PISMO BEACH COUNCIL AGENDA REPORT
Agenda Item #12.C
SUBJECT/TITLE:
CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM (CALPERS) ADDITIONAL DISCRETIONARY PAYMENT OF $1.0 MILLION TO REDUCE THE CITY’S UNFUNDED PENSION LIABILITY
RECOMMENDATION:
Adopt a Resolution appropriating $1.0 million from the General Fund unassigned fund balance to provide additional discretionary payments of $500,000 to each of the City’s CalPERS Miscellaneous and Safety Police Tier 1 plans to reduce the City’s unfunded pension liability.
EXECUTIVE SUMMARY:
The City of Pismo Beach provides retirement benefits for full-time employees through the California Public Employees' Retirement System (CalPERS). Due to past investment earnings that did not achieve targeted earnings, as of June 30, 2021, CalPERS only has approximately 80% of the funds required to pay estimated retirement benefits. Although the funded rate is a moving target depending on the amount of contributions into CalPERS and the market value of CalPERS investments, an 85% to 90% funded rate would better allow CalPERS to support current and future retirement benefits, while a 50% funded rate could mean that the pension system may not be able to deliver promised benefits. As a result of past losses, increases in the life span, retirement enhancements, and other factors, public agencies are now having to pay this unfunded amount, at a 6.8% interest rate.
Based on past practice to use the personnel cost savings from the prior fiscal years to support an additional discretionary payment to CalPERS to reduce its interest costs on this debt and help manage increasing unfunded accrued liability (UAL) payments, staff reviewed the benefit of contributing $1.0 million from the General Fund CalPERS prepayment set-aside (General Fund available fund balance set aside from the FY 2018 through FY 2021 personnel cost savings) toward the UAL in one lump sum. Based on this review and the projected savings, staff recommends that the Council adopt a resolution (Attachment 1) to contribute $1.0 million directly to CalPERS to prefund its UAL for the tier 1 retirement plans for Miscellaneous and Safety Police, including related budget adjustments.
BACKGROUND:
The City of Pismo Beach provides retirement benefits for full-time employees through the California Public Employees' Retirement System (CalPERS). These retirement plans provide a defined benefit to each retired employee based on a set percentage of an employee’s salary multiplied by the number of years that the employee contributed to the CalPERS system, starting at the stated retirement age of each Plan tier. The City has three main retirement plans, each with two or three benefit tiers:
12.C-1Council Agenda 3-15-2022
Chart 1: City’s CalPERS Retirement Plans
Each tier within each plan calls for a different Employer and Employee cost, with the 1st tier costing the most, and the 3rd tier costing the least, to the employer.
How are Employee Pensions Funded?
Normal (Current) Costs
Individual employee contributions make up about 11% of their retirement benefits. City employees contribute a percentage of their salary depending on their plan and fiscal year. Miscellaneous employees currently contribute 8.0% of their salary to their retirement for tiers 1 and 2, and 8.5% for tier 3 employees. Safety Police employees contribute 12.0% of their salary to their retirement for tiers 1 and 2, and 13.5% for tier 3 employees. Safety Fire employees contribute 9.0% for tier 1 employees and 12.0% for tier 3 employees.
Employer contributions make up 29% of employees’ retirement. The City contributes a percentage of the employees’ salary toward the employees’ retirement benefits, ranging from 5.84% for the tier 3 miscellaneous employees to 20.71% for a Sworn Police Officer in tier 1.
The following table illustrates the City (Employer) and Employee contributions for the current fiscal year, FY 2022.
