Santa Barbara Pension fund criminal act's and cover up my County Auditor Robert Geis!

The letter reflecting a cover up involving the Santa Barbara County Pension fund, look no further than the charts on page 2.

http://www.countyofsb.org/auditor/Publications/CountyRetirementCosts.pdf

County of Santa Barbara


Office of the Auditor-Controller

County Retirement Costs: White Paper by Robert W. Geis, CPA

(Through June, 30, 2006)Page 1 of 7

County of Santa Barbara

Office of the Auditor-Controller

County Retirement Costs: White Paper by Robert W. Geis, CPA

(Through June, 30, 2006)

The County Retirement plan and underlying systems can be difficult to understand due to the

complexities of the benefit, investment and funding policies. The benefit system is a multi-employer

plan that includes the County, Courts, Air Pollution Control, Santa Barbara Association of

Governments and six Special Districts. There are nine different benefit plans. The funding policy is

driven by a complex array of actuarial science, federal tax laws, state legislative code and

governmental accounting policies. Losses on investment returns of $464 million between December 31, 1999 and December 31, 2002 had a dominant impact on the fund. This white paper explains some actuarial and accounting concepts to help the reader better understand the financial condition

and dynamics of the pension fund as they relate to the current funded status of the system.

For an in-depth analysis, the County hired an independent third party (Kroll/Mercer) who issued an

evaluation of the system dated November 7, 2006 (http://www.countyofsb.org/auditor/home.asp).

They identified a number of concerns that should be addressed regarding retiree health benefits, the

policy of using “excess earnings,” improving the methods to measure the cost of proposed new

benefits, making the system more transparent (it is difficult to understand), confirm compliance with

applicable laws and improve the stability of the system. To address these concerns, the County hired

tax attorneys Ice Miller to guide us towards assuring the Retirement Plan is in compliance with IRS

federal tax laws. The County and Retirement system are currently compiling a legal plan document to

aid in this effort.

The County has also established a working team to address issues. We are trying to inform and train

the BOS and BOR of the fiscal implications of the fund and its practices. We believe the BOS and BOR

should establish a funding agreement that addresses the basic pension plan, retiree health and

benefit improvements to improve long-term stability. Finally, the County and BOR are addressing and

incorporating GASB 43 and GASB 45 implementation requirements for reporting Other Post

Employment Benefits (OPEB).

Submitted by:

Robert W. Geis, CPA

Auditor-Controller

(805) 568-2101

Page 2 of 7

Financial Status of Retirement Fund

The County’s retirement fund is in good overall financial condition, but maintaining this level is a

stress on the County budget. At 6/30/2006 the fund was 86% funded using the actuarial value

method of measuring the plan assets available to pay for current and future retirement liabilities, and

90% funded using the market value method. In addition, the County has no outstanding pension

obligation bonds. We believe that to be considered in excellent financial condition, the fund should

ideally maintain a funded ratio of 125% or more for a consistent period of time. Superior earnings

above the system-expected investment earnings rate of 8% would contribute to this excellent overall

funding status.

The following two tables demonstrate the financial status of the plan over the last seven years. They

will also be used to show the volatility of investment returns within the system that can occur within

an economic cycle. It is important that retirement systems and decision makers look at longer

planning cycles. Benefits can accumulate over 30 years or longer while an employee works and be

paid out for periods over 30 years after they retire.

Asset Smoothing: Under current retirement board policy the Actuarial Value of assets is a smoothed

market value in which unexpected investment returns (gains or losses) are recognized over a 5-year

period. The purpose is to smooth out the impact of volatile investment returns with respect to County

contribution rates. The downside of using the actuarial method is a distortion of when the investment

losses were actually incurred.

Actuarial Value (Market Gains/Losses Smoothed over 5-Years to Delay or Soften Impact to Contribution Rates)
In Chart below what happen to the accounting for the year 2001?
(in millions) 12/31/99 12/31/00 12/31/02 06/30/03 06/30/04 06/30/05 06/30/06

Plan Assets 1,068 1,171 1,296 1,347 1,379 1,444 1,553

Accrued Liability (Cost) 1,067 1,145 1,364 1,455 1,579 1,688 1,810

Percent Funded 100% 102% 95% 93% 87% 86% 86%

Over(Under) Funded Amount 1 26 (68) (108) (200) (244) (257)

No Asset Smoothing: The Market Value of assets is the true picture.

