ATTACHMENT 6
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 a 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 20 inactive employees or beneficiaries receiving benefits and zero 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: 1) Normal Cost and 2) UAL. The Normal cost rate is a rate to cover current member's future benefits. The UAL will fluctuate based on assumptions and market conditions each year. The following is a table of plans Assets, Liability, UAL, and other information taken from the most current actuarial reports.
Both Employee and employer contributions to this plan are required under state law. As mentioned, the required employer contributions are comprised of two components. The "normal Actuarial Values as of June 30, 2023 Annual Contribution Employer Plan Assets Liability UAL
Funded
Status
Covered
Payroll
FY 2025-26
Normal
Cost Rate
Amortization
of UAL
Miscellaneous $ 97,367,995 $122,607,809 $25,239,814 79.4% $11,183,451 12.58% $ 2,112,886 PEPRA Safety Fire 1,369,509 1,578,683 209,174 86.8% 1,037,398 13.99% 11,517 PEPRA Safety Police 2,671,682 3,107,308 435,626 86.0% 1,922,604 13.99% 23,835 Safety Fire 36,523,518 54,876,320 18,352,802 66.6% 2,004,831 24.40% 1,562,440 Safety Police 58,304,363 89,593,590 31,289,227 65.1% 2,161,517 27.38% 2,582,010 $196,237,067 $271,763,710 $75,526,643 72.2% $18,309,801 $ 6,292,688 Total Cal PERS
Pension Plans
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 $214,700 is included in the budget to help fund the City's pension obligations in accordance to the Pension Funding Policy introduced in FY 2024-25 with the goal to accumulate an amount equal to 1.5% of the City's accrued pension liability over 20 years or by FY 2044-45 (1.5% x $271,763,710 = $4.08 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 2025-26 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 years prior 2022. 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 $4,810,477 as of June 30, 2024 report date.