BACKGROUND:
Over the past six (6) fiscal years (FY), the California Public Entity Retirement System (CalPERS) board has approved reductions in investment rates of return from 7.5% to
6.8% on deposits of funds invested. As a result, this rate reduction increased the City’s estimated annual contribution to CalPERS. Over these years, we saw a significant impact/increase on the Unfunded Actuarial Liability (UAL) for each of our eight (8) retirement plans. To mitigate this impact, the City issued a Pension Obligation Bond (POB) on April 13, 2022 in the amount of $26,750,000 with a 4.5% maximum rate of interest to payoff the calculated liability as of FY ending 2019/2020, June 30, 2020.
DISCUSSION:
The City of Cathedral City’s eight (8) separate retirement plans with CalPERS are comprised of three (3) primary plans commonly referred to as Tier 1 (Classic) plans for Fire, Miscellaneous and Police; two Tier 2 (Interim) plans (2012) for Fire and Miscellaneous; and three (3) Public Employee Pension Reform Act (PEPRA) plans (2013 and forward) for Fire, Miscellaneous and Police.
Tier 1 (Classic) Plans – Pension Obligation Bond: For the fiscal year ended June 30, 2022, the CalPERS investment rate was -6.1%. With the planned investment rate of return at 6.8%, the net loss was an aggregate -12.9%. For the $26,750,000 POB debt UAL, there would have been a $3,450,750 investment loss on the original CalPERS UAL. With having issued the Pension Obligation Bond with a 4.5% maximum interest rate, the investment cost was $1,203,750, resulting in a net difference of $2,247,000 in savings between the two scenarios. Staff recommends making a lump sum payment to CalPERS of $749,000 for each of the three Classic plans for Fire, Miscellaneous and Police for the combined total of $2,247,000. This payment will help minimize the resulting UAL from the investment market’s volatility over the past year. Of the 204 active employees, 79 (39%) of those are in one of these plans. In addition, the City has 140 retirees for a total of 219 Tier 1 PERS members.
Tier 2 and Tier 3 Plans: For the remaining five (newer) plans (the two Interim plans and the three PEPRA plans), these were not included in the POB debt. With the -12.9% combined investment loss discussed above, the UAL for the years ended June 30, 2021 and June 30, 2022 totals $651,000 comprised of:
•Fire Tier 2: $ 20,000
•Miscellaneous Tier 2: $ 67,000
•Fire PEPRA: $110,000
•Miscellaneous PEPRA: $295,000
•Police PEPRA: $159,000
Staff recommends making these five payments to ensure these plans remain fully funded to ensure there is not debt. Of the 204 active employees, 125 (61%) of those are in one of these five plans. It is worth noting, as new Cathedral City staff are hired, they are entered in one of these plans, not into the three Classic plans discussed above.
July 1, 2020 and Forward: With the Pension Obligation Bond covering the PERS UAL through June 30, 2020, the City incurred new PERS UAL from July 1, 2020 – June 30, 2021, estimated to be $6,000,000+ for the 219 Classic members identified above. With the subsequent investment losses below the 6.8 planned investment rate of return (IRR), i.e., the -6.1% FY 2021/2022 IRR for a total -12.9% loss and the upcoming potential for an FY 2022/2023 IRR being less than the targeted 6.8%, the City will incur additional UAL. It will be important to plan for making additional UAL payments in the upcoming years. As a result, we have included $2,355,000 in the proposed FY 2023/2024 budget and $2,535,000 in the proposed FY 2024/2025 budget workbook.
FISCAL IMPACT:
From the Insurance Fund (612), recommend making a $2,898,000 payment to CalPERS by April 30, 2023. This payment is comprised of:
•$2,247,000 toward the three Tier 1 Fire, Miscellaneous and Police plans, and •$ 651,000 for the two Interim Fire and Miscellaneous plans and the three PEPRA Fire, Miscellaneous and Police plans.