Market Value (No Smoothing)
In Chart below what happen to the accounting for the year 2001?

(in millions) 12/31/99 12/31/00 12/31/02 06/30/03 06/30/04 06/30/05 06/30/06

Plan Assets 1,247 1,183 1,080 1,169 1,347 1,476 1,629

Accrued Liability (Cost) 1,067 1,145 1,364 1,455 1,579 1,688 1,810

Percent Funded 117% 103% 79% 80% 85% 87% 90%

Over(Under) Funded Amount 180 38 (284) (286) (232) (212) (181)

Case in point: In 1999 the County was 100% funded per the actuarial value method and 117% funded ($180 million surplus) per the market value method. In our opinion, this was just short of excellent.

At that point decision makers decided to improve both active member and retired member benefits

using surplus earnings to pay the benefits (a part of the $180 million surplus). The cost of these

benefits created new liabilities for past service estimated by the actuaries to cost $87 million. During

the implementation of the new benefits the market lost $142 million by 12/31/00. Therefore, the

surplus to pay the benefits was wiped out and new liabilities were created that had not been paid for

Page 3 of 7

over time. The next year the fund lost an additional $322 million.( How is a reference to this huge loss in 2oo1 made here but missing from Mr. Geis's Charts above on page 2?) The market value unfunded liability went from a surplus of $180 million to a deficit of $284 million. As discussed later, the plan sponsors

(County) are required to payoff the deficit through increases in contribution rates (see UAAL in table

below). The point is that even with 117% funding, because of market volatility any change in benefits

has to be carefully planned, especially in the area of using surplus earnings to fund benefit increases.

A better fiscal policy would be to build a reserve to the 125% or greater funding level with the surplus

maintained to guard against market downturns.

Page 4 of 7

County Retirement Contribution Rates, Pensionable Salaries & Basic Cost

The County’s cost for the basic pension benefit is represented by contribution rates, which have been

growing significantly over the last several years. The table below shows blended rates for all plans.

Each separate plan (i.e., General and Safety) has its own rate. For example, in FY 2005/06, the

General Plan rates averaged 17%, while the Safety Plan rates averaged 32%. In addition to the

Retirement System rate, the County also must pay Social Security of 6.2% for General members.

County rates are developed to pay for the annual normal cost of basic pension benefits and to pay for

the unfunded liability over 15 years. Over time, the County has also bargained to pick-up a portion of

the required employee contribution.

History of Blended Rates

12/31/99 12/31/00 12/31/02 06/30/03 06/30/04 06/30/05 06/30/06

Normal Cost 12.09% 11.87% 11.63% 11.56% 11.48% 11.38% 11.61%

UAAL -0.09% 0.08% 2.29% 3.65% 6.63% 8.40% 9.29%

Total Blended Rate 12.00% 11.95% 13.92% 15.21% 18.11% 19.78% 20.90%

History of Pensionable Salaries and Basic Pension Cost

Estimated

(in thousands) FY 00/01 FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 FY 06/07

Pensionable Salaries 197,458 215,715 227,431 238,879 243,379 250,133 264,732

x County Blended Rate 12.00% 11.95% 11.95% 13.92% 15.21% 18.11% 19.78%

= County Basic Pension Cost 23,695 25,778 27,178 33,252 37,018 45,299 52,364

Without actuarial smoothing County contributions rates would have doubled to about 22% in one year

starting FY 02-03 and doubling the employer contributions from $31 million to $60 million. With the

smoothing method, five years later in FY 06-07 contribution rates have now hit 21% with

contributions approaching $57 million.

History of Basic Pension, Employee Pick-up & FICA (Social Security) Cost

Estimated

(in thousands) FY 00/01 FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 FY 06/07

County Pension Cost 23,695 25,778 27,178 33,252 37,018 45,299 52,364

Employee Contribution Pick-up 3,418 3,591 4,013 4,208 4,176 4,230 4,300

FICA (Social Security) 8,553 9,349 9,639 9,835 10,001 10,234 11,025

Total Basic Pension 35,666 38,718 40,830 47,295 51,195 59,763 67,689

With FICA (Social Security), the County paid almost $68 million for basic retirement in FY 2005/06.

Almost 10% of the County total budget and 23% of basic salary costs.

To be used

in

FY 07/08

Page 5 of 7

Funding Retirement Benefits

• The accrued liability represents the liability attributable to

prior service by the cost method.

• The normal cost represents the increase in liability

attributable to an additional year of service.

