CITY OF EAST PALO ALTO
MISCELLANEOUS AND SAFETY PLANSCalPERS Actuarial Issues – 6/30/20 Valuation Preliminary Results
Presented by Doug Pryor, Vice President
Mary Elizabeth Redding, Vice President
Bianca Lin, Assistant Vice President Tina Liu, Associate Actuary Bartel Associates, LLC March 7, 2022
o:\clients\city of east palo alto\projects\calpers\6-30-20\ba eastpaloaltoci 22-03-07 calpers council slides draft2.docx Agenda How We Got Here Where Are Rates Going? What Options Does the City Have? March 7, 2022 1
HOW
WE
GOT
HERE
–
INVESTMENT
RETURN
Returns (after 2001) shown are gross returns, unreduced for administrative expenses, from CalPERS valuation reports, when available.
The discount rate is based on expected returns net of administrative expenses. 20-Year and 30-Year average return rates on 6/30/21 are 6.9% and 8.3%, respectively March 7, 2022 2
CALPERS
CHANGES
Many changes since 2013, designed to strengthen the funded status Increased cost to employers
21.3% return in FY21 greatly improved funded status and reduced projected contributions Reduction offset by risk mitigation policy - discount rate change In the November 2021 meeting, CalPERS Board adopted new Discount rate and investment allocation
Discount rate: 6.8% for 6/30/2021. UAL impact matches investment gain amortization (5-year ramp-up)
Asset allocation has higher investment risk than current portfolio Experience study (Demographic assumptions)
March 7, 2022 3
CALPERS
CHANGES
Risk Mitigation Strategy
Move to more conservative investments over time to reduce volatility Only when investment return is better than expected Lower discount rate in concert Essentially use ≈50% of investment gains to pay for cost increases
Likely get to 6.0% discount rate over 20+ years
Risk mitigation suspended from 6/30/16 to 6/30/18 valuation Did not trigger for 6/30/19 or 6/30/20 valuations First trigger for 6/30/21 valuation – 6.8% discount rate March 7, 2022 4
PLAN
FUNDED
STATUS
-
MISCELLANEOUS
City CalPERS Assets and Actuarial Liability ($Millions) March 7, 2022 5
CONTRIBUTION
PROJECTIONS
Market Value Investment Return:
June 30, 2021 21.3%1
Future returns based on stochastic analysis using 1,000 trials Single Year Returns at
2 25th Percentile 50th Percentile 75th Percentile
Current investment mix – first 10 years, without risk mitigation -2.1% 5.9% 14.6% Current investment mix – after 10 years, without risk mitigation -0.7% 7.4% 16.4% Assumes investment returns will generally be lower over the next 10 years and higher beyond that.
Discount Rate decreases due to Risk Mitigation policy – Ultimate rate 6.0% No Other: Gains/Losses, Method/Assumption Changes, Benefit Improvements Different from CalPERS projection Impact of Risk Mitigation Policy:
Combined impact of 2021 investment gain and discount rate change amortized over 20 years with 5 year ramp up
1 Gross return based on July 2021 CalPERS press release. 2 Nth percentile means N percentage of our trials result in returns lower than the indicated rates.
March 7, 2022 6
CONTRIBUTION
PROJECTIONS
-
MISCELLANEOUS
Impact of 20/21 Investment Return
March 7, 2022 7
CONTRIBUTION
PROJECTIONS
-
MISCELLANEOUS
March 7, 2022 8
PLAN
FUNDED
STATUS
-
SAFETY
City CalPERS Assets and Actuarial Liability ($Millions) March 7, 2022 9
CONTRIBUTION
PROJECTIONS
-
SAFETY
Impact of 20/21 Investment Return
March 7, 2022 10
CONTRIBUTION
PROJECTIONS
-
SAFETY
March 7, 2022 11
COMBINED
MISCELLANEOUS AND
SAFETY
March 7, 2022 12
WHAT
OPTIONS
DOES THE
CITY
HAVE?
Make payments directly to CalPERS:
Likely best long-term investment return Must be considered an irrevocable decision Extra payments cannot be used as future “credit” PEPRA prevents contributions from dropping below normal cost Option #1: Request shorter amortization period (Fresh Start):
Higher short term payments Less interest and lower long term payments Likely cannot revert to old amortization schedule March 7, 2022 13
WHAT
OPTIONS
DOES THE
CITY
HAVE?
