Revised 1/2023 7/11/2023 1:52 PM
For information regarding this Agenda please contact:
Olivia Nashed
City Clerk
Telephone: (209) 333-6702
A. Call to Order / Roll Call
B. Topics
B-1 Receive Update on Pension Funding Status and Pension Stabilization Policy (CM)
C. Comments by Public on Non-Agenda Items
THE TIME ALLOWED PER NON -AGENDA ITEM FOR COMMENTS MADE BY THE PUBLIC IS LIMITED TO FIVE MINUTES.
Public comment may only be made on matters within the Lodi City Council's jurisdiction (Government Code Section 54954.3, Lodi City Council Protocol Manual Section 6.3l) . The Council cannot take action or deliberate on items that are not on this agenda unless there is an emergency and the need to take action on that emergency arose after this agenda was posted (Government Code Section 54954.2(b)(2)). All other items may only be referred for review to staff or placement on a future Council agenda.
If you wish to address the Council, please refer to the Notice at the beginning of this agenda. Individuals are limited to one appearance during this section of the Agenda.
D. Adjournment
Pursuant to Section 54954.2(a) of the Government Code of the State of California, this agenda was posted at least 72 hours in advance of the scheduled meeting at a public place freely accessible to the public 24 hours a day.
______________________________
Olivia Nashed
City Clerk
LODI CITY COUNCIL
Carnegie Forum
305 West Pine Street, Lodi
Notice Regarding Public Comments
Public Comment may be submitted in the following ways:
• In-person
• Email – [email protected]
Received no later than 4:30 p.m. on the business day prior to the meeting. • Mail – City Clerk’s Office, P.O. Box 3006, Lodi, CA 95241 • Hand delivered to: City Clerk’s Office, 221 W. Pine Street, Lodi, CA 95240 Received no later than 4:30 p.m. on the business day prior to the meeting
Public comment received via email, mail, or hand delivery will be provided to the City Council and included in the official minutes record of the meeting, but will not be read aloud at the meeting.
AGENDA – Shirtsleeve Session
Date: July 18, 2023
Time: 7:00 a.m.
All staff reports or other written documentation relating to each item of business referred to on the agenda are on file in the Office of the City Clerk, located at 221 W. Pine Street, Lodi, and are available for public inspection. Agendas and staff reports are also posted on the City’s website at www.lodi.gov . If requested, the agenda shall be made available in appropriate alternative formats to persons with a disability, as required by Section 202 of the Americans with Disabilities Act of 1990 (42 U.S.C. Sec. 12132), and the federal rules and regulations adopted in implementation thereof. To make a request for disability-related modification or accommodation contact the City Clerk’s Office as soon as possible and at leas t 72 hours prior to the meeting date. Language interpreter requests must be received at least 72 hours in advance of the meeting to help ensure availability. Contact Olivia Nashed at (209) 333- 6702. Solicitudes de interpretación de idiomas deben ser recibi das por lo menos con 72 horas de anticipación a la reunión para ayudar a asegurar la disponibilidad. Llame a Olivia Nashed (209) 333-6702.
Meetings of the Lodi City Council are telecast on SJTV, Channel 26. The City of Lodi provides live and archived webcasts of regular City Council meetings. The webcasts can be found on the City's website at www.lodi.gov by clicking the meeting webcasts link.
Members of the public may view and listen to the open session of this meeting at www.facebook.com/CityofLodi/.
AGENDA ITEM B-01
COUNCIL COMMUNICATION
APPR
OVED: ________________________________
Stephen Schwabauer, City Manager
AGENDA TITLE: Receive Update on Pension Funding Status and Pension Stabilization Policy M
EETING DATE: July 18, 2023
P
REPARED BY: Deputy City Manager
RE
COMMENDED ACTION: Receive update on pension funding status and Pension Stabilization Policy.
B
ACKGROUND INFORMATION: The City of Lodi , like nearly all California public sector agencies , participates in a defined benefit retirement systems to provide pension benefits to employees. Like the overwhelming majority of agencies, the City is in the California Public Employee Retirement System (CalPERS).
S
ystemic issues within the CalPERS system have led to much publicized challenges with meeting funded status targets system wide. The same issues have led Lodi’s system to be significantly underfunded as well. The City Council first adopted a Pension Stabilization Policy in 2017 (PSP). The PSP has been updated twice since then, most recently on June 7, 2023, and is currently suspended pending the allocation of surplus funds from Fiscal Year 2021-22.
C
ity staff is providing a high-level overview of CalPERS current situation in general, the City of Lodi’s CalPERS status and an update on the City’s PSP.
