Chief Deputy County Executive CSAC Finance Corporation Other Post Employment Benefits Seminar Case Study: Santa Clara County Presented By: Gary A. Graves Chief Deputy County Executive Santa Clara County

Historical Context Retiree Health Benefits in Santa Clara County Retiree health benefits were initially offered to employees in 1978. Eligibility: retire from the county with 5 years service at or after age 50. The county paid 100% of the premium for any available health plan. Funding was provided pay-as-you-go and subject to annual appropriation by the Board. In 1984 the Board authorized the first actuarial review, pre- funded the program and included retiree health in the labor contracts. At this time the county agreed to pay the premium of the lowest cost health plan. In 1996 eligibility criteria was changed and the vesting period was increased from 5 to 8 years

Importance of Actuarial Studies in the Funding of Retiree Health Programs The initial actuarial review estimated a $21 million unfunded liability, reviews were not done on a regular basis thereafter. The next actuarial review was completed in 1994 and revealed an unfunded liability of $216 million in this program. Actuarial studies have been done annually since 1994. The initial Funding policy was to amortize the unfunded liability over 30 years. With the reduction in PERS costs in FY 2000, as much as $12 million in PERS savings was used to reduce the amortization period to 7 years. With the subsequent downturn this approach could not be sustained

The Downturn in the Silicon Valley Economy Affects the Funding of Retiree Health Fiscal challenges have resulted in a reduced allocation to the retiree health program. In FY 03 and 04, one-time funds used to fund amortization of unfunded liability. In 03, amortization reset to 30 years. In FY 05 and 06, one-time funds used to fund ½ the normal cost, no funding to reduce unfunded liability.

Historical View of Unfunded Liability in the Retiree Health Program millions

Where We are Today % of Program Funded millions 37% Funded 40% Funded 44% Funded 49% Funded 65% Funded 71% Funded Program Assets Funded at $310 M

Santa Clara County’s Investment Strategy for Retiree Health Trust Fund Assets SCC county received statutory authority to invest retiree health funds similar to pension investments (AB 2764) effective January 1, 1999. The Board has authorized the Controller-Treasurer to invest up to 67% of assets in the equity markets. Currently 62% of assets are invested in the equity market (low cost index funds) and 38% in fixed income instruments that are managed in-house. The return on investment for this fund in FY 2005 was 6.0%.

Other Facts Regarding the Retiree Health Program in Santa Clara County As of June 30, 2005, the County paid benefits to 6,530 retirees. GASB 45 could impact our accrued liability if we cannot convert the current county-managed trust to a “formal trust” to gain the advantage of using a longer term and higher discount rate. Our current contribution to retiree health for all funds represents 3.2% of covered payroll.