Attachment 3 – Bartel Associates Pension Tax Override Study for Fiscal Years 20221-22 and 2022-23.pdf

CalPERS Miscellaneous and Safety Plans

Pension Override Tax Study for
Fiscal Years 2021/22 and 2022/23

Bartel Associates, LLC
June 15, 2022

411 Borel Avenue, Suite 620  San Mateo, California 94402 main: 650/377-1600  web: www.bartel-associates.com

ACTUARIAL CERTIFICATION

This report presents our analysis of the City of Richmond CalPERS Miscellaneous and Safety Plans (“Plans”).

The purpose of this analysis is to calculate the portion of the City’s CalPERS employer contribution that can be paid through City property taxes for the 2021/22 and 2022/23 fiscal years. Future calculations may differ significantly if the Plan’s experience differs from our assumptions or if there are changes in plan design, actuarial methods or actuarial assumptions. The project scope did not include an analysis of this potential variation. Actuarial calculations for other purposes such as plan funding or financial reporting will differ from those shown in this report.

The analysis is based on our understanding of the benefit provisions, actuarial reports and benefit summaries prepared by CalPERS and provided by the City, and on the methodology detailed in this report. Alternative methods could produce different results. The project scope did not include alternate analyses.

The City previously issued Pension Obligation Bonds in 1999 and 2005. We believe the proportion of bond debt service payments in the future should always be the same as determined when the bonds were issued. Section 2 of our report details the methodology used.

We have reviewed CalPERS information for reasonableness, and have relied on that information as the basis of these calculations. We do not make any representation on the accuracy of CalPERS reports.

To the best of our knowledge, this report is complete and accurate and has been conducted using generally accepted actuarial principles and practices. As members of the American Academy of Actuaries, meeting Academy Qualification Standards, we certify the actuarial results and opinions herein.

We are available to answer any questions on this report.

Respectfully submitted,

DRAFT DRAFT
Mary Elizabeth Redding, FSA, EA, FCA, MAAA
Vice President & Actuary
June 15, 2022
Bianca Lin, FSA , EA, FCA, MAAA
Assistant Vice President & Actuary
June 15, 2022
O:\Clients\City of Richmond\Projects\CalPERS\6-30-20 POT\BA RichmondCi 2022-06-15 Pension Override Tax Report.docx

TABLE OF CONTENTS

SECTION P AGE

1. Summary of Results 1

2. Purpose and Methodology 2

3. Normal Cost Analysis 7

4. Unfunded Actuarial Accrued Liability
Analysis
15 5. Employer Contribution Analysis 17

6. Summary of Data Provided 24

7. Definitions 25

SECTION 1

SUMMARY OF RESULTS

Pension Override Tax Report Page 1
We understand the City of Richmond’s property tax can be used to pay for CalPERS retirement benefits effective or contracted before July 1, 1978. The purpose of this study is to estimate the portions of the CalPERS employer contributions for fiscal years 2021/22 and 2022/23, and the portion of the June 30, 2020 unfunded actuarial accrued liability, that are attributable to benefits in effect or contracted before July 1, 1978.

Using the actuarial assumptions and methodology described in this report, we have estimated the portions of the City’s 2021/22 and 2022/23 CalPERS required employer contributions for the Miscellaneous and Safety Plans attributable to pre-July 1, 1978 benefit levels and to subsequent benefit improvements. The following summarizes the results of our calculations.

Employer Contribution Attribution

June 30, 2020 Unfunded Actuarial Accrued Liability Attribution

2021/22 Fiscal Year 2022/23 Fiscal Year
Amounts
($000s)
Percent
of Total
Amounts
($000s)
Percent
of Total
 Total Employer Contribution Attributable to
Pre-1978 Benefit Level
$33,805 83.8% $34,978 84.3%
 Total Employer Contribution Attributable to
Post-1978 Benefit Level
6,555 16.2% 6,511 15.7%
 Total 40,360 100.0% 41,489 100.0%
Miscellaneous
($millions)
Safety
($millions)
Total
($millions)
Percent
of Total
 Total Unfunded Actuarial Accrued Liability
Attributable to Pre-1978 Benefit Level
$118.5 $201.6 $320.1 87.2%
 Total Unfunded Actuarial Accrued Liability
Attributable to Post-1978 Benefit Level

19.2 27.7 46.8 12.8%
 Total 137.7 229.3 366.9 100.0%
SECTION 2

PURPOSE AND METHODOLOGY

Pension Override Tax Report Page 2
The purpose of this study is to estimate the portions of the CalPERS employer contributions for fiscal years 2021/22 and 2022/23 that are attributable to benefits in effect or contracted before July 1, 1978.