I
t is important to note that this report attempts to condense concepts that could each be expanded into full length conference seminars or shirtsleeve sessions. California Society of Municipal Finance Officers (CSMFO) Annual Conference, the conference course on how to read a CalPERS actuarial report is always one of if not the top attended course and has been split into two sessions recently due to overwhelming demand. To fully grasp the nuance, importance and the City’s relationship to each item, each slide could be turned into its own hour-long session. Staff will attempt to provide enough information for Council to have a high-level understanding of the issues and will be available for future consultation or presentation as necessary if requested.
S
TRATEGIC PRIORITY ADDRESSED: 3E. Fiscal Health: Improve pension as against average cities by 25%
FI
SCAL IMPACT: There is no fiscal impact from the discussion. As CalPERS Unfunded Accrued Liability is the City’s largest single liability, decisions based upon the information presented have the
potential to have significant fiscal impact on all operating funds.
Understanding the weight, continued obligation and challenges it presents are paramount to maintaining the City’s Fiscal Health to continue to work towards and achieve the City Council’s Strategic Vision.
FUNDING AVAILABLE: N/A
_______________________________________
Andrew Keys
Deputy City Manager/Internal Services Director
CalPERS, PARS and Pension
Funding
Presented by Andrew Keys, Deputy City Manager
CalPERS
• History (Brief)
• PEPRA
• Asset Liability Management
• Discount Rate
• Other Assumptions
• Risk Mitigation Policy
• Actuarial Reports
Outline
2 Lodi
• Plan Basics
• PERS Bill
• Employee Contributions
• Unfunded Accrued Liability
• Stabilization Policy and Fund
• Funded Status History
• Alternate Strategies
• CalPERS was authorized in 1932 and is the predominant pension system for California public agencies.
• CalPERS serves over 2 million members in the retirement system and had nearly $440 billion market value of investments as of June 30, 2022. • 1,556 public agencies, 1,335 school districts and charters and the state participate in CalPERS.
• In addition, at least 6 cities, 22 counties, UC and CalSTRS have pension systems with reciprocal agreements with CalPERS.
• CalPERS targeted earnings rate, known as the Discount Rate is 6.8%. • Recent History shows CalPERS earnings exceeding the 6.8%. • Poorly timed enhancements to benefit formulas in 2000 followed by substantial losses in 2000/01 earnings year led to significant underfunding.
• Substantial losses in 2008/09 significantly reduced funded status leading to new legislation in 2012 and a push for further change to shore up fund finances. • Major legislative reform in 2012 known as PEPRA has improved the fund outlook, but significant legacy challenges and funding shortfalls still persist.
Recent CalPERS History
3 Recent CalPERS History ‐ Earnings
4 • The California Public Employees’ Pension Reform Act (PEPRA) was approved in 2012 and became effective January 2013.
• PEPRA established minimum levels of employee participation in pension funding for both Classic (pre PEPRA) employees and PEPRA employees (employees hired on or after January 1, 2013).
• A fixed % of salary was set at Classic Safety 9% and Classic MISC 7% for “Normal Cost” funding. Normal Cost is the projected cost for the benefit earned today. • PERPA employee contributions were set at 50% of normal cost. • Limits were placed on pensionable compensation to cap maximum payouts (135K with Social Security, 162k w/o), minimum retirement ages were increased, benefit formulas were reduced and capped, and controls to minimize “spiking” were put in place, among many other changes.
PEPRA
5 • Per CalPERS website:
The Asset Liability Management (ALM) process is an integrated review of our assets and liabilities to inform decisions designed to achieve a sound and sustainable fund.
The goal of the ALM process is to balance the expected cost of future pension payments with the expected future investment returns. During the process, the CalPERS board reviews its overall risks, taking into consideration the long‐term sustainability of the system.
This formal process runs on a four‐year cycle and includes a review of CalPERS’ investment portfolios and retirement plan liabilities. Capital Market Assumptions are primarily based on expectations of future investment returns. Liability projections are based on demographic and economic factors and trends, including membership dynamics, future salary and payroll growth, retirement ages, inflation, and life expectancy.
This innovative and transparent approach is overseen by the board and used to make sound decisions that applies to the Public Employees’ Retirement Fund (PERF) and our other affiliate funds.
Asset Liability Management
6 • Changes as a result of the ALM process result in changes to the City’s required contributions.
• The larges recent change was to the discount rate that became effective beginning in FY 2017/18.
