City of Manhattan Beach
Unfunded Pension Liability Policy
PURPOSE
The purpose of this Unfunded Pension Liability Policy (“Policy”) is to provide guidance on the development and adoption of a funding plan for any Unfunded Accrued Liabilities (“UAL”) that are calculated annually by CALPERS, or for any unfunded accrued liabilities remaining immediately after the issuance of a Pension Obligation Bond (POB). This funding Policy should also support the decision making process of the City Council and should be consistent with the overall purpose and goals of the City of Manhattan Beach’s pension plan. As used in this Policy, “City” shall mean the City of Manhattan Beach and/or the City and its related entities, as the context may require.
The City recognizes that a fiscally prudent Policy should:
Maintain the City’s sound financial position
Ensure the City has the flexibility to respond to changes in future service priorities, revenue levels, and operating expenditures
Protect the City’s creditworthiness
Ensure that all pension funding decisions are structured to protect both current and future taxpayers, ratepayers and residents of the City, and Ensure that the City’s debt is consistent with the City’s strategic planning goals, objectives, capital improvement program, and/or budget.
BACKGROUND
The primary goal of funding defined benefit pension plans is to ensure that sufficient assets will be accumulated to deliver promised benefits when they come due and to protect pension benefits in situations that involve employer insolvency or bankruptcy. Establishing sound funding guidelines promotes pension benefit security. The City’s overall objective is to fund the CALPERS pension plan near 100% of the total accrued liability and no less than 80%, whenever possible.
The City is committed to fiscal sustainability by employing long-term financial planning efforts, maintaining appropriate reserve levels, and employing prudent practices in governance, management, budget administration, and financial reporting. This Policy is intended to make all relevant information readily available to decision-makers and the public to improve the quality of decisions, identify policy goals, and to demonstrate a commitment to long-term financial planning. Adherence to this Policy signals to rating agencies and the capital markets that the City is well managed and able to meet its obligations in a timely manner.
The purpose of this funding policy is to establish a framework for funding the City of Manhattan Beach’s defined benefit pension plan, taking into account factors that are relevant to the plan and the City. These factors include:
The financial position of the City
Stability of the plan and / or the affordability of the annual contributions
Unfunded Pension Liability Policy, page 2
Benefit security
The terms of the CALPERS contract for Manhattan Beach, along with any related collective bargaining agreements
Minimum funding requirements under State law
There are a number of advantages to developing a funding policy to address an unfunded accrued liability. These advantages include the following:
Provides the framework to ensure the proper management of future liabilities and to minimize the effects on operations. The adoption of a funding policy will ensure a disciplined decision making process, which will contribute to better predictability in funding.
Having a written summary of the funding policy that is accessible to the employees and the public will help improve the transparency of funding decisions and increase the understanding of pension funding issues.
The exercise of developing this funding policy improves the identification, understanding, and management of the risk factors that affect the variability of funding requirements and the security of benefits to the employees and retirees.
REMAINING UNFUNDED ACCRUED LIABILITY
The City is in the process of considering issued a POB that would generated bond proceeds to deposit with CALPERS up to an amount equal to 100% of the UAL as of May 2021date (based on the latest actuarial valuation information available to the City).
After the deposit of bond proceeds to CALPERS, the City did not may or may not have any remaining unfunded accrued liability still owed to CALPERS at the time.
If the City issues a POB for less than the full 100% of the UAL, any remaining unfunded liability will be accounted for separately, for the purposes of this Policy, from any new increase in the accrued unfunded liability resulting from the annual actuarial valuation report changes.
The City will create a payoff / funding plan that will address this remaining unfunded liability immediately after the issuance of the POB. The remaining unfunded liability will be paid off or fully funded within a twenty (20) year period.
