CITY OF LAGUNA NIGUEL
CITY COUNCIL AGENDA ITEM
To: Honorable Mayor and Council Members
FROM: Eric Hendrickson, Finance Director
DATE: November 1, 2022
SUBJECT: Unfunded Pension Liability Payments
RECOMMENDATION
Staff recommends that the City Council:
1) Authorize a budget appropriation of $4,800,000 from General Fund reserves to CaPERS to reduce the City's unfunded pension liability; and, 2) Authorize the remittance of $1,000,000 to the City's Section 115 Trust with PARS; and,
3) Commit $100,000 towards General Fund reserves.
BACKGROUND
At the June 7th, 2022 City Council meeting, staff presented a balanced budget for Fiscal Year 2022/2023. The City Council adopted a General Fund budget with estimated revenues of $49.0 million and expenditures of $47.9 million. This resulted in revenues exceeding expenditures by $1.1 million. Furthermore, at that meeting, discussion ensued regarding the best use of these surplus funds and what options are available to address the City's unfunded pension obligations. The City Council directed staff to present options at a future study session.
At the October 17h, 2022 City Council Study Session, the City's actuarial consultant Foster & Foster presented an analysis of the City's pension plans. The presentation included an in-depth examination of the different facets of defined benefit plans, including the value of pooled assets, accrued liabilities, funded status, investment returns, future contribution rates, and options that are available to address unfunded pension obligations. Representatives from the state pension fund CaPERS and the Section 115 Trust provider PARS were present at this Study Session.
ANALYSIS
The City's actuarial consultant presented two viable options to address pension debt. One is to submit additional funds directly to CaPERS and the other is to save funds in a Section 115 Supplemental Pension Trust.
The actuarial consultant concluded that making additional discretionary payments directly to CalPERS will provide greater long-term savings, while saving funds in the Section 115 Trust provides flexibility and control of the investment asset. CaPERS assumes a discount rate (assumed rate of return) of 6.8% on the pooled assets that they manage.
All payments related to pensions are remitted from the City to CaPERS. Both the Untunded Accrued Liability (UAL) payments and regular payroll contribution payments go to CalPERS and credit the City's pool. The 6.8% is the assumed rate of return on the pooled assets; it is not an interest rate charged to the City. By making additional payments to CaPERS, the City is increasing the asset pool earlier, rather than later.
The projected rate of return for assets in the Section 115 trust is 4.5%, as estimated by the actuarial consultant. The benefit of the 115 Trust is that the funds in the Trust, instead of the City's General Fund, can be used to pay annual CaPERS obligations during economic uncertainty, and funds in the Trust can be used to smooth out the annual CaPERS obligations during the years the obligations spike. All payments made to CalPERS get credited to the City's asset pool. The savings estimated below is generated from increasing the asset pool at an earlier time than required by CaPERS.
The following chart shows the City's pension funded status, as of the valuation date of June 30, 2021:
Description Amount
Pooled assets $37.2 million
Actuarial accrued liability $44.1 million
Unfunded liability $6.9 million
Funded ratio 84.5%
The CaPERS representative stated that due to the annual fluctuation of the unfunded liability, it is highly recommended that the funded ratio does not exceed 90-95%. The recommended additional CaPERS contribution of $4.8 million will bring the City closer to this range.
At the October 17'h Study Session, the City Council directed staff to bring a report to a future City Council meeting with the following recommendations: 1) Take $4.8 million from the General Fund reserves and send it to CaPERS to pay down the unfunded pension liability; 2) From the FY 22/23 surplus place $1 million in the City's 115 Trust; and, 3) Commit $100,000 from the FY 22/23 surplus in the General Fund reserves.
Below is a table that shows the projected estimated savings the City may realize as a result of these actions.
Description Amount Projected Savings
Additional Payments to CaPERS $4,800,000 $6,576,000
Deposit to the 115 Trust $1,000,000 $1,126,000
Commitment towards reserves $100,000 n/a
Total Savings $7,702,000
The total savings to the City is over $7.7 million over approximately the next 15 years.
Furthermore, the City Council directed that a dollar-cost averaging approach be used when remitting the funds to CaPERS. With this approach, the City will make three equal, separate payments of $1.6 million spread out within Fiscal Year 22/23. This is beneficial as this method mitigates timing risk.
FISCAL REVIEW
From the FY 22/23 $1.1 million surplus, $1 million will be allocated to the Section 115 Trust and $100,000 will be moved to the General Fund reserves.
The $4.8 million payment to CaPERS to reduce the unfunded pension liability is available in the City's General Fund reserves. As of June 30, 2022 the General Fund reserves totaled approximately $48 million. After the $4.8 million is remitted to CaPERS, the estimated General Fund reserve balance will be $43.2 million.
By making a $4.8 million payment to CalPERS towards the unfunded pension liability and putting $1 million in the Section 115 Trust, the City's estimated long-term savings is $7,702,000 over approximately the next 15 years.
LEGAL REVIEW
No legal review of this staff report is necessary.
CONCLUSION
Staff recommends that the City Council:
1) Authorize a budget appropriation of $4,800,000 from General Fund reserves to CaPERS to reduce the City's unfunded pension liability; and, 2) Authorize the remittance of $1,000,000 to the City's Section 115 Trust with PARS; and,
3) Commit $100,000 towards General Fund reserves.
Jamasa S Resumean Erie Pendicka
Tamara S. Letourneau Eric Hendrickson
City Manager Finance Director