HomeMy WebLinkAboutBUDGET & FINANCE AGENDA 03-17-09~l C'entral Contra Costa Sanitary District
5019 Imhoff Place, Martinez, CA 94553-4392 (925) 228-9500 www.centralsan.org
BUDGET AND FINANCE COMMITTEE
Chair Lucey
Member Nejedly
Tuesday, March 17, 2009
3:00 p.m.
Executive Conference Room
5019 Imhoff Place
Martinez, California
INFORMATION FOR THE PUBLIC
ADDRESSING THE COMMITTEE ON AN ITEM ON THE AGENDA
Anyone wishing to address the Committee on an item listed on the agenda will be heard when the
Committee Chair calls for comments from the audience. The Chair may specify the number of minutes
each person will be permitted to speak based on the number of persons wishing to speak and the time
available. After the public has commented, the item is closed to further public comment and brought to the
Committee for discussion. There is no further comment permitted from the audience unless invited by the
Committee.
ADDRESSING THE COMMITTEE ON AN ITEM NOT ON THE AGENDA
In accordance with state law, the Committee is prohibited from discussing items not calendared on the
agenda. You may address the Committee on any items not listed on the agenda, and which are within their
jurisdiction, under PUBLIC COMMENTS. Matters brought up which are not on the agenda may be
referred to staff for action or calendared on a future agenda.
AGENDA REPORTS
Supporting materials on Committee agenda items are available for public review at the Reception, 5019
Imhoff Place, Martinez. Reports or information relating to agenda items distributed within 72 hours of the
meeting to a majority of the Committee are also available for public inspection at the Reception. During
the meeting, information and supporting materials are available in the Conference Room.
AMERICANS WITH DISABILITIES ACT
In accordance with the Americans With Disabilities Act and California Law, it is the policy of the Central
Contra Costa Sanitary District to offer its public meetings in a manner that is readily accessible to
everyone, including those with disabilities. If you are disabled and require special accommodations to
participate, please contact the Secretary of the District at least 48 hours in advance of the meeting at (925)
229-7303.
i~ Recycled Paper
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Budget and Finance Committee
March 17, 2009
Page 2
1. CALL MEETING TO ORDER
2. PUBLIC COMMENTS
3. OLD BUSINESS
4. CLAIMS MANAGEMENT
*a. Review Outstanding Claims
5. REPORTS/ANNOUNCEMENTS
a. GASB 45 Trust Investment
*b. Review of CCCERA Smoothing and UAAL Layering Methodology
c. Annual Deferred Compensation Report (Item 3.f. in Board Binder)
6. REVIEW EXPENDITURES (Item 3.a. in Board Binder)
7. ADJOURNMENT
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Central Contra Costa Sanitary District
March 16, 2009
TO: BUDGET AND FINANCE COMMITTEE
Q~~
FROM: RANDALL M. MUSGRAVES, DIRECTOR OF ADMINISTRATION F
DEBBIE RATCLIFF, CONTROLLER ,~~
SUBJECT: REVIEW OF CONTRA COSTA COUNTY EMPLOYEES' RETIREMENT
ASSOCIATION SMOOTHING AND UAAL LAYERING METHODOLOGY
SUMMARY
We met with Rick Koehler, Accounting Manager, and Marilyn Leedom, Chief Executive
Officer, on Friday, March 6, 2009. We reviewed the Actuary's (Segal) work assessing
the smoothing of market value returns, the layering of the Unfunded Actuarial Accrued
Liability (UAAL), and the impact of the changes. Segal looked at four scenarios. The
current method smoothes market value returns over five years. This is called the
baseline in Segal's report. Scenario I is a 7 year term, Scenario II is a 10 year term and
Scenario III is a 12 year term. In addition, the Contra Costa County Employees'
Retirement Association (CCCERA) Board is reviewing the feasibility of a layered
approach to the UAAL. The review evaluated the impact to the employer contribution
rates, the UAAL and the retirement program funding percentage. As you know, the
District's UAAL is $43 million as of December 31, 2007.
RETIREMENT SYSTEM FINANCIAL VALUE
With the recent drop in the financial markets, the retirement system's funding has been
reduced from 89.9% funded to below 70%, based upon our understanding of market
value. At this level, the system is underfunded. In addition, the industry has a standard
that the Actuarial Value of Assets (AVA) should not be greater than 120% of the Market
Value of Assets (MVA). CCCERA is currently at 136%. This number must also be
brought down to the 120% level over a reasonable period of time as required by the
Actuarial Standard Board, Actuarial Standard of Practice #44. This will put pressure on
employer contribution rates.
CURRENT IMPACT ON EMPLOYER CONTRIBUTION RATE
Under the current 5 year averaging, the employer contribution rate is expected to
increase from 24.7% (12/31/07) to 25.3% (12/31/08), an increase of 0.6%. These are
the rates being used due to the eighteen month rate development and implementation
period. Due to the eighteen month lag, the 2008-2009 and 2090-2010 rates are too
low. In 2013, rates are projected to jump to approximately 50%. This is a doubling of
rates and would have a dramatic impact on the County, as well as the District. The
District will pay $9,375,000 in fiscal year 2008-2009. This amount will double by 2013.
Approximately $55 of the sewer service charge pays for retirement. In 2013, this will
increase to approximately $108.
MARKET VALUE RETURN SMOOTHING
The basic concept behind the smoothing is to reduce a spike in the employer
contribution rate, resulting in lower annual rates but for a longer period of time and at a
greater cost, due to the delay. The simple fact is that CCCERA, like all other retirement
systems, are trying to deal with the unprecedented loss of 35%+ of the system's assets.
