AGENDA
SPECIAL JOINT CITY COUNCIL
AND FINANCIAL ADVISORY BOARD (FAB) MEETING
SEPTEMBER 27, 2022 – 6:00 p.m.
City Council Members:
Mayor Gabe Quinto
Mayor Pro Tem Lisa Motoyama · Councilmember Janet Abelson Councilmember Paul Fadelli · Councilmember Tessa Rudnick Financial Advisory Board Members:
Chair Farhad Farahmand
Member Ruth Cazden · Member William Ktsanes
Member Dick Patterson · Member Kimberly White
Meeting Location:
Council Chambers, 10890 San Pablo Avenue
El Cerrito, CA 94530
Consistent with the Brown Act as amended by AB 361 (2021), members of the City Council, staff, presenters and the public may participate in-person at the location listed above, or remotely via zoom. In-person attendance will be limited to available seats and designated accessible spaces only (no standing room) with chairs spaced to encourage social distancing. Masks are strongly recommended.
Interested individuals can also participate or view the City Council meeting as follows:
1. Cable T.V. Broadcast on KCRT Channel 28
2. Livestream Online at www.el-cerrito.org/CouncilMeetingMaterials
3. Via Zoom (Closed captioning available):
https://us06web.zoom.us/j/88518790170?pwd=RHJESE9iRE15Q1BsM2dreEs4UTJVZz09 Dial in: 1-408-638-0968 Meeting ID: 885 1879 0170 Password: 932349 Each period for public comment will be announced. Public Comments may be submitted one of the following ways and are limited to items on the agenda only:
1. In-person by submitting a request to speak to the City Clerk.
2. Via Zoom using the “Raise Hand” icon to request to speak. If joining by phone, dial *9 to "raise your hand", and when prompted by the host, *6 to unmute/mute.
3. Via email to [email protected]. Email must contain in the subject line Public Comments – Not on Agenda or Public Comments – Agenda Item #.
Agenda Packet Page 1 of 45
To ensure City Council receives your written comments prior to taking action, they must be received by 3:00 p.m. the day of the meeting. All written comments received by this deadline will be provided to the City Council and posted online in advance of the meeting. Comments received after the deadline will be provided to the City Council and included with supplemental materials after the meeting. No written comments will be read into the record.
6:00 P.M. ROLL CALL - CONVENE SPECIAL JOINT CITY COUNCIL/FINANCIAL
ADVISORY BODY MEETING
1. TELECONFERENCE AND PUBLIC COMMENT INSTRUCTIONS
2. PLEDGE OF ALLEGIANCE TO THE FLAG OR OBSERVATION OF A
MOMENT OF SILENCE
3. PRESENTATIONS
A. CalPERS Unfunded Accrued Liability (UAL)
Action Proposed: Receive and file a presentation from CalPERS on the method of calculation and projected unfunded liability for the City of El Cerrito's pension obligations.
Contact: Tony Cuny, ASA, MAAA, Senior Pension Actuary, CalPERS; Kerry J. Worgan, FSA, FCIA, MAAA, Supervising Pension Actuary, CalPERS; Sandra Dalida, Finance Director/Treasurer, Finance Department
4. STUDY SESSION
A. Section 115 Trust Study Session
Action Proposed: Conduct a study session with NHA Advisors regarding options for funding a Section 115 Trust and provide staff direction.
Contact: Craig Hill, Managing Principal, NHA Advisors; Roy Kim, Associate, NHA Advisors; Matt DeFilippis, Analyst, NHA Advisors; Sandra Dalida, Finance Director/Treasurer, Finance Department
5. ADJOURN SPECIAL JOINT CITY COUNCIL/FINANCIAL ADVISORY BODY
MEETING
The City of El Cerrito serves, leads and supports our diverse community by providing exemplary and innovative services, public places and infrastructure, ensuring public safety and creating an economically and environmentally sustainable future.
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Copies of the agenda bills and other written documentation relating to items of business referred to on the agenda are on file and available for public inspection in the Office of the City Clerk, at the El Cerrito Library and posted on the City’s website at www.el-cerrito.org prior to the meeting. In compliance with the Americans with Disabilities Act, if you need special assistance to participate in this meeting, please contact the City Clerk, 510-215-4305. Notification 48 hours prior to the meeting will enable the City to make reasonable arrangements to ensure accessibility to this meeting. (28 CFR
35.102-35.104 ADA Title I).
