TO:
VIA:
FROM:
DATE:
CITY COUNCIL
CITY ADMINISTRATOR
DIRECTOR OF FINANCE
SEPTEMBER 19, 2023
Placentia City Council
AGENDA REPORT
SUBJECT: OPEB MITIGATION PLAN/ SECTION 115 TRUST UPDATE FISCAL
IMPACT: NONE
SUMMARY:
On September 20, 2022, the City Council approved a Section 115 Trust Policy outlining a strategy for addressing the City's unfunded pension and Other Post -Employment Benefit (OPEB) obligations. Subsequently, the City Council provided direction to develop and OPEB Mitigation Plan to maximize the value of the Section 115 Trust. The City is in the process of transitioning the management of its Section 115 Trust from Public Agency Retirement Services (PARS) to Shuster Advisory Group which is expected to generate significant Tong -term savings due to lower fees and a more proactively managed investment portfolio.
The City's existing Pension Rate Stabilization Program and OPEB Funding Policy, Policy No. 431, requires review of the policy "at a minimum biennially, coincident with preparation of the GASB 75 actuarial valuations, to determine if changes to this policy are necessary to ensure adequate resources are being accumulated to fund OPEB benefits and to gauge progress towards the targeted funding level". Staff is recommending review of the policy at this time to reflect the anticipated impact from changing the management of the Section 115 Trust as well as recently received actuarial reports from CaIPERS.
RECOMMENDATION:
It is recommended that the City Council take the following actions:
1. Receive and file this report updating the City Council on the City's OPEB mitigation effort; and,
2. Following discussion, provide policy direction to Staff.
STRATEGIC PLAN STATEMENT:
This item is consistent with the City Council approved 5 -Year Strategic Goal #1 to Ensure Long - Term Fiscal Sustainability.
3.b.
Sept. 19, 2023
City Council Agenda
September 19, 2023
DISCUSSION:
The City has taken a proactive approach to its pension liability funding strategy, issuing lease revenue bonds in 2020 to address the City's unfunded actuarial liability (UAL) with CaIPERS, establishing a Section 115 Trust to mitigate against CaIPERS investment losses and pre -fund its OPEB obligations and including pension and OPEB obligations within the City's Policy No. 460.
The City's funded status with CaIPERS as of August 2022 was 109.8%-110.1%, with plan assets exceeding its liabilities. However, as expected due to CaIPERS' reduction of its discount rate from
7.0% to 6.8%, and investment losses of 6.1% in FY 2021-22, the actuarial report received August 2023 from CaIPERS for period ending June 30, 2022, now shows a funded status of 90.2%-94.3% for the City's plans with a total Unfunded Actuarial Liability (UAL) of $10,797,201.
In addition to pension liabilities, for employees hired on or before November 21, 1995 the City provides retiree health, dental, vision and life insurance at the same contribution amount as active employees. For employees hired after November 21, 1995, the City contributes the minimum required medical insurance contribution established by CaIPERS for Tier 11 employees. These collective benefits have created an Other Post -Employment Benefit (OPEB) as defined by the Governmental Accounting Standards Board (GASB).
The City's most recent actuarial valuation of its Retiree Healthcare Plan, with a measurement date of June 30, 2021 determined a total OPEB liability of $24,910,487. This is a decrease of $6.4 million from the June 30, 2020 valuation due to changes in demographic and inflationary assumptions, and the difference in the City's actual vs. expected experience. The City is currently funding this expense on a pay-as-you-go basis costing approximately $1.1 million per year. This approach does not reduce the outstanding long-term liability and the City's plans are currently 0% funded on our financial statement.
The City's Section 115 Trust fund is designed to be used as a rate stabilization fund to mitigate against future investment losses by CaIPERS and pre -fund OPEB expenses. Funds in the trust may only be used for:
• Reimbursing the City for Other Post -Employment Benefits (OPEB) pay-as-you-go expenses.
• Reimbursing the City for CaIPERS contributions.
• Paying OPEB expenses directly to retirees.
• Paying down specific CaIPERS liabilities.
• Paying plan expenses (actuarial valuation or audit costs).
The City's existing pension and OPEB funding policy aims to establish the framework wherein the City can fulfill its obligation to its residents and employees to maintain fiscally responsible management practices and to ensure that promised retirement benefits are funded.
Primary tenets of the policy include:
• The City will contribute to CaIPERS the amount determined by CaIPERS actuaries to be the minimum required employer contribution each year.
City Council Agenda
September 19, 2023
Page3of5
• The City will prepay its annual obligation to CaIPERS by July 31st each year to achieve budgetary savings (3% discount compared to monthly payments). • The City will maintain a Section 115 Pension Trust. Assets in the Section 115 Pension Trust may be used only for pension and OPEB related costs and at the direction of the City Council. The City's funding objective is to accumulate sufficient assets to fully fund the retiree healthcare benefits that the City's retired employees receive throughout retirement and to support any increases in the City's UAL with CaIPERS. In meeting this objective, the City will strive to meet the following funding goals:
o The City will strive to maintain assets in the OPEB trust equal to 90%-100% of the actuarial liability for OPEB through regular contributions to the Section 115 Trust.
