ATTACHMENT 7
CITY OF PACIFICA UNFUNDED PENSION AND OPEB LIABILITY FUNDING STRATEGY This section of the report 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 Employer contributions are comprised of two components. The "normal cost" represents the cost Actuarilal Values as of June 30, 2022 Annual Contribution Employer Plan Assets Liability UAL
Funded
Status
Covered
Payroll
FY 2024-25
Normal
Cost Rate
Amortization
of UAL
Miscellaneous $ 94,100,039 $119,322,702 $25,222,663 78.9% $11,093,233 12.60% $ 1,923,242 PEPRA Safety Fire 1,020,868 1,171,877 151,009 87.1% 961,643 13.76% 5,483 PEPRA Safety Police 2,053,888 2,384,040 330,152 86.2% 1,695,546 13.76% 11,434 Safety Fire 35,601,433 52,979,381 17,377,948 67.2% 2,226,262 24.33% 1,382,383 Safety Police 58,130,597 87,881,724 29,751,127 66.1% 2,370,362 27.32% 2,369,381 Total Cal PERS
Pension Plans
$190,906,825 $263,739,724 $72,832,899 72.4% $18,347,046 $ 5,691,923 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 $263,739,724 = $3.96 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 $283,750 to fund OPEB unfunded liability, consistent with the Council funding strategy approved in April 2022. This FY 2024-25 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.