HomeMy WebLinkAbout07 RESPONSE TO OC GRAND JURY REPORTSMEETING DATE
TO:
FROM:
SUBJECT:
SUMMARY
AGENDA REPORT
AUGUST 18, 2015
JEFFREY C. PARKER, CITY MANAGER
Agenda Item 7
Reviewed: Lai
City Manager
Finance Director
CITY MANAGER'S OFFICE AND FINANCE DEPARTMENT
RESPONSE TO JUNE 29, 2015, ORANGE COUNTY GRAND
JURY REPORTS
Pursuant to California law, the City of Tustin and the Tustin Public Financing Authority
("TPFA") have prepared responses to submit to the Presiding Judge of the Orange
County Superior Court regarding the following June 29, 2015, Orange County Grand
Jury Reports:
• "Joint Powers Authorities: Issues of Viability, Control, Transparency, and
Solvency';
• "Unfunded Retiree Healthcare Obligations — A Problem for Public Agencies?";
and
• "Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation"
RECOMMENDATION
1. It is recommended the City Council take the following actions:
A. Approve the response to the Orange County Grand Jury Report entitled —
"Joint Powers Authorities: Issues of Viability, Control, Transparency, and
Solvency" and authorize the Mayor to sign and send the response to the
Presiding Judge of the Orange County Superior Court;
B. Approve the response to the Orange County Grand Jury Report entitled —
"Unfunded Retiree Healthcare Obligations — A Problem for Public Agencies?"
and authorize the Mayor to sign and send the response to the Presiding Judge of
the Orange County Superior Court; and
C. Approve the response to the Orange County Grand Jury Report entitled —
"Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation" and
authorize the Mayor to sign and send the response to the Presiding Judge of the
Orange County Superior Court
Response to June 29, 2015 Orange County Grand Jury Reports
August 18, 2015
Page 2
2. It is recommended the City Council acting as the Tustin Public Financing
Authority Commission approve the response to the Orange County Grand Jury Report
entitled — "Joint Powers Authorities: Issues of Viability, Control, Transparency, and
Solvency" and authorize the Chairman to sign and send the response to the Presiding
Judge of the Orange County Superior Court.
FISCAL IMPACT
No fiscal impact.
ALIGNMENT WITH STRATEGIC PLAN:
The Responses to the Grand Jury Reports are consistent with the City's value of Fiscal
Stewardship.
BACKGROUND
On June 29, 2015, the 2014-2015 Orange County Grand Jury issued the following
reports:
• "Joint Powers Authorities: Issues of Viability, Control, Transparency, and
Solvency" (Attachment 1);
• "Unfunded Retiree Healthcare Obligations — A Problem for Public Agencies?"
(Attachment 4); and
• "Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation"
(Attachment 6)
Joint Powers Authorities (JPAs)
In studying Joint Powers Authorities (JPAs), the Orange County Grand Jury had four
concerns with regard to JPAs in Orange County. Their concerns were (1) the viability of
JPAs with Redevelopment Agencies (RDAs) as members since RDAs were eliminated
in 2012, (2) the use of JPAs by government organizations to be controlled by a single
government entity, (3) the lack of true disclosure and transparency of their organization
and financial information to taxpayers, and (4) the extreme debt to revenue ratio of
some JPAs. In the Report, the Grand Jury identified ten Findings from their study of
JPAs. The City of Tustin was required to respond to Finding 1 (F.1.) and Finding 3
(F.3.) and they were as follows:
• F.1. Orange County has nine "inactive" JPAs that have no viable activity,
revenue, expenditure, assets, or liabilities. The Grand Jury determined that
these JPAs serve no benefit to the public or taxpayers and have the potential for
misuse or obfuscation of public funds.
• F.3. Orange County has 18 vertical JPAs created by a city along with its
redevelopment agency that no longer exists. The Grand Jury determined that
these JPAs serve no benefit to the public or the taxpayers and have the potential
for misuse or obfuscation of public funds.
Response to June 29, 2015 Orange County Grand Jury Reports
August 18, 2015
Page 3
The TPFA, which is the City's only JPA, was required to respond to Findings 1, 3, 4, 5,
and 6 and they were as follows:
• F.1. Orange County has nine "inactive" JPAs that have no viable activity,
revenue, expenditure, assets, or liabilities. The Grand Jury determined that
these JPAs serve no benefit to the public or taxpayers and have the potential for
misuse or obfuscation of public funds.
• F.3. Orange County has 18 vertical JPAs created by a city along with its
redevelopment agency that no longer exists. The Grand Jury determined that
these JPAs serve no benefit to the public or the taxpayers and have the potential
for misuse or obfuscation of public funds.
• F.4. Vertical JPAs with a single controlling entity, such as a city council, have
the potential to use this organizational structure as a shell company to avoid
other legal constraints on the controlling entity and to obfuscate taxpayer
visibility.
• F.5. Vertical JPAs in which the controlling entity transfers assets from itself to a
JPA for the purpose of obtaining additional funding, or signs a long-term lease
with a JPA to obtain assets, are avoiding transparency and are not acting in the
best financial interest of the taxpayers.
• F.6. 32 of the JPAs identified in Orange County are not complying with the
California State reporting requirements in code Section 6500 and SB 282
according to the latest information available from the year 2013.
As to each Grand Jury finding, the responding entity is to indicate one of the following:
(1) The respondent agrees with the Finding; or
(2) The respondent disagrees wholly or partially with the Finding, in which case the
response shall specify the portion of the finding that is disputed and shall include
an explanation of the reasons thereof.
In the City's response to the Report (Attachment 2), the response acknowledges both
agreement and disagreement with the Findings. The City believes JPAs can and do
serve important public purposes and can be an important tool for financing vital public
facilities needed to build out Tustin Legacy, the former Marine Corps Air Station
("MCAS") Tustin. The TPFA, as well, acknowledges both agreement and disagreement
with the Findings (Attachment 3). TPFA disagrees with Grand Jury's assertion the JPA
is not transparent and obfuscates taxpayer visibility. All of TPFA's finances are reported
to an elected body during public meetings and the information is publicly available on
the City's website. In addition, the information is reported publicly and annually in the
City's Comprehensive Annual Financial Report ("CAFR").
Based on their investigation of JPAs, the Grand Jury made eight Recommendations.
Tustin was required to respond to two and they were as follows:
Response to June 29, 2015 Orange County Grand Jury Reports
August 18, 2015
Page 4
• R.1. All Orange County JPAs that are "inactive" should submit the official
paperwork with the State of California requesting termination of their existence or
provide at the next public meeting the justification for continuing the JPA.
• R.2. All Vertical JPAs created by a city along with its redevelopment agency
should submit the necessary paperwork with the State of California requesting
termination of their existence.
The Tustin Public Financing Authority was required to respond to four of the eight
Recommendations the Grand Jury made and they were as follows:
• R.1. All Orange County JPAs that are "inactive" should submit the official
paperwork with the State of California requesting termination of their existence or
provide at the next public meeting the justification for continuing the JPA.
• R.2. All Vertical JPAs created by a city along with its redevelopment agency
should submit the necessary paperwork with the State of California requesting
termination of their existence.
• R.3. All JPAs should take the following actions to insure transparency to the
taxpayers: (1) have an annual outside audit, (2) post the complete audit on their
city website as a separate JPA entity, (3) send the audit to the County Controller
and the State Auditor, and (4) ensure the required reports are filed annually to
the County and the State.
• R.4. The 32 JPAs that are not complying with the California State Law requiring
annual reporting should become compliant by submitting their 2014 report by
December 31, 2015, and submitting the required reports annually thereafter.
As to each Grand Jury Recommendation, the responding entity shall report one of the
following actions:
(1) The Recommendation has been implemented, with a summary regarding the
implemented action;
(2) The Recommendation has not yet been implemented, but will be implemented in
the future, with a time frame for implementation;
(3) The Recommendation requires further analysis, with an explanation and the
scope and parameters of an analysis or study, and a time frame for the matter to
be prepared for discussion by the officer or head of the agency or department
being investigated or reviewed, including the governing body of the public agency
when applicable. This time frame shall not exceed six months from the date of
publication of the Grand Jury report.
(4) The Recommendation will not be implemented because it is not warranted or is
not reasonable, with an explanation therefore.
As outlined in Attachment 2, the City will not be implementing the Recommendations,
believing it to be unwise to eliminate the TPFA at this time. The TPFA will not be
implementing Recommendations 1 and 2, believing them to be unwarranted and unwise
Response to June 29, 2015 Orange County Grand Jury Reports
August 18, 2015
Page 5
at this time, and believes it is already complying with Recommendations 3 and 4
(Attachment 3).
Unfunded Retiree Health Obligations
The purpose of the Grand Jury's Report, "Unfunded Retiree Healthcare Obligations -A
Problem for Public Agencies?"(Report) (Attachment 4), was to quantify the full extent of
the financial liability for retiree health benefits facing the County's 34 Cities, the County
and the Orange County Fire Authority. The Grand Jury also investigated whether each
agency was complying with the requirements and recommendations of Governmental
Accounting Standards Board Statement No. 45.
There were four Findings in the Report of which the City was required to respond to
Findings 2, 3 and 4 and there were four Recommendations. The City was required to
respond to Recommendations 2, 3, and 4.
The three Findings stated that the City was not setting aside funds in an irrevocable
trust to fund future retiree health benefit liabilities; the City did not contribute the full
100% of the Annual Required Contribution (ARC) in FY 2012-13; and the City is not
disclosing the retiree health benefits as part of employee compensation per GAAP
(Generally Accepted Accounting Principles). The three Recommendations include
funding an irrevocable trust for retiree health benefits; recognizing the full amount of
their ARC as expense in the current period; and recognizing retiree health care benefits
in employee compensation in conformity with GAAP.
The City's detailed responses to the three Findings and three Recommendations are
presented in the letter to the Grand Jury (Attachment 5). The City partially agrees with
Finding 2 and 3. The City agrees that it may be prudent to contribute to an irrevocable
trust for future retirement health benefits, but concludes that there are other sensible
strategies to ensure the ability to pay these health costs in the future, and it did not
contribute 100% of its ARC, however, the ARC is an actuarial term and the City is only
required to book the ARC for financial reporting purposes. There is no GASB
requirement to pay the ARC. The City disagrees with Finding 4 because there is no
requirement per GAAP standards to disclose retiree health benefits as part of employee
compensation. The City reports the aggregate cost of the benefits annually and
publicly, including on the City's website.
The City's response to Recommendations 2, 3 and 4 was that future analysis was
needed. The funding of an irrevocable trust and paying the ARC in full annually will take
further analysis by the City as the City does budget the funding of the annual costs of
the retiree health benefits and through the budgeting process contends with many
competing high priority matters. To implement Recommendation 4, which is not
Response to June 29, 2015 Orange County Grand Jury Reports
August 18, 2015
Page 6
required by GAAP, and the City is recognizing retiree health care benefits in conformity
with GASB in its Comprehensive Annual Financial Report, there is significant expense
in creating the information on a position -by -position basis.
Mello -Roos
The Grand Jury's Report, Mello -Roos: Perpetual Debt Accumulation and Tax
Assessment Obligation (Report) (Attachment 6) was completed because of the Grand
Jury's reasoning that it is important that property owners in Orange County become
aware of the implications of the Mellos Roos Act and that most Orange County
residents located within a Community Facilities District (CFD) do not understand how
funds are spent and the purpose of the CFD.
The Report had three Findings stating there is a lack of transparency to homeowners
relative to how CFD funds are being used; there is no proper oversight and auditing of
CFDs; and there is a mechanism available to controlling entities to extend debt
obligations and thereby extend the CFD special tax in perpetuity. The Report's
Recommendations are that each local agency establish an oversight committee and an
audit committee to provide for independent and transparent view of how CFD funds are
being spent, and that the audit report should be posted on the agency's website.
The City's detailed responses to the three Findings and two Recommendations are
presented in the letter to the Grand Jury (Attachment 7). The City disagrees with all
three Findings. There is no lack of .transparency as all documents prepared are
approved by the City Council at a publicly held meeting. Those documents establish the
CFD; set limits on debt; and communicate what projects are funded. Annual budgets
with City Council approval regarding how CFD funds will be spent are presented in a
public meeting and posted on the City's website. There is appropriate oversight and
auditing of CFDs and expenditures through the budget process, which requires City
Council approval held in a public meeting, and CFD bond proceeds are held with a
fiscal agent whose fiduciary responsibility is to review all expenditures to ensure they
are appropriate in relation to the bond documents before the bond proceeds can be
released. Also the City conducts an annual audit by independent certified public
accountants that includes the CFD funds. When CFDs are formed decisions are made
as to how much can be bonded and whether more debt can be issued after the original
debt is paid off, so there is not a mechanism available to controlling entities to extend
debt into perpetuity.
The City is partially completing the Recommendation of the creation of an oversight
committee and an audit committee. The City has an Audit Commission that will be
provided annual information regarding how CFD funds are spent in addition to the
annual budget and annual audit. The creation of an oversight committee for the same
purpose would be an unnecessarily redundant use of time and limited resources. The
Response to June 29, 2015 Orange County Grand Jury Reports
August 18, 2015
Page 7
City posts its annual audit reports, which include the CFD funds, on its website,
implementing the Recommendation of the audit report being posted on a website.
Staff will be available to answer any questions the City Council may have.
Pamela Arends-King
Finance Director/City Treasurer
Finance Department
Jerry Craig
Economic I
City Manac
using Manager
Attachments: Attachment 1 — Grand Jury Report: "Joint Powers Authorities: Issues of
Viability, Control, Transparency, and Solvency"
Attachment 2 — City of Tustin Response to the Grand Jury Report
Attachment 3 — Tustin Public Financing Authority Response to the
Grand Jury Report
Attachment 4 — 2014-2015 Orange County Grand Jury Report:
"Unfunded Retiree Healthcare Obligations —A Problem for Public
Agencies?"
Attachment 5 — City of Tustin Response to the Grand Jury Report
Attachment 6 — 2014-2015 Orange County Grand Jury Report: "Mello -
Roos: Perpetual Debt Accumulation and Tax Assessment Obligation"
Attachment 7 — City of Tustin Response to the Grand Jury Report
ATTACHMENT
Grand Jury Report: "Joint Powers Authorities: Issues of Viability, Control, Transparency,
and Solvency"
JOINT POWERS AUTHORITIES:
ISSUES OF VIABILITY, CONTROL,
TRANSPARENCY. AND SOLVENCY
GRAND JURY 2014-2015
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
TABLE OF CONTENTS
EXECUTIVE SUMMARY................................................................................................ 3
BACKGROUND.............................................................................................................. 3
Statutory Authority of Joint Powers Agreements (JPAs)...............................4
JPAs and Debt Approval Loophole...................................................................4
Typesof JPAs ..................................................................................................... 4
Fundingof JPAs.................................................................................................4
JPA Control and Oversight................................................................................5
JPAs and Special Districts................................................................................5
JPAs with Redevelopment Agencies................................................................6
REASON FOR THE STUDY...........................................................................................7
METHODOLOGY............................................................................................................ 7
INVESTIGATION AND ANALYSIS.................................................................................8
Viability................................................................................................................ 8
Control and Financial Loopholes......................................................................9
Transparency....................................................................................................12
Solvency............................................................................................................13
FINDINGS.....................................................................................................................13
RECOMMENDATIONS.................................................................................................14
REQUIRED RESPONSES............................................................................................15
REFERENCES.............................................................................................................. 22
2014-2015 Orange County Grand Jury Page 2
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
EXECUTIVE SUMMARY
Joint Powers Authorities (JPAs) (also referred to as Joint Power Agencies) are
California organizations set up by California Government Code section 6500. This code
section allows for two or more existing public agencies to jointly agree to perform a
specific service for each of the member agencies. The intent was to enable that service
to be accomplished with a larger economy of scale resulting in financial benefit to the
taxpayers. The code also permits this agreement to authorize the creation of a separate
legal entity (authority or agency) with the full power of a separate legal entity.
Consequently, a JPA has the responsibility to report as a separate legal entity and to
provide accountability to its sponsor public agencies and the public through the county
auditor -controller and State controller's office.
The Orange County Grand Jury has four concerns with regard to JPAs in Orange
County. These concerns are (1) the viability of the JPAs with Redevelopment Agencies
(RDAs) as members since RDAs were eliminated in 2012, (2) the use of JPAs by
government organizations to be controlled by a single government entity, (3) the lack of
true disclosure and transparency of their organization and financial information to
taxpayers, and (4) the extreme debt to revenue ratio of some JPAs, which brings into
question their solvency. For example, if a city sets up a JPA with another legal entity
under its own direct control, such as an RDA, then the JPA has the potential to become
just a "shell" organization under the control of the city. This organizational structure has
the potential to cloak funds and accountability of those funds (City of Bell -like
complexity). It also appears that not all JPAs provide financial information to the State
Controller and the Orange County Auditor -Controller as required by law. Furthermore,
the Orange County Auditor -Controller does not proactively provide the information it
receives in a clear and easily accessible manner for the citizens of the County.
BACKGROUND
Joint Powers Authorities (JPAs) are California organizations set up by California
Government Code section 6500. This code section allows two or more existing public
agencies to mutually agree, and create an agreement, to perform a specific service for
each of the signatory agencies. Essentially, a new organization is created that is
completely separate from the member agencies. A JPA is so flexible that it can be
applied to nearly any situation that benefits from having public agencies cooperate.
JPAs may be formed between local public entities, e.g., regional water districts,
energy agencies, cities, counties, or other entities described in California Government
Code section 6500. They can be formed for many different reasons such as, but not
limited to, acquisition of land, construction, maintenance, financing, insurance pooling,
and operations of facilities. The intention is to save member agencies, and ultimately
taxpayers, time and money by sharing resources and combining services. JPAs exist for
various reasons such as expanding regional wastewater treatment plants, providing
public safety planning, constructing roads, building and setting up emergency dispatch
centers, or financing new county jails. By sharing resources and combining services, the
member agencies potentially save time, create efficiencies, reduce overlapping
services, and reduce costs.
2014-2015 Orange County Grand Jury Page 3
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
Statutory Authority of Joint Powers Agreements (JPAs)
Government agencies derive their authority from California Government Code
sections 6500-6536, also called the Joint Exercise of Powers Act. JPAs can only
administer powers that are specific to the individual agencies.
JPAs are different from other forms of government in that they are formed by
mutual agreement by the member participants and are not formed by voter initiative or
voted on by the electorate. Each JPA is unique. It reflects the agreement among
member agencies for a common purpose. As a legally separate public agency, it can
sue, be sued, hire staff, obtain financing, assume debt, and manage or lease property.
Joint powers agreements usually protect their member agencies from the JPA's debts
or other liabilities (Cypher & Grinnell, 2007, p. 12).
JPAs and Debt Approval Loophole
Local governments, such as a city, can issue revenue bonds, but they need
majority -voter approval. If the bond measure is approved, then the local government
sells revenue bonds to private investors to raise capital in order to build a public facility
or for other designated purposes. As the interest and principal on the bonds become
due, they are repaid from city tax revenues.
However, a JPA can issue bonds without holding a general election. California
state law allows JPAs to issue revenue bonds without voter approval, provided that
each of the member agencies adopts a separate local ordinance. Although local voters
can force a referendum election on these local ordinances, this rarely occurs (Cypher &
Grinnell, 2007, p. 13). As a result, a city could set up a JPA and have the JPA take on
the debt, thereby circumventing the mandated public approval process.
