INTERDEPARTMENTAL PROCEDURES/POLICIES POLICY NO. 431
PENSION RATE STABILIZATION PROGRAM AND OPEB FUNDING POLICY
INTRODUCTION
As part of its overall compensation plan, the City provides a defined benefit pension to its employees. This benefit is administered by the California Public Employees Retirement System (CaIPERS) and funded through contributions from the City and its employees and from investment earnings on those contributions. The CaIPERS Board of Administration is responsible for the administration and investment of the funds it receives and determines the amounts contributed by each of the governmental entities that participate in CaIPERS.
In addition to the CaIPERS defined benefit pension, for retirees hired prior to November 21, 1995, the City pays up to 100% of the health plan selected with monthly maximums varying by bargaining unit. This retiree health benefit has created an Other Post -Employment Benefit (OPEB) liability as defined by the Governmental Accounting Standards Board (GASB).
Public Agency Retirement Services (PARS) has established, and the City has approved, a multiemployer irrevocable trust in compliance with the requirements of Section 115 of the Internal Revenue Code. While it is a multi-employer trust, each employer's contributions benefit only its own employees. There is no sharing of either liability or investment earnings, and separate employer accounts are maintained. PARS serves as the administrator of the Trust.
PURPOSE:
The purpose of this Pension Rate Stabilization Program (PRSP) and Other Post -Employment Benefits (OPEB) Funding Policy ("Policy") is to establish a methodology and a process for funding current and future costs associated with the City's contractual obligations to provide pension and retiree medical benefits as set forth in the City's labor agreements.
The City recognizes that a fiscally prudent Policy should:
• Maintain the City's sound financial position;
• Ensure the City has the flexibility to respond to changes in future service priorities, revenue levels, and operating expenditures;
• Protect the City's creditworthiness;
• Ensure that all pension and OPEB funding decisions are structured to protect both current and future taxpayers, ratepayers, employees and residents of the City, and are consistent with the City's strategic planning goals, objectives, capital improvement program, and other financial policies.
POLICY:
It is the policy of the City to fulfill its obligation to its residents and employees to maintain fiscally responsible management practices and to ensure that promised retirement benefits are funded. To that end, the City will meet its pension and OPEB funding obligations as follows:
1. Actuarially Determined Contributions: Each fiscal year, 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). The normal cost is expressed as a rate that is applied to pensionable payroll costs and reflects the cost of pension benefits earned by employees in the current fiscal year. The UAL payment is a flat dollar amount that represents a portion of the cost of past benefits earned by employees, but for which, because of deviations in actual experience and changes in assumptions about investment performance, the normal cost rates established for those prior years has been determined to be insufficient to provide the promised retirement benefit. The CaIPERS actuaries recalculate the total UAL each year and an updated multi-year amortization schedule is provided to show the projected annual minimum payments.
2. Annual UAL Prepayment: CaIPERS offers the option to make monthly payments on the UAL or prepay the entire annual amount at a discounted level by the end of July. Every effort will be made by the City to prepay its annual obligation each year to achieve budgetary savings.
3. Section 115 Pension Trust: The City will establish and maintain a pension stabilization fund in the form of a Section 115 Pension Trust. Assets in the Section 115 Pension Trust may be used only for pension 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:
• 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.
• The City will strive to make regular contributions to the OPEB trust to achieve this goal. • 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 on the performance of the chosen investment portfolio. • 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 in the Section 115 trust. • 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.
4. Targeted Funding Level: 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 CaIPERS match its accrued liabilities.
5. Review of Funding Policy: Funding a defined benefit pension plan and retiree health benefits requires a long-term horizon. As such, the City will review this 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.
Definitions:
The funding of retirement programs, such as pensions or retiree health plans, is a complex process that utilizes many specialized terms. In this section, we will define the most important ones that are used in this policy statement.
• Actuarial Liability—The portion of the cost of future OPEB and/or pension benefits attributable to work done by current and prior City employees prior to the date of the Actuarial Valuation. • Actuarial Valuation — The City will engage a qualified OPEB actuary to perform an actuarial valuation at least once every two years. The actuarial valuation will calculate the ADC based on current OPEB plan information and a series of demographic assumptions (such as retirement age and life expectancy) and economic assumptions (such as medical inflation and return on investment) adopted by the actuary and approved by the City. Actuarially determined amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. CaIPERS prepares an Actuarial Valuation annually for all pension plans.
• Actuarially Determined Contribution (ADC) — The contribution calculated by the actuary as sufficient, assuming future experience matches the assumptions used in the Actuarial Valuation, to bring the plan to 100% funding by end of the Amortization Period. • Additional Discretionary Payments — When the OPEB plan is less than 100% funded and the ADC is insufficient to bring the plan's funding to 100% in that year, the City Council may, at its own discretion, make an additional contribution from year-end budget surplus to the extent, such budget surplus appears.
• Explicit Benefit Payments—These are the premium payments made by the City in the current year for eligible former employees.
• Normal Cost —The portion of the cost of future OPEB/pension benefits attributable to work done by employees in the current year. The Normal Cost will be calculated using the entry age normal cost method using appropriate economic and demographic assumptions approved by the City. • Pay -As -You -Go —The funding approach where the City pays for the Explicit Benefit Payments from the current year's budget.
• Unfunded Actuarial Liability (UAL) —The difference between the Actuarial Liability and the assets that are in the OPEB Trust. If the assets are greater than the Actuarial Liability at the time of the Actuarial Valuation that is sometimes referred to as a Surplus