For more than a decade, the County of San Diego, California, has worked to strategically align its assets and liabilities to mitigate both short- and long-term risks and needs.This has engrained a discipline within county leadership at all levels of the organization to be consistently mindful of long-term risks when evaluating immediate needs and opportunities. Specifically, the county has taken a long-term approach to aligning and matching assets to growing liabilities. As a result, fund balance has been strategically increased since 2006, with the goal of managing growing liabilities in the areas of pension and capital infrastructure renewal. The county made use of unanticipated property tax growth during the housing bubble to prepay liabilities and cash fund capital.
Implementing the strategy led to an execution model that was fundamentally based on several GFOA best practices (see Exhibit 1). The execution model included:
* A comprehensive review and codification of financial policies.
* Review and evaluation of short-term needs through the assessment of discretionary services while also considering alternate service delivery models.
* Reducing and avoiding new liabilities in the areas of pension and capital through the use of recurring and nonrecurring revenues.
As a result, the county was able to:
* Prepay $422.1 million towards retirement-related costs from 2005 to present (in addition to the actuarially determined contribution).
* Avoid $1.2 billion in costs related to OPEB and implement lower retirement benefit tiers.
* Avoid $1 billion in financing costs by paying cash for capital improvements over a ten-year period.
Today, the County of San Diego has AAA ratings from Moody's Investors Service, Standard & Poor's, and Fitch Ratings. This wasn't the goal of the strategy, but the strategy clearly demonstrated the credit strength of the county, as evidenced by the two rating upgrades the county received since the strategy was deployed.
In an effort to help other agencies replicate this strategy, the following case study summarizes how the county executed this strategy, including the specific guidance from GFOA best practices, difficulties that occurred along the way, and benefits to the county.
THE STRATEGY IN ACTION
From June 1997 to June 2001, the San Diego County Employees Retirement Association (SDCERA) averaged annual investment returns of $168.6 million and an average annual unfunded actuarial accrued liability (UAAL) of $227.5 million. In 2002, the county enhanced retirement benefits in order to attract and retain a strong work force composed of the best and brightest employees. The county was aware that this would increase annual costs and had a plan for how to address these costs. However, in June 2002, SDCERA experienced a $92.0 million investment loss, which augmented the financial impact of the enhanced benefits (also known as Tier A), increasing the county's retirement system UAAL from $238.8 million in 2001 to $1.2 billion in 2002.
The enhanced benefits, combined with economic volatility, made the County of San Diego's pension and retirement system one of its most vulnerable risks--from 2002 to present, the UAAL grew at an average rate of 10.7 percent, or an average of $111.1 million per year. Near the end of 2006, it also became clear that other post-employment benefits (OPEB) offered to retirees presented significant long-term financial pressure. Over 20 years, OPEB would have resulted in costs to the county of $60 million to $70 million annually. In addition to OPEB and pension, the county's capital infrastructure was aging and required renewal. These factors were, and with the exception of OPEB, remain the county's largest financial...