© 2024 GovInvest Inc.
Pension Funding Update
Orange, CA
March 12, 2024
1 © 2024 GovInvest Inc.
Pension Update
2 © 2024 GovInvest Inc.
Understanding Pension Funding
3 Pension Basics
What has changed
since the last valuation
and the Impact of
those Changes
Addressing UALComparison with other
Agencies
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CalPERS Pension Basics
4 © 2024 GovInvest Inc.
Money going into CalPERS is equal to
the Money coming out of CalPERS
Major Driver of
Plan Cost
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CalPERS Projects Future Benefit Payments using
a Series of Assumptions
6 Economic
Inflation
Investment Return
Salary Growth
Demographic
Retirement
Disability
Death
Termination
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Orange has Two Miscellaneous Benefit Structures
PEPRA
Miscellaneous
Classic
Miscellaneous
On or after
1/1/13
On or before
12/31/12Hire Date
2% @ 622.7% @ 55Formula
36 months12 monthsFinal Pay Period
2% per year2% per yearCOLA
7.75% of pay
(50% of Normal Cost)8% of payEmployee Contributions
7 © 2024 GovInvest Inc.
Orange has Two Safety Benefit Structures
PEPRA Safety
Police & Fire
Classic Safety
Police & Fire
On or after
1/1/13
On or before
12/31/12Hire Date
2.7% @ 573% @ 50Formula
36 months12 monthsFinal Pay Period
2% per year2% per yearCOLA
12.75% of pay
(50% of Normal Cost)9% of payEmployee Contributions
8 © 2024 GovInvest Inc.
Over the Next Few Years,
More Employees will be in the PEPRA Tier
9 37.4%
58.9%
77.3%
90.3%
96.8% 99.0%
0%
20%
40%
60%
80%
100%
120%
$-
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
$140,000,000
$160,000,000
$180,000,000
$200,000,000
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
Classic PEPRA % PEPRA
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As the Workforce shifts toward more PEPRA members, the
Normal Cost will decrease as a Percent of Pay
10 © 2024 GovInvest Inc.
Comparison to Other
CalPERS Agencies
11 © 2024 GovInvest Inc.
Comparison Metrics
Funded Percentage
Plan assets divided by Plan liabilities
Calculated as of June 30, 2022
Total Contribution Percentage
Required Contribution divided by Projected Pensionable Compensation Payable in Fiscal Year 2024/25
12 © 2024 GovInvest Inc.
Actuarially Determined Contribution
13 Normal Cost
Unfunded
Actuarial
Liability (UAL)
Amortization
Payment
Total
Employer
Contribution
Cost for current service -
Paid as a percent of payroll
Payment toward past
service - Paid as a dollar
amount each year
Minimum Payment City
can make to CalPERS
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Comparison Group
Miscellaneous results are compared against all the results for CalPERS Miscellaneous Plans that are not in the Risk Pool.
Safety results are compared against all the results for CalPERS Safety Plans that are not in the Risk Pool.
14 © 2024 GovInvest Inc.
Miscellaneous Funded Percentage Comparison –
93.7%
15 © 2024 GovInvest Inc.
Miscellaneous Total Contribution Comparison – 15.6%
16 © 2024 GovInvest Inc.
Safety Funded Percentage Comparison – 90.5%
17 © 2024 GovInvest Inc.
Safety Total Contribution Comparison – 26.6%
18 © 2024 GovInvest Inc.
Changes Since Prior
Valuation
19 © 2024 GovInvest Inc.
CalPERS Investment Return:
-6.1% in 2021/22
5.8% in 2022/23
Weak return in 2021/22 followed by better return in 22/23 20 © 2024 GovInvest Inc.