Miscellaneous Plan (All
Employees except
Sworn Police Officers)
• First tier provides a
benefit of 2.5% at age
55 • Second tier provides a
benefit of 2.0% at age
60 • Third tier provides a
benefit of 2.0% at age
62 Safety Police Plan (for
Sworn Police Officers)
• First tier provides a
benefit of 3.0% at age
50 • Second tier provides a
benefit of 3.0% at age
55 • Third tier provides a
benefit of 2.7% at age
57 Safety Fire Plan
• First tier provides a
benefit of 2.0% at age
50 • Third tier provides a
benefit of 2.7% at age
57 12.C-2Council Agenda 3-15-2022
Table 1: City and Employee Contributions to CalPERS
CalPERS investments fund 60% of the employees’ retirement. CalPERS investments have varied every year, largely depended on the overall economy. Including the most recent FY 2021 investment earnings of 21.3%, earnings have averaged: 8.5% per year over the past 10 years, 6.9% per year over the past 20 years, and 8.4% per year for the past 30 years.
In total, 71% of the pension costs are funded by CalPERS investment earnings and employee contributions, leaving 29% funded by the City. The following graphic illustrates the percentages, or cents per dollar, of contributions per each dollar of public employee pension costs.
Figure 1. Percentage of Respective CalPERS, Employer, and Employee Contributions
Unfunded Pension Costs (Recovering from Past Investment Earnings Lower than Target) In addition to paying the normal or current pensions costs for the year, the City also contributes an amount each year (UAL payment) to help make up for past years where the above 3 factors did not meet the target earnings rate. Although on average, CalPERS has met its target investment earnings, CalPERS experienced significant losses during the recession in 2000 and 2001 of 7.2% and 6.1%, respectively, in investment earnings and during the Great Recession in 2008 and 2009 of 5.1% and 24.0%, respectively, of investment earnings. Since then, CalPERS has been struggling to recover those losses.
As such, CalPERS has large unfunded pension costs that it cannot earn its way out of Plan
City
Rate
Employee
Rate
Miscellaneous - T1 12.20% 8.00%
Miscellaneous - T2 7.65% 8.00%
Miscellaneous - T3 (PEPRA)5.84% 8.50%
Police - T1 20.71% 12.00%
Police - T2 17.64% 12.00%
Police - T3 (PEPRA)12.63% 13.50%
Fire - T1 0.00% 9.00%
Fire - T3 (PEPRA)0.00% 12.00%
12.C-3Council Agenda 3-15-2022
using only investment earnings. In order to manage the lower-than-targeted past investment earnings and provide its promised benefits, CalPERS has amortized these payments across 20 to 30 years to be paid back by public agency contributions. As such, these unfunded pension costs are significant.
Impact of the Normal Cost and UAL cost on Annual Budgets The normal pensions costs that are paid by the City and the employee to pay for retirement benefits are currently $900 thousand in FY 2022. The UAL payment (catching up for earnings not achieved in prior years) was $1.5 million in FY 2022. To put this into context with the City’s all funds operating costs, the City pays 2% of its operating budget to normal or current pension costs. The City pays 4% of its operating budget for unfunded liability payments. The following table shows these normal costs, unfunded liability payments, all funds operating budget, and the percentage of the pension costs compared to the operating budget.
Table 2: FY 2021 to FY 2023 Pension Costs Compared to Operating Budgets
The unfunded liability payments are increasing significantly and, based on the latest CalPERS valuation, they will continue to increase and peak in FY 2031, then start decreasing (assuming no additional retirement benefit enhancements) after that. The following chart illustrates the City’s UAL payments projected from FY 2022 to FY 2041 based on the June 30, 2020 CalPERS actuarial valuation.