NEW UNFUNDED ACCRUED LIABILITY
Every year, CALPERS completes a new actuarial valuation report and recalculates the City of Manhattan Beach’s pension liability as of the new valuation date. If the value of the funded assets is not equivalent to this new liability amount, the City will incur a new unfunded accrued liability at that point in time. The unfunded accrued liability may increase or decrease from year to year, due to the following factors:
Changes in actuarial assumptions and experience changes (e.g., changes in the discount rate, changes in demographic experience, etc.) Unfunded Pension Liability Policy, page 3
Changes in actuarial gains and losses due to asset returns being higher or lower than expected
Changes in plan benefits
Due to the possibility of a new pension liability developing, the City of Manhattan Beach desires to create a policy in order to immediately address any new pension liabilities, or amortization bases, that arise. (Any new increase or decrease in the liability resulting from the annual actuarial valuation is identified as a separate line item, or amortization base, on the annual CALPERS actuarial valuation report.) The table below lays out the parameters for paying off / funding the UAL in a designated amount of time, based on the amount of the UAL, as follows:
New Unfunded Accrued Liability
(Any new liability incurred after the
June 30, 2019 valuation report )
Payoff / Funding Time Period
$0 to $5,000,000 Within 1 to 6 years
$5,000,001 to $10,000,000 Within 7 to 11 years
$10,000,001 to $15,000,000 Within 12 to 16 years
Over $15,000,0001 Within 17 to 20 years
Each year, when the City is provided with the annual valuation report from CALPERS, staff will present to the City Council, as part of a the Mid-Year Budget Report, the following:
The dollar amount of the new liability (new amortization base) The number of years that staff is recommending to pay off/fund the liability The dollar amount of the annual contribution to be made The funding source(s) of the payments
The short-term and long-term financial impacts on the City’s General Fund reserve balance
When a new amortization base results in a credit balance, the credit will be applied, first, to any negative bases during the same period and, secondly, against any prior year bases until the credit is fully exhausted. The remaining outstanding liability will then be recalculated and a new payoff schedule and annual contribution will be determined based on the payoff schedule above. New amortization repayment schedules will be kept within 20 years to help maximize long-term savings.
PREPAYMENT OPTIONS
Unfunded Pension Liability Policy, page 4
At the beginning of each fiscal year, the City analyzes the cost / benefits of prepaying amounts due CALPERS during that fiscal year. The City strives to continue taking advantage of any prepayment discount that is afforded by CALPERS.
FUNDING LEVELS
The City’s target funding level will be near 100% of the accrued liability. The City will strive to achieve this funding level through debt refinancing, allocation of reserves, and / or cost containment measures. The total funding amount will be a combination of the amount on deposit with CalPERS, the funds deposited in the City’s Section 115 trust, and any funds reserved by the City that are designated for pension liabilities.
FUNDING OPTIONS
Funding options for the remaining unfunded liability and / or any new unfunded accrued liabilities may include the use of a Section 115 Trust and / or allocating fund reserves from any allowable fund within the City.
Section 115 Trust
A Section 115 Trust was established in 2017 to transfer funds to a trust to ensure that these funds will only be used for pension related costs. The trust assets can be accessed to pay CalPERS at any time to reduce volatility and offset unexpected pension rate increases. The trust will have funds deposited into it at the discretion of the City Council, based on recommendations made by City staff during the annual budget adoption process.
For the calculation of funding levels, monies put in this trust will be treated the same as putting monies on deposit with CalPERS.
ADDITIONAL DISCRETIONARY PAYMENTS
Additional Discretionary Payments (“ADP”) may be deposited with CalPERS at any time.
After completion of the annual audit, all discretionary fund reserve balances will be reviewed by City staff. Based on any budgetary constraints at that time, a determination may be made that it is in the best interest of the City to use any available reserves or one- time savings from the prior fiscal year to make ADP’s. ADP's should not adversely affect the general operations of the City. ADP’s could be deposited with CalPERS, or invested in the City’s Section 115 trust.
Any savings realized from the issuance of the 2021 POB, as determined by comparing the POB level debt service and fiscal year 2020-2021 CalPERS actuarial determined contributions, will be allocated as follows: approximately 60% of the savings will be used to offset future UAL costs and approximately 40% of the savings will be used for future capital improvements, infrastructure needs and/or debt service.
Each year during the Budget process, a recommendation for the precise savings allocation for the next fiscal year will be determined based on CalPERS’ latest year-end investment return. If CalPERS’ fiscal year-end investment return is below its benchmark, the City will allocate a higher portion of savings to fund future UAL costs. Alternatively, if CalPERS’ Unfunded Pension Liability Policy, page 5
fiscal year-end investment return is higher than its benchmark, then the City may allocate more of the budgetary savings to offset General Fund operational costs.
CONSIDERATION OF FUTURE PENSION BENEFITS
The issuance of a POB may result in the funding of the City’s pension plan with CalPERS up to, and even in excess of, 100% of the plan assets necessary to pay all pension liabilities. Even though this situation may occur, the City is still obligated to make annual debt service payments on the bonds. These payments are in lieu of annual UAL payments that the City would have made to CalPERS.
To the extent that the City is making any annual debt service payments on an issued POB, it is fiscally responsible for the City to not offer any enhanced pension benefits to City employees. This will allow the City to focus its financial resources on the current pension obligations due the bondholders and / or CalPERS.
REVISED DATE,MARCH 2025