Make payments directly to CalPERS (continued):
Option #2: ADP = Additional Discretionary Payment
Extra contribution’s impact muted by reduced future contributions CalPERS can’t track the “would have been” contribution No guaranteed savings
Larger asset pool means larger loss (or gain) opportunity
1. Paying off shortest amortization bases
Less interest savings vs paying off longer amortization bases
2. Paying off longest amortization bases
More interest savings vs paying off shorter amortization bases
3. Maintaining the current payment schedule – not letting payments reduce due to extra payment – gives the greatest long-term savings March 7, 2022 14
IRREVOCABLE
SUPPLEMENTAL (§115)
PENSION TRUST
Can only be used to:
Reimburse City for CalPERS contributions Make payments directly to CalPERS Investments significantly less restricted than City investment funds Fiduciary rules govern Trust investments Usually, designed for long term returns Investment policy and Trust provider selected by City Assets don’t count for GASB accounting
Are considered Employer assets
Over 100 trusts established, mostly since 2015
Trust providers: PARS, PFM, Keenan, CalPERS
March 7, 2022 15
IRREVOCABLE
SUPPLEMENTAL (§115)
PENSION TRUST
More flexibility than paying CalPERS directly
City decides if and when and how much money to put into Trust City decides if and when and how much to withdraw to pay CalPERS or reimburse Agency
Funding strategies typically focus on
Reducing the unfunded liability, and/or Stabilizing contribution rates to better manage budget March 7, 2022 16
COMPARISON OF
OPTIONS
Supplemental Trust
CalPERS ADP
Flexible
Locked In
Likely lower long-term
investment return
Likely higher long-term
investment return
Investment strategy choice
No investment choice
Does not reduce net pension
liability for GASB reporting
Reduces net pension liability for
GASB reporting
More visible
More restricted
March 7, 2022 17
ILLUSTRATION OF
ADDITIONAL
PAYMENTS
Following illustrates additional $1.5 million contribution on 6/30/2022 plus $0.5 million from 2022/23 through 2024/25 made at end of each year to CalPERS and to a Section 115 Supplemental Trust Assets split 50/50 between Miscellaneous and Safety (total $1.5 million each) March 7, 2022 18
ILLUSTRATION OF
ADDITIONAL
PAYMENTS
Direct Payment to CalPERS
Estimated Savings net of ADP
Pay Off Longest Bases – pay reduced future payments as billed by CalPERS: ADP: $3 million $ Savings $ 3,132,000 Present Value Savings @ 3% 1,367,000 No Payment Reduction – follow original payment schedule ADP: $3 million $ Savings $ 4,476,000 Present Value Savings @ 3% 1,933,000 10-Year Fresh Start No ADP $ Savings $ 3,544,000 Present Value Savings @ 3% 1,471,000 March 7, 2022 19
ILLUSTRATION OF
ADDITIONAL
PAYMENTS
Payment to 115 Trust
Savings will depend on the length of time funds are left in the Trust before being applied to CalPERS payments.
Trust Contributions $3 million Trust Earnings 5% Trust Target 3 Example:
- 1st Year of Trust Withdrawals
4 2025/26
- Last Year of Trust Withdrawals
5 2037/38
$ Savings $ 1,708,000 Present Value of Savings @ 3% discount rate 602,000 3 14.3% and 29.3% target contribution rate, respectively, for Miscellaneous and Safety plans 4 2026/27 for Safety plan
5 2036/37 for Safety plan
March 7, 2022 20
ILLUSTRATION OF
ADDITIONAL
PAYMENTS
Direct Payment to CalPERS
March 7, 2022 21
ILLUSTRATION OF
ADDITIONAL
PAYMENTS
Direct Payment to CalPERS
Miscellaneous6
6 Based on 6/30/2020 UAAL – does not include any future new bases March 7, 2022 22
ILLUSTRATION OF
ADDITIONAL
PAYMENTS
Payment to 115 Trust
Miscellaneous – Illustration of One Option
March 7, 2022 23
ILLUSTRATION OF
ADDITIONAL
PAYMENTS
Payment to 115 Trust
Miscellaneous – Illustration of One Option
March 7, 2022 24
ILLUSTRATION OF
ADDITIONAL
PAYMENTS
Questions?
Thank you!