Fiscal
Year
Normal
(current)
Pension
Costs
Unfunded
Liability
Payment
(Principal and
Interest)
All Funds
Operating
Budget
Normal
Pension as
% of
Operating
Budget
CalPERS
Unfunded
Liability as % of
Operating
Budget
FY 2021 823,816$ 1,288,444$ 34,816,106$ 2% 4% FY 2022 900,278 1,532,653 41,030,496 2%4% FY 2023 909,615 1,719,008 42,008,617 2%4%
12.C-4Council Agenda 3-15-2022
Funded Status and Total Unfunded Accrued Liability
Funded Status as of June 30, 2020 Valuation: 74%
The funded status of the City’s retirement plans are determined by comparing the assets the plan needs to cover all its long-term obligations using various actuarial assumptions compared to the market value of its existing assets. As of the most recent, June 30, 2020, CalPERS actuarial valuation, the funded status of each retirement plan is 74% for all three plans. The tier 1 plans range from 70.7% to 74.8% funded, while the tier 2 and 3 (PEPRA) plans range from 80.2% to 92.5% funded status. The unfunded portion of the City’s retirement plans, or the Unfunded Accrued Liability (UAL), as of June 30, 2020 for the all funds is $19.8 million, including $10.0 million for the Miscellaneous Plan tier 1 and $8.0 million for the Safety Police Plan tier 1. The City also has Safety Fire Plans for former fire employees which have a total UAL of $1.4 million as of June 30, 2020. The following table illustrates the funded status of the eight retirement plans, including the total UAL. Taking the weighted average all plans, the funded status of all the City’s plans is 74%.
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
Chart 2: CalPERS Unfunded Accrued Liability Payments
POA Tier 1 POA Tier 2 POA Tier 3 Misc Tier 1
Misc Tier 2 Misc Tier 3 Fire Tier 1 Fire Tier 2
12.C-5Council Agenda 3-15-2022
Table 3: Funded Status of Each Retirement Plan
Preliminary Funded Status Estimate as of June 30, 2021 Valuation: 82% Although CalPERS has not issued its updated actuarial valuations as of June 30, 2021, preliminary findings from the City’s CalPERS actuary suggest that with the strong earnings during FY 2021, the funded status of the City’s Miscellaneous and Public Safety tier 1 plans are 81.9% and 83.1%, respectively. This is in line with the entire CalPERS funded status increasing from 70.6% as of June 30, 2020 to 80.0% as of June 30, 2021.
However, the funded status is a preliminary estimate as CalPERS actuaries will be working on not only the investment earnings, but any changes to other actuarial assumption before finalizing this information in late summer or early fall of 2022.
Future Projected Funded Status over Next Decade: Volatile, but Better Positioned Due to various uncertain economic factors including global unrest, preliminary investment earnings, longer projected lifespans, and other market impacts, CalPERS is projecting volatility over the next decade in its investment earnings, which would impact the funded status. Looking at CalPERS current investments for FY 2022 through February 2022, investments have slightly decreased compared to June 30, 2021, which may signal that CalPERS will not achieve the 6.8% earnings rate it is expected to meet, potentially reducing its funded status for FY 2022. Fortunately, despite these upcoming, uncertain, and volatile projections, CalPERS and public agencies are better positioned to weather some economic downturns through various strategies implemented after the last two economic downturns experienced double digit lost earnings in multiple years. These strategies included pension reform in 2013 that established new tier 3 retirements with reduced benefits and lower costs, CalPERS implemented additional policies to help reduce its earnings target from 7.5% per year to 6.8%, shifting its investment strategy from higher earning riskier investments to more stable and conservative investments to avoid large drops due to market pressures, and public agencies increasing contributions to CalPERS.
Plan
Funded
Status % as
of 6/30/20
Unfunded
Accrued
Liability (UAL)
as of 6/30/21
% of
total
UAL
% funded
all plans
Miscellaneous - T1 73.20% 9,971,433 50% 36.9%
Miscellaneous - T2 90.60% 107,039 1% 0.5%
Miscellaneous - T3 (PEPRA)89.10% 141,765 1% 0.6% Police - T1 74.80% 7,986,248 40% 30.2%
Police - T2 92.50% 39,531 0% 0.2%
Police - T3 (PEPRA)85.70% 126,399 1% 0.5%
Fire - T1 70.70% 1,378,007 7% 4.9%
Fire - T3 (PEPRA)80.20% 10,628 0% 0.0%
19,761,050 74%
12.C-6Council Agenda 3-15-2022
Funded Status, One Measure Reflecting Health of the Retirement Plans Although the funded rate is a moving target depending on the amount of contributions into CalPERS and the market value of CalPERS investments, an 85% to 90% funded rate would allow CalPERS to support current and future retirement benefits, while a 50% funded rate would mean that the pension system would likely not be able to earn sufficient amounts to deliver promised benefits. The City is currently estimated to be approximately 82% funding in FY 2022, meaning the City is progressing toward a more sustainable plan.
