Year-End Budget Adjustments
for City’s Unfunded Liabilities
City Council Meeting
October 18, 2022
1 Presentation Overview
• Background & Economy
• Workers’ Compensation
• General Liability
• Retiree Medical
• Retirement Supplemental
• Section 115 Trust
2 Background & Economy
Finance Department is working on the year-end closing process Preliminary year-end numbers will be presented to City Council on November 15th Year-End Budget Adjustment for FY2021/22 required to close FY 2021/22 US economy faced significant challenges in the first half of 2022 Rising interest rates – Feds raised rates 5X in 2022 to 3%-3.5% Inflation – 9.1% in June 2022
GDP: 1Q2022 -1.6% and 2Q2022 -0.6%
City’s retirement plan assets declined in value due to unfavorable market conditions Estimated Surplus FY2021/22 $17M primarily due to Sales Tax and Transient Occupancy Tax revenues better than anticipated
Opportunity to fund the City’s unfunded liabilities – aligning with the City Council’s Strategic goal of Fiscal Sustainability
3 Workers’ Compensation
California Workers’ Compensation law provides state mandated benefits to employees for work-related illness or injury
City is self-insured up to $1 million per claim for a maximum of $30 million $7.6 million increase in WC liability primarily due to 38 claims that had increases of at least $100K in FY2021/22
Factors include rising medical costs and an expanded list of injuries that are presumed to be work related under California law, including cancer, post-traumatic stress and long-term impacts of COVID 4 Description Amount /
Percentage
Total WC Liability 6/30/2022 $40.7M
Increase in Liability FY 2021/22 $7.6M
Funded Status Without
Transfer
35%
Funded Status With Transfer 42%
Recommended Transfer $3M
Police
67%
Fire
23%
Public Works
9%
All Others
1%
WC Claims 2018-2022
Police
Fire
Public Works
All Others
General Liability
City is self-insured up to $1 million per claim for a maximum of $30 million $1.5 million increase in General Liability primarily due to 3 large claims incurred in FY 2021/22 $2.1 million total legal claims expense in FY21/22
5 Description Amount / Percentage
Total General Liability 6/30/2022 $13.7M
Increase in Liability FY 2021/22 $1.5M
Funded Status Without Transfer 89%
Funded Status With Transfer 100%
Recommended Transfer $1.5M
Retiree Medical
The City administers 2 retiree medical or other post-employment benefit (OPEB) plans Safety employees – Contributions to CalPERS Health Plan for retirement Non-safety employees hired prior to 10/1/2014 – Retiree Medical Subsidy based on years of service
The City utilizes CalPERS’ California Employers’ Retiree Benefit Trust (CERBT) to manage the plan CERBT discount rate: 5.5%
Recommended Transfer: $1M – minimum required to avoid drawing funds from Trust during market low 6 Date
Funded
Status
OPEB
Liab*
OPEB
Asset
Net OPEB
Liab (Asset)
6/30/2021 107% $33.9M $36.3M -$2.4M
6/30/2022 w/o Trsf 94% $33.9M $31.7M $2.1M
6/30/2022 w/Trsf 97% $33.9M $32.8M $1.1M
Years Plan Return
Benchmark
Rate
1 Year -12.54% -12.66%
5 Years 4.66% 4.43%
ITD^
(Oct 2011)
6.29% 6.02%
^ Inception to date
* OPEB Liability is estimated due to CalPERS latest report is for 6/30/2020 Retirement Supplemental
The City administers a supplemental single-employer defined benefit retirement plan for employees hired prior to 1997
The plan pays a supplemental retirement benefit in addition to benefits from CalPERS Investment held separately in the Supplemental Retirement Trust (SRT) and is managed by the City’s Investment Custodian and subject to Investment Policy set by the SRT board. Supplemental Retirement discount rate: 5.5%
Recommended Transfer: $4.6M – minimum required to avoid drawing funds from Trust during market low 7 Date
Funded
Status
SRT
Liab*
SRT
Asset
Net SRT
Liab (Asset)
6/30/2021 92% $76.8M $70.4M $6.4M
6/30/2022 w/o Trsf 77% $76.8M $59.0M $17.8M
6/30/2022 w/Trsf 83% $76.8M $63.6M $13.2M
Years Plan Return
Benchmark
Rate
1 Year -15.98% -12.44%
5 Years 4.84% 4.51%
ITD^
(Oct 2009)
6.20% 6.64%
^ Inception to date
* SRT Liability is estimated due to latest actuary report is for 6/30/2020 Section 115 Trust
On December 21, 2015, City Council authorized the creation of the Section 115 Trust to help address the City’s unfunded pension liabilities.
March 2021, City Council adopted an Unfunded Accrued Liability Pension Funding Policy requiring annual Section 115 Trust funding to protect the City from market volatility and unexpected pension rate increases. Section 115 Trust balance as of June 30, 2022: $12.4M CalPERS return FY2021/22: -6.1% (discount rate of 6.8%) Due to unfavorable return, UAL payments will increase by $3.4M each year from $0 in FY23/24 to $17.7M in FY28/29 (assuming CalPERS hits their 6.8% target return going forward) CalPERS returns > 6.8% will reduce future UAL payments and lower returns will increase UAL payments Recommended Transfer: $3M (in addition to $1.8M required in FY21/22 per UAL Policy) 8 Date
CalPERS
Funded
Status
CalPERS
Liab
CalPERS
Asset
Net CalPERS
Liab (Asset) POB Liab
CalPERS
w/POB
Funded
Status
6/30/2020 68% $1,428M $973M $455M N/A 68%
6/30/2021 104% $1,513M $1,558M -$46M $364M 83%
6/30/2022* 90% $1,513M $1,363M $149M $352M 73%
Years Plan Return
1 Year -6.1%
5 Years 6.7%
10 Years 7.7%
20 Years 6.9%
30 Years 7.7%
* CalPERS values as of 6/30/2022 are estimated due to latest actuary report is for 6/30/2021 CalPERS UAL Payment Projection
9 6
-
4 8
13 18
22 24 24 24 24
6 -
4 7
11 14
18 18 18 18 18
6 -
4 6
9 11
14 13 13 13 13
0 5
10 15
20 25
6/30/2023 6/30/2024 6/30/2025 6/30/2026 6/30/2027 6/30/2028 6/30/2029 6/30/2030 6/30/2031 6/30/2032 6/30/2033 Millions
3.4% Return 6.8% Return 10.2% Return
CalPERS UAL Payments based on projected FY22/23 CalPERS Returns scenarios Section 115 Trust Projected Balance
10 -$10
-$5
$0
$5
$10
$15
$20
$25
$30
$35Millions
with $3M without $3M
Note: Assumes CalPERS hits their 6.8% target return going forward Use of Section 115
Trust per UAL Policy
Recommended Action
Approve the appropriation and transfer of $13.1 million from the General Fund in FY2021/22 to fund the City’s unfunded liabilities (as listed below) – aligning with the City Council’s Strategic goal of Fiscal Sustainability
Estimated FY21/22 surplus after appropriation $3.9 million (subject to change) 11 Fund Amount
Workers’ Compensation $3,000,000
General Liability 1,488,467
Retiree Medical 1,037,740
Retirement Supplemental 4,576,489
Section 115 Trust 3,000,000
Total $13,102,696
Questions?