Types of JPAs
There are no official categories for the types of JPAs, but their services fall into
five broad groups (Cypher & Grinnell, 2007, p. 14):
• Public services: (e.g., police and fire protection)
• Financial services: (e.g., financing construction of public works such as
city halls, bridges, and flood control projects)
• Insurance pooling and purchasing discounts: (e.g., pooling entities for
lower insurance rates)
• Planning Services: (e.g., addressing and planning for topics of regional
importance that go beyond city and county limits)
• Regulatory enforcement: (e.g., ensuring that member agencies adhere to
federal and state laws and procedures by conducting educational
seminars, formulating enforcement procedures, and maintaining an
oversight role)
Funding of JPAs
According to "Governments Working Together: A Citizen's Guide to Joint Powers
Agreements," by Trish Cypher and Colin Grinnell (Cypher and Grinnell, 2007), there are
2014-2015 Orange County Grand Jury Page 4
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
two popular funding vehicles for JPAs: (1) create a revenue stream, and (2) raise capital
through revenue bonds. While JPAs do not require voter approval to issue bonds, each
member agency must pass an ordinance. Voters have a 30 -day period to object through
a referendum requiring a public vote. If there is no referendum petition filed, the JPA is
free to sell bonds and use the proceeds to build, make improvements, or buy
equipment.
JPAs that provide funding and issue bonds for multiple agencies may pay for the
operations by collecting fees from their member agencies for bond services. Issuing and
selling bonds is a complex process, and a joint effort by a JPA has the potential to
facilitate the transactions. These JPAs have the potential to provide these services to
smaller agencies wanting to issue bonds.
JPAs may also sell bonds to refinance their member agencies' debts. The
process involves the JPA selling bonds and using the proceeds to "buy down" a
member agency's debt. This is a practice used to pay off a member agency's debt, thus
allowing that agency to refinance at a lower -interest rate. However, the state no longer
allows JPAs to issue bonds for development outside their members' jurisdiction. JPAs
cannot levy taxes or assessments; however, individual agencies can levy their own
taxes and assessments.
JPA Control and Oversight
JPAs are subject to the Brown Act, the California Public Records Act, the Political
Reform Act, and other public interest laws. As a separate legal entity, a JPA must self -
monitor its actions and activities for its members since no state agency directly
oversees it. County auditors should review the JPA financial reports, and county civil
grand juries function as civil watchdogs (Cypher & Grinnell, 2007, p. 28). Several state
agencies, including the Secretary of State, State Controller, and the California Debt and
Investment Commission, collect reports and data from JPAs.
JPAs that fail to report their financial information to the State or the county violate
California Government Code sections that pertain to JPAs. For example, Section 6505
requires "strict accountability of all funds and report of all receipts and disbursements"
(Section 6505 (a)), and "an annual audit of the accounts and records of every agency or
entity" (Section 6505 (b)). The sections do not specify whether the audit has to be
external or internal. However, Section 6005 (c) requires that when an audit of an
account and records is made, "a report thereof shall be filed as a public record with
each of the contracting parties to the agreement and also with the county auditor of the
county where the home office of the joint powers authority is located." In addition,
Section 6505 (g) provides that "JPAs shall be exempt from the requirement of an annual
audit if the financial statements are audited by the (State) Controller to satisfy federal
audit requirements."
JPAs and Special Districts
A JPA is not a special district, even though it might provide the same services. A
special district is a separate local government with its own governing body that delivers
services to a dedicated community. Special districts rely on other State laws for their
2014-2015 Orange County Grand Jury Page 5
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
existence and legal authority, and on elected boards of directors for their governance.
Most special districts provide only a single service to a defined area, in contrast to
county and city agencies that provide multiple services within their boundaries. While
cities and counties must provide mandated services per federal and state law, special
districts provide services for which the public is willing to pay. Examples include fire
protection districts, water districts, pest abatement districts, etc.
Although a JPA is not a special district, its financial reporting requirements are
the same. The State Controller is required by State law in SB 282 (Chapter 288) to
make available annually, in a separate report published in an electronic format on the
Controller's website, certain financial information about selected districts. This law
amends Government Code section 12463.1 for reporting on the financials of "selected
districts." It further clarifies the definition of "selected districts" to exclude school
districts, but to include all other public entities including special districts, JPAs, and
public benefit corporations. The information provided in this report is required to be
published no later than June 30 following the end of the annual reporting period. The
Controller is required to include in his or her report information that best illustrates the
assets, liabilities, and equity of selected districts. Specifically, the Controller is required
to include in this report a breakdown of each special district's (1) fund balance, which
shall include the reserved and unreserved funds, typical for a nonenterprise district; (2)
retained earnings, which shall include the reserved and unreserved funds, typical for
enterprise districts; (3) fixed assets; and (4) cash and investments. The Controller may
also include separate line items for "total revenues" and "total expenditures." When the
report is available, the Controller is required to notify the Legislature, in writing, within
one week of its publication. (SB No. 282, Chapter 288, 2001)
JPAs have both advantages and disadvantages over special districts. (Cypher &
Grinnell, 2007, p. 22) The stated advantages are that they are flexible, easy to form,
encourage synergy and cooperation between members, and allow for financing.
However, abuse of this financing advantage is not in the best interest of taxpayers. The
stated disadvantages are that they require mutual trust between the members, require
management resolve to retain members, may be difficult to dissolve, and may not have
clear lines of transparency and accountability.
JPAs with Redevelopment Agencies
Many California cities set up redevelopment agencies (RDAs) to fund their urban
renewal efforts. These same cities then set up JPAs between the city and its own RDA.
This resulted in each of these three legal entities being controlled by one organization,
that is, the city council.
Governor Jerry Brown signed into law two bills that amended California
Community Redevelopment Law in order to redress the state's ongoing budget deficit
and to curtail abuses by redevelopment agencies that deviated from the original intent
of redevelopment law. Assembly Bill x1 26 (ABx1 26) dissolved all California RDAs,
effective October 1, 2011. This legislation prevented RDAs from engaging in new
activities and outlined a process for winding down the RDA's financial affairs. It also set
forth a process for distributing funds from the former RDAs to other local taxing entities.
2014-2015 Orange County Grand Jury Page 6
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
In response, the California Redevelopment Association, the League of California
Cities, and other parties filed petitions with the California Supreme Court challenging the
constitutionality of ABx1 26. On December 29, 2011, the California Supreme Court
upheld the constitutionality of ABx1 26. Although delayed by litigation, approximately
400 RDAs were dissolved on February 1, 2012, with the assets and liabilities
transferred to Successor Agencies and Successor Housing Agencies pursuant to ABx1
26. The bottom line, however, is that even though California RDAs have been dissolved,
and they no longer officially exist, in some cases their successor agencies still remain
an active member of a JPA!
REASON FOR THE STUDY
Given the large number (71) of JPAs reported in Orange County (OC) and the
complexity of JPAs, the Orange County Grand Jury (Grand Jury) anticipated that there
could be four concerns with regard to JPAs in Orange County. These concerns are (1)
the viability of the JPAs with RDAs as members, since RDAs were eliminated in 2012,
(2) the use of JPAs by government organizations to be controlled by a single
government entity, (3) the lack of true disclosure and transparency of their organization
and financial information to taxpayers, and (4) the extreme debt -to -revenue ratio of
some JPAs, which brings into question their solvency. The Grand Jury suspected that
nearly one-fourth of the JPAs are no longer relevant, due to the elimination of RDAs,
and for other reasons. The question to be answered is: Are the JPAs with RDAs as a
member still relevant and viable?
It was also anticipated that there has been extensive public debt generated under
these JPAs with limited understanding by the public. The reason for the study was to
provide taxpayers with information regarding these organizations and the financial
exposure facing the public. This information provided to the public may stimulate further
public demands for inquiry on transparency and accountability.
METHODOLOGY
The Grand Jury first attempted to obtain a comprehensive list of all of the JPAs
that were in Orange County. Lists were requested from both the County Auditor -
Controller's Office and the State Controller's Office. Neither of these lists was
determined to be complete. As a result, the Grand Jury proceeded to investigate
Special District reports, city financial records, and County financial records and Internet
files. The result was that the Grand Jury determined that there are currently 71 JPAs in
Orange County. However, it should be noted that due to the lack of a consolidated list
by any County or State organization, the actual number of JPAs may be more than 71.
Once the Grand Jury had a list of the known JPAs in Orange County, the Grand
Jury sent out a request for information (RFI) letter to each organization. This letter
requested confirmation that the entity was a JPA. In addition, information was requested
regarding the JPA's organization, charter, financial data, and the disclosure of
information by the JPA into the public domain (transparency). The data utilized in this
report is primarily that data provided by the JPA itself. If there were issues with regard to
2014-2015 Orange County Grand Jury Page 7
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
inconsistent or contradictory data that was provided, follow-up calls to confirm or correct
information were conducted.
INVESTIGATION AND ANALYSIS
The Grand Jury identified 71 JPAs currently registered in Orange County. There
could be more, but the absence of accurate State and County record keeping and
reporting makes it practically impossible to confirm the exact number. The Grand Jury
investigation's request for information to the OC Auditor -Controller revealed that the
Controller knows the JPAs in which the County is a member, but does not have a list of
all of the JPAs in OC and cannot confirm compliance of their submittal of required
information for public access. In addition, the OC Auditor -Controller does not provide
easy-to-use online access to the data submitted by the JPAs.
The investigation revealed some interesting facts about those JPAs that were
identified. Nine of those have no debt, revenue, activity, or liabilities. This caused the
Grand Jury to question their purpose and viability. Of the remaining 62 JPAs, 29 (or,
47%) have "Financing" as their primary service or activity. Fifteen of the 62 have at least
one school district as a member. Eight of the 62 have "Insurance" listed as their primary
service. Eighteen (or, 29% of the 62) still have an RDA listed as one of their member
participants. The 62 new or currently active JPAs out of the total of 71 have $1.1 billion
in total revenue, $1.2 billion in expenditures, $4.3 billion in assets of which $1.5 billion
are in reserve, $7.1 billion in debt, and over $600 million in unfunded liability. The Grand
Jury concluded that the JPAs in Orange County control a significant amount of public
funds with a limited amount of oversight and disclosure to the taxpayers.
Viability
The following nine JPAs in Orange County have no currently reported revenues,
expenditures, assets, or liabilities:
1. Buena Park Public Financing Authority
2. Capistrano Unified Public Financing Authority
3. Countywide Public Finance Authority
4. Fullerton Library Building Authority
5. Garden Grove Public Financing Authority
6. Newport -Mesa United School District Public Financing Authority
7. Stanton Public Financing Authority
8. Tustin Public Financing Authority
9. Westminster Public Finance Authority
The Grand Jury questions the rationale and continued expense by the members of
these JPAs to keep these legal entities in existence.
The following 18 JPAs in Orange County still have an RDA listed as one of their
member participants:
1. Anaheim Public Financing Authority
2. Brea Public Financing Authority
2014-2015 Orange County Grand Jury Page 8
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
3. Buena Park Public Financing Authority
4. City of Fullerton Public Financing Authority
5. City of San Clemente Public Financing Authority
6. Costa Mesa Public Finance Authority
7. Fountain Valley Financing Authority
8. Garden Grove Public Financing Authority
9. Huntington Beach Public Financing Authority
10. La Habra Civic Improvement Authority
11. Mission Viejo Community Development Financing Authority
12. Rancho Canada Financing Authority
13. Santa Ana Financing Authority
14. Seal Beach Public Financing Authority
15. Stanton Public Financing Authority
16. Tustin Public Financing Authority
17. Westminster Public Financing Authority
18. Yorba Linda Public Financing Authority
JPAs with RDAs have another unique problem associated with them. The
passing of the ABx1 26 forced the RDAs to cease to exist and to become successor
agencies. These successor agencies were expressly prohibited from taking on
additional redevelopment or debt, and were required to wind down and pay off their
existing debt under a conservator's guidance and State oversight. Once the debt is fully
paid off, the successor agency is to terminate. This is a key issue with regard to JPAs.
Since many of the JPAs have RDAs as one of their members, that member is now a
successor agency. Since this successor agency can no longer perform its original
charter, the purpose of the JPA is no longer valid. The Grand Jury has determined that
these legal entities no longer serve any viable purpose or benefit for taxpayers.
Control and Financial Loopholes
The Grand Jury determined that many different types of JPAs exist in Orange
County. As a result, generalizations regarding their use or effectiveness cannot be
easily made. State statutes authorize legal entities, such as cities, counties, school
districts, or special districts to set up JPAs. These statutes give significant authority and
latitude to these entities. As a result, many of these legal entities appear to set up JPAs
which comply with the spirit of the law to provide financial benefit to the taxpayers.
However, other JPAs may provide a legal means to avoid voter approval of debt
decisions and to potentially mask financial accountability. This latter case is of
significant concern since it is not in the best interest of taxpayers and does not provide
for full transparency.
In its analysis, the Grand Jury has determined that "horizontal" JPAs appear to
comply with the spirit of the law. These JPAs provide shared services such as insurance
pools, training, area transportation, communication systems, workers compensation,
area flood protection, and water supply to the community. JPAs were determined to be
horizontal if their members were composed of similar entities that shared a common
problem or opportunity. That is, each of the members was looking to delegate a function
2014-2015 Orange County Grand Jury Page 9
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
of their authority to a JPA in order to either improve the service that is provided or to
reduce the cost through economies of scale. Each member in the JPA is motivated to
have the JPA perform better than the individual member could do it alone. A JPA
member is motivated to be looking out for their entity's best interest. As a result, if the
JPA is not providing the desired results or improvements, then the member can
withdraw from the JPA and go it alone. As a result, there are organizational checks and
balances that tend to allow for self -correction and accountability. Many of these
horizontal JPAs also tend to provide a real service to the community.
"Horizontal" JPA Structural
Organization
between all Cities join
participants -no forcestoform
one entity theJPA
in control
However, the Grand Jury has determined that "vertical" JPAs do not appear to
comply with the spirit of the law. These JPAs were determined to be vertical if their
members were not similar entities but rather the same entity with a different
organizational structure. That is, all of the members of the JPA were controlled by a
single authority. The most common type of these JPAs is a finance JPA with a single
city and the same city's RDA as its members. Under this structure, the city sets up its
own city's RDA then "jointly" agrees to set up the financing JPA. As a result, the city
council has authority over the city, the city's RDA, and the city's financing JPA. One
entity is now controlling all three entities; hence, the name "vertical." As a result, there
are not the same checks and balances of membership or control as with a horizontal
JPA.
2014-2015 Orange County Grand Jury Page 10
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
"Vertical" JPA Structural Organization
Yorba Linda
City
Council
City Council
has complete
control
sggN
City Forms
i Linda JPA with RDA
the City
Formed
The Grand Jury initially did not understand the benefit of having a vertical JPA
since, in this model, the city council had control over all three entities. Clearly the city
could perform these functions on its own behalf. Upon further investigation, the reasons
became clearer, but the potential risk to the public also became clear and engendered
concern. This understanding came from the lessons learned from the City of Bell fiasco.
The City of Bell was not able to borrow any more money to pay for the salaries
that the officials had granted themselves due to Article XVI, Section 18 of the California
Constitution, which prohibits cities, counties, and school districts from borrowing an
amount in a given year that exceeds "....the income and revenue provided for such
year" unless approval is obtained from at least 2/3 of the voters (California Constitution,
Art. XVI, Sec. 18). So, the City of Bell created a vertical JPA under its city council's
control. The JPA now had the authority to issue debt without the approval of the voters.
Since the JPA is a separate legal entity, the city is not responsible for its debt. As a
result, the JPA did not have collateral to obtain a loan. So the city transferred an asset
from the city to the JPA to be the collateral for the loan. Consequently, a loan was given
to the JPA since the risk to the bond holders was secured. The money obtained from
this loan was then transferred back to the city to pay for general obligations. This
answers the question of how the City of Bell was able to borrow so much money without
the ability to ever pay it back. In this case, the city taxpayers were not given their legal
right to vote on the city adding additional debt upon itself. The taxpayers were also
paying for the asset the city gave to the JPA twice. It was already a city asset paid by
tax money and now it was being paid off again through the JPA loan.
Another example of potential abuse using a JPA is through a vertical financial
JPA that involves contract leases in lieu of asset procurement. This technique has the
city sign a long term lease agreement to their own JPA, with the JPA as the lessor. The
2014-2015 Orange County Grand Jury Page 11
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
JPA then buys a building or builds a building. The JPA can obtain debt financing since
is holding a long term lease from the city as its collateral. This approach does not
require voter approval of the debt or voter approval on the capital investment for the
city. Since the city council has total control over this vertical JPA, they can direct the
process and the decisions.
The structure of a vertical JPA with a single entity having control over all of the
members is a legal organization in the State of California. However, the Grand Jury has
concluded that this vertical JPA could be used by the single governing entity to bypass
other legal constraints on that same entity. This structure breeds the temptation to
acquire more debt without a ceiling limit like that imposed on city governments. This
type of JPA can be used to circumvent the California Constitution which prohibits cities,
counties, and school districts from borrowing an amount in a given year that exceeds
"....the income and revenue provided for such year" unless approval is obtained from at
least 2/3 of the voters (California Constitution. Article XVI. Section 18. "Debt"). The
JPAs are not bound by this prohibition and do not need voter approval unless contested
during the 30 -day referendum period. Transparency is limited in this type of transaction
because most taxpayers are unaware that a notice has been posted and there is no
requirement to give it wide public dissemination. In addition, the opaque, layered
structure gives the government the ability to obfuscate financial transactions within the
parent organization and hence from the taxpayers. This is the equivalent of a "shell
company" in business. The Grand Jury has concluded that the use of a JPA to legally
by-pass the voting rights of the taxpayers or obfuscates the financial transaction's real
cost is an unacceptable situation for its citizens.
Transparency
The Grand Jury originally believed that they would be able to obtain information
regarding the finances of JPAs from both the County or State government organizations
since there is a statutory reporting requirement. However, this was not the case. The
County did not have a list of JPAs in the County other than those JPAs of which the
County is a member. In addition, the State records regarding JPAs were also found to
be incomplete. There appears to be confusion by many of the JPAs regarding their
responsibility to report to the State under SB 282 Chapter 288. This is further
complicated because the State Controller's report lists them under a "Special Districts"
heading. In addition, the State Controller's report provides a disclaimer that the State is
not responsible for the content. In addition, the Orange County Auditor -Controller's
Office does not provide any review or easy access to the JPA financial reports that are
sent to them. Any assumption by the public that either the State or the County is
providing a value-added review of the audited information, or lack thereof, would be
incorrect.
As a result, the Grand Jury has concluded that there is extensive non-compliance
with the disclosure requirements contained in the Government Code Section 6500 and
SB 282. This results in a significant loss of transparency to the public and taxpayers.
There are ten JPAs in OC that do not report their financial information to either the State
or the County. In addition, there are 32 JPAs in OC that do not report their financial
information to the State.
2014-2015 Orange County Grand Jury Page 12
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
Solvency
While some JPAs have relatively modest levels of debt, others have very
significant debt. The Foothill Transportation Corridor Agency and the San Joaquin
Transportation Corridor Agency have a joint debt level of over $4.5 billion, which is
about 63% of the total debt reported by all the JPAs in Orange County. This level of
public debt on the citizens of Orange County is very significant. These two
transportation agencies only have an income level of $292 million per year. With this
extreme debt burden, the Grand Jury questions their ability to pay off the principal and
interest, based on their current revenue level.
The Orange County Fire Authority is a JPA with annual revenue of $331 million
and a modest reported debt level of about $10 million. However, the Orange County
Fire Authority has an off -the -books unfunded debt liability of over $577 million. This debt
liability is the result of pension commitments made to employees which encumber future
tax revenues that are not actuarially held in reserve. This has the potential to become a
financial debacle, for the JPA and the taxpayers.
The Anaheim Public Financing Authority which is a JPA between the City of
Anaheim and the Anaheim Redevelopment Agency, has an income of $154 million and
a debt exposure of $1.2 billion. The debt level of this JPA is extremely high compared to
its income level. In addition, with the elimination of the Anaheim Redevelopment
Agency, its successor agency can continue to be a member of the JPA. However,
neither the JPA nor the successor agency can exist for any other purpose besides
paying off remaining debt or bonds. As a result, the Grand Jury questions both the
viability and the solvency of this JPA based on the information provided.