• The unfunded actuarial accrued liability is amortized over

15 years as a level percentage of payrolls.

• Actuarial assets must earn at least 8.16% in order to keep

unfunded actuarial accrued liability from growing.

This is a pictorial representation of the theoretical overview of retirement funding. Assets must earn

8.16% over the long-term to keep the unfunded actuarial accrued liability (see amortization above)

from growing. A lower return due to underperforming investments will cause the unfunded liability to

grow. The investment return is the single most important component of the long-term stability of a

pension fund.

$1.810 B $1.553 B

$31.5 M $30.1 M (11.38% of Pensionable Salaries)

$25.2 M (8.40% of Pensionable Salaries)

$52.4 M

(19.78% of Pensionable Salaries)

Page 6 of 7

Funding Retiree Health and Other Benefit Costs

Currently, retirees receive health and other benefits outside of the basic pension benefit. These other

benefits are not officially or explicitly paid for through the normal method described above. The

method used to pay for these other benefits is a complicated process that takes a portion (50%) of the

investment earnings above the expected rate of return (“excess earnings”) and sets it aside for these

other benefits. This is not an actuarially sound practice because “excess earnings” are not equivalent

to surplus earnings. Effectively, this practice diverts assets from the basic pension and increases the

unfunded liability. The table below shows the fiscal impact of this practice on the unfunded liability.

With the current practice, the unfunded liability is $257 million. If the practice was not followed, all

assets would be available for the basic pension benefit and there is no additional liability outside of

the basic pension benefit, the unfunded liability would be reduced by $138 million to $119 million.

Each time there is a distribution of “excess earnings,” the unfunded liability will increase. For

example, at 6/30/06, “excess earnings” totaled $86 million. If these are distributed, 50% or $43

million will go towards increasing the retiree health or other benefits and the unfunded liability will

increase by $43 million to $300 million. The associated County UAAL rate will then increase from

9.29% to 11.31% to pay for the increase in the unfunded liability increasing County costs by an

additional $5 million annually. In addition, the plan sponsor does not contribute the additional cost of

the retiree health benefit on an annual basis creating additional unfunded liabilities.

Without Impact of

Current Current "Excess"

(in millions - based on FYE 6/30/06) Practice Practice Distribution

Assets Available - Basic Pension Benefits 1,415 1,553 1,372

Assets Available - Other Retiree Benefits 138 - 181

Total Assets Available 1,553 1,553 1,553

Liability (future cost) - Basic Pension Benefits 1,672 1,672 1672

Liability (future cost) - Other Retiree Benefits 138 - 181

Total Liability 1,810 1,672 1,853

Difference (Assets less Costs = "Unfunded Liability") (257) (119) (300)

History of Costs for Retiree Health & Other Benefits

Estimated

(in thousands) FY 99/00 FY 00/01 FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06 FY 06/07

Retiree Health Costs 3,272 3,676 3,876 4,834 5,202 5,740 6,005 6,250

Cash In-Lieu of Health 273 284 350 520 549 435 449 450

Ad Hoc COLA Costs 2,333 2,321 3,397 2,382 2,334 2,304 2,256 2,300

Total Other Benefits 5,878 6,281 7,623 7,736 8,085 8,479 8,710 9,000

The costs of these external benefits have grown 48% from FY 1999/00 to FY 2005/06. The

Mercer/Kroll report states that “a long-term return of 9.6% would result in the distribution of over $3

billion in additional retiree benefits over the next 50 years,” which is two times our current assets of

$1.553 billion available for basic pension benefits. The nature of these benefit increases is

unsustainable by the plan sponsor.

Page 7 of 7

Conclusion

Decision makers should be concerned with the complexities of the benefit, investment and funding

policies. What follows are a few concerns:

The system has a 50% chance that it will earn more than 8.16% over the long-term and a 50% chance

that it will not earn 8.16%. The volatility of investment returns should always be the first thing

considered in any system decision.

The County budget is under stress from the requirement to increase contributions. Actuarial

smoothing helps with contribution rates but increases long-term costs. Each decision maker on the

Board of Supervisors and Retirement Board should strive to eliminate the UAAL. The goal should be to

pay only the next year’s normal cost and all normal costs should be paid annually.

The retirement trustees are contemplating continuing the practice of distributing “excess earnings”

for new retiree health benefits. It may be argued that it is not prudent to do so if the pension benefits

are not fully funded and perhaps more than fully funded.

