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SD. 8
To: Board of Supervisors
From: David Twa, County Administrator
Date: May  5, 2009
The Seal of Contra Costa County, CA
Contra
Costa
County
Subject: RESPONSE TO GRAND JURY REPORT NO. 0907, ENTITLED “Retiree Healthcare Benefits Leave County Taxpayers on the Hook
APPROVE OTHER
RECOMMENDATION OF CNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE
Action of Board On:   05/05/2009
APPROVED AS RECOMMENDED OTHER
Clerks Notes:

VOTE OF SUPERVISORS
Contact: Lisa Driscoll, County Finance Director 335-1023
cc: Steve Ybarra, County Auditor-Controller     Bill Pollacek     Lisa Driscoll, County Finance Director    
I hereby certify that this is a true and correct copy of an action taken and entered on the minutes of the Board of Supervisors on the date shown.
ATTESTED:     May  5, 2009
David Twa,
 
BY: , Deputy

 

RECOMMENDATION(S):

RECEIVE Civil Grand Jury Report No. 0907, entitled "Retiree Healthcare Benefits Leave County Taxpayers on the Hook – A New Approach is required to Deal with Unsustainable Retiree Healthcare Benefits Provided to Most Contra Costa Governmental Employees”, APPROVE response, and DIRECT the Clerk of the Board to forward the response to the Superior Court no later than June 1, 2009.

FISCAL IMPACT:

None.

BACKGROUND:

On April 2, 2009, the 2008/2009 Civil Grand Jury filed the above-referenced report, which was reviewed by the Board of Supervisors and subsequently referred to the County Administrator who prepared the attached response that clearly specifies:  
BACKGROUND: (CONT'D)
  • Whether a finding or recommendation is accepted or will be implemented;
  • If a recommendation is accepted, a statement as to who will be responsible for implementation and by what definite target date;
  • A delineation of the constraints if a recommendation is accepted but cannot be implemented within a six-month period; and
  • The reason for not accepting or adopting a finding or recommendation.
    •   
    BOARD OF SUPERVISORS RESPONSE TO  
    CIVILGRAND JURY REPORT NO. 0907:  
    Retiree Healthcare Benefits Leave County Taxpayers on the Hook – A New Approach is required to Deal with Unsustainable Retiree Healthcare Benefits Provided to Most Contra Costa Governmental Employees  
      
    FINDINGS  
      
      
    1. Retiree health benefits have traditionally been a form of compensation earned by County and local government employees (e.g., pension income) over their working career, but paid to them over the years they spend in retirement. In prior years the cost of these benefits was usually recognized as an expense only when actual payments began following an employee’s retirement (This method of recognizing an expense is commonly described as “pay-as-you-go” or “paygo”.)  
      
    Response: Agree that retiree health benefits have traditionally been funded by pay-as-you-go accounting rather than as an expense each year, during the years that employees are providing service to the County and its constituents.  
      
    2. GASB 45 now requires that larger governmental entities commence accounting for (but not necessarily funding) these benefits on an Accrual basis – during the employees’ period of active service when the benefits are actually earned.  
      
    Response: Agree that GASB 45 requires the County to provide more complete, reliable, and decision-useful financial reporting regarding the costs and financial obligations incurred when providing postemployment benefits other than pensions (OPEB) as part of compensation for services rendered by its employees.   
      
    3. GASB 45 requires the following expenses to be recognized:  
    • the current year’s cost to fund that year’s earned benefits, plus  
    • the amount necessary to fund the unfunded OPEB liability for benefits earned but not funded in prior years.  
      
    In most cases, these rules first became effective for public entities with revenues in excess of $100 million for the fiscal year ended June 30, 2008. Smaller public entities will be required to comply during the following two fiscal years.  
      
    Response: Agree.   
      
    4. To date in Contra Costa County there has been little or no funding of the OPEB liabilities for most governmental entities offering retiree medical benefits, including County, school districts, cities, and special districts.   
      
    Response: Disagree. Entities governed by Contra Costa County Board of Supervisors will have funded $20 million by June 30, 2009 and an additional $20 million by the end of fiscal year 2009/10.  
      
    5. Most larger County governmental employers provide their employees with extraordinarily generous retiree health benefits.  
      
    Response: This appears to be a generalization rather than a finding.   
      
    6. Property taxes accounted for almost 93% of Contra Costa County tax revenues in the most recent fiscal year with sales and other taxes making up the balance of total tax revenues received. These locally derived taxes also represented a significant portion of the revenue of school districts, cities and special districts located in the County.  
      
    Response: Agree that property related taxes account for more than 93% of Contra Costa County tax revenues and that sales and other taxes make up the balance of the total tax revenues received.  
      
    7. The Board of Supervisors of Contra Costa County has committed to a future OPEB liability funding schedule for the County, including a commitment to contribute $20 million during the 2008-2009 fiscal year. Although no actual payments were made into the County’s OPEB Irrevocable Trust as of January 31, 2009, $10 million is held by the County Treasurer in a designated account.  
      
    Response: Partially disagree. The County’s Post Retirement Benefit Trust Agreement became effective January 1, 2008 and all of the current year contributions are considered part of that Irrevocable Trust. The recent quarterly deposit of $4,989,994 brought the total pre-funding for the year to $14, 991,734.  
      