CalPERS Miscellaneous Plan Benefits
The benefit formulas in effect on July 1, 1978 were:
 Miscellaneous Plan: 2% @ 60 benefit formula, with final 3 year average compensation, post-retirement survivor allowance, and 2% COLA

The cost of benefit improvements effective after July 1, 1978 that affect the City’s CalPERS contribution rates must be separated. These improvements are:
 Final 1 year average compensation, effective 9/1/1978  2% @ 55 benefit formula, effective 7/1/1992.
 2.7% @ 55 benefit formula, effective 1/1/2003.
 2% @ 62 benefit formula, effective 1/1/2013. This PEPRA benefit is a lower benefit than the pre-1978 2%@60 benefit for employees retiring at all ages younger than age 66, and so it is not considered a benefit improvement.

Retirement Age
Benefit Multiplier
SECTION 2

PURPOSE AND METHODOLOGY

Pension Override Tax Report Page 3
CalPERS Safety Police and Safety Fire Plans Benefits
The benefit formulas in effect on July 1, 1978 were:
 Safety Police and Safety Fire Plans: 2% @ 50 benefit formula, with final 3 year average compensation, post-retirement survivor allowance, and 2% COLA

The cost of benefit improvements effective after July 1, 1978 that affect the City’s CalPERS contribution rates must be separated. These are:
 Final 1 year average compensation, effective 7/1/1978 for Fire members and 12/1/1979 for Police members
 3% @ 55 benefit formula for both Police and Fire members, effective 10/1/2002  3% @ 50 benefit formula for Police members, effective 3/1/2003  2.7% @ 57 benefit formula, effective 1/1/2013. This PEPRA benefit is a lower benefit than the pre-1978 2%@50 benefit and so it is not considered a benefit improvement.

Benefit Multiplier
Retirement Age
SECTION 2

PURPOSE AND METHODOLOGY

Pension Override Tax Report Page 4
Cost of Benefit Improvements
The actual costs of a defined benefit plan are determined by the amount of the benefit promise, the actual salaries and service of the plan participants, and how long they and their beneficiaries live to receive payments. The ultimate cost of the plan cannot be determined until all benefits have been paid.

There is no perfect way to evaluate the “true cost” of a benefit change. In part this is because all plan benefits have not yet been paid so the total plan cost is not yet known.

Two other important difficulties arise because:
 Benefit changes typically cause changes in employee behavior, most typically retiring earlier or later than before the benefit change. This new behavior impacts both the cost of the original benefit and the benefit improvements.  Salary negotiations might have been different if benefits had not been improved.

Different salary patterns impact both the cost of the original benefits as well as the cost of the improvements.

Following is an example illustrating how lower salaries negotiated in concert with a benefit increase can impact the perceived cost of a benefit improvement.

Illustrative Example for Sample Employee

Original
Benefit
Formula
2% @ 50
Improved
Benefit
Formula
3% @ 50
Unchanged
Final
Compensation

Improved
Benefit Formula
3% @ 50
Lower
Final
Compensation
Final compensation $ 100,000 $ 100,000 $ 95,000
Retirement age 55 55 55
Service at retirement 30 years 30 years 30 years
Benefit Factor for formula 2.70% 3.00% 3.00%
Annual Retirement Benefit
(compensation x service x
benefit factor)
$ 81,000 $ 90,000 $ 85,500
Apparent pension increase
due to benefit change 11.1% 5.6%

SECTION 2

PURPOSE AND METHODOLOGY

Pension Override Tax Report Page 5
Our calculations do not reflect any employee behavior changes or salary changes triggered by the benefit level change, except for differences by benefit level reflected in CalPERS actuarial assumptions.

Cost of CalPERS Benefit Improvements after July 1, 1978 We estimated the impact of benefit improvements effective after July 1, 1978 by estimating the increase in the Normal Cost (see Section 3) and the portion of the Unfunded Actuarial Accrued Liability (UAAL) (see Section 4) due to the benefit improvements. The cost of benefit improvements can change from time to time as CalPERS actuarial assumptions change. The biggest cost impacts are generally from changes in the discount rate or assumed future salary increases.