FINDINGS
In accordance with California Penal Code sections 933 and 933.05, the 2014-
2015 Grand Jury requires (or, as noted, requests) responses from each agency affected
by the findings presented in this section. The responses are to be submitted to the
Presiding Judge of the Superior Court.
Based on its investigation titled "Joint Powers Authorities in Orange County," the
2014-2015 Orange County Grand Jury has arrived at ten principal findings, as follows:
F.1. Orange County has nine "inactive" Joint Powers Authorities that have no viable
activity, revenue, expenditure, assets, or liabilities. The Grand Jury determined
that these Joint Powers Authorities serve no benefit to the public or the taxpayers
and have the potential for misuse or obfuscation of public funds.
F.2. Horizontal Joint Powers Authorities among peer organizations appear to meet
the intent of State laws to delegate a common service for a city or other legal
entity for the purpose of reducing cost on behalf of the taxpayers.
F.3. Orange County has 18 vertical Joint Powers Authorities created by a city along
with its redevelopment agency that no longer exists. The Grand Jury determined
2014-2015 Orange County Grand Jury Page 13
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
that these Joint Powers Authorities serve no benefit to the public or the taxpayers
and have the potential for misuse or obfuscation of public funds.
F.4. Vertical Joint Powers Authorities with a single controlling entity, such as a city
council, have the potential to use this organizational structure as a shell company
to avoid other legal constraints on the controlling entity and to obfuscate taxpayer
visibility.
F.S. Vertical Joint Powers Authorities in which the controlling entity transfers assets
from itself to a Joint Powers Authority for the purpose of obtaining additional
funding, or signs a long-term lease to a Joint Powers Authority to obtain assets,
are avoiding transparency and are not acting in the best financial interest of the
taxpayers.
F.6. 32 of the Joint Powers Authorities identified in Orange County are not complying
with the California State reporting requirements in code Section 6500 and SB
282 according to the latest information available from the year 2013.
F.7. The Orange County Auditor -Controller knows of the Joint Powers Authorities in
which the County is a member, but does not have a list of all of the Joint Powers
Authorities in Orange County and cannot confirm compliance of their submittal
for public access. The Orange County Auditor -Controller does not provide easy-
to-use online access to the data submitted to it by the Joint Powers Authorities
that are compliant with the requirement to submit.
F. 8. The Foothill Transportation Corridor Agency and the San Joaquin Transportation
Corridor Agency have a joint debt level of over $4.5 billion. The Grand Jury has
determined that this debt level is excessive based on their revenues, and it
threatens to render them insolvent.
F.9. The Orange County Fire Authority has an off -the -books unfunded debt liability of
$577 million which the Grand Jury has determined to be of concern since it is a
real liability on the County taxpayers.
F.10. The Anaheim Pubic Financing Authority has a debt exposure of $1.2 billion which
the Grand Jury has determined to be excessive in light of the fact that it was
incurred without voter approval.
RECOMMENDATIONS
In accordance with California Penal Code sections 933 and 933.05, the 2014-
2015 Grand Jury requires (or, as noted, requests) responses from each agency affected
by the recommendations presented in this section. The responses are to be submitted
to the Presiding Judge of the Superior Court.
Based on its investigation titled "Joint Powers Authorities in Orange County," the
2014-2015 Orange County Grand Jury makes the following eight recommendations:
R.1. All Orange County Joint Powers Authorities that are "inactive" should submit the
official paperwork with the State of California requesting termination of their
2014-2015 Orange County Grand Jury Page 14
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
existence or provide at the next public meeting the justification for continuing the
Joint Powers Authority. (F.1.)
R.2. All Vertical Joint Powers Authorities created by a city along with its
redevelopment agency should submit the necessary paperwork with the State of
California requesting termination of their existence. (F.3.)
R.3. All Joint Powers Authorities should take the following actions to insure
transparency to the taxpayers: (1) have an annual outside audit, (2) post the
complete audit on their city website as a separate Joint Powers Authority entity,
(3) send the audit to the County Controller and the State Auditor, and (4) ensure
the required reports are filed annually to the County and the State. (F.4., F.S.)
R.4. The 32 Joint Powers Authorities that are not complying with the California State
Law requiring annual reporting should become compliant by submitting their
2014 report by December 31, 2015, and submitting the required reports annually
thereafter. (F.6.)
R.S. The Orange County Auditor -Controller should maintain a current list of all of the
Joint Powers Authorities in Orange County, confirm that reports have been
submitted annually, and post the completed reports with all the details on an
easy-to-use Internet public access website. (F.7.)
R.6. The Foothill Transportation Corridor Agency and the San Joaquin Transportation
Corridor Agency should address their solvency by an aggressive plan to reduce
their public debt. (F.B.)
R.7. The Orange County Fire Authority should address their lack of transparency by
providing public disclosure of their off -the -books unfunded public liability in their
financial statements and address their solvency by an aggressive plan to reduce
their unfunded liabilities. (F.9.)
R.B. The City of Anaheim City Council should redress the debt incurred by the
Anaheim Pubic Financing Authority under its direction by an aggressive plan to
reduce their public debt. (F.10.)
REQUIRED RESPONSES
The California Penal Code section 933 requires the governing body of any public
agency which the Grand Jury has reviewed, and about which it has issued a final report,
to comment to the Presiding Judge of the Superior Court on the findings and
recommendations pertaining to matters under the control of the governing body. Such
comment shall be made no later than 90 days after the Grand Jury publishes its report
(filed with the Clerk of the Court). Additionally, in the case of a report containing findings
and recommendations pertaining to a department or agency headed by an elected
County official (e.g. District Attorney, Sheriff, etc.), such elected official shall comment
on the findings and recommendations pertaining to the matters under that elected
official's control within 60 days to the Presiding Judge with an information copy sent to
the Board of Supervisors.
2014-2015 Orange County Grand Jury Page 15
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
Furthermore, California Penal Code section 933.05, subdivisions (a), (b), and (c),
provides as follows, the manner in which such comment(s) are to be made:
(a) As to each Grand Jury finding, the responding person or entity shall indicate one of
the following:
(1) The respondent agrees with the finding
(2) The respondent disagrees wholly or partially with the finding, in which case
the response shall specify the portion of the finding that is disputed and shall include an
explanation of the reasons therefore.
(b) As to each Grand Jury recommendation, the responding person or entity shall report
one of the following actions:
(1) The recommendation has been implemented, with a summary regarding the
implemented action.
(2) The recommendation has not yet been implemented, but will be implemented
in the future, with a time frame for implementation.
(3) The recommendation requires further analysis, with an explanation and the
scope and parameters of an analysis or study, and a time frame for the matter to be
prepared for discussion by the officer or head of the agency or department being
investigated or reviewed, including the governing body of the public agency when
applicable. This time frame shall not exceed six months from the date of publication of
the Grand Jury report.
(4) The recommendation will not be implemented because it is not warranted or
is not reasonable, with an explanation therefore.
(c) If a finding or recommendation of the Grand Jury addresses budgetary or personnel
matters of a county agency or department headed by an elected officer, both the
agency or department head and the Board of Supervisors shall respond if requested by
the Grand Jury, but the response of the Board of Supervisors shall address only those
budgetary /or personnel matters over which it has some decision making authority. The
response of the elected agency or department head shall address all aspects of the
findings or recommendations affecting his or her agency or department.
Comments to the Presiding Judge of the Superior Court in compliance with Penal
Code section 933.05 and Penal Code 933(c) are required from the respondents listed in
the following two Response Matrices (one for cities and County and one for Joint
Powers Authorities):
2014-2015 Orange County Grand Jury Page 16
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
Matrix 1 REQUIRED RESPONDENTS (Cities & County)
2014-2015 Orange County Grand Jury Page 17
Required Respondents
Findings
Recommendations
F
F
F
F
F
F
F
F
F
F
R
R
R
R
R
R
R
R
7
2
3
4
5
6
7
8
9
1
1
2
3
4
5
6
7
8
1
City of Anaheim
X
X
X
X
Mayor & City Council
2
City of Brea Mayor &
X
X
City Council
3
City of Buena Park
X
X
X
X
Mayor & City Council
4
City of Costa Mesa
X
X
Mayor & City Council
5
City of Fullerton
X
X
X
X
Mayor & City Council
City of Fountain
6
Valley Mayor & City
X
X
Council
City of Garden
7
Grove Mayor & City
X
X
X
X
Council
City of Huntington
8
Beach Mayor & City
X
X
Council
9
City of La Habra
X
X
Mayor & City Council
10
City of Lake Forest
X
X
Mayor & City Council
11
City of Mission Viejo
X
X
Mayor & City Council
City of San
12
Clemente Mayor &
X
X
City Council
City of San Juan
13
Capistrano Mayor &
X
X
City Council
14
City of Santa Ana
X
X
Mayor & City Council
15
City of Seal Beach
X
X
Mayor & City Council
16
City of Stanton
X
X
X
X
Mayor & City Council
17
City of Tustin Mayor
X
X
X
X
& City Council
2014-2015 Orange County Grand Jury Page 17
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
Matrix 2 REQUIRED RESPONDENTS (Joint Powers Authorities)
Required Respondents
Findings
Recommendations
F
F
F
F
F
F
F
F
F
F
R
R
R
R
R
R
R
R
1
2
3
4
5
6
7
8
9
1
1
2
3
4
5
6
7
8
18
City of Westminster
X
X
X
X
Mayor & City Council
X
X
X
19
City of Yorba Linda
X
X
Mayor & City Council
X
X
X
20
Orange County
X
X
Auditor -Controller
X
X
X
X
X
X
X
Matrix 2 REQUIRED RESPONDENTS (Joint Powers Authorities)
2014-2015 Orange County Grand Jury Page 18
Required Respondents
Findings
Recommendations
F
F
F
F
F
F
F
F
F
F
R
R
R
R
R
R
R
R
1
2
3
4
5
6
7
8
9
1
1
2
3
4
5
6
7
8
1
Anaheim Community
Center Authority
X
X
X
2
Anaheim Housing and
Public Improve. Auth.
X
X
X
3
Anaheim Public
Financing Authority
X
X
X
X
X
X
X
4
Big Independent Cities
Excess Pool
X
X
X
5
Bonita Canyon Public
Facilities Fin. Auth.
X
X
X
6
Brea Community
Benefits Financing Auth.
X
X
X
7
Brea Public Financing
Authority
X
X
X
X
X
8
Buena Park Public
Financing Authority
X
X
X
X
X
X
X
9
California Insurance Pool
Authority
X
X
X
10
Capistrano Unified Public
Financing Auth.
X
X
X
X
X
X
X
11
Central Net Operations
Authority
X
X
X
X
X
12
City of Brea Midbury
Assessment Auth.
X
X
X
X
X
X
13
City of Fullerton Public
Financing Auth.
X
X
X
X
X
X
X
14
City of San Clemente
Public Fin. Auth.
X
X
X
X
X
X
X
15
Coastal Animal Services
Authority
X
X
X
X
X
2014-2015 Orange County Grand Jury Page 18
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
2014-2015 Orange County Grand Jury Page 19
Required Respondents
Findings
Recommendations
F
F
F
F
F
F
F
F
F
F
R
R
R
R
R
R
R
R
1
2
3
4
5
6
7
8
9
1
1
2
3
4
5
6
7
8
16
Coastal District
Financing Authority
X
X
X
17
Co -Op- Org. Develop.
Employee Selec.Proced.
X
X
X
18
Costa Mesa Public
Finance Authority
X
X
X
X
X
19
Countywide Public
Finance Authority
X
X
X
X
X
X
X
X
20
Fountain Valley
Financing Authority
X
X
X
X
X
X
X
21
Fullerton Arboretum
Authority
X
X
X
22
Fullerton Library Building
Authority
X
X
X
X
X
X
X
23
Fullerton School District
Financing Auth.
X
X
X
X
X
24
Garden Grove Public
Financing Authority
X
X
X
X
X
X
X
X
X
25
Huntington Beach Public
Financing Auth.
X
X
X
X
X
26
Independent Cities Risk
Management Auth.
X
X
X
X
X
27
Integrated Law and
Justice Agency for OC
X
X
X
X
X
28
Irvine Child Care Project
X
X
X
X
X
29
Irvine Unified School
District Financing Auth.
X
X
X
30
Joint Powers Employee
Benefit Authority
X
X
X
31
La Habra Civic
Improvement Authority
X
X
X
X
X
X
X
32
Metro Cities Fire
Authority
X
X
X
X
X
33
Mission Viejo Commu.
Devel. Fin. Auth.
X
X
X
X
X
X
X
34
National Water Research
Institute
X
X
X
X
X
35
Newport -Mesa United
School Fin. Auth.
X
X
X
X
X
X
X
36
North Net Joint Powers
Training Agree.
X
X
X
X
X
2014-2015 Orange County Grand Jury Page 19
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
2014-2015 Orange County Grand Jury Page 20
Required Respondents
Findings
Recommendations
F
F
F
F
F
F
F
F
F
F
R
R
R
R
R
R
R
R
1
2
3
4
5
6
7
8
9
1
1
2
3
4
5
6
7
8
37
Northern OC Self -
Funded Workers
X
X
X
Comp..Auth.
38
Northern OC Lia. &
Property Self-Insu.Auth.
X
X
X
39
Orange County Cities
Airport Authority
X
X
X
40
Orange County Civic
Center Authority
X
X
X
X
X
41
Orange County Council
of Governments
X
X
X
X
X
42
Orange County Fire
X
XX
X
X
Authority
43
Orange County Fringe
X
X
X
Benefits Agreement
44
Orange County Public
X
X
X
Financing Authority
45
Orange County -City
X
X
X
Hazardous Matl. Auth.
46
Orange Uni. School
X
X
X
X
X
Distr. Public Fin. Auth.
47
Public Cable Television
X
X
X
Authority
48
Rancho Canada
X
X
X
X
X
Financing Authority
49
Rancho Santa Margarita
X
X
X
X
X
Public Fin. Auth
50
Saddleback Valley
X
X
X
Unified Sch. Fin. Auth.
51
San Joaquin Trans.
X
X
X
X
X
Corridor Agency
52
San Juan Basin Authority
X
X
X
53
Santa Ana Financing
X
X
X
X
X
X
X
Authority
54
Santa Ana River Flood
X
X
X
Protection Agency
55
Santa Margarita -Dana
X
X
X
Point Authority
56
Santiago Aqueduct
X
X
X
Commission
57
School Employers
X
X
X
Association of California
58
Seal Beach Public
X
X
X
X
X
X
X
Financing Authority
59
South Coast Water
X
X
X
District Financing Auth.
60
South Orange County
X
X
X
Public Financing Auth.
2014-2015 Orange County Grand Jury Page 20
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
2014-2015 Orange County Grand Jury Page 21
Required Respondents
Findings
Recommendations
F
F
F
F
F
F
F
F
F
F
R
R
R
R
R
R
R
R
1
2
3
4
5
6
7
8
9
1
1
2
3
4
5
6
7
8
61
South Orange County
X
X
X
Wastewater Auth.
62
Southern Orange County
X
X
X
Prop/Lia. Self Insu.
63
Stanton Public Financing
X
X
X
X
X
X
X
X
X
Authority
64
The Foothill Trans.
X
X
X
X
X
Corridor Agency
65
Trabuco Canyon Public
X
X
X
Financing Authority
66
Tustin Public Financing
X
X
X
X
X
X
X
X
X
Authority
67
Tustin Unified School
X
X
X
X
X
District Fin. Auth.
68
West Cities Commun.
X
X
X
X
X
Cntr. Joint Powers Auth.
69
Western Orange County
X
X
X
Self -Funded Comp
70
Westminster Public
X
X
X
X
X
X
X
X
X
Finance Authority
71
Yorba Linda Public
X
X
X
X
X
X
X
Finance Authority
2014-2015 Orange County Grand Jury Page 21
Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency
REFERENCES
Cypher, T. & Grinnell, C. (2007). Governments Working Together. A Citizen's
Guide to Joint Powers Agreements. California State Legislature, Senate Local
Government Committee Report.
State of California Constitution. Article XVI. Section 18. "Debt".
State of California Government Code Section 6500. Joint Exercise of Powers Act
State of California Senate Bill No. 282. (2001). Chapter 288, Amended Section
12463.1 [Government Code].
2014-2015 Orange County Grand Jury Page 22
ATTACHMENT
City of Tustin Response to the Grand Jury Report
August 5, 2015
Honorable Glenda Sanders, Presiding Judge
Orange County Superior Court
700 Civic Center Drive West
Santa Ana, CA 92701
Re: Response by the City of Tustin to the June 29, 2015 Grand Jury Report re Joint Powers
Authorities
Your Honor,
The City of Tustin ("City") hereby responds to the June 29, 2015 Grand Jury Report entitled "Joint Powers
Authorities: Issues of Viability, Control, Transparency, and Solvency" (referred to herein as the "Report").
Pursuant to California Penal Code Section 933.05(a) and (b), please find the following responses to Findings
F1, and F3 and Recommendations RIand R2:
Findings of the Grand Jury
F1) Orange County has nine "inactive" Joint Powers Authorities that have no viable activity, revenue,
expenditure, assets, or liabilities. The Grand Jury determined that these Joint Powers Authorities serve
no benefit to the public or the taxpayers and have the potential for misuse or obfuscation of public
funds.
City Response:
The City agrees and disagrees with this Finding in part. While the City agrees that Tustin's Public
Financing Authority (the "Finance Authority") (a joint powers authority (`JPA"))) is presently serving
no specific purpose, the City believes that JPAs like the Finance Authority can and do serve important
public purposes. The Financing Authority has and could continue to provide an important tool for
financing vital public facilities needed to build out the former Marine Corps Air Station ("MCAS")
Tustin.
F3) Orange County has 18 vertical Joint Powers Authorities created by a city along with its redevelopment
agency that no longer exists. The Grand Jury determined that these Joint Powers Authorities serve no
benefit to the public or the taxpayers and have the potential for misuse or obfuscation of public funds.
City Response:
The City agrees and disagrees with this Finding in part. The City agrees the Tustin Public Financing
Authority is presently not in use but that JPAs and financing authorities can and do serve useful public
purposes such as the financing of vital public facilities needed to build out the MCAS Tustin.
1103468.1
Response to June 29, 2015 Grand Jury Report
August 5, 2015
Page 2 of 2
Recommendations of the Grand Jury
RI) All Orange County Joint Powers Authorities that are "inactive" should submit the official paperwork
with the State of California requesting termination of their existence or provide at the next public
meeting the justification for continuing the Joint Powers Authorities (See FI)
City Response:
The City will not implement this recommendation because it is unwarranted. There is a need for
maximum flexibility in financing infrastructure, environmental cleanup and improvements needed to
develop the former MCAS Tustin. The City believes it would unwise to eliminate this alternative
public finance tool with such important long-term public needs still pending. .
R2) All Vertical Joint Powers Authorities created by a city along with its redevelopment agency should
submit the necessary paperwork with the State of California requesting termination of their existence.
(See F3)
City Response:
As stated in response to Recommendation 91, the City will not implement this recommendation
because it is unwarranted. There is a need for maximum flexibility in financing infrastructure,
environmental cleanup and improvements needed to develop the former MCAS Tustin. The City
believes it would unwise to eliminate this public finance tool with such important long-term public
needs still pending.
Thank you for the opportunity to respond to the Grand Jury's Report. If you have any questions regarding
our response, please contact Jeffrey C. Parker, City Manager, at (714) 573-3012 or Jerry Craig, Economic
Development & Housing Manager, at (714) 573-3121.