Still Large Unfunded Liability Payments Due to CalPERS, Peaking in FY 2031 Although the City’s funded status improved in FY 2021, there still remains large unfunded accrued liabilities (UAL) from promised defined benefits compared to the fiscal health of the CalPERS system. This UAL for the City is $19.8 million as of the June 30, 2020 valuation and will grow with the next valuation. In order to pay down this UAL, public agencies have been making payments amortized over 20 to 30 years. As the valuation and funded status assumes a 6.8% earnings rate, these payments reflect a 6.8% interest rate, a high interest rate compared to all the other City’s debt obligations. As shown in Chart 1, these UAL payments are only expected to increase and finally peak in FY 2031.
Currently 4% of the City’s operating costs are paid to CalPERS, and this percentage will increase as UAL payments increase. Other than CalPERS consistently exceeding its earnings target to make up for its past investment losses, the most cost-effective way to help manage these costs is to pay down this debt. Paying down the unfunded liability earlier than the current amortization schedule not only reduces the City’s unfunded liability and the high interest costs, but also reduces the City’s operating costs over that period.
In other words, although the plans are potentially reaching a more sustainable funded status, the City still has increasingly large debt payments, reflecting a 6.8% interest rate.
As such, it is in the best interest of the City’s financial portfolio to pay this down to reduce this interest cost. In fact, several public agencies, including the City of Pismo Beach, have made additional discretionary payments to reduce the high interest costs and pay down this debt. To date, Pismo Beach has paid $3.0 million toward its UAL ($1.0 million in 2015 and $2.0 million in 2018), saving $4.2 million in interest costs over 30 years and $382,000 per year, negotiated new retirement tiers, and increased employee contributions. Staff had originally planned to recommend an additional $1.0 million in 2020, but due to COVID-19 global pandemic and the plunging economic situation, staff did not recommend making an investment at that time.
Pay Down UAL Debt
The most direct way to reduce the City’s interest costs is to make direct CalPERS additional discretionary payments. Providing an additional discretionary payment to CalPERS provides a direct benefit by reducing the City’s interest on its unfunded liability and helps to reduce the City’s UAL payments over time. Staff worked with its CalPERS Actuary to determine the results of contributing $500 thousand to each of the tier 1 Miscellaneous and Public Safety Police plans.
Staff used the CalPERS Managing ER Contributions tool to determine how to best allocate the $1.0 million across the various plans to maximize interest cost savings overall
12.C-7Council Agenda 3-15-2022
and to reduce the City’s payments while also achieving savings in the first 5 years from FY 2023 to FY 2027. Staff applied the $500 thousand for each plan to the longest amortization period to maximize interest savings. Based on this review, the total $1.0 million prepayment to CalPERS will save the City $1,102,570 in interest costs, of which $347,492 will be saved in the first five years. The average annual saving for both plans is $105,129, reducing the City’s operating costs. below are the proposed options and corresponding savings.
Table 4: CalPERS Prepayment Projected Savings
Plan Prepayment Total Interest
Savings
FY 2022-FY
2027 Savings
FY 2022 to
FY 2042
Annual
Savings
Police Safety
Plan Tier 1
$500,000 $530,832 $179,997 $51,542
Miscellaneous
Plan Tier 1
500,000 571,738 167,495 53,587
TOTAL $1,000,000 $1,102,570 $347,492 $105,129
The annual payments by year are reflected in the Annual Savings for Safety Police Plan Prepayment (Attachment 2) and Annual Savings for Miscellaneous Plan Prepayment (Attachment 3). The following charts illustrate the savings to the City for the Police Safety Plan tier 1 and the Miscellaneous Plan tier 1.