Cost of CalPERS Benefit in Effect on July 1, 1978
We estimated the cost of benefits in effect on July 1, 1978 by subtracting our estimate of the cost of benefit improvements effective after July 1, 1978 from the total CalPERS employer contribution rates for each year.

2005 Pension Obligation Bond Refunding
We understand the City of Richmond previously issued pension obligation bonds in 1999 and in 2005. During the 2005 bond issuance process, the City determined that 86.13% of the UAAL at that time was attributable to pre-1978 benefit levels.

The proportion of the plan’s unfunded actuarial accrued liability that is attributable to pre-1978 benefit levels will change over time as the mix of current employees with benefits above and below that level changes. However, the 2005 POB paid off the dollar amount of UAAL at that one point in time -- 2005. The amount of UAAL paid off does not change, and so we believe the proportion of that POB that relates to pre-1978 benefit levels also cannot change. Therefore, in our opinion as actuaries, the proportion of the 2005 POB’s debt service attributable to pre-1978 benefit levels will not change for the entire duration of that POB, even if the POB is refinanced and the dollar amount of the payments changes.

Similarly, if there are any debt service payments remaining that relate to the 1999 POB, the proportion of those debt service payment attributable to pre-1978 benefit levels also should not change.

Impact of Previous Pension Obligation Bonds
We estimate the 2005 POB funded 99.5% of the estimated UAAL at November 9, 2005.

For purposes of the calculations in this report, we have treated the 2005 POB as paying off 100% of the then-existing UAAL. Because the entire UAAL was paid off by adding assets to the CalPERS fund, there was no change in the proportion of the UAAL SECTION 2

PURPOSE AND METHODOLOGY

Pension Override Tax Report Page 6
attributable to pre-1978 benefits and our methodology can be applied to the entire current UAAL.

The 2005 POB paid off all of the then-existing UAAL and the plans’ current UAAL has all arisen since 2005. However, the current UAAL is attributable to pre 1978 and post 1978 benefits.

SECTION 3

NORMAL COST ANALYSIS

Pension Override Tax Report Page 7
The following section summarizes the net employer (“ER”) normal cost change due to each benefit improvement after July 1, 1978 separately for each plan and tier.

Miscellaneous Tier 1 Plan
June 30, 2020

Benefit
Improvements

Effective
Date
Estimated
ER Cost as a
Percentage of
PERSable
Payroll

Basis for Estimate:

CalPERS June 30, 2020
Miscellaneous Risk Pool
Actuarial Valuation
Final One Year
Average
Compensation
9/1/1978 0.47% Current normal cost increase for
final one year average
compensation for 2%@60,
including adjustment for
demographic difference between
the City combined Miscellaneous
and the CalPERS risk pool
2%@55
Benefit Formula
7/1/1992 1.74% Current normal cost increase for
2%@55 over 2%@60 benefit
formula with final one year
average compensation, post-
retirement survivor allowance
and 2% COLA, including
adjustment for demographic
difference between the City
combined Miscellaneous and the
CalPERS risk pool

2.7%@55
Benefit Formula
1/1/2003 3.14% Current normal cost increase for

2.7%@55 over 2%@55 benefit
formula with final one year
average compensation, post-
retirement survivor allowance
and 2% COLA, including
adjustment for demographic
difference between the City
combined Miscellaneous and the
CalPERS risk pool
Total 5 . 3 5 %

SECTION 3

NORMAL COST ANALYSIS

Pension Override Tax Report Page 8
Miscellaneous PEPRA Plan
Miscellaneous is the PEPRA 2%@62 formula. It is a lower benefit than the pre-1978 benefit. Therefore, all PEPRA 2%@62 benefits can be paid from the Pension Override Tax.