Sincerely,
Charles E. "Chuck" Puckett
Mayor
cc: 2014-2015 Orange County Grand Jury
Jeffrey C. Parker, City Manager
David E. Kendig, City Attorney
Pamela Arends-King Finance Director/City Treasurer
John Buchanan, Deputy Director of Economic Development
Jerry Craig, Economic Development & Housing Manager
1103468.1
ATTACHMENT
Tustin Public Financing Authority Response to the Grand Jury Report
August 5, 2015
Honorable Glenda Sanders, Presiding Judge
Orange County Superior Court
700 Civic Center Drive West
Santa Ana, CA 92701
Re: Response by the Tustin Public Financing Authority to the June 29, 2015 Grand Jury Report re
Joint Powers Authorities
Your Honor,
The Tustin Public Financing Authority ("TPFA") hereby responds to the June 29, 2015 Grand Jury Report
entitled "Joint Powers Authorities: Issues of Viability, Control, Transparency, and Solvency" (referred to
herein as the "Report"). Pursuant to California Penal Code Section 933.05(a) and (b), please find the
following responses to Findings Fl, F3, F4, F5 and F6 and Recommendations RI, R2, R3 and R4:
Findines of the Grand J
Fl) Orange County has nine "inactive" Joint Powers Authorities that have no viable activity, revenue,
expenditure, assets, or liabilities. The Grand Jury determined that these Joint Powers Authorities serve
no benefit to the public or the taxpayers and have the potential for misuse or obfuscation of public
funds.
TPFA Response:
The TPFA agrees and disagrees with this Finding in part. While TPFA agrees that the TPFA (a joint
powers authority or `JPA") is presently serving no specific purpose, the TPFA believes that JPAs like
the TPFA can and do serve important public purposes. The TPFA has and could continue to provide
an important tool for financing vital public facilities needed to build out the former Marine Corps Air
Station (`MCAS") Tustin.
F3) Orange County has 18 vertical Joint Powers Authorities created by a city along with its redevelopment
agency that no longer exists. The Grand Jury determined that these Joint Powers Authorities serve no
benefit to the public or the taxpayers and have the potential for misuse or obfuscation of public funds.
TPFA Response:
The City agrees and disagrees with this Finding in part. The TPFA agrees the Financing Authority is
presently not in use but that JPAs and financing authorities can and do serve useful public purposes
such as the financing of vital public facilities needed to build out the MCAS Tustin..
F4) Vertical Joint Powers Authorities with a single controlling entity, such as a city council, have the
potential to use this organizational structure as a shell company to avoid other legal constraints on the
controlling entity and to obfuscate taxpayer visibility.
TPFA Response:
11034721
Response to June 29, 2015 Grand Jury Report
August 5, 2015
Page 2 of 4
The TPFA disagrees with this Finding because the City of Tustin ("City") and the TPFA are very
transparent. All of its finances are reported to an elected body during public meetings, and the
information is publicly available on the City's website. In addition, the information is reported in the
City's Comprehensive Annual Financial Report ("CAFR" ), a National award-winning public
disclosure document for 28 years running.
F5) Vertical Joint Powers Authorities in which the controlling entity transfers assets from itself to a Joint
Powers Authority for the purpose of obtaining additional funding, or signs a long-term lease to a Joint
Powers Authority to obtain assets, are avoiding transparency and are not acting in the best financial
interest of the taxpayers.
TPFA Response:
As stated in response to Finding #4, the TPFA disagrees with this Finding because the City and the
TPFA are very transparent. All of TPFA's finances are reported to an elected body during public
meetings, and the information is publicly available on the City's website. In addition, the information
is reported publicly and annually in Tustin's CAFRs.
F6) 32 of the Joint Powers Authorities identified in Orange County are not complying with the California
State reporting requirements in code Section 6500 and SB 282 according to the latest information
available from the year 2013.
TPFA Response:
The TPFA disagrees with this Finding. Whenever the notice anticipated by SB 282 is provided by the
State Controller, the TPFA has provided and will continue to provide the required response. In recent
years there has been no activity for the TPFA to report, but that absence of information to report is
itself also reflected in the reports provided to the Controller. In addition, this information is included in
the City's award-winning CAFRs.
Recommendations of the Grand
RI) All Orange County Joint Powers Authorities that are "inactive" should submit the official paperwork
with the State of California requesting termination of their existence or provide at the next public
meeting the justification for continuing the Joint Powers Authorities (See Fl)
TPFA Response:
The TPFA will not implement this recommendation because it is unwarranted. There is a need for
maximum flexibility in financing infrastructure, environmental cleanup and improvements needed to
develop the former MCAS Tustin. The TPFA and the City believe it would unwise to eliminate this
alternative public finance tool with such important long-term public needs still pending.
R2) All Vertical Joint Powers Authorities created by a city along with its redevelopment agency should
submit the necessary paperwork with the State of California requesting termination of their existence.
(See F3)
TPFA Response:
As stated in response to Recommendation #1, the TPFA will not implement this recommendation
because it is unwarranted. There is a need for maximum flexibility in financing infrastructure,
11034721
Response to June 29, 2015 Grand Jury Report
August 5, 2015
Page 3 of 4
environmental cleanup and improvements needed to develop the former MCAS Tustin. The TPFA and
the City believe it would unwise to eliminate this public finance tool with such important long-term
public needs still pending.
R3) All Joint Powers Authorities should take the following actions to insure transparency to the taxpayers:
(1) have an annual outside audit, (2) post the complete audit on their city website as a separate Joint
Powers Authority entity, (3) send the audit to the County Controller and the State Auditor, and (4)
ensure the required reports are filed annually to the County and the State. (F4, F5)
TPFA Response:
The recommendation has been and will continue to be implemented as all required audits are prepared
and submitted to the State and are on the City's website. SB 282 requires reports to be submitted to the
State when the State Controller provides notice to do so in accordance with California Government
Code section 12463.1(a). SB 282 does not require the same reports to also be further duplicated for the
County, but the TPFA will be happy to submit the same reports to the County if a County system is
established for their submittal. As noted above, the reports are public documents available from the
State Controller and on the City's website.
R4) The 32 Joint Powers Authorities that are not complying with the California State Law requiring annual
reporting should become compliant by submitting their 2014 report by December 31, 2015, and
submitting the required reports annually thereafter. (F6)
TPFA Response:
This recommendation has been implemented because the City has complied and will continue to
comply with State law about submittal of reports. All required audits are prepared and submitted to the
State and are on the City's website. SB 282 requires reports to be submitted to the State when the State
Controller provides notice to do so in accordance with California Government Code section
12463.1(a). SB 282 does not require the same reports to also be further duplicated for the County, but
the TPFA will be happy to submit the same reports to the County if a County system is established for
their submittal. As noted above, the reports are public documents available from the State Controller
and on the City's website.
Thank you for the opportunity to respond to the Grand Jury's Report. If you have any questions regarding
our response, please contact Jeffrey C. Parker, City Manager, at (714) 573-3012 or Jerry Craig, Economic
Development & Housing Manager, at (714) 573-3121.
Sincerely,
Charles E. "Chuck" Puckett
Chair, TPFA Authority Board
cc: 2014-2015 Orange County Grand Jury
11034721
Response to June 29, 2015 Grand Jury Report
August 5, 2015
Page 4 of 4
bcc: Jeffrey C. Parker, TPFA Executive Director
David E. Kendig, City Attorney
Pamela Arends-King, Finance Director/City Treasurer
John Buchanan, Deputy Director of Economic Development
Jerry Craig, Economic Development & Housing Manager
1103472.1
F_\M/S9:Iul:1 k,ICI
2014-2015 Orange County Grand Jury Report
"Unfunded Retiree Healthcare Obligations —A Problem for Public Agencies?"
UNFUNDED RETIREE HEALTHCARE
OBLIGATIONS -
A PROBLEM FOR PUBLIC
AGENCIES?
GRAND JURY 2014-2015
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
TABLE OF CONTENTS
EXECUTIVE SUMMARY................................................................................................3
BACKGROUND.............................................................................................................. 3
Overview............................................................................................................. 3
GASB Statement No. 45 Reporting Requirements..........................................4
REASON FOR THE STUDY...........................................................................................5
METHODOLOGY............................................................................................................ 5
INVESTIGATION AND ANALYSIS.................................................................................6
GASB 45 Requirement: Authorize Actuarial Study ......................................... 7
GASB 45 Requirement: Calculate & Disclose Annual ARC ............................ 7
GASB 45 Requirement: Disclose Cumulative Amount Owed to Retirees ...10
GASB 45 Requirement: Compare ARC to the Annual Payroll Cost .............13
GASB 45 Requirement: Timely and Appropriate Recognition of Benefit.... 15
Other Analysis on OPEB Financial Data.........................................................15
FINDINGS.....................................................................................................................17
RECOMMENDATIONS.................................................................................................17
REQUIRED RESPONSES............................................................................................18
REFERENCES.............................................................................................................. 21
APPENDIX: GLOSSARY OF TERMS..........................................................................23
2014-2015 Orange County Grand Jury Page 2
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
EXECUTIVE SUMMARY
When local government employees retire from service in Orange County, their
employment often allows them to continue purchasing health insurance through the
agency (city or county) for which they had been employed. They may also receive a
stipend from that agency to help pay for these health insurance premiums. These
benefits are known as Other Post -Employment Benefits, or OPEB in governmental
accounting terms. Until 2004, these costs were considered routine operating expenses
that were paid from an agency's general fund. As a result, historically, local agencies
did not make any provisions to estimate the amount of funds that would be required in
the future and did not set money aside to make sure the employers were able to make
these payments when they came due. In 2004, the Governmental Accounting
Standards Board (GASB) issued Statement No.45 "Accounting and Financial Reporting
by Employers for Postemployment Benefits Other than Pensions" in an effort to improve
financial reporting by state and local government agencies. The objective of issuing this
directive was to require governments to improve their accounting practices. These
changes were required to meet certain financial reporting goals that were not being met.
These goals were:
1. Recognize the cost of benefits in periods when the related services are
received by the employer.
2. Provide information about the actuarial accrued liabilities for promised
benefits associated with past services and whether and to what extent these
benefits have been funded.
3. Provide information useful in assessing potential demands on the employers
future cash flows.
The Orange County Grand Jury (OCGJ) reviewed the data provided in the
investigated agencies' financial statements for the fiscal year ended June 30, 2013, to
locate the information identified above. The inquiry determined that the combined
Unfunded Retiree Health Obligation for the 36 (less four non -reporting cities) agencies
was $1.1 billion as of June 30, 2013, which were derived from the Comprehensive
Annual Financial Reports (CAFRs). This is a significant amount, especially when
combined with the Unfunded Pension Liability of $5.7 billion. The OCGJ further
determined that less than 30% of the agencies surveyed recognized the full annual cost
of the OPEB expense, with most not recognizing the deferred benefit as earned
compensation of current employees. The analysis of the potential demands on the
employer's future cash flows revealed that certain agencies were at far greater risk of
encountering issues with future cash flows than others due to the higher benefits
promised to retirees in the past and lack of efforts to fund the liability at present.
BACKGROUND
(A Glossary of Terms is provided in the Appendix.)
Overview
In 1961 the State of California (State) began to offer State workers retiree
healthcare benefits because workers were at risk of losing their health care coverage
2014-2015 Orange County Grand Jury Page 3
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
upon retirement. This loss to the retiree may have resulted because the high premium
cost was more than the retiree could afford, or the retiree had a health condition that
resulted in insurers denying coverage. Local governments followed suit, and many cities
and local agencies began offering health care benefits to retirees. This is true today
even though conditions have changed; for example, today government workers are
eligible for federal Medicare at age 65 or through the Affordable Care Act.
All 34 cities in Orange County, as well as the County of Orange (County) and the
Orange County Fire Authority (OCFA), offer their employees some form of retiree health
care benefits. In many agencies, if a retiree purchases health insurance through the
agency that they retired from, that agency may choose to contribute a minimal amount.
This amount is established by the Public Employees Medical and Hospital Care Act
(PEMHCA) and helps to offset the retiree's health insurance premium. Some agencies
provide generous benefits that may pay up to 90% of the premium cost for retirees. Until
2004, most local government agencies accounted for the costs of paying for retiree
benefits as a cost of doing business and charged the costs to ongoing expenses.
In 2004, the Governmental Accounting Standards Board (GASB), an organization
that oversees how governments account for their financial activities, examined this pay-
as-you-go policy used to account for the health care benefits payables. The GASB
concluded that this approach is not a sound accounting practice for three reasons. First,
it did not allow the government entity or the public to know what the actuarial accrued
liabilities for health benefits are which have been promised to retirees. Second, it did not
provide information about whether the government entity had the funds to pay for these
costs annually as well as in the future. Third, it did not match the expense of the benefit
in the period that it was earned/incurred.
GASB Statement No. 45 Reporting Requirements
In order to correct the above accounting and information issues, the GASB,
through GASB Statement No. 45, required government agencies to do the following:
1. Authorize an actuarial or alternate measurement study done which assesses
how much the agency will have to pay for medical benefits in the future based
on the life expectancy of current employees as well as retirees for whom
benefits are being paid. This calculated amount is known as the Accrued
Actuarial Liability (AAL).
2. Calculate the annual amount that the agency will have to pay every year to
make sure that all future obligations are met. This amount is known as the
Annual Required Contribution (ARC).
3. Disclose the cumulative amount owed to retirees for the health care benefits
promised or Accrued Actuarial Liability (AAL) as well as the amount of monies
the employer has put aside in an irrevocable trust to pay for the future liability
(Contributed Amount).
4. Compare the ARC to the annual payroll cost of the employer to assess
potential demands on the employers' future cash flow.
5. Recognize the cost of benefits in periods which the related services are
received (including the benefit as compensation to the employee that has
2014-2015 Orange County Grand Jury Page 4
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
earned it even though the employee does not collect the benefit until after
retirement).
Orange County cities, the County, and the OCFA all provide retiree health
benefits that are funded at varying levels. This report provides the citizens of the County
a snapshot of the overall financial situation regarding retiree health benefits promised by
local agencies.
REASON FOR THE STUDY
The main purpose of this study is to quantify the full extent of the financial liability
for retiree health benefits facing the County's 34 cities, the County, and the OCFA. The
goal is to determine how much is owed in total by these 36 agencies and how much
each agency has to contribute each year to meet its obligation to pay for the benefit.
The State's Legislative Analyst Office (LAO) Report in 2015 stated that retiree
healthcare is "the state's last major liability that needs a funding plan" (Legislative,
2015). According to the LAO, the "unfunded liability" for retiree healthcare promised to
state workers over the next 30 years is $72 billion, which is greater than the $50 billion
unfunded liability for state worker pensions reported by the California Public Employees
Retirement System (CaIPERS) in 2014. In light of the LAO report, the Orange County
Grand Jury (OCGJ) decided it was advisable to determine the level of the liability for
retiree healthcare costs facing the taxpayers of the County.
In addition to determining the magnitude of the liability, the OCGJ also
considered it advisable to see how many public agencies were complying with the
requirements and recommendations put forward by the GASB in Statement No. 45, as
they play an important role in transparency by revealing the full extent of future costs
and public liabilities of retiree health benefits. In addition, the analysis provided by the
OCGJ provides quantitative information regarding each public entity's progress in
addressing the important issue of unfunded liability.
METHODOLOGY
The method of investigation adopted by the OCGJ was mainly through document
and literature reviews.
The historical origins of the retiree health benefit provisions by local agencies
were studied and analyses were done on the subject of post -employment benefits and
the issues involved in reporting and paying for these benefits.
The research included a review of the accounting literature as it pertains to the
recognition of these expenses and the correct presentation of this data in the financial
reports of local agencies.
The OCGJ decided to examine the financial statements of the 34 cities of Orange
County, the County of Orange, and the Orange County Fire Authority to determine if
these agencies were complying with the disclosure requirements imposed on them by
GASB Statement No. 45. The OCGJ also obtained an understanding of the potential
2014-2015 Orange County Grand Jury Page 5
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
demands on the agencies' future cash flows based on the annual cost, as well as the
accumulated liability, for their Other Post Employment Benefit obligations.
The Comprehensive Annual Financial Reports (CAFR) for the year ending June
30, 2013, were obtained from the agencies' websites and analyzed by the OCGJ. The
"Notes to the Financial Statements" were analyzed for the required information and data
regarding balance sheet liabilities. General Fund annual expenditures were also
obtained for analysis purposes. In cases where a disclosure was missing, the agencies
were contacted by mail and were requested to provide the information to the OCGJ.
The resulting data gathered was analyzed to provide insight into the level of liability for
healthcare that the agencies are responsible for, as well as annual expenses incurred
by each agency.
INVESTIGATION AND ANALYSIS
The investigation yielded a significant amount of data. The following tables lay
out the nature of the data collected and support the conclusions drawn from the data.
The OCGJ had access to information regarding the AAL calculated for each agency by
an external actuary or, in a few cases, by using an alternate measurement method
prescribed by the GASB; and was also able to determine the amount of funding that the
agencies had put in an irrevocable trust. In addition to the data on the extent of the
liability and the annual required contribution to be made by an agency, the OCGJ
collected information on the amount of General Fund liabilities and expenditures for the
FY 2012-13. The Grand Jury also analyzed the population of each jurisdiction to assess
the impact of that agency's annual OPEB costs on its residents.
Table 1: List of Orange County Cities/Agencies Reviewed
1
Aliso Viejo
19
Lake Forest
2
Anaheim
20
Los Alamitos
3
Brea
21
Mission Viejo
4
Buena Park
22
Newport Beach
5
Costa Mesa
23
Orange
6
Cypress
24
Placentia
7
Dana Point
25
Rancho Santa Margarita
8
Fountain Valley
26
San Clemente
9
Fullerton
27
San Juan Capistrano
10
Garden Grove
28
Santa Ana
11
Huntington Beach
29
Seal Beach
12
Irvine
30
Stanton
13
La Habra
31
Tustin
14
La Palma
32
Villa Park
15
Laguna Beach
33
Westminster
16
Laguna Hills
34
Yorba Linda
17
Laguna Niguel
35
County of Orange
18
Laguna Woods
36
Orange County Fire Authority
2014-2015 Orange County Grand Jury Page 6
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
The data collected were for the 34 cities in Orange County, the County, and the
OCFA (see Table 1). The last two agencies (County and OCFA) were included because
many County cities contract with the County Sheriff's Department and the OCFA for
police and/or fire services, and do not have a local police and/or fire department. To
fully estimate the liability for post -employment healthcare costs for County agencies
(and ultimately residents), the information related to the County agencies needs to be
included.
GASB 45 Requirement: Authorize Actuarial Study
A review of the data collected from the Comprehensive Annual Financial
Reports (CAFRs) of the 36 entities revealed that four cities did not have the disclosures
in their CAFR regarding retiree healthcare obligations. As a result, the OCGJ concluded
that these cities did not comply with the GASB Statement No. 45 requiring them to
conduct an actuarial or alternative measurement study, to estimate the annual required
contribution and the amount of the actuarial obligation. These cities were Aliso Viejo,
Dana Point, Laguna Hills, and Villa Park. The City of Laguna Woods also did not
disclose GASB Statement No. 45 in the annual CAFR, but provided the information to
the OCGJ when requested. The Grand Jury followed up with a questionnaire to each of
the above four cities.
It is the opinion of the OCGJ that if a city or agency is subject to PEMHCA, the
agency is providing post -employment healthcare benefits even if it is at a very low level.
Since all California cities that allow their retirees to purchase health insurance are
subject to PEMCHA and are required to provide a subsidy to retirees towards the
payment for healthcare premiums, it is important that each of the four cities listed above
review their policies to determine if they are, in fact, exempt from GASB Statement No.
45 reporting.
GASB 45 Requirement: Calculate & Disclose Annual ARC
The OCGJ reviewed the Comprehensive Annual Financial Reports for the year
ended June 30, 2013, and was able to determine the level of ARC for the year by each
agency (see Table 2). The total annual cost is almost $100 million dollars for the 32
entities that provided this information.