• The discount rate was decreased in December 2016 from 7.5% to 7% over a 3 year period with each drop phased in over 5 years, paid off over 20 years with a declining contribution requirement in the last 5 years (see next slide). • Additional assumption changes from recent ALM cycles include increased life expectancy and earlier retirement ages (longer payouts), later assumed start dates (less time to earn), and decreased overall mortality rates.
• ALM has historically led to cost increases, not decreases.
Asset Liability Management
7 ALM Discount Rate Drop
8 • The discount rate is the most significant factor in calculating funding requirements.
FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 FY 2036 FY 2037 FY 2038 20%
20% 20% 20%
7.5% to 7.375% Effective with the June 30, 2016 Actuariual Report.
7.375% to 7.25% Effective with the June 30, 2016 Actuariual Report.
7.25% to 7.0% Effective with the June 30, 2016 Actuariual Report. 60%
40%
20%
100% 100%
100%
100%
80%
100% 100% 100% 100% 100% 100%
100%
80%
60%
40%
40%
20%
40%
60%
80%
100% 100% 100% 100% 100% 100%
100% 80% 60% 40%
40%
60%
80% 100% 100% 100%
100% 100% 100% 100% 100% 100%
60% 80% 100% 100% 100%
Other Assumptions
9 • CalPERS defined benefit is earned today but paid out long term over a period of time in the distant future.
• Significant assumptions include:
• Wage growth of individuals and payroll growth of the agency • System entry age
• Retirement age
• Life expectancy
• Pre and post retirement mortality
• Investment earnings
• Price inflation
• Marital status and Age of spouse
• Terminated members
• Vested retirement age (59 and 54)
• Non vested cash out immediately
• Disability (industrial and non industrial)
Risk Mitigation Policy
10 • In 2015, CalPERS adopted a Risk Mitigation Policy to reduce discount rate and risk if earnings were above expectation.
• FY 2021 earnings of 21.3% required a drop to 6.8% with excess earnings funding the drop.
• This policy limited funded status improvement from FY 2021 earnings.
• CalPERS annually publishes a Public Agency Actuarial Report for each member jurisdiction.
• Reports can be found by internet search “CalPERS Public Agency Actuarial Report” or at this link:
https://www.calpers.ca.gov/page/employers/actuarial‐resources/public‐ agency‐actuarial‐valuation‐reports
• Each agency’s assets are held in an independent account but investments, investment decisions and management is conducted at the system level. • Actuarial reports contain details about assumptions, demographics, funding status, plan details and other key information critical to each local agency’s participation in CalPERS retirement system.
• Actuarial information is provided on the aggregate agency plan level, not on the individual employee level.
Public Agency Actuarial Reports
11 • The appendices in the Actuarial Report contain demographic data on plan participants.
• The Active/Retired ratio of the Misc plan is 0.57 and the Safety plan is
0.59. Lodi Demographics
12 Group Name Active Employees Retirees and Beneficiaries Miscellaneous First Level (Classic) 140
Miscellaneous PEPRA Level 127
Miscellaneous Plan Total 267 466
Safety First Level (Classic) 58
Safety Second Level (Classic) 11
Safety PEPRA Level 51
Safety Total 120 202
• Lodi has the following benefit formulas for employees. • All new hires since 2013 are PEPRA unless they have previous and continuous PERS experience.
Lodi Benefit Formulas
13 Employee Category Pension Formula
Safety – Classic Tier 1 3% @ 50
Safety – Classic Tier 23 % @ 55
Safety – PEPRA 2.7% @ 57
Miscellaneous – Classic 2% @ 55
Miscellaneous – PEPRA 2.0% @ 62
• PERS separated into a split billing system in FY 2016/17. • Previous bills were all expressed as a % of payroll.
• Current bills are an annual fixed Unfunded Accrued Liability (UAL or catch up) amount and a % of salary Normal Cost (cost of the current benefit) shown on the cover page of the Actuarial Report.
Lodi PERS Bill
14 Plan Employer Normal
Cost Rate
UAL PEPRA Member
Rate
Miscellaneous 10.29% $5,118,826 8.00%
Safety 20.40% $6,969,718 13.00%
Lodi Actuarial Bases ‐ Misc
15 Lodi Actuarial Bases ‐ Safety
16 • Beginning in 2013 Lodi employees have been paying a significant portion of normal pension costs.