The Deadline for agenda items and communications is eight days prior to the next meeting by 12 noon, City Clerk’s Office, 10890 San Pablo Avenue, El Cerrito, CA. Tel: 510-215–4305, email [email protected]
IF YOU CHALLENGE A DECISION OF THE CITY COUNCIL IN COURT, YOU MAY BE LIMITED TO RAISING ONLY THOSE ISSUES YOU OR SOMEONE ELSE RAISED AT THE COUNCIL MEETING.
ACTIONS CHALLENGING CITY COUNCIL DECISIONS SHALL BE SUBJECT TO THE TIME LIMITATIONS CONTAINED IN CODE OF CIVIL PROCEDURE SECTION 1094.6. The City Council believes that late night meetings deter public participation, can affect the Council’s decision-making ability, and can be a burden to staff. City Council Meetings shall be adjourned by 11:00 p.m., unless extended to a specific time determined by a majority of the Council.
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1 Overview of CalPERS Unfunded Liability
Status
City of El Cerrito
September 27, 2022
Tony Cuny ASA, MAAA
Senior Pension Actuary, CalPERS
Agenda Item No. 3.A.
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2 Valuation Changes – June 30, 2021
2 Agenda Packet Page 5 of 45
3 Overview of CalPERS Unfunded Liability – City of El Cerrito Valuation Changes at 6.30.21
• Risk Mitigation Policy Triggered by 21.3% return
• Discount Rate 7.00% 6.80%
• New Experience Study: Nov-2021
– Analysis of recent demographic experience
– Salary Growth 2.75% 2.80%
– Inflation 2.50% 2.30%
– Mortality: Generational Mortality adopted
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4 Required Contributions Summary –
June 30, 2021
4 Agenda Packet Page 7 of 45
5 Overview of CalPERS Unfunded Liability – City of El Cerrito Required Contributions
• Payment on Amortization Bases
– Unfunded Liability = Accrued Liability (AL) – Assets (A) – Pay down Unfunded Liability to get back to 100% funded • Normal Cost: Cost of service earned in the coming year – Provided as dollar amount and level percent of pay
– Fluctuates due to assumption changes and changes in
aggregate entry age of active members
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6 Overview of CalPERS Unfunded Liability – City of El Cerrito Required Contributions Summary: UAL
City of El Cerrito Plan Name Unfunded Liability Payment FY 2022-23 FY 2023-24
Classic Miscellaneous $1,926,454 $1,896,880
PEPRA Miscellaneous $8,869 $0
Classic Safety $4,253,080 $4,222,686
PEPRA Fire $5,282 $6,845
PEPRA Police $18,246 $16,978
Total $6,211,931 $6,143,290
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7 Overview of CalPERS Unfunded Liability – City of El Cerrito Required Contributions Summary: Normal Cost
City of El Cerrito Plan Name Employer Normal Cost Rate
FY 2022-23 FY 2023-24
Classic Miscellaneous 14.03% 15.95%
PEPRA Miscellaneous 7.47% 7.68%
Classic Safety 23.75% 27.11%
PEPRA Fire 12.78% 13.54%
PEPRA Police 12.78% 13.54%
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8 Funded Status Summary – June 30,
2021
8 Agenda Packet Page 11 of 45
9 Overview of CalPERS Unfunded Liability – City of El Cerrito Funded Status
1. Present Value of Projected Benefits: current value of all future expected benefits
2. Accrued Liability (AL): current value of accrued benefits
3. Market Value of Assets (MVA): current value of plan assets
4. Unfunded Liability (UAL): AL less MVA [(2) –(3)]
5. Funded Ratio: MVA divided by AL [(3) ÷ (2)]
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10 Overview of CalPERS Unfunded Liability – City of El Cerrito Funded Status Summary
Funding Item as of June 30, 2021
Classic
Miscellaneous
Plan
PEPRA
Miscellaneous
Plan
Classic Safety
Plan
PEPRA Fire
Plan
PEPRA Police
Plan Total
1. Present Value of Benefits $73,715,880 $5,214,913 $175,288,015 $6,079,294 $9,967,634 $270,265,736
2. Entry Age Accrued Liability (AL) $65,705,040 $1,944,122 $161,290,875 $1,128,938 $2,864,509 $232,933,484
3. Plan's Market Value of Assets
(MVA) $48,704,943 $2,014,000 $120,388,390 $1,160,902 $2,873,030 $175,141,265