To assess the how significant this cost was to the agencies, the OCGJ decided
to compare the Annual OPEB Cost (which is the ARC less any payments already made
in the current year) for each agency to its General Fund Expenditures for the same
period.
The data in Table 3 indicates the annual OPEB cost (AOPEBC) on average was
2% of General Fund Expenses (GFEXP). However, in Westminster the OPEB cost was
over 9% of annual expenditures, which is significantly higher than the survey average.
Six cities had AOPEBC that were more than double the average. Cities with higher than
average AOPEBC/GFEXP ratios may encounter difficulty in meeting their obligations in
the case of an economic downturn when their revenues are reduced.
2014-2015 Orange County Grand Jury Page 7
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
Table 2: Annual Required Contribution of Orange County Agencies
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
2014-2015 Orange County Grand Jury Page 8
Agency
Annual Required Contribution
(ARC)
1
Anaheim
$8,694,000
2
Brea
$1,443,000
3
Buena Park
$563,749
4
Costa Mesa
$2,146,578
5
Cypress
$519,000
6
Fountain Valley
$2,533,000
7
Fullerton
$3,860,848
8
Garden Grove
$925,657
9
Huntington Beach
$1,561,000
10
Irvine
$679,000
11
La Habra
$615,000
12
La Palma
$159,370
13
Laguna Beach
$153,301
14
Laguna Woods
$14,924
15
Laguna Niguel
$242,811
16
Lake Forest
$50,024
17
Los Alamitos
$243,447
18
Mission Viejo
$736,000
19
Newport Beach
$2,806,000
20
Orange
$989,285
21
Placentia
$2,198,487
22
Rancho Santa Margarita
$45,299
23
San Clemente
$139,542
24
San Juan Capistrano
$114,894
25
Santa Ana
$2,732,000
26
Seal Beach
$502,000
27
Stanton
$177,000
28
Tustin
$1,195,094
29
Westminster
$4,878,000
30
Yorba Linda
$1,748,362
31
County of Orange
$42,713,000
32
OCFA
$14,307,307
Total ARC
$99,686,979
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
2014-2015 Orange County Grand Jury Page 8
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
Table 3: Annual Cost as a Percentage of General Fund Expenditures
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
2014-2015 Orange County Grand Jury Page 9
Cities/Agencies
Annual
OPEB Costs
(AOPEBC)
Total General
Fund
Expenditures
ures
(GFEX
AOPEBC/
GFEXP
Percentage
1
Westminster
$4,272,000
$44,977,980
9.5%
2
Fountain Valley
$2,533,000
$38,207,193
6.6%
3
Yorba Linda
$1,583,193
$26,255,575
6.0%
4
Laguna Woods
$226,947
$4,095,104
5.5%
5
Placentia
$1,375,364
$25,061,558
5.5%
6
Fullerton
$3,877,097
$74,222,592
5.2%
7
OCFA
$13,689,125
$285,518,241
4.8%
8
Anaheim
$8,574,000
$238,154,000
3.6%
9
Brea
$1,324,000
$53,866,984
2.5%
10
Costa Mesa
$2,153,804
$90,115,525
2.4%
11
Los Alamitos
$243,447
$11,513,015
2.1%
12
Seal Beach
$507,830
$25,610,260
2.0%
13
Newport Beach
$2,806,000
$143,834,937
2.0%
14
Cypress
$462,249
$23,834,348
1.9%
15
Tustin
$1,034,400
$54,837,976
1.9%
16
La Palma
$155,293
$9,159,937
1.7%
17
La Habra
$556,000
$33,355,966
1.7%
18
County of Orange
$42,497,000
$2,654,002,000
1.6%
19
Mission Viejo
$747,497
$48,447,473
1.5%
20
Santa Ana
$2,785,000
$184,442,950
1.5%
21
Buena Park
$636,448
$49,520,579
1.3%
22
Stanton
$177,000
$14,881,860
1.2%
23
Orange
$931,833
$89,018,039
1.0%
24
Garden Grove
$941,164
$90,026,024
1.0%
25
Huntington Beach
$1,484,000
$185,015,000
0.8%
26
San Juan Capistrano
$113,595
$20,066,475
0.6%
27
Irvine
$666,000
$155,031,000
0.4%
28
Rancho Santa Margarita
$48,968
$14,301,268
0.3%
29
San Clemente
$139,542
$45,678,277
0.3%
30
Laguna Beach
$150,021
$59,572,597
0.3%
31
Lake Forest
$50,024
$36,884,211
0.1%
32
Laguna Niguel
$11,965
$27,468,565
0.0%
TOTALS
$96,753,806
$4,856,977,509
2.0%
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
2014-2015 Orange County Grand Jury Page 9
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
GASB 45 Requirement: Disclose Cumulative Amount Owed to Retirees
The level of overall liability recorded by the various agencies was quite
significant. Table 4 displays the amount of the actuarial liability for each of the 32
agencies, which totals almost $1.3 billion. There are some agencies that have
contributed towards funding the deficit, thereby reducing the unfunded portion of their
AAL.
Table 4: Retiree Health Benefit Liability
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
GASB Statement No. 45 requires agencies to recognize 100% of the AOPEBC
every year. An analysis was undertaken to determine whether the agencies had been
booking their AOPEBC in full. Table 5 presents the results of that analysis. Note that 26
of the 32 agencies were not complying with this GASB requirement, while five agencies
were contributing more than their requirement and essentially prefunding their liability.
2014-2015 Orange County Grand Jury Page 10
Most Recent
Most Recent
Cities/Agencies
Accrued
Actuarial
Cities/Agencies
Accrued
Actuarial
Liability (AAL)
Liability (AAL)
1
County of Orange
$528,639,000
18
Mission Viejo
$7,500,000
2
Anaheim
$201,108,000
19
Seal Beach
$6,902,000
3
OCFA
$156,623,184
20
La Habra
$5,879,000
4
Westminster
$62,216,000
21
Irvine
$5,407,000
5
Santa Ana
$44,238,000
22
Los Alamitos
$2,724,394
6
Fullerton
$37,800,000
23
La Palma
$1,893,010
7
Costa Mesa
$36,429,075
24
Cypress
$1,725,000
8
Newport Beach
$35,922,000
25
San Clemente
$1,432,716
9
Fountain Valley
$35,418,000
26
Laguna Beach
$1,346,828
10
Placentia
$23,732,646
27
San Juan Capistrano
$1,207,808
11
Huntington Beach
$20,200,000
28
Laguna Niguel
$865,981
12
Yorba Linda
$18,725,000
29
Stanton
$771,000
13
Brea
$18,197,000
30
Lake Forest
$499,136
14
Orange
$11,873,809
31
Rancho Santa Margarita
$272,705
15
Garden Grove
$10,633,859
32
Laguna Woods
$106,225
Total AAL
$1,297,588,376
16
Tustin
$9,800,000
17
Buena Park
$7,500,000
Funding Contributed
$244,591,329
Unfunded Liability
$1,052,997,047
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
GASB Statement No. 45 requires agencies to recognize 100% of the AOPEBC
every year. An analysis was undertaken to determine whether the agencies had been
booking their AOPEBC in full. Table 5 presents the results of that analysis. Note that 26
of the 32 agencies were not complying with this GASB requirement, while five agencies
were contributing more than their requirement and essentially prefunding their liability.
2014-2015 Orange County Grand Jury Page 10
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
Table 5: Contributions as a Percentage of Cost
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
The OCGJ also analyzed the data to determine how many agencies had set up
a trust fund to help fund their retiree health care liability, as recommended by GASB
Statement No. 45 (Governmental, 2004). The review disclosed that only 11 of the 32
agencies that had submitted data had started such a trust fund. These trust funds
2014-2015 Orange County Grand Jury Page 11
Cities/Agencies
Annual
OPEB Cost
(AOPEBC)
Actual
Contributions
(AC)
% of Cost
Contributed
(AC/AOPEBC)
1
Lake Forest
$50,024
$247,263
494.3%
2
Huntington Beach
$1,484,000
$2,683,000
180.8%
3
Anaheim
$8,574,000
$9,826,000
114.6%
4
County of Orange
$42,497,000
$48,446,580
114.0%
5
Buena Park
$636,448
$659,520
103.6%
6
Stanton
$177,000
$177,000
100.0%
7
Seal Beach
$507,830
$502,000
98.9%
8
Mission Viejo
$747,497
$736,000
98.5%
9
Costa Mesa
$2,153,804
$1,727,148
80.2%
10
Laguna Beach
$150,021
$115,181
76.8%
11
Placentia
$1,375,364
$1,053,529
76.6%
12
La Palma
$155,293
$108,299
69.7%
13
Irvine
$666,000
$430,902
64.7%
14
Fountain Valley
$2,533,000
$1,613,268
63.7%
15
Brea
$1,324,000
$776,718
58.7%
16
Westminster
$4,272,000
$2,206,588
51.7%
17
Los Alamitos
$243,447
$122,503
50.3%
18
Fullerton
$3,877,097
$1,593,988
41.1%
19
Yorba Linda
$1,583,193
$583,255
36.8%
20
Tustin
$1,034,400
$372,160
36.0%
21
Garden Grove
$941,164
$327,517
34.8%
22
OCFA
$13,689,125
$4,759,104
34.8%
23
Orange
$931,833
$323,234
34.7%
24
Santa Ana
$2,785,000
$874,000
31.4%
25
San Juan Capistrano
$113,595
$33,801
29.8%
26
Cypress
$462,249
$117,249
25.4%
27
La Habra
$556,000
$137,000
24.6%
28
San Clemente
$139,542
$33,125
23.7%
29
Rancho Santa Margarita
$48,968
$4,750
9.7%
30
Laguna Woods
$11,965
$673
5.6%
31
Laguna Niguel
$226,947
$6,748
3.0%
32
Newport Beach
$2,806,000
$0
0.0%
Totals
$96,753,806
$80,598,103
83.3%
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
The OCGJ also analyzed the data to determine how many agencies had set up
a trust fund to help fund their retiree health care liability, as recommended by GASB
Statement No. 45 (Governmental, 2004). The review disclosed that only 11 of the 32
agencies that had submitted data had started such a trust fund. These trust funds
2014-2015 Orange County Grand Jury Page 11
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
convert the liability from unfunded to a funded category that reduces financial exposure
and risk to the public.
As shown in Table 6, the combined AAL was less than 20% funded as of June
30, 2013. While some agencies contributed a significant amount in funding the health
care obligations for retirees, some agencies did not contribute any money.
Table 6: Contributions to Retiree Healthcare Trust Fund:
Accrued Actuarial Liability (AAL)
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
To assess the impact of the OPEB liability on the population of each agency the
OCGJ conducted an analysis to determine how much each resident of an agency owed
for that agency's unfunded liability. Table 6 displays the results.
As Table 7 shows, certain cities, such as Westminster, Fountain Valley and
Placentia, carry a relatively high per resident liability. Other cities, like Lake Forest and
Stanton carry a very low per resident liability. Unfunded liabilities have higher funding
priority than other agency obligations and, in the event of a fiscal crisis, funding these
unfunded liabilities will require that other agency budget items will have to be slashed.
2014-2015 Orange County Grand Jury Page 12
Cities/Agencies
Assets
Cities/Agencies
Assets
Contributed
Contributed
1
County of Orange
$116,804,000
19
La Palma
0
2
Anaheim
$67,747,000
20
Laguna Beach
0
3
OCFA
$28,910,090
21
Laguna Woods
0
4
Huntington Beach
$9,600,000
22
Laguna Niguel
0
5
Newport Beach
$7,889,000
23
Los Alamitos
0
6
Fountain Valley
$6,068,000
24
Orange
0
7
Mission Viejo
$4,300,000
25
Placentia
0
8
Seal Beach
$1,738,000
26
Rancho Santa Margarita
0
9
Stanton
$585,000
27
San Clemente
0
10
Buena Park
$500,000
28
San Juan Capistrano
0
11
Lake Forest
$450,239
29
Santa Ana
0
12
Brea
0
30
Tustin
0
13
Costa Mesa
0
31
Westminster
0
14
Cypress
0
32
Yorba Linda
0
15
Fullerton
0
16
Garden Grove
0
Total Contributed
$244,591,329
17
Irvine
0
Total AAL
$1,297,588,376
18
La Habra
0
Percent of AAL
18.85%
Contributed
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
To assess the impact of the OPEB liability on the population of each agency the
OCGJ conducted an analysis to determine how much each resident of an agency owed
for that agency's unfunded liability. Table 6 displays the results.
As Table 7 shows, certain cities, such as Westminster, Fountain Valley and
Placentia, carry a relatively high per resident liability. Other cities, like Lake Forest and
Stanton carry a very low per resident liability. Unfunded liabilities have higher funding
priority than other agency obligations and, in the event of a fiscal crisis, funding these
unfunded liabilities will require that other agency budget items will have to be slashed.
2014-2015 Orange County Grand Jury Page 12
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
Table 7: Funds Owed Per Resident for Retiree Healthcare
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
GASB 45 Requirement: Compare ARC to the Annual Payroll Cost
The next step in the data analysis was to determine whether the annual costs of
retiree health benefits comprised a significant portion of each agency's annual covered
payroll (ACP) costs. A comparison of each agency's ARC/ACP is depicted in Table 8.
2014-2015 Orange County Grand Jury Page 13
City/Agencies
Population
Unfunded Accrued
Liability(UAAL)
UAAL per
Resident
1
Westminster
89,701
$62,216,000
$694
2
Fountain Valley
55,313
$29,350,000
$531
3
Placentia
50,533
$23,732,646
$470
4
Brea
39,282
$18,197,000
$463
5
Anaheim
336,265
$133,361,000
$397
6
Costa Mesa
109,960
$36,429,075
$331
7
Newport Beach
85,186
$28,033,000
$329
8
Yorba Linda
64,234
$18,725,000
$292
9
Fullerton
135,161
$37,800,000
$280
10
Los Alamitos
11,449
$2,724,394
$238
11
Seal Beach
24,168
$5,164,000
$214
12
County of Orange
3,010,232
$411,835,000
$137
13
Santa Ana
324,528
$44,238,000
$136
14
Tustin
75,540
$9,800,000
$130
15
La Palma
15,568
$1,893,010
$122
16
La Habra
60,239
$5,879,000
$98
17
Orange
136,416
$11,873,809
$87
18
Buena Park
80,530
$7,000,000
$87
19
Garden Grove
170,883
$10,633,859
$62
20
Laguna Beach
22,723
$1,346,828
$59
21
Huntington Beach
190,963
$10,600,000
$56
22
OCFA
3,010,232
127,713,124
$42
23
Cypress
47,802
$1,725,000
$36
24
San Juan Capistrano
34,593
$1,207,808
$35
25
Mission Viejo
93,305
$3,200,000
$34
26
Irvine
212,375
$5,407,000
$25
27
San Clemente
63,522
$1,432,716
$23
28
Laguna Niguel
62,979
$865,981
$14
29
Laguna Woods
16,192
$106,225
$7
30
Rancho Santa Margarita
47,853
$272,705
$6
31
Stanton
38,186
$186,000
$5
32
Lake Forest
77,264
$48,897
$1
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
GASB 45 Requirement: Compare ARC to the Annual Payroll Cost
The next step in the data analysis was to determine whether the annual costs of
retiree health benefits comprised a significant portion of each agency's annual covered
payroll (ACP) costs. A comparison of each agency's ARC/ACP is depicted in Table 8.
2014-2015 Orange County Grand Jury Page 13
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
Table 8: Annual Contributions as Percentage of Annual Payroll for FY12-13
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites: Data
on Laguna Niguel covered payroll not available from CAFR FY 12-13
Table 8 reveals that some cities had OPEB annual costs that exceeded 20% of
the annual payroll, while others, had costs that were less than 1 % of their annual
payroll. The median is approximately 5% of payroll costs. Agencies that significantly
exceed the median have a greater risk of facing financial difficulties in an economic
downturn. In the opinion of the OCGJ, it is in the best interest of the cities with high
2014-2015 Orange County Grand Jury Page 14
Annual Required
Annual
ARC as a
Agencies
Contributions
Covered
o
�� of ACP
(ARC)
Payroll (ACP)
1
Placentia
$2,198,487
$8,500,000
25.86%
2
Westminster
$4,878,000
$20,722,000
23.54%
3
Yorba Linda
$1,748,362
$7,619,000
22.95%
4
OCFA
$14,307,307
$75,432,000
18.97%
5
Garden Grove
$925,657
$6,528,958
14.18%
6
Fountain Valley
$2,533,000
$18,041,000
14.04%
7
Stanton
$177,000
$1,870,000
9.47%
8
Fullerton
$3,860,848
$45,200,000
8.54%
9
Mission Viejo
$736,000
$9,900,000
7.43%
10
Seal Beach
$502,000
$8,083,000
6.21%
11
Brea
$1,443,000
$24,983,000
5.78%
12
Costa Mesa
$2,146,578
$38,315,112
5.60%
13
Tustin
$1,195,094
$21,520,000
5.55%
14
Los Alamitos
$243,447
$4,400,809
5.53%
15
Anaheim
$8,694,000
$169,331,000
5.13%
16
Cypress
$519,000
$10,749,000
4.83%
17
Santa Ana
$2,732,000
$68,382,000
4.00%
18
Newport Beach
$2,806,000
$74,971,000
3.74%
19
La Habra
$615,000
$16,525,000
3.72%
20
County of Orange
$42,713,000
$1,273,636,000
3.35%
21
La Palma
$159,370
$4,788,525
3.33%
22
Rancho Santa Margarita
$45,299
$1,663,686
2.72%
23
Buena Park
$563,749
$21,600,000
2.61%
24
Huntington Beach
$1,561,000
$82,400,000
1.89%
25
Laguna Woods
$14,924
$790,122
1.89%
26
San Juan Capistrano
$114,894
$6,200,557
1.85%
27
Orange
$989,285
$55,933,448
1.77%
28
San Clemente
$139,542
$13,708,188
1.02%
29
Irvine
$679,000
$68,415,000
0.99%
30
Lake Forest
$50,024
$5,201,037
0.96%
31
Laguna Beach
$153,301
$20,159,361
0.76%
Sub -Total $99,444,168
$2,185,568,803
4.55%
Laguna Niguel $242,811
No data avail
Total $99,686,979
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites: Data
on Laguna Niguel covered payroll not available from CAFR FY 12-13
Table 8 reveals that some cities had OPEB annual costs that exceeded 20% of
the annual payroll, while others, had costs that were less than 1 % of their annual
payroll. The median is approximately 5% of payroll costs. Agencies that significantly
exceed the median have a greater risk of facing financial difficulties in an economic
downturn. In the opinion of the OCGJ, it is in the best interest of the cities with high
2014-2015 Orange County Grand Jury Page 14
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
ARC/ACP values to take steps to reduce their AAL, either by putting away funds
(sinking fund) to meet these future expenses, or by renegotiating their future benefit
payments with their employees/unions.
GASB 45 Requirement: Timely and Appropriate Recognition of Benefit
According to Generally Accepted Accounting Principles (GAAP), retiree health
benefits earned by current employees for their future use should be recognized in the
agency's compensation report in the period in which those benefits are earned.
Compliance with this reporting requirement is important to both the agency and the
public, because it results in a more accurate representation of actual agency
compensation costs. The OCGJ analyzed the compensation reports completed by the
reviewed agencies to determine whether the agencies that had accrued actuarial liability
of their OPEB costs had also disclosed earned retiree health benefits on their
compensation reports for current employees. The analysis showed that only one
agency, Anaheim, properly discloses retiree health benefits as part of employee
compensation.