SECTION 3

NORMAL COST ANALYSIS

Pension Override Tax Report Page 9
Safety Tier 1 Plans
June 30, 2020

Benefit
Improvements

Effective
Date
Estimated ER
Cost as a
Percentage of
PERSable
Payroll

Basis for Estimate:

CalPERS June 30, 2020
Safety Risk Pool
Actuarial Valuation
Final One Year
Average
Compensation
Police 12/1/1979
Fire 7/1/1978

1.03% Current normal cost increase
for final one year average
compensation for 2%@50
benefit formula including
adjustment for demographic
difference between the City
combined Safety and the
CalPERS risk pool
3%@55
Benefit Formula
Police 10/1/2002
Fire 10/1/2002

2.55% Current normal cost increase
for 3%@55 over 2%@50
benefit formula with final one
year average compensation,
post-retirement survivor
allowance, and 2% COLA,
including adjustment for
demographic difference
between the City combined
Safety and the CalPERS risk
pool
3%@50
Benefit Formula
Police 3/1/2003 1.21% Current normal cost increase
for 3%@50 over 3%@55
benefit formula with final one
year average compensation,
post-retirement survivor
allowance, and 2% COLA,
including adjustment for
demographic difference
between the City combined
Safety and the CalPERS risk
pool, as well as adjustment for
Police members only
Total 4 . 7 9 %

SECTION 3

NORMAL COST ANALYSIS

Pension Override Tax Report Page 10
Safety PEPRA Plans
Safety PEPRA is the PEPRA 2.7%@57 formula. It is a lower benefit than the pre-1978 benefit. Therefore, all PEPRA 2.7%@57 benefits can be paid from the Pension Override Tax.

SECTION 3

NORMAL COST ANALYSIS

Pension Override Tax Report Page 11
The following table separates the current employer (ER) portion of the normal cost rate for Miscellaneous and Safety plan tiers between amounts attributable to post-July 1, 1978 benefit improvements as calculated above, and the remaining normal cost which is attributable to benefit levels in effect at July 1, 1978.

Normal Cost rates for FY2021/22 are based on the following information in the June 30, 2019 actuarial valuation reports and the cost of benefit improvements from pages 6 to 9 of this report.

Miscellaneous FY 2021/22
Tier 1 PEPRA Total
 Total employer normal cost rate as a
percentage of payroll 14.68% 7.42% 13.03%
 ER Normal Cost attributable to Post-1978
Benefit Level (calculated on previous
pages)

5.35% 0.00% 4.17%
 ER Normal Cost attributable to Pre-1978
Benefit Level 9.33% 7.42% 8.86%
 FY 2021/22 projected payroll ($’000s) $30,710 $8,662 $39,372

FY 2021/22 FY 2022/23
Miscella-
neous Safety
Miscella-
neous Safety
 Total ER normal cost rate (as a percentage
of PERSable payroll) for fiscal year 13.03% 21.83% 12.58% 21.07%  ER Normal Cost attributable to Post-1978
Benefit Level 4.17% 3.85% 3.96% 3.63%
 ER Normal Cost attributable to Pre-1978
Benefit Level 8.86% 17.98% 8.62% 17.44%
Safety FY 2021/22
Tier 1 PEPRA Total
 Total employer normal cost rate as a
percentage of payroll 24.81% 10.28% 21.83%
 ER Normal Cost attributable to Post-1978
Benefit Level (calculated on previous
pages)

4.79% 0.00% 3.85%
 Normal Cost attributable to Pre-1978
Benefit Level 20.02% 10.28% 17.98%
 FY 2021/22 projected payroll ($’000s) $30,469 $7,488 $37,957 SECTION 3

NORMAL COST ANALYSIS

Pension Override Tax Report Page 12
Normal Cost rates for FY2022/23 are based on the following information in the June 30, 2020 actuarial valuation reports and the cost of benefit improvements from pages 6 to 9 of this report.

Miscellaneous FY 2022/23
Tier 1 PEPRA Total
 Total employer normal cost rate as a
percentage of payroll 14.52% 7.29% 12.58%
 ER Normal Cost attributable to Post-1978
Benefit Level (calculated on previous
pages)

5.35% 0.00% 3.96%
 ER Normal Cost attributable to Pre-1978
Benefit Level 9.17% 7.29% 8.62%
 FY 2022/23 projected payroll ($’000s) $27,325 $9,626 $36,952

Safety FY 2022/23
Tier 1 PEPRA Total
 Total employer normal cost rate as a
percentage of payroll 24.60% 10.50% 21.07%
 ER Normal Cost attributable to Post-1978
Benefit Level (calculated on previous
pages)

4.79% 0.00% 3.63%
 Normal Cost attributable to Pre-1978
Benefit Level 19.81% 10.50% 17.44%
 FY 2022/23 projected payroll ($’000s) $27,461 $8,773 $36,234 SECTION 3

NORMAL COST ANALYSIS

Pension Override Tax Report Page 13
Projection of Future Normal Cost (for Illustrative Purposes Only)

Each year in the future, Miscellaneous and Safety classic members in Tier 1 will leave employment with the City and be replaced by employees in the classic Tier 1 (for certain lateral hires) or PEPRA tiers. As this happens, the portion of the City’s normal cost that is attributable to post-July 1, 1978 benefit improvements will decrease, since PEPRA members’ benefits are lower than the pre-July 1, 1978 benefit level. The following chart illustrates that anticipated change.