4. Unfunded Accrued Liability (UAL)
[(2) - (3)] $17,000,097 -$69,878 $40,902,485 -$31,964 -$8,521 $57,792,219
5. Funded Ratio [(3) ÷ (2)] 74.1% 103.6% 74.6% 102.8% 100.3% 75.2% Agenda Packet Page 13 of 45
11 Path Forward – Beyond June 30, 2021
11 Agenda Packet Page 14 of 45
12 Overview of CalPERS Unfunded Liability – City of El Cerrito Path Forward – Miscellaneous Plans
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13 Overview of CalPERS Unfunded Liability – City of El Cerrito Path Forward – Safety Plans
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14 Plan Information – June 30, 2021
14 Agenda Packet Page 17 of 45
15 Overview of CalPERS Unfunded Liability – City of El Cerrito Required Contributions – Misc. Classic Plan
Unfunded Liability Payment $1,926,454 $1,896,880
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16 Overview of CalPERS Unfunded Liability – City of El Cerrito Funded Status – Misc. Classic Plan
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17 Overview of CalPERS Unfunded Liability – City of El Cerrito Required Contributions – Misc. PEPRA Plan
Unfunded Liability Payment $8,869 $0
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18 Overview of CalPERS Unfunded Liability – City of El Cerrito Funded Status – Misc. PEPRA Plan
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19 Overview of CalPERS Unfunded Liability – City of El Cerrito Required Contributions – Classic Safety Plan
Unfunded Liability Payment $4,253,080 $4,222,686
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20 Overview of CalPERS Unfunded Liability – City of El Cerrito Funded Status – Classic Safety Plan
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21 Overview of CalPERS Unfunded Liability – City of El Cerrito Required Contributions – PEPRA Fire Plan
Unfunded Liability Payment $5,282 $6,845
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22 Overview of CalPERS Unfunded Liability – City of El Cerrito Funded Status – PEPRA Fire Plan
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23 Overview of CalPERS Unfunded Liability – City of El Cerrito Required Contributions – PEPRA Police Plan
Unfunded Liability Payment $18,246 $16,978
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24 Overview of CalPERS Unfunded Liability – City of El Cerrito Funded Status – PEPRA Police Plan
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25 Overview of CalPERS Unfunded Liability – City of El Cerrito Questions?
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26 Accelerated Funding
26 Agenda Packet Page 29 of 45
27 Overview of CalPERS Unfunded Liability – City of El Cerrito Accelerated Funding
• Multiple ways to do it
– Fresh start over a reduced period
– Additional Discretionary Payment (ADP) on an ad hoc basis – Pension Obligation Bond (POB) to pay off UAL
– Section 115 Trust
• Ad hoc basis – Employer Option
– Short-term Savings : Apply to Shortest Base
– Long-term Savings : Apply to Longest Base
– Flexible
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28 Overview of CalPERS Unfunded Liability – City of El Cerrito Accelerated Funding
• Fresh Start
– Must pay off bases faster than existing schedule
– Creates new higher Minimum UAL payment
– Significant long-term savings
– Inflexible
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29 Overview of CalPERS Unfunded Liability – City of El Cerrito Accelerated Funding
• Discuss with your CalPERS Actuary
– they will explain options and show financial impacts
• Help us Understand your Goals
• CalPERS will prepare paperwork and payment
instructions
– need Payment Amount & Payment Date
• New Amortization schedules show up in next valuation
report
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30 Thank You
30 Agenda Packet Page 33 of 45
CITY OF EL CERRITO
CALPERS COST MANAGEMENT
SECTION 115 TRUST DISCUSSION
SEPTEMBER 27, 2022
Agenda Item No. 4.A.