CalPERS Actual Investment Returns versus
Assumed Investment Return
21 -3.1%
35.4%
24.6%
13.8%
3.9%
15.7%
9.7%
6.5%
12.5%
14.5%
2.0%
16.3%
15.3%
20.1%
19.5%
12.5%
10.5%
-7.2% -6.1%
3.7%
16.6%
12.3%
11.8%
19.1%
-5.1%
-24.0%
13.3%
21.7%
0.1%
13.2%
18.4%
2.4%
0.6%
11.2%
8.6%
6.7%
4.7%
21.3%
-6.1%
5.8%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Plan Year Ending June 30
Investment Return Discount Rate 5 per. Mov. Avg. (Investment Return) Dot Com Crash
Great Recession
Discount Rate = Assumed Investment Return Rate
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Less Money from Investment Return means
More Money Required from Contributions
22 Contributions
Contributions
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Higher than Assumed Retiree COLA in 2022
23 © 2024 GovInvest Inc.
Impact of Changes
24 © 2024 GovInvest Inc.
Unfunded Accrued Liability
25 © 2024 GovInvest Inc.
Funded Percentage
26 © 2024 GovInvest Inc.
Employer Required Contributions
27 © 2024 GovInvest Inc.
Employer Required Contribution Increase is
Primarily Due to UAL Payments
28 © 2024 GovInvest Inc.
Total Payments toward Pension Includes
Payments to Pension Obligation Bond Holders
29 $0
$5
$10
$15
$20
$25
$30
$35
$40
$45
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
Millions
Required Contribution and Bond Payment
Required Contribution Bond Payment
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Addressing Unfunded
Liability
Approaches the City can take to control future Unfunded Liability 30 © 2024 GovInvest Inc.
Unfunded Actuarial Liability
should be Monitored Regularly
Paying off the current UAL does not mean there will be no Unfunded Actuarial Liability in the future.
Each year, new Unfunded Actuarial Liability (both positive and negative) are created based on plan assumptions and experience.
These are referred to as Amortization Bases.
Payments toward the new UAL Amortization Bases are generally amortized over a 20-year period.
31 © 2024 GovInvest Inc.
Each Year, UAL is Adjusted due to the Previous Year’s
Experience, and paid off over a 20-Year Period
32 $0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
UAL Payments
2022 Bases 2023 Bases
© 2024 GovInvest Inc.
What is Unfunded Actuarial Liability?
When actual plan experience is different than the plan’s assumptions, new Unfunded Actuarial Liability (UAL) is created.
UAL is also created when assumptions are changed.
UAL increases when experience is worse for the plan than what was assumed. For example, when the Investment Return assumption was lowered to 6.8%.
UAL decreases when experience is better for the plan than what was assumed. For example, when the Investment Return is greater than the assumed Interest Rate.
It can also happen for salary increases, or demographic changes, such as high levels of turnover, or increasing life expectancy. 33 © 2024 GovInvest Inc.
Why Address Unfunded Liability?
Most of the increase in Required Contribution is due to payment toward Unfunded Actuarial Liability
City is effectively paying interest to CalPERS for Unfunded Actuarial Liability
Current interest rate is 6.8%
34 © 2024 GovInvest Inc.
Potential Approaches to Addressing UAL
One-time Additional Contribution
Additional Annual Contributions
Budgeted
Based on Budget Surplus or Other Savings
35 © 2024 GovInvest Inc.
Questions
36 © 2024 GovInvest Inc.
While tested against actuarial valuation results, the software results will not necessarily match actuarial valuation results, as no two actuarial models are identical. The software offers financially sound projections and analysis; however, outputs do not guarantee compliance with standards under the Government Accounting Standards Board or Generally Accepted Accounting Principles. The software and this presentation are not prepared in accordance with standards as promulgated by the American Academy of Actuaries, nor do outputs or this presentation constitute Statements of Actuarial Opinion. GovInvest has used census data, plan provisions, and actuarial assumptions provided by Customer and/or Customer’s actuary to develop the software for Customer. GovInvest has relied on this information without audit.
Disclaimer
37