Other Analysis on OPEB Financial Data
The OCGJ tried to determine why certain agencies had higher OPEB liabilities
than others. To determine if high OPEB benefits are a byproduct of contractual
agreements between agencies and safety employees, the OCGJ compared the OPEB
liabilities of agencies that have the safety employees in-house versus where they are
contracted. Safety employees are defined by the California Public Employees
Retirement System (CaIPERS) as those employees "who are involved in law
enforcement, fire suppression, or who are employed in a position designated by law as
"Local Safety." Typically these employees include law enforcement officers (e.g., police
officers or deputy sheriffs), their supervisors (e.g., police sergeants), and management
(e.g. police lieutenants, commanders, captains, and chiefs); or fire protection officers
(e.g., firefighters), their supervisors and managers (e.g., fire captains, battalion chiefs,
and fire chiefs).
An analysis of the data in Table 9 confirms that generally agencies that
outsource their safety functions incur lower costs than agencies that have in-house
safety departments. There are a few exceptions, such as the City of Laguna Beach that
has both police and fire agencies in-house yet has only $1.3 million in unfunded OPEB
liabilities, and the City of Yorba Linda that has outsourced both safety services and yet
has $18.7 million in OPEB liabilities. However, in general, it appears that outsourcing
does bring down OPEB costs for agencies, and that there are budgetary implications in
changing from in-house versus outsourcing of safety functions.
2014-2015 Orange County Grand Jury Page 15
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
Table 9: Unfunded Accrued Actuarial Liability (UAAL) for Safety Services
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
2014-2015 Orange County Grand Jury Page 16
City/Agencies
Safety -Police
Safety -Fire
UAAL
1
County of Orange
IN HOUSE
IN HOUSE
$411,835,000
2
Anaheim
IN HOUSE
IN HOUSE
$133,361,000
3
Orange County Fire Authority
IN HOUSE
IN HOUSE
$127,713,094
4
Westminster
IN HOUSE
OUTSOURCE
$62,216,000
5
Santa Ana
IN HOUSE
OUTSOURCE
$44,238,000
6
Fullerton
IN HOUSE
IN HOUSE
$37,800,000
7
Costa Mesa
IN HOUSE
IN HOUSE
$36,429,075
8
Fountain Valley
IN HOUSE
IN HOUSE
$29,350,000
9
Newport Beach
IN HOUSE
IN HOUSE
$28,033,000
10
Placentia
IN HOUSE
OUTSOURCE
$23,732,646
11
Yorba Linda
OUTSOURCE
OUTSOURCE
$18,725,000
12
Brea
IN HOUSE
IN HOUSE
$18,197,000
13
Orange
IN HOUSE
IN HOUSE
$11,873,809
14
Garden Grove
IN HOUSE
IN HOUSE
$10,633,859
15
Huntington Beach
IN HOUSE
IN HOUSE
$10,600,000
16
Tustin
IN HOUSE
OUTSOURCE
$9,800,000
17
Buena Park
IN HOUSE
OUTSOURCE
$7,000,000
18
La Habra
IN HOUSE
OUTSOURCE
$5,879,000
19
Irvine
IN HOUSE
OUTSOURCE
$5,407,000
20
Seal Beach
IN HOUSE
OUTSOURCE
$5,164,000
21
Mission Viejo
OUTSOURCE
OUTSOURCE
$3,200,000
22
Los Alamitos
IN HOUSE
OUTSOURCE
$2,724,394
23
La Palma
IN HOUSE
OUTSOURCE
$1,893,010
24
Cypress
IN HOUSE
OUTSOURCE
$1,725,000
25
San Clemente
OUTSOURCE
OUTSOURCE
$1,432,716
26
Laguna Beach
IN HOUSE
IN HOUSE
$1,346,828
27
San Juan Capistrano
OUTSOURCE
OUTSOURCE
$1,207,808
28
Laguna Woods
OUTSOURCE
OUTSOURCE
$865,981
29
Rancho Santa Margarita
OUTSOURCE
OUTSOURCE
$272,705
30
Stanton
OUTSOURCE
OUTSOURCE
$186,000
31
Laguna Niguel
OUTSOURCE
OUTSOURCE
$106,225
32
Lake Forest
OUTSOURCE
OUTSOURCE
$48,897
Total UAAL
$1,052,997,047
Source: Annual Comprehensive Financial Reports for FY 2012-13 obtained from agency websites
2014-2015 Orange County Grand Jury Page 16
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
FINDINGS
In accordance with California Penal Code Sections 933 and 933.05, the 2014-
2015 Grand Jury requires (or, as noted, requests) responses from each agency affected
by the findings presented in this section. The responses are to be submitted to the
Presiding Judge of the Superior Court.
Based on its investigation titled "Unfunded Retiree Health Care Obligations -A
Problem for Public Agencies?," Orange County, the 2014-2015 Orange County Grand
Jury has arrived at five principal findings, as follows:
F.1. Aliso Viejo, Dana Point, Laguna Hills, and Villa Park were not in compliance with
GASB Statement No. 45 regarding the authorization of a study to determine
other post -employment benefit liabilities. Aliso Viejo, Dana Point, Laguna Hills,
Laguna Woods, and Villa Park were not in compliance with the disclosure of
post- employment benefits in the Notes Section of their Comprehensive Annual
Financial Report for the FY2012-13
F.2. Twenty one out of the 32 agencies that provided June 30, 2013, data to the
Grand Jury had not put aside funds in an irrevocable trust to help pay for the
accrued actuarial liability of retiree healthcare costs in the future. This is an
imprudent level of contribution.
F.3. Anaheim, Buena Park, County of Orange, Huntington Beach, Lake Forest, and
Stanton were in compliance with the requirement to contribute a full 100% or
more of their Annual Required Contribution in the FY 2012-13. The remaining 26
agencies were not in compliance.
F.4. All agencies surveyed (except Anaheim) do not disclose retiree health benefits
as part of employee compensation per GAAP standards.
RECOMMENDATIONS
In accordance with California Penal Code sections 933 and 933.05, the 2014-
2015 Grand Jury requires (or, as noted, requests) responses from each agency affected
by the recommendations presented in this section. The responses are to be submitted
to the Presiding Judge of the Superior Court.
Based on its investigation titled "Unfunded Retiree Health Care Obligations -A
Problem for Public Agencies?," the 2014-2015 Orange County Grand Jury makes the
following four recommendations:
R.1. The cities of Aliso Viejo, Dana Point, Laguna Hills, Villa Park, and Laguna Woods
should measure and disclose their liability in accordance with Governmental
Accounting Standards Board Statement No. 45. (F.1.)
R.2. The 21 agencies that have not contributed into an irrevocable trust fund to
finance their retiree health obligations should begin to put aside monies to fund
this obligation and reduce their unfunded public liabilities (F.2.)
2014-2015 Orange County Grand Jury Page 17
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
R.3. The 26 agencies that are not recognizing the full amount of their Annual
Required Contribution as expense in the current period and should comply with
the requirement to do so. (F.3.)
R.4. All agencies surveyed should recognize retiree health care benefits in employee
compensation in conformity with GAAP. (F.4.)
REQUIRED RESPONSES
The California Penal Code section 933 requires the governing body of any public
agency which the Grand Jury has reviewed, and about which it has issued a final report,
to comment to the Presiding Judge of the Superior Court on the findings and
recommendations pertaining to matters under the control of the governing body. Such
comment shall be made no later than 90 days after the Grand Jury publishes its report
(filed with the Clerk of the Court). Additionally, in the case of a report containing findings
and recommendations pertaining to a department or agency headed by an elected
County official (e.g. District Attorney, Sheriff, etc.), such elected official shall comment
on the findings and recommendations pertaining to the matters under that elected
official's control within 60 days to the Presiding Judge with an information copy sent to
the Board of Supervisors.
Furthermore, California Penal Code section 933.05, subdivisions (a), (b), and (c),
provides as follows, the manner in which such comment(s) are to be made:
(a) As to each Grand Jury finding, the responding person or entity shall indicate one of
the following:
(1) The respondent agrees with the finding
(2) The respondent disagrees wholly or partially with the finding, in which case
the response shall specify the portion of the finding that is disputed and shall include an
explanation of the reasons therefore.
(b) As to each Grand Jury recommendation, the responding person or entity shall report
one of the following actions:
(1) The recommendation has been implemented, with a summary regarding the
implemented action.
(2) The recommendation has not yet been implemented, but will be implemented
in the future, with a time frame for implementation.
(3) The recommendation requires further analysis, with an explanation and the
scope and parameters of an analysis or study, and a time frame for the matter to be
prepared for discussion by the officer or head of the agency or department being
investigated or reviewed, including the governing body of the public agency when
applicable. This time frame shall not exceed six months from the date of publication of
the Grand Jury report.
2014-2015 Orange County Grand Jury Page 18
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
(4) The recommendation will not be implemented because it is not warranted or
is not reasonable, with an explanation therefore.
(c) If a finding or recommendation of the Grand Jury addresses budgetary or personnel
matters of a county agency or department headed by an elected officer, both the
agency or department head and the Board of Supervisors shall respond if requested by
the Grand Jury, but the response of the Board of Supervisors shall address only those
budgetary /or personnel matters over which it has some decision making authority. The
response of the elected agency or department head shall address all aspects of the
findings or recommendations affecting his or her agency or department.
Comments to the Presiding Judge of the Superior Court in compliance with Penal Code
section 933.05 are required from Orange County, the Orange County Fire Authority, and
the Mayors of the cities as denoted in the following Response Matrix:
RESPONSE MATRIX
Findings
Recommendations
F1
F2
F3
F4
R1
R2
R3
R4
1 Aliso Viejo
2 Anaheim
3 Brea
4 Buena Park
5 Costa Mesa
6 County of Orange (BOS)
7 Cypress
8 Dana Point
9 Fountain Valley
10 Fullerton
11 Garden Grove
12 Huntington Beach
13 Irvine
14 La Habra
15 La Palma
16 Laguna Beach
17 Laguna Hills
18 Laguna Niguel
19 Laguna Woods
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
2014-2015 Orange County Grand Jury Page 19
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
RESPONSE MATRIX
Findings
Recommendations
F1
F2
F3
F4
R1
R2
R3
R4
20 Lake Forest
21 Los Alamitos
22 Mission Viejo
23 Newport Beach
24 Orange
25 Orange County Fire Authority
26 Placentia
27 Rancho Santa Margarita
28 San Clemente
29 San Juan Capistrano
30 Santa Ana
31 Seal Beach
32 Stanton
33 Tustin
34 Villa Park
35 Westminster
36 Yorba Linda
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
2014-2015 Orange County Grand Jury Page 20
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
REFERENCES
California Debt and Investment Advisory Commission. OPEBs &GASB 45, A Question
and Answer Guide CDIAC # 06-09(2009)
Comprehensive Annual Financial Reports for FY 2012-13, as retrieved from the
following city/agency web sites:
Aliso Viejo
Anaheim
Brea
Buena Park
Costa Mesa
Cypress
Dana Point
Fountain Valley
Fullerton
Garden Grove
Huntington Beach
Irvine
Laguna Beach
Laguna Hills
Laguna Niguel
Laguna Woods
La Habra
Lake Forest
La Palma
Los Alamitos
Mission Viejo
Newport Beach
Orange
Placentia
Rancho Santa Margarita
San Clemente
San Juan Capistrano
Santa Ana
Seal Beach
Stanton
Tustin
Villa Park
Westminster
Yorba Linda
County of Orange
Orange County Fire Authority
2014-2015 Orange County Grand Jury Page 21
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
Governmental Accounting Standards Board GASB (2004). Summary of Statement
No.45, as retrieved from :
http://www.gasb.org/jsp/GASB/Pronouncement_C/GASBSummaryPage&cid=117
6156700943
Governmental Accounting Standards Board (GASB)(2004). GASB Statement 45 on
OPEB accounting by governments, A few basic questions and answers as
retrieved from:
http-//www.gasb.org/project_pages/gasb—st45—basic_q&a.pdf
Legislative Analyst Office. Consider phasing out retiree health care. (2015): as retrieved
from: http://cal pensions. com/2015/03/23/lao-consider-phasing-out-retiree-health-
care.
New Reports Detail Pension Fund Finances(2015) as retrieved from:
https://www.calpers.ca.gov/index.msp?bc=/about/newsroom/news/new-report-
fund-finances.xml
Torres, Zahira (2015, March 7). Health benefits are a promise school districts find hard
to keep. Los Angeles Times.
2014-2015 Orange County Grand Jury Page 22
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
APPENDIX: GLOSSARY OF TERMS
Governmental Accounting Standards Board (GASB): GASB is the source of
generally accepted accounting principles (GAAP) used by state and local governments
in the United States. As with most of the entities involved in creating GAAP in the United
States, it is a private, non-governmental organization.
The GASB is subject to oversight by the Financial Accounting Foundation (FAF), which
selects the members of the GASB and the Financial Accounting Standards Board and
funds both organizations.
The mission of the GASB is to establish and improve standards of state and local
governmental accounting and financial reporting that will result in useful information for
users of financial reports and guide and educate the public, including issuers, auditors,
and users of those financial reports.
The GASB has issued Statements, Interpretations, Technical Bulletins, and Concept
Statements, defining GAAP for state and local governments since 1984. GAAP for the
Federal government is defined by the Federal Accounting Standards Advisory Board.
Other Post -Employment Benefits (OPEB): are part of total compensation offered by
employers to attract and retain employees. OPEB includes postemployment health
care, as well as other postemployment benefits e.g. life insurance when provided
separately from a Pension Plan.
The applicable GASB statements are:
• Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and
Note Disclosures for Defined Contribution Plans
• Statement No. 26, Financial Reporting for Post -employment Healthcare Plans
Administered by Defined Benefit Pension Plans
• Statement No. 43, Financial Reporting for Post -employment Benefit Plans, Other
Than Pension Plans
• Statement No. 45, Accounting and Financial Reporting by Employers for Post -
employment Benefits, Other Than Pensions
GASB pronouncements apply to governmental entities, public benefit entities, public
employee retirement systems, and public utilities, hospitals and other healthcare
providers, and colleges and universities.
Unfunded Accrued Actuarial Liability (UAAL) is the amount of retirement benefits
that are owed to employees in future years that exceed current assets and their
projected growth.
Annual Required Contribution (ARC)is the employer's required contributions for the
year, calculated in accordance with certain parameters and includes (a) the normal cost
2014-2015 Orange County Grand Jury Page 23
Unfunded Retiree Health Care Obligations -A Problem for Public Agencies?
for the year and (b) a component for amortization of total unfunded actuarial accrued
liabilities(or funding excess) of the plan over a period not to exceed thirty years.
2014-2015 Orange County Grand Jury Page 24
ra%W/3y:IJ,14Uml
City of Tustin Response to the Grand Jury Report
August 18, 2015
Honorable Glenda Saunders, Presiding Judge
Orange County Superior Court
700 Civic Center Drive West
Santa Ana, CA 92701
Re: Response by the City of Tustin to the July 2015 Grand Jury Report on Perpetual
Debt Accumulation and Tax Assessment Obligation
Your Honor:
The following response is provided by the City of Tustin ("City") to the July 2015 Grand Jury
Report entitled "Mello -Roos: Perpetual Debt Accumulation. and Tax Assessment Obligation"
(referred to herein as the "Report").
Pursuant to California Penal Code Section 933.05, the City responds that it "disagrees" with
findings F1, F2, and F3, and reports that recommendation RI has not yet been implemented, but
will be, in part, and that recommendation R2 has been implemented. These responses are based'
upon the following reasons:
Finding #1. There is a lack of transparency to homeowners relative to how Community
Facility Districts (CFD) funds are being used.
The City of Tustin disagrees with this finding. The public documents that are prepared in
regards to any debt issued state for what purposes the bond proceeds will be used. The specific
projects are usually mentioned, however, the language usually states that the funds are to be used
for infrastructure projects within the CFD or for infrastructure projects providing a direct benefit
to the CFD. The City posts the annual budget, capital improvement budget and annual
independent audit on its website at www.tustinca.org. Also, annual disclosure reports that the
City is required by the SCE to complete and post to the Electronic Municipal Market Access
website (www.emma.msrb.ore) are available to all citizens and taxpayers.
Finding 42. There does not seem to be appropriate oversight and auditing of CFDs and
special tax expenditures within the County of Orange.
The City of Tustin disagrees with this finding. The City requires all appropriations and capital
improvement projects that include CFD projects and other CFD expenditures to be approved by
the City Council through the annual budget process that is held in a public meeting, and all
documents regarding the proposed and approved budget are available on the City's website.
CFD bond proceeds are held with a fiscal agent whose fiduciary responsibility is to review all
expenditures to ensure they are appropriate in relation to the bond documents before the bond
proceeds can be released. The City also conducts an annual audit performed by independent
certified public accountants. The CFD funds are included in that audit. The annual audit and
reports such as audit findings are available on the City's website at www.tustinca.org.
Finding #3. While the assumption is that the CFD debt would be repaid in a finite period
of time, there is a mechanism available to controlling entities to extend debt obligations and
thereby extend the CFD special tax in perpetuity.
The City of Tustin disagrees with this finding. With the establishment of the CFD the decisions
as to how much can be bonded, whether more debt can be issued after the original debt is paid
off and whether an additional special tax can be assessed for services provided under Mello Roos
law are made and approved by the City Council through resolution. Changing those decisions
requires input and votes from property owners. If a special tax is assessed in perpetuity for
ongoing services, then that is a matter of public record and is recorded on title to the property
that is publicly available at the County Recorder, and is on the public tax roll, and is referenced
on the Title Insurance Report property purchasers obtain when acquiring property.
Recommendation 41. Each local agency that established the CFD should create an
oversight committee and an audit committee to provide for an independent, transparent
view of the manner in which CFD funds are being expended.
This recommendation has not yet been implemented but will be, in part. The City of Tustin
agrees that either an oversight committee or an audit committee should review at a public
meeting the manner in which CFD funds are expended, but that creating or convening both for
that same purpose would be an unnecessarily redundant use of time and limited resources. The
City has an Audit Commission, and the City agrees to provide the Audit Commission with
annual information regarding how CFD funds are spent in addition to the annual budget and
annual audit.
Recommendation 92. Audit report information, as delineated in California Government
Code, 1982 Section 53343.1, should be made available to the CFD taxpayers on a website
after each fiscal year for each CFD number.
This recommendation has been implemented. The City of Tustin posts its annual audit reports
on its website which includes the CFD funds.
Thank you for the opportunity to respond to the Grand Jury's Report. If you have any questions
regarding our response, please contact Jeffrey C. Parker, City Manager, at (714) 573-3012 or
Pamela Arends-King, Finance Director/City Treasurer at (714) 573-3061.
Sincerely,
Charles E. "Chuck" Puckett
Mayor
cc: Orange County Grand Jury
Jeffrey C. Parker, City Manager
ATTACHMENT
2014-2015 Orange County Grand Jury Report
"Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation"
MELLO-ROOST
PERPETUAL DEBT ACCUMULATION
AND TAX ASSESSMENT
OBLIGATION
GRAND JURY 2014-2015
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
TABLE OF CONTENTS
EXECUTIVE SUMMARY................................................................................................3
BACKGROUND.............................................................................................................. 3
Proposition13............................................................................................................3
Community Facilities Districts (CFDs).....................................................................4
Forminga CFD...........................................................................................................4
REASON FOR THE STUDY...........................................................................................5
METHODOLOGY............................................................................................................ 5
INVESTIGATION AND ANALYSIS.................................................................................5
Creationof CFDs........................................................................................................6
CFDsand Proposition 13..........................................................................................6
CFDLongevity............................................................................................................7
CFDUsage..................................................................................................................7
Accounting and Reporting........................................................................................
7
Oversight....................................................................................................................
8
CFDTransparency.....................................................................................................
8
OrangeCounty CFDs.................................................................................................9
FINDINGS.......................................................................................................................