Agenda Packet Page 34 of 45
2 NHA’s Pension Practice Group & Work with City of El Cerrito NHA’s Pension Practice Group was established in 2014
Serves 85+ California public agencies
Education – NHA Summary Reports, White Papers, Newsletters, Workshops Financial Planning – CalPERS Sensitivity Analysis & Projection Modeling Cost Management Strategies – Section 115 Trusts, Additional Discretionary Payments (ADPs), POBs/UAL Restructurings
Stress Testing and Risk Assessment
Pension Funding Policy Development
The City and NHA Advisors have been proactively discussing CalPERS trends over the last 5 years
Spring 2017 – Workshop with City Council / Labor Groups 10-Page Pension Report produced in 2018
2019/2020 – NHA Advisors/City staff updated projection models to account for various assumption changes
February 2021 – City Council Workshop – UAL Trends + Cost Management Strategies The following slides provide an overview of pension cost management strategies, including Section 115 Trust options and potential benefits Public Agencies Served by NHA Advisors*
*Engagements since 2012
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3 Cost-Containment Strategies – Not Mutually Exclusive
(1) Prepay UAL early in Fiscal Year (≈ 3.3% discount)
(2) Negotiate Cost Sharing With Employees
• Require employees to pay their share; new employees already governed by lower cost/benefit PEPRA plans • Negotiated cost sharing of the City’s share
(3) Fresh Start Amortization offered by CalPERS
• Pros: Smooths payment, shortens repayment period; reduces overall interest paid from shorter amortization period • Cons: New structure “locked-in” + increased annual payments in near term; still amortized at discount rate (4) Use Cash Reserves to Pay Extra (two options)
• Section 115 Trust - Separate trust solely dedicated to pension/OPEB • Lump Sum Pay Down of UAL – Reduce UAL through “Additional Discretionary Payments” (ADPs) • Choose optimal amortization bases to pay off
(5) Restructure All or Portion of Remaining UAL
• Restructure portion of UAL at lower bond interest rate and “smooth out” payments for enhanced budget predictability, near and mid-term potential savings, and preservation of cash for other critical projects Agenda Packet Page 36 of 45
4 What is a Section 115 Trust?
Dedicated (restricted to pension/OPEB) account managed by 3rd party Pros:
Potential for increased investment returns vs. current General Fund reserves General Fund investments restricted by Government Code (limits types of instruments and maturities) Flexibility – more investment options than current CalPERS pension portfolio and City can decide when and how to use Longer-Term: Trust funds can grow over time and pay off full UAL in the future Shorter-Term: Apply during challenging budget years or “smooth” payment spikes in UAL and/or Normal Cost
Potential shock absorber for volatility from CalPERS investment performance & assumption changes
Cons:
Market risk (dependent on type of investment portfolio) Note: The Trust will show up as an asset on the City’s financial statements, but will not technically offset UAL until funds are transferred to CalPERS
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5 Section 115 Trust & CalPERS Additional Discretionary Payment (ADP) A Comparison of Two Cost Management Strategies
OPTION Section 115 Trust CalPERS ADP
Reduced UAL & UAL Payments
with CalPERS No Yes
Reduced Pension Liability in ACFR No (but will be off-setting asset on balance sheet) Yes
Control of Investment Strategy Yes No
Funds Managed By Trust Administrator CalPERS
Flexibility in Uses
Yes (annual pension or OPEB expense,
direct UAL pay down, OPEB,
reimbursement, etc.)
No
Savings Varies; Depends on when City utilizes
funds to pay liabilities
Immediate; Length of time varies based on
which amortization component is paid off
(City's amortization bases currently range from
5 - 27 years)
Enhanced Budgetary Flexibility Yes No
How Many Agencies in CA Have
Used?