Thus, by lengthening the years to average the losses, it lowers the employer
contribution rate (percent of payroll) reducing the negative impact on the employer, in
the short term. It also ensures that the employer contribution rate is not likely to rise
quickly and then be reduced in future years when investment income returns. From a
business perspective, it is like obtaining a loan to help reduce the spiking. The problem
is that smoothing postpones placing funds into the system thereby loosing the
opportunity for accumulation of assets. Thus, the longer the smoothing occurs, the
greater the cost to the employer.
Exhibits 3 (single layer UAAL amortization) and 7 (multi le layer UAAL amortization)
visually display the impact of increasing the smoothing term of market value returns
(Exhibit 3) and the impact of layering the UAAL amortization (Exhibit 7). Exhibit 3
shows that under the current 5 year smoothing, the employer contribution rate (percent
of payroll) increases from the current 24.7% to a high of 54.9% in 2016 and begins to
decrease in 2021 to 47.9%. That is approximately 11 years of rates that are twice what
they are today. The other three scenarios yield a more gradual increase, but
significantly exceed the highest rate of the basic or current methodology. In fact, the 12
year term yields a rate of 96.7% of payroll in 2021. This rate could not be sustained by
any employer.
Exhibit 7 shows the benefit to the contribution rate of layering the UAAL. In all
scenarios, the rate does not exceed 50%. However, a high rate over more years is
required resulting in greater long-term cost to the employer. The UAAL increases by
approximately $1.5 billion by 2021.
It is unclear what the specific impact of the smoothing and layering scenarios will be to
the District. The Segal report looked at the retirement system as a whole, blending
safety and general employees. We made a request to CCCERA to have Segal provide
us with the information for only general employees. Marilyn thought the request was
beneficial to all CCCERA employers and will contact Segal for the information. I have
requested that Segal recalculate the Exhibits using the general employee number only.
We will be better able to ascertain the impacts to the District.
2
UAAL LAYERING METHODOLOGY
The Retirement Association is looking at a new layered approach to the payment period
for the UAAL. The current UAAL of $43 million would be amortized over an 18 year
period rather than the current thirteen year term. Next year's increase in the UAAL
would also be amortized for 18 years while the original $43 million would then have 17
years remaining of amortization. It is a rolling 18 year amortization period. This would
also help to smooth the employer contribution rate. CCCERA staff is seeking
clarification regarding the current UAAL at $43 million or recalculating it to account for
the 2008 losses. In 2008 CCCERA lost 26.5% of total assets. In the first part of 2009,
an additional 12% loss has occurred.
Exhibits 4 (single layer) and 8 (multiple layer) clearly show the impact to the UAAL. As
previously discussed, the layering of the UAAL, and thus the postponement of
payments, has a significant negative financial impact. By the year 2021, in the twelve
year scenario, the UAAL is projected to increase by approximately $1.5 billion (from
$310 million to $1.8 billion) using the multiple layer methodology. Employer contribution
rates would be comparable at the year 2021 (47.9% using five year smoothing and
47.3% using the layered method).
Exhibits 5 (single layer) and 9 (multiple layers) also confirm that the funded percentage
of the retirement program would be higher by six to eight percent (97.3% vs. 91.4%)
using the current UAAL payment methodology.
CONCLUSION
The conclusion is clear, even from a pooled perspective. It is better to pay more now
than to postpone payment. However, not all employers in CCCERA can afford to
double their rates in such a short period of time.
The CCCERA staff informed us that whatever methodology changes are adopted by
their Board would apply to all employers. Currently, participating agencies/employers
are able to pay down their specific UAAL. Payments are tracked and applied to the
agency. Do remember that the UAAL is a prorated calculation of the pooled liability
less assets. Staff is reluctant to pay down the UAAL until we determine if the District is,
in any way, subsidizing the County or other participating agencies. However, the ability
to pay against the UAAL, independent from the pool, will aid in minimizing significant
costs due to postponed employer contributions.
The Budget and Finance Committee and the General Manager have expressed interest
in sending a letter to CCCERA regarding the suggested changes. Staff has prepared a
DRAFT for the Committee's consideration.
3
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FAX: (925) 676-7211
March 16, 2009
~RPpt
JAMES M. KELLY
General Manager
Ms. Marilyn Leedom
Chief Executive Officer
Contra Costa County Employees' Retirement Association
1355 Willow Way, Suite 221
Concord, CA 94520
Dear Ms. Leedom:
KENTON L. ALM
Counsel for the District
(Sl0) 808-2000
F.LA/NE R. BOEHME
Secretary of the District
The Central Contra Costa Sanitary District (CCCSD) Board of Directors received an
informational memo from staff summarizing the Segal presentation given to Contra Costa
County Employees' Retirement Association's (CCCERA) Board on February 11, 2009. Both the
issue of extending the smoothing period of gains and losses, and a layered approach for the
amortization of the Unfunded Actuarial Accrued Liability (UAAL) were discussed.
The District Board is sensitive to the current economic climate and how market losses in asset
value and subsequent necessity to raise employer rates effects the County and other public
entities including CCCSD. However, by extending the smoothing period and layering the UAAL,
the deferral of losses significantly increases the UAAL and the employer's cost in the long term.
This is clearly demonstrated by the Segal exhibits.
It is the opinion of CCCSD's Board of Directors that the smoothing period should remain at five
years in an effort to control long term employer costs. As to the layered amortization approach,
we would recommend looking at other options that did not increase the UAAL by $1.5 billion by
2021. Exhibit 4 estimates $310 million in 2021 using the current methodology compared to $1.8
billion in 2021 using the twelve year smoothing period and layering the UAAL, Exhibit 8.
We greatly appreciated the information provided and look forward to more data and information
as your Board continues to evaluate the current issues facing the retirement system.
Sincerely,
James M. Kelly ~~
General Manager R~