ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM

MEMORANDUM

DATE: January 30, 2015 TO: Members of the Board of Retirement FROM: Suzanne Jenike, Assistant CEO, External Operations

SUBJECT: 2015 Cost of Living Adjustment

Recommendation: Adjust all applicable benefit allowances, effective April 1, 2015, in accordance with Government Code Section 31870.1, resulting from the 1.35% change in CPI, as follows:

1. For benefit recipients who began receiving benefits on or before April 1, 1971 through April 1, 1983, increase applicable benefit allowances by 3%, and reduce COLA banks by 1.5%.

2. For benefit recipients who began receiving benefits between April 2, 1983 and April 1,

1985, increase applicable benefit allowances by 2%, and reduce COLA banks by 0.5%. 3. For benefit recipients who began receiving benefits or will begin receiving benefits

between April 2, 1985 and April 1, 2015, increase applicable benefit allowances by 1.5% with no reduction in COLA banks.

Discussion: Per Government Code Section 31870.1 OCERS annually adjusts the benefit allowances relative to the increase or decrease in the Consumer Price Index (CPI). This adjustment, known as a Cost of Living Adjustment (COLA), is effective April 1st of each year. This year, there was an increase in the CPI for year-end 2014 of 1.35%. To determine the change in CPI, Segal compares the Bureau of Labor Statistics’ annual average CPI for All Urban Consumers for the Los Angeles-Riverside-Orange County Area for each of the past two years and derives the percentage change between the two. This is done in accordance with Government Code Section 31870.1, which is the COLA section operative in Orange County. That section also states that any increase or decrease in the CPI is to be rounded to the nearest one-half of one percent (1.35% rounded to 1.5%) and provides that a maximum COLA of 3% shall be granted on every retirement allowance, optional death allowance, or annual death allowance payable to or on account of any member of the system.

I-2 2015 Cost of Living Adjustment Page 1 of 2 Regular Board Meeting, February 17, 2015

ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM

For years in which the COLA exceeds 3%, the amount over 3% is banked for future years when the COLA is less than 3%, which happens to be this year. For our benefit recipients who began receiving benefits on or before April 1, 1971 through April 1, 1983, their allowances will be increased by a 3% COLA and 1.5% will be deducted from their COLA banks, since they have accumulated enough in their banks to provide a full 1.5% to be added to the 1.5% rounded CPI change. For the benefit recipients who began receiving benefits on or after April 2, 1983 through April 1, 1985, they only have 0.5% accumulated in their COLA banks, so their total 2015 COLA will be 2%. For all remaining benefit recipients, who began or will begin receiving benefits on or after April 2, 1985 through April 1, 2015, their allowances will be increased by 1.5% since their COLA banks are presently at zero. In order to answer questions that often arise from Board Members, Plan Sponsors and stakeholders about the cost impact of the annual COLA, the history of COLA as well as options available to OCERS I have included materials that were presented as part of the 2014 COLA adjustment for informational purposes. Prepared by:

S. J. – APPROVED Suzanne Jenike Assistant CEO, External Operations

I-2 2015 Cost of Living Adjustment Page 2 of 2 Regular Board Meeting, February 17, 2015

ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM

MEMORANDUM

DATE: February 6, 2014 TO: Members of the Board of Retirement FROM: Steve Delaney, CEO

SUBJECT: 2014 Cost of Living Adjustment

Recommendation: Adjust all applicable benefit allowances, effective April 1, 2014, in accordance with Government Code Section 31870.1, resulting from the 1.08% change in CPI, as follows:

1. For benefit recipients who began receiving benefits on or before April 1, 1971 through April 1, 1985, increase applicable benefit allowances by 3%, and reduce COLA banks by 2%.

2. For benefit recipients who began receiving benefits between April 2, 1985 and April 1,

1986, increase applicable benefit allowances by 2%, and reduce COLA banks by 1%. 3. For benefit recipients who began receiving benefits or will begin receiving benefits

between April 2, 1986 and April 1, 2014, increase applicable benefit allowances by 1% with no reduction in COLA banks.