Chart 3: Police Safety Plan Tier 1 Annual Payments
Before and After $500,000 Prepayment
$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Police Tier 1 Current Schedule Police Tier 1 Schedule with $500K ADP
12.C-8Council Agenda 3-15-2022
Chart 4: Miscellaneous Plan tier 1 Annual Payments
Before and After $500,000 Prepayment
Conclusion and Recommendation
Staff recommends that Council adopt a Resolution (Attachment 1) appropriating $1.0 million from the General Fund unassigned fund balance to provide additional discretionary payments of $500,000 to each of the City’s CalPERS Miscellaneous and Safety Police tier 1 plans to reduce the City’s unfunded pension liability.
FISCAL IMPACT:
The fiscal impact of adopting the attached Resolution is an initial cost of $1.0 million in FY 2022, which will reduce the General Fund available unassigned fund balance and deplete the CalPERS prepayment set-aside. Projected interest savings for this action are $1,102,570 in interest costs, of which $347,492 will be saved in the first five years. The average annual saving for both plans is $105,129, reducing the City’s operating costs. below are the proposed options and corresponding savings.
Table 5: CalPERS Prepayment Projected Savings
Plan Prepayment Total Interest
Savings
FY 2022-FY
2027 Savings
FY 2022 to
FY 2042 Annual
Savings
Police Safety
Plan Tier 1 $500,000 $530,832 $179,997 $51,542
Miscellaneous
Plan Tier 1 500,000 571,738 167,495 53,587
TOTAL $1,000,000 $1,102,570 $347,492 $105,129
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
Misc Tier 1 Current Schedule Misc Tier 1 Schedule with $500K ADP
12.C-9Council Agenda 3-15-2022
ALTERNATIVES:
1. Do not approve Resolution; provide staff with different direction.
ATTACHMENTS:
1. Resolution
2. Annual Savings for Safety Police Plan Prepayment
3. Annual Savings for Miscellaneous Plan Prepayment
Submitted by: Meeting Date: March 15, 2022
Nadia Feeser, Administrative Services Director
City Manager Approval:
12.C-10Council Agenda 3-15-2022
RESOLUTION NO. R-2022-XXX
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PISMO BEACH, CALIFORNIA APPROPRIATING $1.0 MILLION FROM THE GENERAL FUND
UNASSIGNED FUND BALANCE TO PROVIDE ADDITIONAL DISCRETIONARY PAYMENTS OF $500,000 TO EACH OF THE CITY’S CALPERS MISCELLANEOUS AND SAFETY POLICE TIER 1 PLANS TO REDUCE THE CITY’S UNFUNDED
PENSION LIABILITY
WHEREAS, the City of Pismo Beach provides retirement benefits for full-time employees through the California Public Employees' Retirement System (CalPERS); and WHEREAS, during the recession in 2000 and 2001, CalPERS had losses of 7.2% and
6.1%, respectively, in investment earnings and during the Great Recession in 2008 and 2009, CalPERS suffered losses of 5.1% and 24.0%, respectively, of investment earnings and since then, has been struggling to recover those losses; and WHEREAS, as a result of past investment losses, increases in life span, retirement enhancements, and other factors, public agencies are now having to pay this unfunded amount, at a 6.8% interest rate, costing the City of Pismo Beach over $1.5 million per year and growing; and
WHEREAS, in order to help reduce the impact of the increasing unfunded accrued liability (UAL) costs, the City may contribute an additional discretionary payment of $500,000 from the General Fund unassigned fund balance CalPERS Prepayment set-aside towards the Miscellaneous Plan Tier 1 UAL and $500,000 from the General Fund unassigned fund balance CalPERS Prepayment set-aside toward the Safety Police Plan Tier 1 UAL for a projected combined $1,102,570 in CalPERS interest savings, averaging $105,129 of savings per year and $347,492 of the total projected savings to be realized in the first five years from FY 2023 and FY 2027 as a reduction in the City’s UAL and ongoing operating costs, and an improvement of the City’s retirement plans’ funded status.
NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Pismo Beach hereby appropriates $500,000 from the General Fund unassigned fund balance CalPERS Prepayment set-aside to prepay the Safety Police Plan Tier 1 UAL and $500,000 from the General Fund unassigned fund balance CalPERS Prepayment set-aside to prepay the Miscellaneous Plan Tier 1 UAL in FY 2022.
UPON MOTION OF Council Member , seconded by Council Member , the foregoing resolution was adopted by the City Council of the City of Pismo Beach this 15th day of March 2022, by the following vote:
AYES:
NOES:
12.C-11Council Agenda 3-15-2022
Attachment 1
ABSENT:
ABSTAIN:
RECUSED:
Approved: Attest:
________________________ ________________________
Ed Waage, Mayor Erica Inderlied, City Clerk
12.C-12Council Agenda 3-15-2022
Attachment 1
Fiscal
Year
Police Tier 1
Current Schedule
Police Tier 1
Schedule with
$500K ADP Net Savings
Projected
Funded Ratio
2022 562,321$ 562,321$ -$ 77.7% 2023 639,661 603,709 (35,952) 78.7% 2024 683,595 649,061 (34,534) 79.7% 2025 740,048 704,547 (35,501) 81.0% 2026 775,267 738,772 (36,495) 82.3% 2027 808,152 770,635 (37,516) 83.7% 2028 827,808 789,241 (38,567) 85.1% 2029 848,015 808,368 (39,647) 86.6% 2030 868,787 828,030 (40,757) 88.1% 2031 890,141 848,243 (41,898) 89.7% 2032 912,093 869,022 (43,071) 91.3% 2033 898,083 853,805 (44,277) 92.9% 2034 882,656 837,139 (45,517) 94.4% 2035 852,273 805,482 (46,791) 95.9% 2036 801,696 753,595 (48,102) 97.3% 2037 713,557 664,109 (49,448) 98.5% 2038 391,841 341,008 (50,833) 99.1% 2039 329,283 277,027 (52,256) 99.5% 2040 278,463 224,744 (53,719) 99.9% 2041 245,155 54,000 (191,155) 100.0% 2042 64,797 (64,797) 100.0%
14,013,691$ 12,982,859$ (1,030,832)$
Total Savings (530,832)$
Average Annual Savings (51,542)$
5 Year Savings (179,997)$
12.C-13Council Agenda 3-15-2022
Attachment 2
Fiscal
Year
Misc Tier 1
Current
Schedule
Misc Tier 1
Schedule with
$500K ADP Net Savings
Projected
Funded Ratio
2022 723,295$ 723,295$ -$ 76.3%
2023 816,275 786,322 (29,953) 77.4% 2024 864,495 833,184 (31,311) 78.7% 2025 931,519 897,082 (34,437) 80.1% 2026 974,224 938,823 (35,401) 81.6% 2027 1,014,353 977,960 (36,393) 83.2% 2028 1,039,355 1,001,943 (37,412) 84.8% 2029 1,065,057 1,026,597 (38,459) 86.4% 2030 1,091,478 1,051,942 (39,536) 88.0% 2031 1,118,640 1,077,997 (40,643) 89.7% 2032 1,146,561 1,104,780 (41,781) 91.5% 2033 1,133,209 1,090,259 (42,951) 93.1% 2034 1,118,306 1,074,153 (44,153) 94.8% 2035 1,086,106 1,040,716 (45,390) 96.3% 2036 1,032,954 986,294 (46,661) 97.8% 2037 523,495 475,527 (47,967) 98.5% 2038 458,237 408,926 (49,310) 99.0% 2039 389,009 338,318 (50,691) 99.5% 2040 333,630 281,520 (52,110) 99.9% 2041 296,025 105,648 (190,378) 100.0% 2042 136,802 (136,802) 100.0% 17,293,024$ 16,221,286$ (1,071,738)$
Total Savings (571,738)$
Avgerage Annual savings (53,587)$
5 Year Savings (167,495)$
12.C-14Council Agenda 3-15-2022
Attachment 3