The 1994 Orange County financial debacle has materially increased the concern index regarding the handling of similar funds in Santa Barbara County.
Information concerning how County tax and employee retirement monies are handled is difficult for citizens to obtain. In addition the employees of the County are vitally concerned whether their retirement funds are in hand, how they are held, what kind of records exist, who is monitoring these funds, and what the investment record is over the past several years.
The Grand Jury believes that it was not competent to evaluate the quality of investments. However, the Grand Jury did feel it prudent to look into the status of the various Santa Barbara County finances and the existing mechanism for the handling, monitoring and reporting of the true status of the various County Trust Funds, especially the Employees Retirement Funds.
The Jury also believes that the average Santa Barbara County resident has no concept of the size and diversity of these funds. This report is designed to shed some light on the magnitude of these funds and to let the public know who is responsible for their handling, the process used, and who is responsible for monitoring them.
To enable ease in reading this report, the County Treasurer-Tax Collector-Public Administrator-Guardian will henceforth be referred to as the Treasurer, his assistant as the Assistant Treasurer and the Investment and Retirement Manager as the Investment Manager.
The objective of this study was to secure information regarding County funds in an endeavor to inform the public how they are handled by County officials.
This study consists of 4 parts:
* General background information
* A review of the Employees Retirement Fund, where and how it is held, by whom, who is responsible for its safe keeping, and who is monitoring the "safe keeper"
* A study of the Santa Barbara Investment Pool, its size, how it is handled and by whom, and finally who monitors it
* An examination of the process, implications and ramifications of interfund transfers.
The Grand Jury collected data on each objective through interviews with the County Auditor-Controller, the County Treasurer, the Assistant Treasurer, and the County Investment Manager,
and by reviewing internal memoranda especially with the very helpful aid of the Office of the Clerk of the Board of Supervisors.
General Background Information
The Grand Jury learned that there are two separate groups of investment funds: the Employees Pension Funds and the County Investment Pool which consists of 959 separate "funds." The combination of these two funds in Santa Barbara County may, at times, exceed $800 million.
The Treasurer is primarily responsible for all of these funds. He operates under a number of rigid Federal and State laws as well as under carefully crafted Santa Barbara County Investment Regulations recommended by the Treasurer, the Auditor-Controller and approved by the County Board of Supervisors. The Treasurer is chairman of the Employees Retirement Board and the Santa Barbara County Debt Committee (which will not be discussed in this report). He is committed to the placement of all cash immediately into investments, and to dealing in dollar denominated investments only. He balances the funds so cash is available in order that Santa Barbara County can promptly pay its bills.
The Auditor-Controller performs a "cash count" (a cash audit) every quarter, and a more thorough audit annually. A "cash count audit" looks at the investment book value, and not the investments themselves. The Auditor-Controller constantly observes the Treasurer's investments for compliance with policies. The Auditor-Controller is currently performing an internal audit of the Treasurer's Investment Policy with respect to both the Pension Fund and the Investment Pool. The outside auditors verify the investments to see if they meet policy, but do not look into the quality of the investments themselves.
Employees Retirement Fund
On January 1, 1995 the Fund had a book value of $516,671,000. Examination of the management, process of investing, monitoring, and future projection of this Fund became of special interest to the Grand Jury. The Grand Jury learned that it is administered by a Board of Retirement consisting of 11 members as follows:
* The County Treasurer (Chairman)
* 2 Members elected by the general members
* 2 Members elected by the safety members
* 2 Members elected by the retirement members
* 4 Members appointed by the Board of Supervisors
The Treasurer has a team of 8 advisors who help him operate within an Asset Allocation Model. The investments are apportioned within the Model to each of eight investment advisors, each of whom has an investment specialty. Seven of the advisors are paid by "negotiated" fees and one on previous year's performance. In addition the Board has actuarial consultants, pension consultants, and a custodian. The advisors meet each September to review and evaluate the previous year's performance. An updated Asset Allocation Model is to be developed by August 1995. The investment policies for the Fund are governed by State law, which is based upon the 1974 federal Employees Retirement Income Security Act (ERISA), and the Santa Barbara County policy. This Fund stands alone, and is not interconnected in any way with other County investment projects except that a small amount of cash is temporarily invested in the Investment Pool. The Grand Jury was told that there are no loans against the Employee Retirement Fund.
The Grand Jury was informed that the Retirement Plan, which includes the Disability Plan, is presently 88% funded. It was entirely unfunded in 1978 and now about 35-40 % of current payments into the plan (about $9 million) are for the purpose of reaching a fully funded condition by 2006. The County currently pays in $25 million annually and the employees 3 to 4 million dollars. With the recent 1994 changes in the plan, new employees will pay twice as much as the previously hired employees.
The Grand Jury was informed that the Fund has yielded 8.7% over the last three years and is currently invested approximately 55% in equities, approximately 45% in bonds, and 1-2% in cash. The cost for all investment advisors, consultants, and custodians is less than 1% annually.
A detailed Pension Report is made quarterly by the Pension Advisor. The Jury did not investigate the details of how the Board of Retirement operates nor how it handles dividends and earnings from the Employee Retirement Fund.
A thorough actuarial evaluation is performed every two years, and an interim review is reported annually. The actuarial assumptions currently include an 8% investment return and the area Consumer Price Index (CPI) at a maximum of 3%.
Santa Barbara County Investment Pool
The County Treasurer collects taxes for all schools and Special Districts and serves as the "banker" for each of these districts. The County Investment Pool is for the benefit of the County (25%), School Districts (55%), and Special Districts not under the control of the County Board of Supervisors (20%). As of early May 1995, the Pool was $420 million (it was $360 million on March 31, 1995), and as a result of tax receipts and expenditure patterns, may fluctuate by $70 or $80 million throughout the year.
