City of Fort BraggCalPERS Pension Liability Update
July 8, 2024
Executive Summary
City has 5 employee plans with CalPERS: Miscellaneous, PEPRA Miscellaneous, Safety Fire, Safety Police and PEPRA Safety Police Lower cost PEPRA plans helpful to limit future unfunded CalPERS unfunded actuarial liability (“UAL”) 94% of UAL is from older, non-PEPRA (i.e. “Classic”) Plans and not reduced as City transitions to PEPRA City issued 2021 Bonds, a portion of which was used to refinance / restructure its UAL Objectives: cash flow savings, smoothing pension payments, fiscal sustainability / resiliency $6.6M UAL has reemerged due to CalPERS investment returns below 6.8% target (FY ‘21-22: -7.5% and FY ‘22-23: 6.1%) Increase in payments begin in FY ‘24-25
Given current City revenues, City must actively manage for these increasing Pension payments to ensure these costs do not “crowd” out other priority services Section 115 Trust Smoothing and Additional Discretionary Payments (“ADPs”) can help stabilize pension cost volatility
Background on How CalPERS WorksTwo Annual Payments Made to CalPERS (1) Normal Cost (“NC”) = Cost for current employees
(2) UAL: Payment to amortize this “debt”
Amortized over 20 years
UAL is increased / decreased when CalPERS investment returns are below 6.80% or above 6.80%, respectively *Assumes FY 2022-23 investment returns of 6.1%
Source: CalPERS Pension Outlook Tool
How Retirement Benefits Get FundedMoney Going In vs. Money Going Out Historical PERS Returns
(as of 6/30/2023)
5-Year: 6.1%
10-Year: 7.1%
20-Year: 7.0%
30-Year: 7.5%
2023: $6.6M
2022: $6.2M
2021:
~$0.0M
2020: $11.5M
UAL Balance (FYE):
Historical & Projected UAL + 2021 LRB (UAL Restructuring) UAL Payments
(6/30/2022 Actuarial Valuation)
Historical UAL Payments
Source: CalPERS Pension Outlook Tool & Actuarial Valuation Reports *UAL balance and annual payments are projections from the CalPERS Pension Outlook Tool. Assumes FY 2022-23 investment returns of 6.1%, which is the money-weighted rate of return reported by CalPERS in its FY 2022-23 Annual Comprehensive Financial Report.
Projected Additional UAL Payments from 6.1% FY 2022-23 Returns* Returns:
4.7%
21.3%
-7.5%
6.1%
2021 LRB (UAL Restructuring)
Estimated UAL Costs Without LRB
Total Projected Pension Payments (UAL + Normal Cost + LRB) Annual pension payment are increasing:
Total pension costs increase from ~$940k (FY’24) to ~$1.89M (FY’29) Source: CalPERS Actuarial Valuation Reports and CalPERS Pension Outlook Tool. Pension Outlook Tool assumes FY 2022-23 returns of 6.1% and 6.80% returns from FY 2023-24 onward. 2021 LRB
Normal Cost
UAL
Estimated Pension Costs Without LRB
Cost-Containment Strategies – Not Mutually Exclusive
Additional Discretionary Payment (“ADP”)
What is it? Direct payment to CalPERS which then eliminates payments associated with the portion of the UAL paid off (6.8% interest rate assumed ) Advantages:
Reduced UAL / higher CalPERS funding ratio
Reduced future payments
CalPERS investment portfolio has potential for higher returns Disadvantages:
Requires reserves / surplus to fund
Re-investment and market timing risk with ADP funds
Less budgetary flexibility and investment control (vs. Section 115 Trust option)
Section 115 Trust
What is it? Depositing money into an account which then earns interest and can be directed to pay only pension (Normal or UAL) or OPEB costs Advantages:
Flexibility: Can earn potentially higher returns (vs. non-115 Trust City cash reserves) & also City can decide how and when to direct spending of 115 Trust funds:
Shorter-Term Benefit: Apply funds to “smooth” payment spikes in UAL and/or Normal Cost Longer-Term Benefit: Trust funds can grow over time and pay off a large % of UAL in the future Diversification: “Shock Absorber” for CalPERS investment performance Disadvantages:
Requires reserves/surplus contributions to build account balance Investment risk (dependent on type of investment portfolio) Doesn’t reduce UAL (and increase funding ratio) until funds are transferred to CalPERS
Section 115 vs. ADP ComparisonUsing $1.95M City has Accumulated 2021 LRB
(UAL Restructuring)
Projected UAL Payments
Section 115 Trust Smoothing
Pension Costs
After ADPs
$200K Annual Contributions
Comparison of Section 115 Trust & ADP Preliminary Analysis Strategy:
ADP
Section 115 Trust Smoothing
Assumed Interest Rate Benefit
6.80%*
4.00%*
Estimated Gross Savings
$4.53 Million
$3.58 Million
Contributions
$2.35 Million
$2.35 Million
Estimated Net Savings
$2.18 Million
$1.23 Million
Budgetary Flexibility
$0 (ADPs deposited cannot be retrieved from CalPERS)
Assets in Trust are available to City for pension costs Target Smoothing Level
Net payments fluctuate
$1.08 Million
*Assumed long-term investment returns; Not fixed or guaranteed.
Takeaways
Rising pension costs are a challenge facing most public agencies, and the City has aggressively addressed this challenge through strategies such as:
Refinanced/restructured UAL debt in 2021 to save interest and to “smooth” payment Building up Section 115 Trust reserves ($1.95M Balance) Yet, significant CalPERS UAL balance / required payment has re-emerged Requires continued vigilance to pro-actively manage the payment on this liability to ensure other priority services are not impacted Consider making direct ADPs to CalPERS to pay down UAL
Consider growing City’s Section 115 Trust