    8. As of January 1, 2008 the County’s OPEB obligation was determined to be $2.367 billion, or almost four times the County’s covered payroll (annual payroll of active employees covered by the plan) of $610 million. Its Annual Required Contribution for the fiscal year ended June 30, 2008 was $195 million, or almost 32% of covered payroll.  
      
    Response: Agree.   
      
    9. The calculation to determine a liability for future payments is primarily dependent upon the interest rate assumption. If the interest rate assumption is higher then the liability is lower; if the interest rate assumption is lower, then the liability is higher. If no funding mechanism is in place, and there is no expectation of putting money aside, the rules under GASB 45 require that a lower interest rate assumption be used.  
      
    The interest rate assumption that was used for the calculation of the OPEB liability and ARC for the fiscal year 2007-2008 was 4.5%. The basis for allowing the use of a higher interest assumption rate is that the entity will earn a rate of return on investments that can be used to help pay for the future benefits. Because the funding commenced with the current fiscal year, the assumed interest rate was increased to 7.75% in 2008-2009.   
      
    The result of the assumed interest rate increase was the OPEB liability dropped from $2.3 billion to 1.7 billion, almost solely due to the interest rate assumption change.  
      
    Response: Partially disagree. The primary calculation to determine a liability for future payments is primarily dependent upon the benefit level. A portion of the drop in liability was due to the elimination of subsidized medical inflation on premiums for all management employees. This change had an impact on the liability reduction as well as the discount rate. The discount rate increase from 4.5% to 6.32% in 2008-09 did have an overall greater impact in lowering the liability than the management benefit change alone.  
      
    Responses to Findings #10 and #11 not required from Contra Costa County  
      
    12. As the summary numbers shown in Finding 11 indicate, County local governments are currently only paying 34% ($83,348,000 / $245,324,000) of the Annual Required Contribution set forth in GASB 45. This means that the unpaid balance of the Annual Required Contribution, ($245,324,000 - $83,348,000) $161,976,000, is being transferred to future taxpayers. This transfer to future taxpayers takes place every year.  
      
    Response: The County is unable to verify the accuracy of the data presented; however, agrees that any unpaid balance of the Annually Required Contribution has the potential of being transferred to future taxpayers given no change to benefits.  
      
    13. The 2007-2008 property tax revenue for the entire County was $2.077 billion. Projections are that this amount will decline significantly during the next several fiscal years because of the current widespread decline in property values.  
      
    Response: Partially disagree. The County agrees that the total combined tax levy for the County was $2.077 billion in 2007-08 and expects its own property tax revenue to decline; however, it is not expected that the total combined tax levy for the County will change significantly. This is because the total number includes general obligation bonds, fixed charges, and assessments for all taxing jurisdictions in Contra Costa. A significant portion of this tax levy is not based on assessed valuation growth. From fiscal year 1950-51 to current, in over sixty years of tracking property tax revenue, the total combined tax levy has only declined in tax year 1978-79, the year in which Proposition 13 was implemented (the roll declined 47.46%).   
      
    14. Larger Contra Costa County governmental entities with identified retiree healthcare plans are:  
    Response: The County can neither confirm nor deny this finding.   
      
    15. Recent information provided to the Contra Costa County Board of Supervisors makes clear that tax revenues and state support to the County are likely to decline for at least the next several years. This reduction in projected revenue has been currently offset by County Departments reducing their budgeted 2009-2010 full-time equivalent headcount by 191 public safety, health care and social services positions. If the County were to commence fully funding its ARC, its only practical source of near term future funding would be to further lower its staffing levels.  
      
    Response: Agree that recent information provided to the Board of Supervisors indicated that 191 full-time equivalent (FTE) positions would need to be eliminated throughout the County in fiscal year 2009-10; however, since that time the number increased to 202.5 FTE. In fact, the County has cut from its 2008/09 and 2009/10 operating budgets over $150 million, requiring the elimination of more than 600 staff positions.   
      
    16. On May 6, 2008, the Contra Costa County Administrator presented the following challenge to the Board of Supervisors:  
      
    “The ever growing health care expense demand on the general fund will consume our ability to provide public services. Given the size of our liability, we cannot responsibly eliminate enough programs to fund our current health care programs; we must contain and change the County’s cost of health care.”  
      
    Response: Agree.   
      
      
    RECOMMENDATIONS  
      
      
    The 2008/09 Contra Costa County Civil Grand Jury recognizes that Contra Costa County government entities in most cases do not have the financial ability to prudently pay for the current retiree healthcare benefits that have been, and are continuing to be, earned by their employees. The Civil Grand Jury recommends that: Governmental entities implement sustainable strategies to reduce retiree healthcare benefits.  
      
    Response: This appears to be a comment and not a specific recommendation. The County agrees.  

    CLERK'S ADDENDUM

    David Twa, County Administrator, presented the staff report.

    Supervisor Uilkema requested a more detailed response to the Grand Jury’s finding No. 5 “ Most larger County governmental employers provide their employees with extraordinarily generous retiree health benefits.”

    Supervisor Piepho said she would like to see more information to illustrate past actions and conditions that led to the County’s current financial status in regard to retiree benefits, as well as a big-picture description of what the County is doing to move forward. She said the report could use more of a conclusion or wrap-up in its response.

    Lisa Driscoll, Finance Director, said there is sufficient time to revise the response for the Board’s review.

    Chair Bonilla invited the public to comment. The following person spoke: 

               Rollie Katz, Public Employees' Union Local One; Ralph Hernandez, retired Contra Costa County employee.

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