Profits either from trades or earned income are proportionally divided among the individual funds within the Investment Pool at the time they are earned. The yield from the Treasurer's Investment Pool averaged over 4.5% over the last few years. Trades in the Employees Retirement Fund are completely segregated from all others.
The Investment Pool represents 959 separate funds, including the County General Fund, 6 County project funds, 9 internal County service funds, 3 County enterprise funds, 64 County special reserve funds, 3 Debt Service Funds, and almost 600 trust and agency funds (includes County and special districts for the County.) There are approximately 290 separate funds for School Districts. The 21 largest County funds, under the direct supervision of the Board of Supervisors, are listed in Exhibit A. In order to manage the flow of expenditures, one County fund may borrow from another County fund with initiation of the transaction by the Auditor-Controller and affirmative vote by the Board of Supervisors. In such case, each fund is credited with its proper share of interest or capital gain. Transfers or borrowings may only occur between funds controlled by the same entity such as the Board of Supervisors.
County funds in the Investment Pool are for a wide variety of functions. There are funds actuarially calculated-such as the Workman's Compensation Fund, and there are funds providing a reserve for self insurance and litigation liabilities. There are also funds set aside for capital projects such as land, buildings, trucks and equipment, for telephone, computer and office equipment systems.
Investments in the Pool are governed by State law and the County Investment Policy shown in Exhibit B. No investment is over 5 years in length and the average duration is about 310 days. The types of investments permitted are specified by the County Investment Policy.
Through an apparently efficient cash management program, the Treasurer keeps all cash invested at all times, and the expiration of investments is timed to meet the flow of expenditures. The Grand Jury actually watched the Treasurer invest $2 million in overnight funds. The expenditure flow by the entities in the Pool is approximately $80 million per month. Due to the fact that property taxes are received twice each year, part of the cash management program includes borrowing approximately $60 million annually through Revenue Anticipation Notes. The value of this borrowing on May 23,1995 was $64 million.
The average yield of the Investment Pool was 4.671% for Fiscal Year (FY) 1992-93, 4.265% for FY 1993-94, and 4.717% thus far in FY 1994-95. The Trustee for the Pool Funds is the Bank of America.
In order to constantly monitor the Stock and Bond markets, the Treasurer employs an Investment Manager in his department. The Job Description for this office was prepared in 1988 and upgraded in 1992 (see Exhibit C). The Investment Manager monitors several screens connected by satellite to appropriate investment trading centers from his office in the County Administration Building during trading hours. As a part of the "banking services" the short term interest from such investments is credited to the collecting agency's account. The Pool thus varies in amount daily depending upon tax receipts or demands for cash by either a County department or an agency such as a School District to pay a bill, acting as the bank for that agency. Exhibit D shows a list of short term bonds held on April 1, 1995 and Exhibit E gives an Investment Summary covering the period from January 3, 1995 to April 3, 1995.
The Treasurer collects tax revenues for School and other Special Districts and provides for the depositing and handling of these funds. He provides investment services to these agencies whenever requested and serves as their "banker." Thus citizens may read about what appears to be a capricious transfer of funds from one fund to another agency; but, in actuality the transfers are the "arms length" completion of a transaction within the County bank with appropriate interest allocated. The County simply is fulfilling its role as the agency's banker.
The average citizen may be shocked by an expenditure of funds from what appears to be nowhere during a money crunching period. These expenditures usually are the result of moving large sums of money from "insurance money" such as held in the Disaster Relief Fund and various Insurance Funds including indemnity or other legal judgements. Santa Barbara County is largely self-insured. The transfer of County funds are initiated, after scrutiny and approval by the Auditor-Controller, with a vote by the Board of Supervisors.
Based upon information made available, the Grand Jury hopes that this report will serve to lower the concern index regarding the manner by which the County handles its finances. In addition, again based upon the information obtained, it appears that Santa Barbara County finances are being efficiently handled. The Treasurer's Office and that of the Auditor-Controller appear to conduct their respective responsibilities efficiently, at low cost, and utilize modern management skills and equipment. In addition, they both have staff training programs and it appears that each has developed a deputy capable of taking over in an emergency.
As stated earlier in this report, the Grand Jury made no attempt to evaluate the quality of individual investments or their financial potential in the Pension Funds or the Investment Pool.
Santa Barbara County has a S & P rating of l+ for short term notes (under 3 Years) and A+ for long term investments (over 5 years as in the pension fund) and a Moody Rating of A1 for long term investments. No county in California has a higher rating.
This is an informational report, and no findings or recommendations are presented.
COPIES OF REPORT SENT TO:
1. Santa Barbara Board of Supervisors
2. Santa Barbara Administrative Officer
3. Santa Barbara County Treasurer-Tax Collector-Public Administrator-Guardian
4. Santa Barbara County Auditor-Controller
1. County of Santa Barbara-Comprehensive Annual Financial Report
2. County of Santa Barbara-Final Budget 1994-1995 Fiscal Year
3. Pamphlet entitled "The Treasurer-The Investment Process-The Statement of Investment Policy" prepared by the Treasurer's Office.
1. Clerk of the Board of Supervisors April 19, 1995
2. Auditor-Controller April 19, 1995 and May 30, 1995
3. Treasurer-Tax Collector-Public Administrator April 27, 1995; May 4, 1995,
May 10, 1995, and June 10, 1995
4. The Santa Barbara County Investment Manager May 4, 1995
EXHIBIT B (Continued)
EXHIBIT B (Continued)
EXHIBIT B (Continued)
EXHIBIT B (Continued)
EXHIBIT C (Continued)