AgdaPkt 2019-10-14 Joint SA PFA - Laserfiche WebLink

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6.A. - Page 9 of 114 BACKGROUND The 2017-18 San Mateo County Civil Grand Jury issued a report in June 2018 entitled "Soaring City Pension Costs — Time for Hard Choices." The report received substantial press coverage,1 and the 2018-19 Grand Jury decided to update the financial data in the report and conduct a follow-up investigation to identify what progress has been made to address the issues raised in the prior report. The 2017-18 report provided a detailed analysis of the local government employee pension system and the factors affecting its financial health. It provided key statistics on the recent (FY 2014-15 through FY 2016-17) and projected future pension costs of each city in San Mateo County (each referred to here as a "City" and collectively as the "Cities"). The report found that most Cities' pension costs would likely double within the next seven to ten years, posing a serious threat to their ability to continue to deliver public services at current levels. The report outlined the alternatives available to meet these costs and recommended that the Cities develop long-term financial plans for how to address the coming crisis of pension payments. Analyses in the 2017-18 report are not repeated in this new report and the reader is encouraged to read the prior report first, in order to fully understand this update. A brief summary of the report's key findings follows. Each City provides its employees with a defined -benefit pension plane administered by the California Public Employees Retirement System ("Ca1PERS"). These plans are funded by Normal Cost' contributions4 to Ca1PERS from both the Cities and the employees themselves. Ca1PERS, in turn, invests these contributions in a portfolio of assets. Ca1PERS relies on a Return on Investments (ROI) from this portfolio for about 61 percent of the funds needed to pay the pension benefits promised to retired City employees. Ca1PERS' current ROI expectation over the long- term is an annual return of seven percent.6 In the event that the projected cost of benefits increases unexpectedly, or Ca1PERS' ROI falls short of projections, the pension plans will have Unfunded Liabilities.7 The Cities, rather than Ca1PERS, are responsible for paying off Unfunded Liabilities through payments to Ca1PERS of their Amortization Cost8 of principal and interest on the Unfunded Liabilities. Both Normal Cost and Amortization Cost contributions are legal obligations that the Cities have to Ca1PERS and are not discretionary spending. 1 Bradshaw, Kate, "Grand jury urges county cities to prepare for crushing pension costs," The Almanac, July 31, 2018. Walsh, Austin, "Study: Cost of pensions dangerous," San Mateo Daily Journal, July 18, 2018. Climate Magazine, "Wiping Out on the California Pension Wave" March 2019. 2 Defined pension benefit plans are described on page 4 of the prior report. s "Normal Cost" is defined on page 3 of the prior report. a The terms "contributions" and "pension contribution costs" as used in this report and in the prior report refer to payments to Ca1PERS of pension costs, including both Normal Costs and Amortization Costs. s All capitalized terms used in this report that are not defined have the definitions given to them in the prior report. 6 SFGate, "Ca1PERS lowers projected return on investment," December 22, 2016. "Unfunded Liability" is defined on page 4 of the prior report. a "Amortization Cost" is defined on page 2 of the prior report. 2018-2019 San Mateo County Civil Grand Jury 2 13