9
RECOMMENDATIONS.................................................................................................10
REQUIRED RESPONSES............................................................................................10
REFERENCES..............................................................................................................13
APPENDIX: ORANGE COUNTY CFDS LONG TERM DEBT......................................14
2014-2015 Orange County Grand Jury Page 2
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
EXECUTIVE SUMMARY
Taxation without representation: Is there adequate oversight and auditing of
Community Facility Districts within the County of Orange to protect the interests of the
tax paying public?
A Community Facility District (CFD) is a legally constituted governmental entity
for the purpose of financing public facilities and public services and collecting special
property taxes, within specified CFD boundaries. To create a CFD, a two-thirds vote of
property owners within the proposed district is required. The vote is conducted by the
county registrar of voters. In a new subdivision, the developer may be the only owner at
the time of the vote creating the CFD. The developer has a financial interest and profits
from creation of the CFD. The vast majority of the CFDs in Orange County are created
and debt incurred before any of the ultimate taxpayers acquire their property. There is
little oversight of CFD's revenue, expenditures, and debt management by the public.
CFD funding and usage is not readily transparent and therefore not generally
understood and its consequences are not appreciated by the general public. The
problem is compounded by a lack of information available to the public on how CFD
funds are being used. Many of the Orange County CFD formation documents and
reports use general, vague language that does not meet the requirements and intent of
the Mello -Roos Community Facilities Act of 1982.
BACKGROUND
Property taxes are collected by each county in order to provide for the common
needs of the county, cities, special districts and school districts. Property taxes are ad
valorem, based on the assessed real property value. These taxes can be used for
infrastructure, public works, public services, and schools. In new housing developments,
cities and special districts routinely required development contractors to construct the
infrastructure including roads, sewers, parks, and schools and the costs were included
in the price of homes.
Proposition 13
In the 1970s, California was faced with a period of severe inflation, and this was
especially felt in the housing market. Property taxes averaged almost 3% of the market
value with no statutory limits on tax rates or property assessments. These factors led to
a grass roots revolt, resulting in an initiative that was placed on the State ballot—
Proposition 13.
Proposition 13 was overwhelmingly passed by California voters in 1978 (62% of
votes cast). This proposition rolled property taxes back to 1975 levels and restricted ad
valorem (according to value) annual increases to an inflation factor not to exceed 2%
each year. The new law also disallowed reassessment of a new base year except for
(a) change in ownership or (b) completion of new construction.
In addition to decreasing property taxes, Proposition 13 also required a 2/3
majority in both State houses for future increases in other taxes, including income tax
rates.
2014-2015 Orange County Grand Jury Page 3
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community Facilities Districts (CFDs)
The passage of Prop 13 severely restricted local governments' ability to raise
property taxes. There was a concerted effort to discover a way to fund public
improvements and still remain in compliance with Proposition 13.
The Mello -Roos Community Facilities Act of 1982 (the Act), was passed by the
State legislature to provide local government agencies an alternative method of
obtaining community property tax funding to pay for local government public facilities
and services (California Government Code, 1982, section 53312.5).
The Act allows any county, city, special district, school district, or joint powers
authority to establish a Communities Facilities District (CFD), which permits financing of
public improvements and services. CFDs are normally established in undeveloped
areas and are used to construct infrastructure in new housing developments.
Forming a CFD
A CFD is a legally constituted government entity for the purpose of financing
public facilities and public services and collecting special property taxes within specified
CFD boundaries (California Government Code, 1982, § 53317). The first step in forming
a CFD is to file a petition in support of the CFD signed by not less than 10% of
registered voters residing in the proposed district. If the governing body agrees, an
election is held requiring an affirmative vote by 2/3 of the property owners residing
within the district at the time of the vote. The vote is conducted by the County Registrar
of voters. In many cases, the only resident of the district is the owner/ developer
(California Government Code, 1982, § 53319)
Once a CFD is approved, a special tax (lien) is placed against each property in
the district and is paid on an annual basis. CFD bonds can be sold by the CFD to
provide needed funding as specified in the Resolution of Formation document. Special
taxes (CFD -T) are charged annually on the occupants' property tax bill to support the
designated purpose of the CFD.
Land developers saw the opportunity to use CFD funding methodology to relieve
them of the expense of building the public facilities (primarily infrastructure
improvements) for their developments. It also allows them to reduce prices on homes,
as they do not have to include the cost of the infrastructure in the price of homes.
Additionally, cities and school districts saw the opportunity to use CFDs to obtain an
additional funding source for the infrastructure and new schools in newly developed
areas.
The special property tax paid by the homeowner is based on the number of
subdivided parcels in the CFD. The tax is a special property tax, not an assessment, as
there is no requirement that the tax be apportioned based on benefit to any property
owner (California Government Code, 1982, section 53325.3). In addition, the public
facilities need not be physically located within the CFD district, and there is no
requirement that funds be used in the district paying the special tax (California
Government Code, 1982, section 53313.5).
2014-2015 Orange County Grand Jury Page 4
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
It is assumed that when a house is purchased and the CFD is disclosed, the
purchaser agrees to the tax; this is referred to as "vote by purchase" (California, 1982, §
536313.5[2]). Special property taxes are listed on the homeowner's property tax bill,
usually by CFD -T number. They are collected by the County of Orange Tax Collector
and are subject to all laws affecting general taxes.
A CFD does not have a "sunset" date unless one is specified in forming
documents by the local entity creating the CFD (California Government Code, 1982, §
53338.5). The maximum term of bonds issued under a CFD shall not exceed 40 years.
However, this applies only to the term of the bond. It does not place any restriction on
the term of the CFD (§ 53351.e). The local legislative body creating the CFD may, after
a public hearing, eliminate a type of facility or service but may not finance any facility or
service not specified in resolution of formation (§ 53330.7). The creating legislative body
is permitted to terminate a CFD; however, a CFD may not be terminated while a bond is
still active (§ 53338.5).
REASON FOR THE STUDY
It is important that the property owners in Orange County be aware of the
consequences of the Mello -Roos Act used by the local government agencies that
govern them. Many homeowners, especially in south Orange County, are in a CFD, but
the Grand Jury suspected that few understood how and why they were formed, how
long they lasted, and how the funds were spent. The purpose of this study is to shed
light on these specific issues.
METHODOLOGY
The Grand Jury utilized a variety of methods to collect information during the
course of this investigation. The Act and its amendments were scrutinized, with special
attention paid to the specificity of project descriptions, the length or "life" of the CFD, the
duration of the CFD -issued bonded debt, and the use of the CFD bond funds for public
services. Constituents of local agencies that created CFDs provided documents, and
some of those agencies were interviewed for this report. The Grand Jury sent a detailed
questionnaire to each of the 32 local agencies that have established nearly 100 CFDs
Proposition 13 was also analyzed to ascertain the limitations imposed on additional
property taxation without a vote of the local constituents. In addition, the California
Mello -Roos Community Facilities Districts Yearly Fiscal Status Reports were examined.
INVESTIGATION AND ANALYSIS
Mello-Roos/CFD legislation enabled local governments to obtain funding for
public facilities and public services without a plebiscite (public vote). Mello -Roos is a
special property tax on homeowners in a community, to be used for the repayment of
bonds used to fund the infrastructure (roads, storm drains, sewers, waterlines, curbs,
gutters, sidewalks, schools, parks, etc.) of the community, or to provide services such
as police and fire. The special property tax is in addition to the ad valorem property tax
and is based on acreage (typically, single-family lots). By statute, a CFD is also entitled
to recover legal formation expenses as well as administrative costs.
2014-2015 Orange County Grand Jury Page 5
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Creation of CFDs
Prior to the passage of the Act, developers were often required to build the
infrastructure and recover their expenditure by including the cost in the purchase price
of homes. With the creation of CFDs, home developers got early funding for
construction of infrastructure through CFD debt funding. This debt obligation was
passed to the new homeowner to keep home prices at a lower level.
The Act allows local governments to create a CFD in a single parcel of land,
typically a subdivision of single-family homes where there is a single developer/property
owner. By statute, a CFD is established when 2/3s of the property owners vote for it.
Since the developer is often the only property owner, the CFD is easily created. Not
only are developers relieved of the cost of building the infrastructure, they may even
profit from building the infrastructure as well.
As individual residential lots are sold, the new property owner takes on the tax
burden created by the CFD bonds. The special tax is not an ad valorem tax; it is based
on property plot size, in accordance to a predetermined formula. As an example, if a
new CFD subdivision contains 1,000 single-family lots, a new property owner will pay
1 /1000th of the CFD bond debt service and/or other tax fees specified in Resolution of
Formation as a special property tax.
New homeowners can also be exposed to multiple CFD special taxes. New
home developments often require the construction of schools, so an additional CFD
might be formed which would result in an additional special property tax. Therefore, a
new homeowner could be paying at least three annual property tax amounts: the ad
valorem and two CFD -Ts. These special property taxes are listed on the homeowner's
property tax bill, usually by CFD -T number.
CFDs and Proposition 13
Mello -Roos taxes provide an alternative funding source that is not subject to the
strictures of Proposition 13. These restrictions include the requirement that 2/3 of the
voters of a community must approve any proposed raise in ad valorem property taxes.
In addition, Proposition 13 ad valorem taxes are subject to a cap, by statute; CFDs do
not have a required special tax cap. It should also be noted that the controlling entity,
such as a city or school district, still get their share of Proposition 13 taxes.
Ad valorem property taxes are deductible from federal and state income taxes.
CFD -Ts may or may not be deductible. According to the Internal Revenue Service and
the California Franchise Tax Board, the burden falls on the property owner/tax payer to
establish a deduction if the CFD -T tax has been levied for the general public welfare.
Not all homes in Orange County are subject to CFD taxes. It is important to note
that buying a home in a special tax district is strictly voluntary. Buyers considering
moving into a special tax district are encouraged to do due diligence prior to purchase.
2014-2015 Orange County Grand Jury Page 6
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
CFD Longevity
A CFD does not have an "end date," unless one is specified in its resolution of
formation by the establishing authority (California Government Code, 1982, § 53330.7).
This means that potentially a CFD may continue in perpetuity. If bonds have been
issued by a CFD, special taxes will be charged annually until the bond has been retired.
A single bond may not be issued for a period longer than 40 years. However, this
applies only to the term of the bond; it does not place any restriction of the term of the
CFD (§ 53351.e). After bonds are paid off, a CFD tax may continue to be collected for
maintenance of the facilities. In many instances, CFDs can refund bonds to take
advantage of lower bond interest rates and then use the difference (spread) between
the original interest rate and the new bond interest rate to create revenue to be used for
other purposes. This call proviso will reset the 40 -year period and potentially the CFD
will continue in perpetuity.
The creating legislative organization may, after a public hearing, eliminate a type
of facility or service; but it may not finance any facility or service not specified in the
resolution of formation. The creating legislative body is permitted to terminate a CFD;
however, a CFD may not be terminated while a bond is active. The controlling agency of
the CFD clearly does not have any motivation or incentive to terminate a CFD since it
would in effect eliminate an entity that is a ready-made organization for future debt
obligations. The burden of that motivation remains with the tax paying public who pay
the special CFD tax.
CFD Usage
The Mello -Roos Act specifically states that a legislative body may not finance any
facility or service not specified in the resolution of formation. The Grand Jury found that
CFDs often use vague language in the formation documents, which allows significant
latitude as to how the funds will be used. The Grand Jury also found that CFDs do not
clearly identify the specific uses or identify facilities to be built. The descriptions often
are vague statements such as "public works," "maintenance," and "schools" which are
very broad and do not have the detail that is required by the Act (California Government
Code, 1982, § 53316.4, 53321, 53325.1(2) & 53330.7).
Accounting and Reporting
The Grand Jury discovered that the State does not require a complete
accounting of the use of CFDs. The only information required by the State CDIAC is the
original amount of bond funding, bond balance, taxes outstanding to be collected, and
the end date of the bonds. Bond payment amount, interest rate, and administration
costs are not reported.
Interestingly, the Act does not require that funds collected be used in the district
paying the special tax. The Act also states that the public facilities need not be
physically located within the CFD district (California Government Code, 1982, §
53313.5).
2014-2015 Orange County Grand Jury Page 7
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Oversight
The Mello -Roos Act (California Government Code, 1982, § 53343.1) states that
the annual report shall include the following information for the fiscal year:
(a) The amount of special taxes collected for the year.
(b) The amount of other moneys collected for the year.
(c) The amount of monies expended for the year.
(d) A summary of the amount of money expended for the following:
(1) Facilities, including property.
(2) Services.
(3) The costs of bonded indebtedness.
(4) The costs of collecting the special tax under § 53340.
(5) Other administrative and overhead costs.
(e) For moneys expended for facilities, including property, an identification of
the categories of each type of facility funded with amounts expended in
each category, including the total percentage of the cost of each type of
facility that was funded with bond proceeds of special taxes.
(f) For moneys expended for services, an identification of the categories of
each type of facility funded with amounts expended in each category,
including the total percentage of the cost of each type of facility that was
funded with bond proceeds of special taxes.
(g) For moneys expended for other administrative costs, an identification of
each of these costs.
(h) The annual report shall contain references to the relevant sections of the
resolution of formation of the district so that interested persons may
confirm that bond proceeds and special taxes are being used for
authorized purposes.
The Grand Jury found that CFDs in Orange County do not appear to have any
oversight committees or audit oversight to ensure the tenets of the Act are being
followed. Orange County does not require a complete accounting of the use of CFD
funds so that the homeowner can determine if the funds are being properly used. There
also is no requirement to publically reveal maintenance or administrative costs.
CFD Transparency
The Grand Jury found that there is a significant lack of transparency regarding
CFDs. Information pertaining to a CFD that is provided to the homeowner often does
2014-2015 Orange County Grand Jury Page 8
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
not include the intended purposes of the special tax. Administrative costs and servicing
costs of the bond are often not openly revealed.
The homeowner may receive information on a CFD -T by paying a fee to the
legislative body (California Government Code, 1982, § 53343.1). The Grand Jury was
advised that the fee is substantial, and the information provided by the legislative body
is incomplete to the point of not being useful and not meeting the requirements of the
law (§ 53343.1). It has been suggested to the Grand Jury that the only way to get good
information is for the homeowner to request detailed accounting records (internal
financial statements) of the CFD -T under the Freedom of Information Act.
Another relatively unknown fact is that a homeowner may go to the CFD
legislative body and pay off the entire special property tax in one transaction. This would
perpetually relieve the taxpayer from this burden (California Government Code, 1982,
sections 53344 & 53321).
Orange County CFDs
Thirty-two (32) Orange County local public agencies have incurred a total of
nearly $2 billion in bonded long-term debt (see Appendix). These 32 agencies have
established close to 100 CFDs; Orange County has 23 CFDs of its own. Each of these
CFDs has incurred long-term bonded debt. Some of this debt will be paid into the mid -
2030s, and beyond. The amount of debt will arguably obligate the CFD taxpayers to pay
additional special property taxes, over and above their normal property taxes, far into
the future.
An estimated $2 billion in bonded debt has been accumulated by Orange County
CFDs. Of that $2 billion, $1.3 billion (65%) has been incurred by the County of Orange
and three school districts: Capistrano, Tustin, and Irvine. This total amount does not
include a proposed City of Irvine CFD bond amount of $384 million (Five Points Great
Park), and a proposed County of Orange CFD bond amount of $110 million (Village of
Esencia). If these two CFDs sell bonds in their estimated amounts, the total local
agency Mello-Roos/CFD debt in Orange County will be nearly $2.5 billion.
The Act has a provision called "Rights to Accelerated Foreclosure." It is very
important for property owners to pay their tax bill on time, for the CFD has the right, and
if bonds are issued, the obligation, to foreclose on a property when special taxes are
delinquent for more than 90 days. The costs of collection and penalties can also be
imposed on property owners. This provision makes the forfeiture process faster than the
five-year waiting period required for ad valorem taxes.
FINDINGS
In accordance with California Penal Code sections 933 and 933.05, the 2014-
2015 Grand Jury requires (or, as noted, requests) responses from each agency affected
by the findings presented in this section. The responses are to be submitted to the
Presiding Judge of the Superior Court.
2014-2015 Orange County Grand Jury Page 9
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Based on its investigation titled "Community Facilities Districts (Mello -Roos):
Perpetual Debt Accumulation and Tax Assessment Obligation," the 2014-2015 Orange
County Grand Jury has arrived at three principal findings, as follows:
F.1. There is a lack of transparency to homeowners relative to how CFD funds are
being used.
F.2. There does not seem to be appropriate oversight and auditing of CFDs and
special tax expenditures within the County of Orange.
F.3. While the assumption is that the CFD debt would be repaid in a finite period of
time, there is a mechanism available to controlling entities to extend debt
obligations and thereby extend the CFD special tax in perpetuity.
RECOMMENDATIONS
In accordance with California Penal Code sections 933 and 933.05, the 2014-
2015 Grand Jury requires (or, as noted, requests) responses from each agency
affected by the recommendations presented in this section. The responses are to be
submitted to the Presiding Judge of the Superior Court.
Based on its investigation titled "Community Facilities Districts (Mello -Roos):
Perpetual Debt Accumulation and Tax Assessment Obligation", the 2014-2015 Orange
County Grand Jury makes the following two recommendations:
R.1. Each local agency that established the CFD should create an oversight
committee and an audit committee to provide for an independent, transparent
view of the manner in which CFD funds are being expended. (F.1, F.2)
R.2. Audit report information, as delineated in California Government Code, 1982 §
53343.1, should be made available to the CFD taxpayers on a website after each
fiscal year for each CFD number. (F.1, F.2)
REQUIRED RESPONSES
The California Penal Code § 933 requires the governing body of any public
agency which the Grand Jury has reviewed, and about which it has issued a final report,
to comment to the Presiding Judge of the Superior Court on the findings and
recommendations pertaining to matters under the control of the governing body. Such
comment shall be made no later than 90 days after the Grand Jury publishes its report
(filed with the Clerk of the Court). Additionally, in the case of a report containing findings
and recommendations pertaining to a department or agency headed by an elected
County official (e.g. District Attorney, Sheriff, etc.), such elected official shall comment
on the findings and recommendations pertaining to the matters under that elected
official's control within 60 days to the Presiding Judge with an information copy sent to
the Board of Supervisors.
Furthermore, California Penal Code § 933.05, subdivisions (a), (b), and (c),
provides as follows, the manner in which such comment(s) are to be made:
2014-2015 Orange County Grand Jury Page 10
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
(a) As to each Grand Jury finding, the responding person or entity shall indicate one of
the following:
(1) The respondent agrees with the finding
(2) The respondent disagrees wholly or partially with the finding, in which case
the response shall specify the portion of the finding that is disputed and shall include an
explanation of the reasons therefore.
(b) As to each Grand Jury recommendation, the responding person or entity shall report
one of the following actions:
(1) The recommendation has been implemented, with a summary regarding the
implemented action.
(2) The recommendation has not yet been implemented, but will be implemented
in the future, with a time frame for implementation.
(3) The recommendation requires further analysis, with an explanation and the
scope and parameters of an analysis or study, and a time frame for the matter to be
prepared for discussion by the officer or head of the agency or department being
investigated or reviewed, including the governing body of the public agency when
applicable. This time frame shall not exceed six months from the date of publication of
the Grand Jury report.
(4) The recommendation will not be implemented because it is not warranted or
is not reasonable, with an explanation therefore.
(c) If a finding or recommendation of the Grand Jury addresses budgetary or personnel
matters of a county agency or department headed by an elected officer, both the
agency or department head and the Board of Supervisors shall respond if requested by
the Grand Jury, but the response of the Board of Supervisors shall address only those
budgetary /or personnel matters over which it has some decision making authority. The
response of the elected agency or department head shall address all aspects of the
findings or recommendations affecting his or her agency or department.