Lodi Employee Contributions
17 Bargaining Unit Misc or
Safety Cost Share % Employee Required
Contribution % Total Paid by Employee
General Services M 57 1 2
Maintenance & Operators M 6 7 13
Dispatchers M 3 7 10
I B E W M 279
LCMMA M 3 7 10
POAL S 9 9 18
Police Mid‐Mgmt S 9 9 18
Police Mid‐Mgmt (Misc.) M 9 7 16
Fire S 6 9 15
Fire Mid‐Mgmt S 3 9 12
Fire Chief S 3 9 12
Police Chief S 9 9 18
Unrepresented/ Confidental M 6 7 13
Executive/Department Heads M 6 7 13
Council Appointees M 6 7 13
Classic Employees
• Beginning in 2013 Lodi employees have been paying a significant portion of normal pension costs.
Lodi Employee Contributions
18 Bargaining Unit Misc or
Safety Cost Share % Employee Required
Contribution % Total Paid by Employee
General Services M 58 1 3
Maintenance & Operators M 6 8 14
Dispatchers M 3 8 11
IBEW M 2 8 10
LCMMA M 3 8 11
POAL S 6 13 19
Police Mid‐Mgmt S 6 13 19
Police Mid‐Mgmt (Misc.) M 9 8 17
Fire S 2 13 15
Fire Mid‐Mgmt S 3 13 16
Fire Chief S 3 13 16
Police Chief S 9 13 22
Unrepresented/ Confidental M 6 8 14
Executive/Department Heads M 6 8 14
Council Appointees M 6 8 14
PEPRA Employees PERS Contribution
• As of the June 30, 2021, actuarial report, the City’s Unfunded Accrued Liability is shown below (page 6 actuarial report).
Current Unfunded Accrued Liability
19 Plan Total Liability MVA UAL Funded %
Miscellaneous 224,689,925 177,481,645 47,208,280 79.0%
Safety 233,987,791 156,554,968 77,432,823 66.9%
All Plans 458,677,716 334,036 ,613 $124,641,103 72.8%
• In late 2016, anticipating the significant financial impacts of the discount rate drop, Lodi City Council adopted a Pension Stabilization Policy (PSP) and created a Pension Stabilization Fund (PSF) at PARS.
• The policy relied on excess fund balance from FY 2016 in the General Fund to invest in the PSF to provide a source to minimize the impact of rising pension costs and set a target of 80% combined funding for the City’s pension plans.
• The PSF was first funded in April 2017 based on excess fund balance from FY 2016.
• In late 2017, the PSP was enhanced to require all future reserves in excess of the target to be deposited into the PARS account and to require budgeting at the monthly (higher rate) to CalPERS but paying at the annual (lower rate) with the excess being applied as Additional Discretionary Payments (ADP) to buy down the liability.
Pension Stabilization Policy and Progress
20 • The PSF is an IRS section 115c trust fund for pension benefits. • By law the use is restricted to funding future pension costs. • Permits investment in higher yielding, higher risk assets. • Principal purpose is to provide financial flexibility in the face of either known or unknown upward pressures on pension costs.
• Not intended to out earn CalPERS.
• Adopted with knowledge of but before discount rate drop from 7.5% to 7.0%. • PERS inability to appreciably improve funded status makes risk of future and costly systemic changes likely.
Pension Stabilization Fund History
21 • The City has contributed $17.1 million and earned nearly $4.5 million since the PSF was initially funded in April 2017.
Pension Stabilization Fund History
22 FY2016‐17 FY2017 ‐18 FY2018 ‐19 FY2019 ‐20 FY2020 ‐21 FY2021 ‐22 FY2022‐23
(est.)
Beginning Balance as
of July 1 ‐ 3,938,615 11,095,822 13,937,524 16,607,021 20,499,725 20,037,023 PARS Contributions 3,843,954 6,907,626 1,979,931 2,160,716 ‐ 2,230,107 ‐ Earnings/(Losses) 94,661 249,581 861,771 508,781 3,892,704 (2,692,809) 1,531,760 Ending Balance as of
June 30 3,938,615 11,095,822 13,937,524 16,607,021 20,499,725 20,037,023 21,568,7483 Earnings/Losses is shown net of expenses.
FY 2020‐21 contribution was made as ADP to PERS.
FY 2022‐23 balance and earnings are est as of June 30, 2023. • PARS Compounded Annual Returns have exceed both PERS discount rate (6.8%) and PERS experienced rates of return.
• Comparisons are as of June 30, 2021.
• The City’s selected PARS fund has a lower risk profile than PERS due to lower equity exposure.
• All City assets at PARS are invested in the Balanced Fund.