The chart is based on the following assumptions:
 7.00% discount rate used in the 6/30/20 CalPERS valuation; does not reflect the 2021 discount rate change to 6.8% or the impact of future discount rate reductions anticipated from CalPERS’ Risk Mitigation policy. No other changes in CalPERS actuarial assumptions after the 6/30/20 valuations are included.  The PEPRA benefit formula effective January 1, 2013 is lower than the pre-1978 benefit level.
 Payroll for classic members decreases to zero in 2041/42 in a straight line.

Miscellaneous: Projection of Post-1978 Normal Cost

Conclusion: When all active Miscellaneous members are in the PEPRA tier, none of the normal cost will be attributable to post July 1, 1978 benefit increases.

SECTION 3

NORMAL COST ANALYSIS

Pension Override Tax Report Page 14
Safety: Projection of Post-1978 Normal Cost

Conclusion: When all active Safety members are in the PEPRA tier, none of the normal cost will be attributable to post July 1, 1978 benefit increases.

SECTION 4

UNFUNDED ACTUARIAL ACCRUED LIABILITY ANALYSIS

Pension Override Tax Report Page 15
Allocation of Current Unfunded Actuarial Accrued Liability The Plans’ current unfunded actuarial accrued liability (UAAL) must be analyzed to determine what portion of that UAAL is attributable to benefit increases after July 1, 1978. We have used the following assumptions in our analysis:
 We used CalPERS actual investment returns from June 30, 1984 through June 30, 2021.
 Actual returns before 1984 were not available. We estimated each year’s investment return from July 1, 1978 to June 30, 1984 as the average return from 1984 through 2021.
 City PERSable Payrolls were estimated as:
• Miscellaneous 1995 – 2020, Safety 1995 – 2020: Based on CalPERS actuarial reports
• Prior to 1995: projected backward using 2.75% annual total payroll decrease  No adjustment was made for prior retirement-allocated property taxes different from our model’s assumptions.

Methodology
We developed the UAAL allocation basis by calculating two amounts:
1) We applied the normal cost rate attributable to the pre-July 1, 1978 benefit level to the PERSable payroll for each year beginning in 1978/79. Normal cost amounts were accumulated to the present with the actual (or assumed, prior to 1984) investment return in each year
2) We applied the normal cost rate attributable to post-July 1, 1978 benefit increases to the PERSable payroll in each year after the increase was effective. These amounts were accumulated to the present with the actual (or assumed, prior to 1984) investment return in each year
3) The June 30, 2020 UAAL was then allocated to pre- and post-July 1, 1978 in proportion to the two accumulated balances (1) and (2) described above.

This methodology does not take into account any actions the City may have taken in regards to the pension override tax in prior years.

SECTION 4

UNFUNDED ACTUARIAL ACCRUED LIABILITY ANALYSIS

Pension Override Tax Report Page 16
The following tables show the resulting allocation of the UAAL at June 30, 2020.

Miscellaneous UAAL
June 30, 2020
Miscellaneous
($’000s) %
 Unfunded Liability Attributable to Pre-1978 Benefit Level $118,511 86.1%  Unfunded Liability Attributable to Post-1978 Benefit Level 19,156 13.9%  Total 137,667 100.0%

Safety UAAL
June 30, 2020

Combined Miscellaneous & Safety UAAL
June 30, 2020
Total
($’000s) %
 Unfunded Liability Attributable to Pre-1978 Benefit Level $320,115 87.2%  Unfunded Liability Attributable to Post-1978 Benefit Level 46,831 12.8%  Total 366,946 100.0%

Safety
($’000s) %
 Unfunded Liability Attributable to Pre-1978 Benefit Level $201,604 87.9%  Unfunded Liability Attributable to Post-1978 Benefit Level 27,675 12.1%  Total 229,279 100.0%
SECTION 5