Pension Funding_Patterson_010522 v1 — Patterson City Council, January 18, 2022

Pension Funding
City of Patterson
January 18, 2022
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Understanding Pension Funding
2 Pension Basics Changes Since the
Last Valuation
Impact of Changes
How is your agency
doing relative to other
agencies?
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Pension Basics
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City has Two Safety Benefit Structures
Safety PEPRA Safety
Hire Date On or before
12/31/12
On or after
1/1/13
Formula 3.0% @ 55 2.7% @ 57
Final Pay Period 36 months 36 months
COLA 2% per year 2% per year
Employee
Contributions 9% of pay 13.0% of pay
(50% of Normal Cost)
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City has Two Miscellaneous Benefit Structures
Miscellaneous PEPRA
Miscellaneous
Hire Date On or before
12/31/12
On or after
1/1/13
Formula 2.7% @ 55 2% @ 62
Final Pay Period 36 months 36 months
COLA 2% per year 2% per year
Employee
Contributions 8% of pay 6.75% of pay
(50% of Normal Cost)
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Projected Classic vs PEPRA Payroll
6 42.2%

59.4%

75.3%

87.3%

96.3% 99.1% 99.9%
0%
20%
40%
60%
80%
100%
120%
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
2020 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 Classic PEPRA % PEPRA
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Assumptions Set Future Cost & Funding Expectations
7 Economic
• Inflation
• Investment Return
• Salary Growth
Demographic
• Retirement
• Disability
• Death
• Termination
Major Driver of
Plan Cost
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How is Patterson doing
Relative to Other Agencies?
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Comparison Metrics
• Funded Percentage
• Plan assets divided by Plan liabilities
• Calculated as of June 30, 2020
• Total Contribution Percentage
• Required Contribution divided by Projected Pensionable Compensation 9 Proprietary and Confidential © 2021 GovInvest Inc.

Comparison Group
• City results are being compared against the results for all CalPERS agencies in the Risk Pool
• Comparisons are made to similar classifications:
• Classic Miscellaneous Plan against all Classic Miscellaneous Plans • PEPRA Miscellaneous Plan against all PEPRA Miscellaneous Plans • Classic Safety Plan against all Classic Safety Plans
• PEPRA Safety Plan against all PEPRA Safety Plans
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Miscellaneous Plan
– Funded Percentage as of June 30, 2020 (76.9%)
11 Patterson
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Miscellaneous Plan
– Total Contribution Percentage as of June 30, 2020 (30.9%) 12 Patterson
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Patterson
PEPRA Miscellaneous Plan
– Funded Percentage as of June 30, 2020 (90.7%)
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PEPRA Miscellaneous Plan
– Total Contribution Percentage as of June 30, 2020 (7.8%) 14 Patterson
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Safety Plan
– Funded Percentage as of June 30, 2020 (73.4%)
15 Patterson
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Safety Plan
– Total Contribution Percentage as of June 30, 2020 (43.0%) 16 Patterson
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PEPRA Safety Plan
– Funded Percentage as of June 30, 2020 (89.7%)
17 Patterson
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PEPRA Safety Plan
– Total Contribution Percentage as of June 30, 2020 (13.5%) 18 Patterson
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Changes Since Prior Valuation
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CalPERS Investment Return:

21.3%
Strong Investment Return Triggers Lower Discount Rate
Provision of Funding Risk Mitigation Policy
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CalPERS Historic Investment Returns
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%

21.30%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%
19841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015201620172018201920202021 Plan Year Ending June 30
Actual Discount Rate 5 per. Mov. Avg. (Actual)
Dot Com Crash
Great Recession
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More Money from Investment Return means
Less Money Required from Contributions
22 Contributions
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Lower Bond Yields make it More Difficult to Hit
Investment Targets
23 Source: CalPERS
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Funding Risk Mitigation Policy
- Less Investment Risk means Lower Expected Investment
Return
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Lower Discount Rate Means Less Money is Expected
from Future Investments
25 Discount Rate
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Major Assumption Changes
• Discount Rate – Reduced from 7.0% to 6.8%
• Inflation – Reduced from 2.5% to 2.3%
• Wage Growth – Increased from 2.75% to 2.8%
• Demographic Assumptions – Minor Changes to Mortality, Retirement, Termination and Disability Rates
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Why are Funding Policies Important
• Pension obligations are expensive and can become a serious financial threat to agencies without regular and appropriate attention;
• Pensions require long-term management therefore it is important to develop pension management strategies memorialize practices;
• 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.

Three Sections
• Why is this Policy being put in
place?
• Basic information related to
setting funding policy
• How the Policy will work
33 Purpose Background Policy
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Purpose
• Documents method the City will use to determine its annual pension contributions;
• 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 35 Proprietary and Confidential © 2021 GovInvest Inc.

Background
• City provides retirement benefits through CalPERS
• All full-time and certain part-time employees of the City are eligible to participate in CalPERS
• Funding goal – Fund the long-term cost of benefits provided to the plan members
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Goals
• Make contributions to CalPERS to reach
• 90% funding by 2025
• 95% funding by 2028
• Stabilize contributions from General Fund
• Additional contributions, when possible, to Section 115 Trust to allow for future contribution flexibility
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Actuarially Determined Contribution
40 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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Section 115 Pension Trust –
Contributions Into Trust
• At Discretion of City Council
• Begin funding - one-time contribution of $1.5 Million • Additional funding - approximately $500 thousand per year when revenue from the recent Sales Tax reaches 110% of projected returns 41 Proprietary and Confidential © 2021 GovInvest Inc.

Section 115 Pension Trust –
Payments from Trust
• At Discretion of City Council
• Some or All Required Contributions – When General Fund revenues insufficient to make payments
• Additional Funding - help reach the City’s funding goals stated in Section 3A1, or additional goals as determined by the City Council 42 Proprietary and Confidential © 2021 GovInvest Inc.

Transparency and Reporting
• CalPERS Annual Actuarial Valuation Reports to City Council • Annual Operating Budget lists pension contributions
• On website:
• Funding Policy
• Annual Comprehensive Financial Report
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Review Policy
• At Discretion of City Council
• No less frequently than once every five years
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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
46

Patterson City CouncilJanuary 18, 2022

Patterson City Council
January 18, 2022