Pension Stabilization Fund History
23 Investment Strategy Equity %1 Year 5 Years 10 Years PARS – Capital
Appreciation Fund
65‐85% 32.31% 12.64% 9.75%
PARS – Balanced
Fund
50‐70% 27.05% 11.26% 8.67%
PERS ~75% 21.3% 10.3% 8.5%
• On June 7, 2023, City Council adopted a revised pension stabilization policy that is temporarily suspended in order to consider FY 2021/22 fund balances.
• Revisions include:
• Capping annual contributions to 5% of General Fund revenue. • Setting a target of 5% of the total PERS liability to be invested at PARS with the excess to be used as ADP to PERS.
• Requiring the General Fund to pay the costs for Parks and Library PSP contributions.
Pension Stabilization Policy Update
24 • In addition to PSF contributions, the City has made significant ADP contributions totaling nearly $6.4 million over this time period. • Information through FY 2020‐21 is contained on page 21 of Actuarial Reports.
FY 2020‐21 includes $4,246,277 in ADP made in lieu of PARS deposits.
ADP is made in proportion to the pension bill in any given year.
Additional Discretionary Payments History
25 FY2018‐19 FY2019 ‐20 FY2020 ‐21 FY2021 ‐22 FY2022 ‐23 FY2023 ‐24 Totals Safety 151,021 188,083 2,642,028 193,039 339,113 225,531 3,738,815 Miscellaneous 122,421 156,589 1,963,043 157,941 76,040 165,639 2,641,674 Totals 273,442 344,672 4,605,071 350,980 415,153 391,170 6,380,488 • As a result of the City’s PSF balance, the City is approximately 4.4% better funded as of December 31, 2022.
Pension Funding Current Status
26 PERS Valuation
Date
PERS Funded
Status
PARS Assets (as
of 12.31 + one
year)
City's Funded
Status
% improvement
due to PARS
6.30.16 63.4% 5,229,493 64.8% 1.5%
6.30.17 64.9% 10,685,927 67.8% 3.0%
6.30.18 63.8% 17,023,582 68.0% 4.2%
6.30.19 64.2% 18,946,524 68.8% 4.6%
6.30.20 63.2% 21,245,657 68.1% 4.9%
6.30.21 72.8% 20,023,091 77.2% 4.4%
• As of the most recently available actuarial data, Lodi Ranks 415 out of the 430 cities in terms of reported funded status.
• PARS assets improve status by 5.2% and comparative ranking by 70. • Data comes from State Controller’s Office reporting on funded status.
Comparative Funding Current Status
27 • Lodi’s PERS relationship is long.
• Older agencies with a long PERS relationship are worse funded system wide. • Lodi has a 0.58 Active/Retiree ratio; each active employee supports 1.73 retirees. • Historically and financially necessary workforce reductions mean less money was flowing into the system to support future benefit payouts.
• Historical salary increases have not followed the slow and steady 2.8% annual wage inflation and change in payroll assumptions and instead have been “lumpy”. • Large increases to achieve current market competitiveness create funding gaps. • Employees who leave often get outsized raises and we do not lose the obligation to pay the retirement benefit from our plan.
• Lodi took advantage of three CalPERS allowed programs that substantially increased liability.
• 2001 benefit formula increases for safety and miscellaneous increased % of salary and decreased retirement age retroactively.
• Lodi took pension holidays when its plan was super funded. • Lodi offered “Golden Handshakes” for short term budget savings. Substantial ADP payments have eliminated these liabilities.
Why is Lodi Poorly Funded?
28 • One strategy touted as a solution to pension funding is Pension Obligation Bonds.
• At least 60 since 2017 have issued POBs as a strategy • POB’s fundamentally swap the 6.8% projected earnings rate at PERS for a lower taxable municipal bond rate.
• Ideally, the difference in rates results in savings for the local agency. • The agency is subject to significant market risk, most acute in the early years:
If PERS earns less than 6.8% in the first few years, the agency will end up paying more for the combined POB + debt payment than for just the PERS payment.
• The impact of changes to pension funding are more pronounced when the agency is better funded.
Pension Obligation Bonds
29 • Should the City wish to terminate its plan with CalPERS, CalPERS would assign a risk free rate to calculate the termination liability (page 29 actuarial report).
• Termination closes the system but keeps currently accrued benefits. • PERS gets no new money and must continue to pay all future benefits with only existing assets.
• Current funds are invested in “risk free” assets with substantially lower potential earnings.
Hypothetical Termination Liability
30 Plan 1% Risk Free Rate 2.25% Risk Free Rate
Miscellaneous $314,923,414 $232,578,607
Safety $400,852,804 $296,272,397
Total $715,776,218 $528,851,004
Questions?
31