It is anticipated to take several years for the City to achieve full funding of the actuarial liability as the plan is currently 0% funded. o The City will strive to make regular contributions to the OPEB trust to achieve this goal. For FY 2023-24, the City is contributing $770,000 to the trust. o The funds in the OPEB trust may be used to make the City's pay-as-you-go payments each year beginning with the FY 2023-24 budget. It is the intention of the City Council to continue to fund pay-as-you-go payments from the General Fund and allow for the funds in the Section 115 Trust to grow based upon the performance of the chosen investment portfolio.
o When budgetary resources are available, the City will strive to contribute its Actuarially Determined Contribution (ADC) into the Section 115 Trust each year, in addition to pay -as -you go payments, to offset its OPEB liability on the City's Annual Comprehensive Financial Report and increase assets to be invested within the Section 115 trust.
o The City will review the CaIPERS actuarial report annually as part of the budget process to assess the City's UAL sensitivity to changes in CaIPERS rate of return assumptions. The City Council may direct staff to allocate budgetary surplus, if any, at the close of the fiscal year to the Section 115 Trust to mitigate future increases in the UAL.
• The City's goal is to achieve and maintain a funded status for each of its CaIPERS and OPEB plans of between 90% and 100%. A funded status of 100% signifies that the City's pension assets with CatPERS match its accrued liabilities. • The City will review this policy at a minimum biennially, coincident with preparation of the OPEB actuarial valuations, to determine if changes to this policy are necessary to ensure adequate resources are being accumulated to fund OPEB benefits and to gauge progress towards the targeted funding level.
Policy Review Analysis
After receiving the most recent CatPERS actuarial report and the approval of the transition to Shuster Advisory Group's Section 115 trust, Staff has reviewed the City's existing policy and is
City Council Agenda
September 19, 2023
recommending no changes to the policy at this time. Analysis and updates on key elements of the policy are outlined below.
Polic Re • uirement
Action Taken/ To be Take
Actuarially Determined Contributions: The City
will contribute to CaIPERS the amount determined
by CaIPERS actuaries to be the minimum required
employer contribution for that year. The minimum
contribution consists of two components, normal
cost and unfunded accrued liability (UAL).
Annual UAL Prepayment: Every effort will be
made by the City to prepay its annual obligation
each year to achieve budgetary savings.
The City pays CaIPERS for normal costs bi-weekly
as part of the payroll process. Due to a funding
status of over 100% for all plans as of June 30,
2021, the City did not have a UAL in FY 2023-24.
Due to investment losses at June 30, 2022, the City
now has a UAL of $10.8 million and will begin
making payments on it in FY 2024-25.
Due to a funding status of over 100% for all plans
as of June 30, 2021, the City did not have a UAL to
prepay in FY 2023-24. By July 31, 2024, the City
will prepay its annual UAL payment ($446,569) to
take advantage of the 3% discount.
Section 115 Pension Trust: The City will strive to The City made its initial funding payment of $2.4 maintain assets in the OPEB trust equal to 90%- million to the trust in October, 2022. The trust had a 100% of the Actuarial liability for OPEB through balance of $2.7 million as of July 31, 2023, regular contributions to the Section 115 Trust representing 10.7% of the City's OPEB liability.
However, due to a two-year delay between the
actuarial valuation and the City's financial
statements, this initial funding will first be reflected on the FY 2023-24 Annual Comprehensive
Financial Report (ACFR).
Section 115 Pension Trust: The City will strive to In FY 2023-24, $770,000 will be transferred from make regular contributions to the OPEB trust to the General Fund to the Section 115 trust, bringing achieve this goal. the total assets in the trust to approximately 14% of the City's OPEB liability.
Section 115 Pension Trust: The funds in the
OPEB trust may be used to make the City's pay-
as-you-go payments each year beginning with the
FY 2023-24 budget.
Consistent with the policy's "intention of the City
Council to continue to fund pay-as-you-go
payments from the General Fund and allow for the
funds in the Section 115 Trust to grow based upon
the performance of the chosen investment portfolio"
the City is not planning to make pay-as-you-go
payments from the General Fund in
FY 2023-24. Staff will analyze the benefits of
making pay-as-you-go payments from the trust,
including performance of the trust's rate of return
during the FY 2024-25 budget preparation process
and make recommendations to the City Council
with the proposed budget.
City Council Agenda
September 19, 2023
Section 115 Pension Trust: the City will strive to
contribute its Actuarially Determined Contribution
(ADC) into the Section 115 Trust each year, in
addition to pay -as -you go payments.
FISCAL IMPACT:
Because this funding started after June 30, 2022,
the impact of pre -funding will first appear in our
June 30, 2024 financial statement, based upon a
measurement date of June 30, 2023.
Transitioning to the Shuster Advisory Group's Section 115 Trust saved the City 35 basis points in fees. Based upon the most recent actuarial valuation of the City's OPEB liability, a 1`)/0 increase (100 bps) in the discount rate would decrease the City's OPEB liability by 12%. Based upon that analysis, a 0.35% (35 bps) increase in the discount rate would be expected to decrease the OPEB liability by 4%, or $996,419. In addition, with more customizable and nimble investment options, the opportunity to yield a higher rate of return and grow the trust's assets at a greater pace will reduce the OPEB and UAL burden on the General Fund.
The impact of pre -funding OPEB expenses within the Section 115 trust on our financial statements will first appear in our June 30, 2024 financial statement. This is based upon a measurement date of June 30, 2023, which is due to a two-year delay between actuarial measurement date and a fiscal year's Annual Comprehensive Financial Report (ACFR).
Prepared by:
v
Jennifer Lampman
Director of Finance
Reviewed and approved:
Damien R. Arrula
City Administrator
Attachments:
1. Policy No. 431 Pension Rate Stabilization Program and OPEB Funding Policy
2. PowerPoint Presentation