179.0 million and $120.6 million for San Rafael to MCERA [3]. On the OPEB side, it is $67.8 million and $33.7 million, liability respectively.
In response to this significant pension funding shortfall, CalPERS has taken a number of steps. They have lowered their assumed rate of return on plan assets, moved to a more conservative investment policy in recognition of the aging population of employees, and have raised the ADC that the cities must pay over a 5‐year ramp‐up period. As a result of these changes, the contributions to CalPERS have and will continue to increase significantly and the shortfall listed above will grow larger.
The League of California Cities commissioned an actuarial report in January of 2018 with Bartel Associates [4], a leading California actuarial firm serving only public sector agencies, to analyze anticipated pension contribution rates for cities as a percentage of payroll and to determine how those future contribution rates would impact General Funds of cities.
The report reached the following conclusions:
- Rising pension costs will require cities over the next seven years to nearly double the percentage of their General Fund dollars they pay to CalPERS;
- For many cities, pension costs will dramatically increase; and
- The impacts of increasing pension costs as a percentage of General Fund spending will affect cities even more than the state. Employee costs, including police, fire and other municipal services, are a larger proportion of spending for cities.
Several Marin cities have also already completed detailed studies reaching similar conclusions about projected CalPERS contributions as shown in Appendix E.
Over many years, cities and towns gave increasingly generous post‐employment health care benefits using defined benefits plans. In many cases, the employee need only retire from that agency and/or provide only minimal service to qualify for OPEB. In these cases, years of OPEB payout can vastly exceed the years of service actually provided to the agency. Like pension benefits, the cost of those benefits has ballooned. Unlike pensions, OPEBs may be changed during periodic labor negotiations with fewer constraints.
In response to increased accounting disclosure requirements, some jurisdictions have negotiated with their respective labor groups to reign in OPEB benefits using a variety of strategies, including reducing benefits, increasing employee contributions, and/or funding the costs over the employees’ working life. Other cities have allowed a growing OPEB liability to continue to build up.
In the long run, there are only a few theoretical ways that cities can address the challenge of underfunded pension and OPEB costs:
- Raise taxes and fees;
- Reduce benefits or the number of employees;
- Use existing reserves or borrow to pay higher contributions; and/or
- Reduce services provided to their residents.
Subsequent chapters address the challenges or even the possibility of executing each of these theoretical approaches.
This committee encourages all cities to immediately take these actions:
- Develop a long‐range financial plan to measure their exposure to increased pension costs and begin addressing which combination of strategies is appropriate for the city. Such a 5‐year or 10‐ year long‐range plan must consider hard choices about taxation, benefits, number of
- Be more transparent about benefit costs. As discussed in a subsequent chapter, city financial statements are aggregated by function (e.g. Fire, Police, or Library) rather than by costs (e.g. payroll, benefits, and purchases). We support specific disclosure of payroll and benefit costs so that citizens can see how their tax dollars are spent.
- Make OPEB obligations more sustainable. Unlike pension costs, cities may have more control over their OPEB obligations. The level of benefits varies by city. In addition, those with costly plans vary as to the level of funding currently put aside to fund the benefit. We support curtailment of this benefit for future employees when legally allowed and for agencies using the CalPERS medical benefit plan only to fund at the legally allowed minimum under the Public Employees’ Medical & Hospital Care Act (PEMHCA). We support all agencies fully funding the ADC for current employees so employees can better count on receiving the benefit when due. Whatever each city decides, the impact of these costs should be considered as part of any long‐ range financial plan.
employees, and services provided as discussed in subsequent chapters.
This report will attempt to address the following questions:
- How will cities respond to the challenge of meeting their obligation to pay the shortfall in pension and OPEB costs?
- How can cities provide more transparency in reporting these obligations
- What solutions exist to mitigate this coming challenge?
[1] See Appendix A for more information about the MCCMC and a list of the committee members.
[2] Marin County Local Government Reform of Pensions and Other Post‐Employment Benefits: Defining the Problem & Scope of Local Solutions (6/20/11)‐ http://mccmc.org/wp-content/uploads/Pension-OPEB-Committee-Report-Final-6-20-11.pdf
[3] Based on a 7.65% discount rate for valuations as of 6/30/16 and 7.15% for valuations as of 6/30/17 for CalPERS cities. San Rafael was based on a 7.25% discount rate as of 6/30/16 – See Appendix E
[4] League of California Cities Retirement System Sustainability Study and Findings (January 2018) ‐ https://www.cacities.org/Resources-Documents/Policy-Advocacy-Section/Hot-Issues/Retirement-System-Sustainability/League-Pension-Survey-(web)-FINAL.aspx
CLICK HERE to read the full Report.
Credits
Principal Authors are Larry Chu, Larkspur City Council and John McCauley CPA (retired), CPCU, Mill Valley City Council.
Contributing Author Ray Withy, Sausalito City Council.
Administrative review of this report was performed by Larkspur City Manager Dan Schwarz and Ross Town Manager Joe Chinn.
A legal review of this report was performed by Roy Clarke and Greg Stepanicich of the law firm of Richards, Watson & Gershon which serves as City Attorney for Mill Valley. The City of Mill Valley paid for this review.
A technical review of this report was performed by Catherine MacLeod, FSA, FCA, EA, MAAA, Principal & Consulting Actuary, MacLeod Watts, Inc.