ATTACHMENT 6
CITY OF PACIFICA UNFUNDED PENSION AND OPEB LIABILITY FUNDING STRATEGY This section of the report is being added per Council request at the last budget study session and aims to provide a refresher and an overview of the City's strategy for managing Pension and Other Post Employment Benefit liabilities. As a best practice in Government finance, it is prudent to develop a funding strategy for pension and OPEB plans. Over the last few years the City has setup such a structure. The City has pension plans with the California Public Employees Retirement System (Cal PERS) and the trust fund with the Public Agency Retirement Services (PARS). The City also participates in the Cal PERS medical program known as Other Post-Employment Benefits (OPEB) Plan.
CalPERS Pension Plans:
Miscellaneous
Safety Police
PEPRA Safety Police
Safety Fire
PEPRA Safety Fire
CalPERS OBEB
Cal PERS OPEB medical program is an agent multiple employer defined benefit retiree healthcare plan.
PARS Pension Plan
The City has an Agent Multiple-Employer PARS Retirement Enhancement Plan (REP) that was implemented July 1, 2003, and is now closed to new participants hired after January 1, 2012. There are 22 inactive employees or beneficiaries receiving benefits and 2 active employees in the plan. The REP is administered by PARS.
All these plans accumulate assets that will be used to pay future benefits. An actuary prepares a report for each of these plans. They determine the market value of the assets and the accrued liability (present value of the amount needed to pay future benefits). The difference between the plan assets and the plan liability is the Unfunded Accrued Liability (UAL; also known as the Unfunded Actuarily Accrued Liability (UAAL). They determine the amount the City needs to pay each year, which has two components. The Normal cost rate which is a rate to cover current member's future benefits. In addition, they calculate the contribution needed to pay the Unfunded Accrued Liability (UAL) which will fluctuate based on assumptions and market conditions each year. The following is a table of plans Assets, Liability, Unfunded Accrued Liability, and other information taken from the most current actuarial reports.
Both Employee and employer contributions to this plan are required under state law. Required Annual Contribution
Employer Plan Assets Liability UAL
Funded
Status
Covered
Payroll
FY 2023-24
Normal
Cost Rate
Amortization
of UAL
Miscellaneous $104,117,864 $114,759,803 $10,641,939 90.7% $ 9,722,756 12.75% $ 1,574,329 PEPRA Safety Fire 908,815 866,243 (42,572) 104.9% 897,233 13.54% - PEPRA Safety Police 1,906,526 1,855,907 (50,619) 102.7% 1,562,823 13.54% - Safety Fire 40,804,921 52,002,809 11,197,888 78.5% 2,162,135 24.15% 1,168,121 Safety Police 65,178,791 84,860,105 19,681,314 76.8% 2,393,774 27.11% 2,012,423 Total Cal PERS
Pension Plans $ 212,916,917 $ 254,344,867 $41,427,950 83.7% $16,738,721 $ 4,754,873 Employer contributions are comprised of two components. The "normal cost" represents the cost attributable to services earned during the current fiscal period and are expressed as a percentage of pensionable payroll. The second component is a flat dollar amount representing the "UAL Contribution" which is an amortization of outstanding individual UAL bases (layers). The method and maximum term of the UAL amortization is dictated by the CalPERS policy, but the repayment of the UAL can be accelerated and/or restructured at the employer's discretion. Together, the two employer components represent the total required employer contribution. The sum of the required employer and employee contributions is called the Actuarial Determined Contribution (ADC).
Due to the frequent volatility in the total required employer contribution rate, the City has opted to utilize an Internal Revenue Code (IRC) §115 trust as a buffer against future expected volatility investing in a manner consistent with the long-term nature of pension liabilities and the City's tolerance for investment risk.
How Can a 115 Trust Be Structured?
An additional contribution to the 115 Trust of $167,500 is included to help fund the City's pension obligations in accordance to the Pension Funding Policy with the goal to accumulate an amount equal to 1.5% of the City's accrued pension liability over the next 20 years (1.5% x $254,344,867 = $3.8 million). This trust fund account will serve as a "rainy day fund" or buffer against future pension cost volatility.
Similarly, a continuing contribution to the PARS trust is budgeted at $200,000 to fund OPEB unfunded liability, consistent with the Council funding strategy #5 approved in April 2022. This FY 2023-24 allocation will provide additional contributions toward the Actuarial Determined Contribution (ADC) in addition to the pay-as-you-go payment strategy, which was historically the only budget mechanism of this unfunded liability in prior years. Because the City closed the OPEB pool to all new members, unlike pensions, the actuarial liability will gradually go away. By prefunding this liability through PARS, the City will be able to significantly reduce the Net OPEB liability reported annually in the Annual Comprehensive Financial Report (ACFR). The most current actuarial report shows the OBEB unfunded liability balance of $8,998,717 as of June 30, 2022.