Discussion: Per Government Code Section 31870.1 OCERS annually adjusts the benefit allowances relative to the increase or decrease in the Consumer Price Index (CPI). This adjustment, known as a Cost of Living Adjustment (COLA), is effective April 1st of each year. This year, there was an increase in the CPI for year-end 2013 of 1.08%. To determine the change in CPI, Segal compares the Bureau of Labor Statistics’ annual average CPI for All Urban Consumers for the Los Angeles-Riverside-Orange County Area for each of the past two years and derives the percentage change between the two. This is done in accordance with Government Code Section 31870.1, which is the COLA section operative in Orange County. That section also states that any increase or decrease in the CPI is to be rounded to the nearest one-half of one percent (1.08% rounded to 1%) and provides that a maximum COLA of 3% shall be granted on every retirement allowance, optional death allowance, or annual death allowance payable to or on account of any member of the system.

I-5 2014 Cost of Living Adjustment - Revised: 2/13/14 2:44 p.m. Page 1 of 3 Regular Board Meeting, February 18, 2014

ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM

For years in which the COLA exceeds 3%, the amount over 3% is banked for future years when the COLA is less than 3%, which happens to be this year. For our benefit recipients who began receiving benefits on or before April 1, 1971 through April 1, 1985, their allowances will be increased by a 3% COLA and 2% will be deducted from their COLA banks, since they have accumulated enough in their banks to provide a full 2% to be added to the 1% rounded CPI change. For the benefit recipients who began receiving benefits on or after April 2, 1985 through April 1, 1986, they only have 1.0% accumulated in their COLA banks, so their total COLA will be 2%. For all remaining benefit recipients, who began or will begin receiving benefits on or after April 2, 1986 through April 1, 2014, their allowances will be increased by 1% with no reduction in their COLA banks since their COLA banks are presently at zero. Determining Cost Impact of COLA: In mid-January Trustee Wayne Lindholm asked what portion of the employer contribution was attributed to the cost of the COLA, in order to assist in determining the actual dollar amount being paid each year towards COLA. Mr. Andy Yeung has in response provided several comments.

“COLA costs are part of the ongoing normal cost contribution rate paid on a 50:50 basis by the employer and the employee. For the employee, that rate is dependent on the age at entry at OCERS and it can be calculated by taking the difference between the “total” and the “normal” contribution rates as they are provided in Appendix B of the Annual Actuarial Valuation report. For the employer, it is a weighted average of the above COLA rates paid by the employees (after an adjustment is made for refundability of member contributions). That weighted average rate is not separately identified in our valuation report.”

In a later correspondence, Mr. Yeung was able to provide that breakdown of the employer contribution rate:

“As you requested, we have provided the breakdown of the normal cost rates calculated for the employers in the 12/31/12 valuation to provide the basic and the 3% cost-of-living-adjustment (COLA) benefits. (Note that the employers also pay UAAL contribution rates for both the basic and the COLA benefits but a breakdown of those rates is not readily available since the assets in the System are maintained without a breakdown between those available to pay for each type of benefit.)

I-5 2014 Cost of Living Adjustment - Revised: 2/13/14 2:44 p.m. Page 2 of 3 Regular Board Meeting, February 18, 2014

ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM

In this email, we have only provided a summary of the cost by General, Safety and for the two groups combined. We can provide a more detailed breakdown by Rate Groups and by Plans within each Rate Group if requested to do so by your office.”

COLA History and Options: Often a discussion of COLA raises questions as to its background, and legal tool sets or options available to plan sponsors, the County of Orange in particular, or even OCERS as a governing body. Mr. Harvey Leiderman has provided a thorough encapsulation of those topics in an attached memo, dated February 4, 2014. Prepared by:

____________________________________ Steve Delaney CEO

I-5 2014 Cost of Living Adjustment - Revised: 2/13/14 2:44 p.m. Page 3 of 3 Regular Board Meeting, February 18, 2014