Over 300 (estimated) CA agencies
maintain Section 115 Trusts (>150 cities)
Historically, hundreds of ADPs made by CA
agencies annually
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6 $-
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
$9.0
$10.0
202320242025202620272028202920302031203220332034203520362037203820392040204120422043204420452046 Millions
Projected UAL Payments (6.80% Discount Rate, -6.1% Returns in FY 2021-22) Net UAL Payments Section 115 Trust – Hypothetical Short-Term Example
Assets Used to Smooth Out Near and Mid Term Fluctuations Assuming $5.00M is invested in FY
2022-23, with $1.00M annual
contributions from FY 2023-24 to FY
2026-27, @ 4.00% earnings rate,
funds could be withdrawn from the
Section 115 trust during higher
payment years to stabilize net impact
to General Fund
During fluctuating peak payments
from 2027 – 2035, the City could use
Section 115 funds to maintain net UAL
payments at $7.18M
$5.00M initial principal + $4.00M total
additional contributions + $2.86M
interest earned on this principal would
suffice to cover payments above orange
line
NHA and City staff can also analyze
other smoothing strategies during the
process of developing a funding
strategy for the Section 115 trust
Source: CalPERS Outlook Tool for projected UAL payments Agenda Packet Page 39 of 45
7 Section 115 Providers – Brief Overview of Key Players CalPERS
2 portfolio options (one targets 3.5% returns and one targets 4.5% returns) Lower cost (0.25%) than non-CalPERS options for assets under ~$50M 621 total Section 115 Trust clients and approximately $15.4B in assets (primarily OPEB) Pension Section 115 Trust is relatively new (established in 2019): $80M in assets Includes 17 Cities/Towns (~$36M in assets)
Non-CalPERS
PARS (Public Agency Retirement Services)
Keenan
PFM Asset Management
Note: Section 115 information for CalPERS is sourced from recent presentations and conversations, and can be considered a best estimate.
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8 Non-CalPERS Section 115 Providers
High-level Overview
PARS
• Works with Highmark Capital
(Investment Manager) and US Bank
(Trustee)
• 480+ Section 115 clients (150
cities/towns) and approximately
$4.9B in Section 115 assets
• 276 pension clients & 362 OPEB
clients
• 5 portfolio options based on risk
tolerance; both active and passive
management options
• Est. Fees: 0.67% to 0.72% for Passive
and 0.96% to 1.00% for Active
• Only provider with IRS Private
Letter ruling
Keenan
• Works with Morgan Stanley
(Investment Manager) and Benefit
Trust (Trustee)
• Approximately 70 Section 115
clients and more than $1B in assets
• Mostly school clients; 12
cities/towns
• 6 portfolio options; only passive
management
• 0.80% to 1.02% est. fees
PFM Asset Management
• Currently geared towards public
agencies with large amounts of
Section 115 assets
• Fixed management fee may only
begin to make sense if greater than
$10M in assets
Note: Section 115 information for PARS, Keenan, and PFM has been sourced from recent presentations and conversations, and can be considered a best estimate.
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9 Section 115 Trust – Provider Selection and Implementation Timeline of Potential Next Steps
Late-September:
Working group
kickoff meeting
Early October:
Evaluate potential
Section 115 Trust
Providers
Mid-October: FAB to
develop pension
funding policy in
conjunction with
NHA
Mid/Late-October:
Select Provider and
work with its
Investment Advisor
to determine
preferred
investment portfolio
November 1: Formal
City Council
adoption of
necessary
documentation
November: Trust
established and
funded by City (if
desired at that time)
Establishment of the Trust can be completed in 30 – 90 days Agenda Packet Page 42 of 45
Roles and Next Steps
Finance Advisory Board
• Develop General Fund Reserve (surplus) allocation policy recommendation
• Develop Section 115 Trust initial funding and ongoing contribution policy recommendation
• Identify FAB member to serve on the Section 115 Work Group.
Work Group will (NHA facilitators):
- Identify approach and impacts/constraints for each approach (i.e. Section 115 Trust, Fresh Start, Additional Discretionary Payment, etc.) - City’s Section 115 requirements, administrator selection criteria and evaluation process, and recommendations
submitted to City Council for consideration
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Roles and Next Steps
City Council
Identify City Council member to serve on the Section 115 Work Group.
Work Group will (NHA facilitators):
- Identify approach and impacts/constraints for each approach (i.e. Section 115 Trust, Fresh Start, Additional Discretionary Payment, etc.) - City’s Section 115 requirements, administrator selection criteria and evaluation process, and recommendations
submitted to City Council for consideration
Consider FAB recommendations for General Fund Reserve (surplus) allocation policy
Consider FAB recommendations for Section 115 Trust initial funding and ongoing contribution policy
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Thank you
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