The County is not funding the additional annual cost of retiree health benefits on an annual basis.

To be competitive with other public safety agencies the County granted the 3% at 50 benefit for

public safety members (Sheriff). This cost is not yet reflected in the normal rate or the UAAL rate

currently being paid by the County.

The need to provide competitive benefits for general members both for benefit formula and employee

contributions continues to be an issue. The County needs to carefully consider and understand the

costs associated with any change in benefits.



CERTIFICATE OF ACHIEVEMENT

The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate

of Achievement for Excellence in Financial Reporting to Santa Barbara County Employees’ Retirement System

for its comprehensive annual financial report for the fiscal year ended June 30, 2005. This was the fifth

consecutive year that SBCERS submitted the report for consideration and received this prestigious award.

End of
http://www.countyofsb.org/auditor/Publications/CountyRetirementCosts.pdf

Pension Fund Data Web Site


http://www.countyofsb.org/sbcers/default.aspx?id=19040&ekmensel=e2f22c9a_608_622_btnlink

http://www.countyofsb.org/uploadedFiles/sbcers/ActuarialValuation20090630.pdf

http://www.countyofsb.org/sbcers/fnp/2007FinalValuation.pdf

http://www.allianceresourceconsulting.com/Profiles/460.pdf

http://www.hfmweek.com/news/526392/santa-barbara-pension-looks-to-replace-arden.thtml

Santa Barbara pension looks to replace Arden

The $1.7bn Santa Barbara County Employees’ Retirement System (SBCERS) has terminated its only hedge fund manager, Arden Asset Management, but will look to replace the investment this summer.

Money Management Letter

http://www.moneymanagementletter.com/Search.aspx?SearchStr=Santa%20Barbara%20County%20Employees%20Retirement%20System

http://www.ipe.com/realestate/santa-barbara-county-opens-separate-account-search_34572.php

Santa Barbara County opens separate account search

1 April 2010 17:04:

UNITED STATES - Santa Barbara County Employees Retirement System has approved a Request for Information to hire a discretionary separate account real estate manager.

http://www.independent.com/news/2009/mar/12/county-budget-bloodbath/

Sounds like bankruptcy is in the county’s future. Seriously. Under Chapter 9 of the Federal Bankruptcy Act a local government can declare bankruptcy, void all of its contracts including pension obligations, and start fresh. No government has been so lavish with pension and benefits than our local pols. Easy for them: buy off the unions, get votes, get termed out, and leave the taxpayers to deal with the problems. So my vote is for bankruptcy, the recall of all Supes, and a new election to replace them with leaders and problems solvers.

Read this letter is she really serious?

http://www.sec.gov/rules/proposed/s70306/s70306-574.pdf

http://www.sbcgj.org/2009/responses/SBCERS_Response.pdf

Below is a partial response to the Grand Jury report from 2009.

In there response the B.O.S. claims a17.2% return and yet the Pension fund reflects 143 million dollar loss



Pension association

http://www.sacrs.org/mc/page.do?sitePageId=20260&orgId=slgs

Pension Watch

http://pensiontsunami.com/blog/?p=85

Read the numbers in this story

http://www.kcoy.com/Global/story.asp?S=12192053

Is it 2 Billion as listed below or 1.2 Billion on the next page?

http://www.accessmylibrary.com/article-1G1-137823402/deadline-participant-sues-avon.html

Santa Barbara Hires for Int’l Equity.

Magazine article from: Investment Management Weekly Sorondo, Marc October 24, 2005 700+ words ...2 billion Santa Barbara County Employees’ Retirement System (SBCERS) has hired New Star Asset Management to manage an active international...Street Global Advisors, but Peters said that New Star was selected because of its investment style

http://www.sec.gov/litigation/litreleases/2008/lr20471.htm

“SEC Distributes Nearly $50 Million to Defrauded Xerox Investors

The Xerox Fair Fund resulted from SEC actions brought in 2002 and 2003 against Xerox Corporation, five of its officers, Xerox’s independent audit firm (KPMG, LLP) and five KPMG accountants who held senior positions on the Xerox engagement. Among them, the defendants paid more than $46 million to settle SEC charges that they caused Xerox to make materially false and misleading statements in SEC filings. (Ten million dollars of the total amount was paid by Xerox to the U.S. Treasury before the Fair Fund provisions were enacted.)” Please go to the above web page for full version of the S.E.C. report