Comments to the Presiding Judge of the Superior Court in compliance with Penal
Code section 933.05 are required for Findings F.1, F.2 and F.3 and for
Recommendations R.1 and R.2 from the following organizations:
Orange County Board of Supervisors
The mayors and city councils of the following cities
City of Anaheim
City of Brea
City of Buena Park
City of Cypress
2014-2015 Orange County Grand Jury Page 11
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
City of Dana Point
City of Fullerton
City of Hunting Beach
City of Irvine
City of Mission Viejo
City of Orange
City of Placentia
City of San Clemente
City of Seal Beach
City of Tustin
Public Agencies:
Bonita Public Facilities Financing Authority—
A Joint Powers Authority under the Newport Mesa Unified School
District and the City of Newport Beach
Brea Olinda Unified School District
Capistrano Unified School District
Fullerton Joint Union High School District
Fullerton School District
Irvine Unified School District
La Habra Redevelopment Agency —
A Redevelopment Agency under the City of La Habra
Laguna Beach Unified School District
Los Alamitos Unified School District
Newport -Mesa Unified School District
Orange Unified School District
Placentia — Yorba Linda Unified School District
Saddleback Unified School District
Tustin Unified School District
2014-2015 Orange County Grand Jury Page 12
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
REFERENCES
California Government Code (1982). Mello -Roos Community Facilities Act of
1982. Sacramento, CA.
2014-2015 Orange County Grand Jury Page 13
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
APPENDIX: ORANGE COUNTY CFDS LONG TERM DEBT
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
Multiple capital
Aliso Viejo
improvements, public
2005-01
$34,070,000
$33,945,000
works (Glenwood)
Multiple capital
improvements, public
06-2
$9,060,000
$8,250,000
works (Platinum
Triangle)
Multiple capital
improvements, public
08-1
$28,630,000
$27,095,000
works (Platinum
Triangle)
Multiple capital
Anaheim
improvements, public
1989-1
$4,220,000
$1,045,000
works((Sycamore
Canyon)
Multiple capital
improvements, public
1989-2
$6,990,000
$1,725,000
works((The Highlands)
Multiple capital
improvements, public
1989-3
$9,085,000
$1,530,000
works((The Summit)
Bonita Canyon
Public
Facilities
K-12 School Facility
98-1
$38,330,000
$37,735,000
Financing
Authority
2014-2015 Orange County Grand Jury Page 14
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
Multiple capital
improvements, public
1988-1
$2,580,000
$1,900,000
works((Fairway Ctr)
Multiple capital
improvements, public
1990-1
$1,478,000
$158,000
works(Imperial Ctr
East)
Multiple capital
Brea
improvements, public
1996-1
$3,235,000
$1,765,000
works(Downtown)
Multiple capital
improvements, public
1997-1
$6,665,000
$5,165,000
works(Olinda Heights)
Multiple capital
improvements, public
2008-2
$8,145,000
$8,095,000
works(Brea Plaza
area)
Brea Olinda
K-12 School Facility
95-1
$2,300,000
$2,300,000
K-12 School Facility
Unified School
District
Olinda
95-1
$6,440,444
$4,995,000
Height)Refunding
Multiple capital
Buena Park
improvements, public
2001-1
$7,655,000
$6,655,000
works(Mall)
K-12 School Facility
87-1
$71,810,000
$41,025,000
(Refunding)
Capistrano
Unified School
K-12 School Facility
88-1
$12,755,000
$2,570,000
District
(Refunding)
K-12 School Facility
90-2
$49,675,000
$47,335,000
(Talega)
2014-2015 Orange County Grand Jury Page 15
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
K-12 School Facility
90-2
$44,980,000
$40,820,000
(Talega)Refunding
K-12 School Facility
92-1
$31,360,000
$18,410,000
(Las Flores)
K-12 School Facility
98-2
$119,099,491
$107,499,491
(Ladera)
K-12 School Facility
(Rancho Madrina Sch.
2004-1
$7,085,000
$6,725,000
Facs & Cap Imp)
Multiple capital
Cypress
improvements, public
1
$9,705,000
$3,785,000
works (Sorrento
Homes)
Multiple capital
Dana Point
improvements, public
2006-1
$8,710,000
$0
works (Headlands Rev
Dev.)
Multiple capital
improvements, public
2006-1
$17,885,000
$17,885,000
works (Headlands Rev
Dev)(Refunding)
Multiple capital
improvements, public
1
$21,375,000
$0
works (Amerige
Heights)
Fullerton
Multiple capital
improvements, public
1
$19,040,000
$19,040,000
works (Amerige
Heights) (Refunding)
2014-2015 Orange County Grand Jury Page 16
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
Fullerton Joint
K-12 School Facility
Union High
(District & Buena Park
2005-1
$2,050,000
$1,785,000
School District
Sch. Facs )
Other, multiple
2000-1
$1,195,000
$960,000
Fullerton
educational use
School District
K-12 School Facility
2001-1
$9,725,000
$7,757,500
Parks, open space
2001-1
$9,725,000
$3,878,750
Multiple capital
improvements, public
works
1990-1
$2,155,000
$1,145,000
(Goldenwest/Ellis
Area)(Refunding)
Multiple capital
improvements, public
2000-1
$16,000,000
$13,330,000
works(Grand Coast
Resort)
Huntington
Beach
Multiple capital
improvements, public
2002-1
$4,900,000
$4,670,000
works(McDonnell
Centre Business PK)
Multiple capital
improvements, public
2003-1
$25,000,000
$21,595,000
works(Huntington Ctr
Bella Terra)
Multiple capital
Irvine
improvements, public
2005-2
$24,375,000
$21,540,000
works(Columbus
Grove)
2014-2015 Orange County Grand Jury Page 17
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
Multiple capital
improvements, public
2005-2
$16,975,000
$16,975,000
works(Columbus
Grove) Refunding
K-12School facility
86-1
$96,565,000
$73,685,000
(Bond) Refunding
K-12School facility (S
Irvine Communities)
01-1
$103,475,000
$99,715,000
Refunding
Multiple capital
improvements, public
works(Northwood
04-1
$9,000,000
$8,745,000
Master Planned
Community)
Multiple capital
improvements, public
works (Woodbury
04-2
$38,000,000
$35,903,130
Master IA A Planned
Irvine Unified
Community)
School District
Multiple capital
improvements, public
works (Woodbury
04-2
$23,935,000
$21,610,000
Master IA B Planned
Community)
K-12 School facility
(Portola Springs)
06-1
$13,075,000
$6,715,000
(Refunding)
K-12 school facility
(Qualified School
09-1
$25,000,000
$25,000,000
Construction Bond )
K-12 school facility
09-1
$63,640,000
$63,640,000
(Series A)
K-12 school facility
09-1
$50,000,000
$50,000,000
(Series B)
2014-2015 Orange County Grand Jury Page 18
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
La Habra
Multiple capital
Redevelopment
improvements, public
1990-1
$3,185,000
$154,000
Agency
works (Marketplace)
(Refunding)
K-12 school facility
98-1
$9,970,000
$0
Laguna Beach
(Refunding)
Unified School
Multiple capital
District
improvements, public
98-1
$9,330,000
$9,330,000
works (Crystal Cove)
(Refunding)
K-12School facility
90-1
$3,240,000
$0
Los Alamitos
Refunding
Unified School
K-12School facility
District
Refunding Measure K
90-1
$3,240,000
$0
Flood Control, Storm
Mission Viejo
Drainage(LaPaz
92-1
$2,060,000
$1,670,000
channel) (Refunding)
Newport -Mesa
K-12School facility
90-1
$20,735,000
$0
Unified School
Refunding
K-12School facility
90-1
$9,720,000
$9,720,000
District
Refunding
2014-2015 Orange County Grand Jury Page 19
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
Multiple capital
improvements, public
works(Serrano
91-2
$35,330,000
$0
Heights Pub Imp)
(Series A) Refund
Multiple capital
improvements, public
works (Serrano
91-2
$2,200,000
$0
Orange
Heights Pub Imp)
(Series B) Refund
Multiple capital
improvements, public
works (Serrano
91-2
$28,810,000
$28,810,000
Heights Pub Imp)
Refund
Multiple capital
improvements, public
06-1
$24,975,000
$24,945,000
works (Del Rio)
Multiple capital
improvements, public
86-1
$32,335,000
$11,665,000
works (Rancho Santa
Margarita) Refund
Multiple capital
improvements, public
works(Rancho Santa
86-2
$10,975,000
$598,000
Margarita/Saddleback)
Refund
Orange County
Bridges and
Highways(Rancho
86-2
$8,005,000
$1,100,000
Santa Margarita)
Refund
Commercial
development Bus Pk
87-1
$762,808
$743,414
(Refunding)
Multiple capital
improvements, public
87-2
$24,080,000
$4,530,000
works(Portola Hills)
Refund
2014-2015 Orange County Grand Jury Page 20
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
Multiple capital
improvements, public
87-3
$49,697,035
$10,988,000
works(Mission Viejo)
Refund
Multiple capital
improvements, public
87-4
$71,435,333
$25,179,820
works(Foothill Ranch)
Refund
K-12 School
87-4
$10,815,000
$5,865,000
facility(Foothill Ranch)
Multiple capital
improvements, public
87-5A
$8,863,770
$924,268
works(Rancho Santa
Margarita) Refund
Multiple capital
improvements, public
87-513
$27,396,720
$7,639,334
works(Rancho Santa
Margarita) Refund
Multiple capital
improvements, public
87-5C
$15,221,979
$5,363,907
works(Rancho Santa
Margarita) Refund
Multiple capital
improvements, public
87-5D
$12,042,509
$4,746,180
works(Rancho Santa
Margarita) Refund
Multiple capital
improvements, public
87-5E
$12,780,000
$5,385,000
works(Rancho Santa
Margarita) Refund
Multiple capital
improvements, public
87-6
$9,330,000
$1,860,000
works(Baker Ranch)
Refund
2014-2015 Orange County Grand Jury Page 21
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
Multiple capital
improvements, public
87-7
$17,425,000
$3,475,000
works(Los Alisos)
Refund
Street construction
and improvement
87-8
$30,412,976
$10,894,283
(Coto de Caza)
Refunding
Multiple capital
improvements, public
87-9
$4,050,000
$805,000
works(Los Alisos)
Refund
Multiple capital
improvements, public
87-9
$2,335,000
$475,000
works(Santa Teresita)
Multiple capital
improvements, public
88-1
$207,845,000
$31,455,000
works(Aliso Viejo)
Refund
Multiple capital
improvements, public
88-2
$1,775,000
$340,000
works(Lomas Laguna)
Refund
Multiple capital
improvements, public
99-1
$22,560,000
$19,505,000
works(Lomas Laguna)
Refund
Multiple capital
improvements, public
2001-1
$28,890,000
$25,130,000
works(Ladera Ranch)
Refund
Multiple capital
improvements, public
2001-1
$32,565,000
$29,315,000
works(Ladera Ranch)
Refund
Multiple capital
improvements, public
2002-1
$68,280,000
$64,495,000
works(Ladera Ranch)
2014-2015 Orange County Grand Jury Page 22
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Facilities
Districts - Mello
Roos
Governance/Control
Name/
CFD
Number
Original Bond
Value
Principal
Outstanding
Multiple capital
improvements, public
2003-1
$57,185,000
$54,825,000
works(Ladera Ranch)
Multiple capital
improvements, public
2004-1
$75,645,000
$71,745,000
works(Ladera Ranch)
K-12 school facility
(Santiago Hills)
88-1
$4,625,000
$900,000
Refunding
K-12 school facility
(Sycamore Canyon)
89-1
$4,250,000
$740,000
Refunding
K-12 school facility
Refunding
89-2
$9,095,000
$1,780,000
Orange Unified
School District
K-12 school facility
Tremont School & City
2005-1
$654,000
$6,385,000
Facs
K-12 school facility
(Del Rio Riverbend)
2005-2
$5,920,000
$5,785,000
Refunding
Placentia
89-1
$0
Placentia -
K-12 school facility
1
$5,505,000
$0
Yorba Linda
Unified School
District
K-12 school facility
Refunding
1
$6,730,000
$6,730,000
K-12 school facility
88-1
$2,365,000
$1,490,000
K-12 school facility
(Town Center)
88-1
$8,635,000
$5,280,000
Saddleback
Valley Unified
School District
K-12 school facility
(Rancho Cielo)
88-2
$3,525,000
$1,270,000
Refunding
2014-2015 Orange County Grand Jury Page 23
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
K-12 school facility
(Robinson Ranch)
89-1
$8,250,000
$3,190,000
Refunding
K-12 school facility
89-2
$15,686,602
$6,731,602
Refunding
K-12 school facility
(Rancho Trabuco)
89-2
$3,208,398
$1,890,000
Refunding
K-12 school facility
89-3
$12,213,718
$5,238,718
Refunding
K-12 school facility
(Rancho Trabuco)
89-3
$891,282
$525,000
Refunding
K-12 school facility
(Dove Canyon)
89-4
$4,465,000
$535,000
Refunding
K-12 school facility
(Dove Canyon)
89-4
$970,000
$955,000
Refunding
Multiple capital
San Clemente
improvements, public
99-1
$5,005,000
$4,850,000
works Refund
K-12 school facility
Santa Ana
Central Park(School
Unified School
Facs, Irvine Ranch
2004-1
$11,785,000
$11,355,000
District
WD & Orange County
Fire Authority)
Water supply, storage,
distribution (Talega)
99-1
$63,480,000
$58,290,000
Santa
Refunding
Margarita
Multiple capital
Water District
improvements, public
99-1
$38,710,000
$37,920,000
works(Talega A&B)
Refund
2014-2015 Orange County Grand Jury Page 24
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
Multiple capital
improvements, public
2002-01
$3,985,000
$3,610,000
works(Heron Point)
Seal Beach
Multiple capital
improvements, public
works(Pacific
2005-01
$8,800,000
$8,595,000
Gateway Business
Ctr.)
Flood control, storm
drainage (Tustin
04-1
$11,415,000
$9,845,000
Legacy/ john Laing
Homes)
Multiple capital
improvements, public
works (Tustin Legacy/
04-1
$9,350,000
$9,350,000
john Laing
Homes)Refunding
Multiple capital
improvements, public
Tustin
works (Legacy &
06-1
$53,570,000
$52,580,000
Columbia Villages
Zones 1 &2)
Multiple capital
improvements, public
works (Legacy &
06-1
$1,675,000
$1,600,000
Columbia Villages
Zones 1 &2)
Multiple capital
improvements, public
07-1
$13,680,000
$13,550,000
works (Legacy/Retail
Center)
Tustin Unified
K-12 Schools Facility -
School District
(Tustin
88-1
$64,615,000
$47,955,000
Ranch)Refunding
2014-2015 Orange County Grand Jury Page 25
Mello -Roos: Perpetual Debt Accumulation and Tax Assessment Obligation
Community
Name/
Facilities
Governance/Control
CFD
Original Bond
Principal
Districts - Mello
Number
Value
Outstanding
Roos
K-12 Schools Facility-
97-1
$87,697,675
$83,332,675
Sr Series A Refunding
K-12 Schools Facility-
97-1
$14,090,000
$13,220,000
Sr Series B Refunding
K-12 Schools Facility -
Elementary, Middle,
06-1
$13,560,000
$13,545,000
High (Columbus
Square)
K-12 school facility
07-1
$90,500,000
$90,500,000
Refunding
Total
Total
Original Bond
Principal
Districts
CFDs
Value
Outstanding
32
119
$2,701,562,740
$1,909,301,072
(Grand Jury, 2014-2015)
2014-2015 Orange County Grand Jury Page 26
F_\ ar_T9:h4142kIN
City of Tustin Response to the Grand Jury Report
August 18, 2015
Honorable Glenda Saunders, Presiding Judge
Orange County Superior Court
700 Civic Center Drive West
Santa Ana, CA 92701
Re: Response to the July 2015 Grand Jury Report: Unfunded Retiree Healthcare
Obligations — A Problem for Public Agencies?
Your Honor:
The following response is provided by the City of Tustin ("City") to the July 2015 Grand Jury
Report entitled "Unfunded Retiree Healthcare Obligations —A Problem for Public Agencies?"
(referred to herein as the "Report").
Pursuant to California Penal Code Section 933.05, the City responds that it agrees partially with
findings F2 and F3, and disagrees with finding F4, and reports that recommendations R2, R3,
and R4 require further analysis. These responses are based upon the following reasons:
Finding #2. The City is not putting aside funds in an irrevocable trust to help pay for the
accrued actuarial liability of retiree healthcare costs in the future, which is an imprudent
level of contribution.
The City of Tustin agrees partially with the finding. The City of Tustin agrees that it may be
prudent to put aside additional funds in an irrevocable trust to help pay for the accrued liability
of retiree health costs in the future. There are other sensible strategies to ensure the ability to pay
these health costs in the future, such as long-term budgeting to include these costs and ensure
future payment. At this time, the City is not funding an irrevocable trust to pay for the liability.
Finding #3. The City did not contribute the full 100% or more of the Annual Required
Contribution (ARC) in FY 2012-13, and therefore, is not complying with requirements.
The City agrees partially with the finding. The City of Tustin did not contribute the full 100% or
more of the Annual Required Contribution in FY 2012-13. However, the "Annual Required
Contribution" is an actuarial term defined as the employer's required contributions for the year,
calculated in accordance with certain parameters, which apply for financial reporting purposes,
and the City disagrees that the contribution is required to be made annually. The City pays for
the benefit on a pay-as-you-go basis. There is no GASB requirement to pay the full Annual
Required Contribution annually.
Finding 94. The City is not disclosing retiree health benefits as part of employee
compensation per GAAP standards.
The City disagrees with the finding. The City of Tustin did disclose retiree health benefits per
GASB standards which govern the annual audited comprehensive annual financial report. While
the City of Anaheim chose to present the additional information about estimated cost per
employee position in their compensation report posted on their website, posting this information
is not required by GASB standards. The City reports the aggregate cost of the benefits annually
and publicly, including on the City's website. However, breaking down the same information on
a position -by -position basis would require undue consumption of time and limited City
resources.
Recommendation #2. The 21 agencies that have not contributed into an irrevocable trust
fund to finance their retiree health obligations should begin to put aside monies to fund this
obligation and reduce their unfunded public liabilities.
The recommendation requires further analysis. The City will consider funding options available
to begin setting aside money to finance the retiree health obligations and reduce the unfunded
liability by December 31, 2015. The City's fiscal year 2015-16 and 2016-17 budgets were
recently adopted and included funding for the costs for these years.
Recommendation #3. The 26 agencies that are not recognizing the full amount of their
Annual Required Contribution as expense in the current period should comply with the
requirement to do so.
The recommendation requires further analysis. As mentioned previously there is no requirement
to pay the "Annual Required Contribution", as this is an actuarial term and is subject to certain
parameters. While it may be prudent to begin setting aside greater funding for these benefits, the
City's budgeting process contends with many competing high priority matters. Nevertheless, the
City will begin analysis to determine the best way for the City to reduce the unfunded liability
further.
Recommendation 44. All agencies should recognize retiree health care benefits in employee
compensation in conformity with GAAP.
The recommendation requires further analysis. The City does recognize retiree health care
benefits in conformity with GASB in our Comprehensive Annual Financial Report. Any
changes to the financial reporting must be further evaluated because there is significant expense
in creating the information on a position -by -position basis. As noted above, the aggregate costs
are already being reported publicly in the City's annual reports in any case.
Thank you for the opportunity to respond to the Grand Jury's Report. If you have any questions
regarding our response, please contact Jeffrey C. Parker, City Manager, at (714) 573-3012 or
Pamela Arends-King, Finance Director/City Treasurer, at (714) 573-3061.
Sincerely,
Charles E. "Chuck" Puckett
Mayor
cc: Orange County Grand Jury
Jeffrey C. Parker, City Manager
Pamela Arends-King, Finance Director/City Treasurer