Report 2019-108 Recommendation 11 Responses

Report 2019-108: Sacramento City Unified School District: Because It Has Failed to Proactively Address Its Financial Challenges, It May Soon Face Insolvency (Release Date: December 2019)

Recommendation #11 To: Sacramento City Unified School District

To prevent a similar fiscal crisis in the future, Sacramento Unified should do the following by July 2020:

Develop a long-term funding plan to address its retiree health benefits liability. The plan should include appropriate action necessary to ensure the district will be able to meet its obligations to its employees and retirees.

Annual Follow-Up Agency Response From September 2023

The District is funding at the rates specified in order to maximize the return earnings and has reduced the liability from $700M to $415M as of fiscal year June 30, 2022 and is finalizing the OPEB report for fiscal year 2022-23. The district plans to continue to fund at the actuarially determined contribution level to fund the OPEB liability which includes fully funding all future costs of projected benefits.

California State Auditor's Assessment of Annual Follow-Up Status: No Action Taken

The district reports that it is contributing the actuarially determined contribution toward its retiree health benefit costs each year, the minimum amount it should pay toward those obligations. However, the district's actuarial report as of June 30, 2022, shows that projected annual benefit payments are expected to double within the next 15 years. We recommended that the district develop a long-term plan to address its growing retiree health benefit costs to minimize the impact such costs have on the district's budget and its ability to provide educational services to its students. By failing to develop a plan to address these costs, the district risks not being able to meet its obligations in the future.

Annual Follow-Up Agency Response From October 2022

The District is funding at the rates specified in order to maximize the return earnings and has reduced the liability from $700M to $415M as of fiscal year June 30, 2022. See the latest OPEB report. For fiscal year 2021-22, the Actuarially Determined Contribution Amount was $28,427,786 and the district contributed $28,457,590, or 100.10%. The district plans to continue to fund at the actuarially determined contribution level.

California State Auditor's Assessment of Annual Follow-Up Status: No Action Taken

The district reports that it is contributing the actuarially determined contribution toward its retiree health benefit costs each year, the minimum amount it should pay toward those obligations. However, the district's actuarial report shows that projected annual benefit payments are expected to double over the next 15 years. We recommended that the district develop a long-term plan to address its growing retiree health benefit costs to minimize the impact such costs have on the district's budget and its ability to provide educational services to its students. By failing to develop a plan to address these costs, the district risks not being able to meet its obligations in the future.

Annual Follow-Up Agency Response From October 2021

The Budget Department is in the process of finalizing the OPEB report for 2020-2021.

The department and staff responsible are Superintendent Aguilar and Chief Business Officer Rose Ramos.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

As we noted in our last assessment, to fully address the recommendation, the district will need to develop and adopt a plan detailing how it will address its retiree health benefits liability. Such a plan will allow the district's board and stakeholders to hold the district accountable for its efforts to reduce its liability.

1-Year Agency Response

The District has passed a proposal to SCTA to increase the employee contribution from $20 per month to 2% of employee salary - a major increase to address the projected shortfall. In addition, due to changes in assumptions since the State Auditor Report was issued, the OPEB liability decreased substantially from the $726 million outlined in the State Audit. Due to additional changes in the assumptions of the most recent Actuarial Report dated September 3, 2020, however, the District's total Net OPEB liability increased by $41M year over year from $526M to $567M. The discount rate used to calculate the District's total liabilities decreased from 4.25% to 3.90% which accounted for the majority of the increase in the Net OPEB liability. For the fiscal year ending 2020, SCUSD contributed $26.7M towards its Net OPEB liability which is $4.1M under the Actuarially Determined Contribution (ADC) of $30.8M necessary to fund OPEB liabilities (a decrease from the $8.7M gap outlined in the State Audit). The District will review options in addition to the proposed increased employee contribution to fully fund at the ADC level which, over a five year span, will substantially decrease the Net OPEB liability.

California State Auditor's Assessment of 1-Year Status: Pending

Although the steps discussed above could have an impact on the district's retiree health benefits liability, to fully address the recommendation, the district will need to develop and adopt a plan detailing how it will address its liability. Such a plan will allow the district's board and stakeholders to hold the district accountable for its efforts to reduce its liability.

6-Month Agency Response

The District is developing its plan to establish the OPEB commission, including identifying qualified individuals to serve on a "Blue Ribbon Commission" to evaluate the District's strategies and make recommendations aimed at how to best meet the District's OPEB obligations. The expectation is that individuals will be selected in the coming weeks in order to form the OPEB Commission.

Negotiations also continue with labor partners regarding increasing employee contributions to OPEB and the impact of same on the budget.

California State Auditor's Assessment of 6-Month Status: Pending

As we note in our report, Sacramento Unified has not developed a plan to address its large retiree health benefit liability, which impacts the minimum amount the district has to contribute each year to pay for current and future retiree health benefits. Therefore, any plan developed by the OPEB commission must be integrated into the district's fiscal recovery plan.

60-Day Agency Response

The District Business Office is reviewing its OPEB liability and potential funding strategies, including an evaluation of District and employee contribution amounts, fully funding the future cost for current employees, and the amortization of the unfunded liability. This includes the District's August 2, 2019 proposal to SCTA Article 13, to increase to SCTA employee OPEB contributions to a higher percentage of their salaries.

Currently, the District contributes a fixed amount per current employee that pays for current year retiree health premiums and funds our California Employees Retiree Benefit Trust account. All employee contributions are invested in the trust. The current trust value is nearly $93.5 million, which includes over $20 million in interest earnings since 2012, over $6 million in the current fiscal year. The trust earnings will eventually fund annual costs, alleviating the District contribution from current operating funds.

The District intends to form an OPEB commission to evaluate the overall plan.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2019-108

Agency responses received are posted verbatim.