Pension Funding Policy
CITY OF PATTERSON, CALIFORNIA
FINANCE ADMINISTRATIVE DIRECTIVE
Subject:
Pension Funding Policy
Directive No. 017 Page No. 1 of 11
Effective Date:
1/18/2022
Revised date:
Overview
The City of Patterson has developed a Pension Funding Policy to guide the City Council and Staff in making decisions related to the funding of pension benefits. This document outlines that policy.
1. Purpose Section
The City of Patterson’s Pension Funding Policy documents the method the City of Patterson will use to determine its annual pension contributions. The annual pension contributions fund the longterm cost of benefits to the plan participants and annuitants. The policy also:
• Provides guidance in making annual budget decisions;
• Demonstrates prudent financial management practices;
• Reassures bond rating agencies; and
• Shows employees and the public how pensions will be funded Nothing in this funding policy shall constitute an obligation upon the City of Patterson, nor an implied contract. The City of Patterson’s Council may revoke or amend this policy whenever it determines the changes to be in the best interest of the City of Patterson.
2. Background Section
The City of Patterson provides defined retirement benefits through the California Public Employees’ Retirement System (CalPERS). CalPERS is a multiple-employer public employee defined benefit pension plan.
Pension Funding Policy
All full-time and certain part-time City employees are eligible to participate in CalPERS. CalPERS provides retirement, disability and death benefits and annual cost of living adjustments to plan members and their beneficiaries. CalPERS acts as a common investment and administrative agent for participating public entities with the State of California. Benefit provisions and all other requirements are established by state statute.
The financial objective of a defined benefit pension plan is to fund the long-term cost of benefits provided to the plan members. In order to assure that the plan is financially sustainable, the plan should accumulate adequate resources in a systematic and disciplined manner over the active service life of benefitting employees. This funding policy outlines the method that the City of Patterson will utilize to determine its Actuarially Determined Contributions to fund the long-term cost of benefits to the plan members and annuitants.
Pension Funding: A Guide for Elected Officials, issued by eleven national groups including the U.S. Conference of Mayors, the International Agency/County Management Association, and the Government Finance Officers Association, established the following five general policy objectives for a pension funding policy:
• Actuarially Determined Contributions. A pension funding plan should be based upon an actuarially determined contribution (ADC) that incorporates both the cost of benefits in the current year and the amortization of the plan’s unfunded actuarial accrued liability. • Fund Discipline. A commitment to make timely, actuarially determined contributions to the retirement system is needed to ensure that sufficient assets are available for all current and future retirees.
• Intergenerational equity. Annual contributions should be reasonably related to the expected and actual cost of each year of service, so that the cost of employee benefits is paid by the generation of taxpayers who receive services from those employees. • Contributions as a stable percentage of payroll. Contributions should be managed so that employer costs remain consistent as a percentage of payroll over time. • Accountability and transparency. Clear reporting of pension funding should include an assessment of whether, how, and when the plan sponsor will ensure sufficient assets are available for all current and future retirees.
3. Policy Section
A. Goals of Funding Policy
:
3A1: The City of Patterson’s goal is to reach 90% funding of the Actuarial Liability by 2025 and 95% percent funding of the Actuarial Liability by 2028.
Pension Funding Policy
3A2: The City of Patterson’s goal is to stabilize contribution rates. 3A3: The City of Patterson’s goal is to fund liabilities using the discount rate adopted by the CalPERS Board for funding purposes.
3A4: In addition to the contributions required to meet the above goals, the City of Patterson will periodically make additional contributions to a Section 115 Pension Trust, with the goal of providing additional stabilization to future contribution requirements from the City’s General Fund.
B. Actuarially Determined Contribution (ADC)
CalPERS actuaries will determine the City of Patterson’s minimum required contribution to CalPERS based on approved Actuarial Standards of Practice as reported in an annual actuarial valuation. The ADC will include the normal cost for current service and amortization of any under-funded amount. The normal cost will be calculated using the entry age normal cost method using economic and non-economic assumptions approved by CalPERS Board of Administration.
The City of Patterson will review the CalPERS annual actuarial valuations to validate the completeness and accuracy of the member census data and the reasonableness of the actuarial assumptions.
The City of Patterson will contribute an amount no less than the ADC as required by CalPERS.
C. Section 115 Pension Trust Contribution
To address long-term pension costs and rising unfunded accrued liabilities, the City of Patterson established a Section 115 Trust to pre-fund pension obligations. The objective of contributions to a 115 trust is to increase the plan’s funded status by reducing the unfunded accrued liability, lowering annual pension contribution volatility, and reducing ongoing pension costs.
115 Trust Contribution Options:
3C1: To begin the funding of the 115 Pension Trust, the City of Patterson will make a onetime contribution of $1.5 Million to the 115 Pension Trust utilizing General Fund resources.
3C2: The City of Patterson will consider making additional contributions to the 115 Pension trust at a rate of approximately $250 thousand per year when revenue from the current year Sales Tax increase by 15% from prior year Sales Tax. In the event of a projected deficit in the General Fund for the fiscal year, City Manager and Finance Director will review in good faith the City’s overall fiscal condition and reach a determination on whether the additional contributions can be implemented.
Pension Funding Policy
115 Trust Usage Options:
3C3: The City of Patterson may use accumulated 115 Trust funds to make some or all of the City’s ADC contributions when the City Council determines that General Fund Revenues for the year are not sufficient to make those required contributions. 3C4: The City of Patterson may use accumulated 115 Trust funds to help reach the City’s funding goals stated in Section 3A1, or additional goals as determined by the City Council.
D. Transparency and Reporting
Funding of the City of Patterson’s pension plans should be transparent to interested parties including plan members, annuitants, the City Council and Patterson residents. In order to achieve this transparency, the following information shall be available:
• Copies of the annual actuarial valuations for the City of Patterson’s CalPERS plans shall be made available to the City of Patterson Council. • The City of Patterson’s Annual Comprehensive Financial Report shall be published on its website. This report includes information on the City of Patterson’s annual contributions to the pension systems and their funded status. • The City of Patterson’s annual operating budget shall include the City’s contributions to CalPERS.
• The City of Patterson’s Funding Policy shall be published on its website.
E. Review of Funding Policy
Funding a defined benefit pension plan requires a long-term horizon. As such, the City Council will review this policy no less frequently than once every five years to determine if changes to this policy are needed to ensure adequate resources are being accumulated.