Sunday, June 27, 2010

Pension Fund warnings that Mr. Geis Santa Barbara County auditor choose to Ignore!

Summary and Recommendations That our whole County Government choose to Ignore.

In summary, we have a number of concerns about how the retirement system is managed. Our report focuses on the areas of concern, but is not meant to imply that the system is currently in a crisis. The issues raised are intended to help the County better understand and manage the retirement system in the future. SBCERS is currently reasonably well funded and the primary underlying methodologies used are sound and lead to a fully funded system. However, there are complex interactions embedded in the retirement program that may affect the future soundness of the system if they are not well understood by all parties. The current structure is not transparent in how the system operates which may lead to poor decisions in the future. There are also some technical issues that should be addressed immediately in order to limit their potential impact.

In particular, we have the following concerns:

􀂃The mechanism for paying retiree healthcare benefits does not appear to be consistent with our understanding of federal law potentially jeopardizing the tax qualification of SBCERS and tax returns for all retirees receiving healthcare benefits.

􀂃The proposal to establish a 401(h) account appears to vest benefits that are not currently vested and may contravene Section 401(a).

􀂃There may be an implicit retiree healthcare subsidy that should be valued under GASB 45.

􀂃The SBCERS policy for using Excess Earnings appears to be independent of fiduciary responsibilities for protecting pension benefits and creates an asymmetrical risk distribution for the County.

􀂃SBCERS appears to view benefits that are fully funded through Excess Earnings as creating no additional cost to the County. Any benefit improvement has a cost.

􀂃The number of different reserve accounts established by SBCERS and the discretionary transactions between those reserve accounts make the system less transparent than it should be.

Mercer Human Resource Consulting 26

Retirement System Evaluation County of Santa Barbara

􀂃The practice of crediting reserves with the assumed rate of earnings each year instead of the actual rate of earnings distorts funding levels, is not transparent and may prevent the recognition of those assets for purposes of GASB 43 and 45.

􀂃The practice of establishing reserves as both assets and liabilities under GASB 25 distorts the reported funded status and makes benefit improvements appear less costly than they really are.

􀂃The analysis used to grant benefit improvements failed to test the sensitivity of assumptions and may have underestimated the cost of those benefit improvements.

􀂃When actuarial assumptions are next reviewed, particular attention should be paid to the following:

• – retiree mortality,

• – rates of retirement for public safety,

• – salary increases in year of retirement, and

• – inflation and wage growth.

With each of these concerns, we recommend that the County work with the Retirement Board to take appropriate corrective action or to investigate alternatives and develop appropriate policies. The overriding objectives of any changes should be:

􀂃to confirm compliance with applicable laws and regulations,

􀂃to improve the stability of the retirement system, and

􀂃to improve the transparency of the retirement system.