CALPERS ADDITIONAL DISCRETIONARY PAYMENT (ADP) V. SECTION 115 TRUST COMPARISON JULY 11, 2023
Executive Summary
City of Richmond has a projected $381.5M CalPERS Unfunded Accrued Liability (UAL) Reflects -7.5% CalPERS investment returns in FY 2022, which will increase the UAL from $248.6M UAL may increase slightly to $385.4M should CalPERS achieve 6.0% returns in FY 2023 City also has $154M of outstanding Pension Obligation Bonds (POBs) City has historically taken proactive steps toward managing pension costs Annual UAL Prepayment Discount, 2022 Pension Refunding Bonds, Section 115 Trust Established in 2022
Educational Presentations and Analysis: Two meetings in 2022 (NHA), GovInvest in May 2023, NHA on May 26th and July 11th)
Pension Funding Policy Adoption (last City Council meeting) This presentation will include follow up to May 26th meeting comparing 115 Trust to Additional Discretionary Payments (ADPs)
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$45
2018
2019
2020
2021
2022
2023
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Millions
Historical and Projected UAL Payment Schedule: Update
The City’s UAL has increased
45% over the last 7 years
($263.3M → $381.5M)
The City’s UAL balance would
increase to $385.4M if CalPERS
earns 6% in FY 2022-23
The annual UAL payment has
more than doubled from 2018
($14M) to 2023 ($29M)
Projected to increase another
50% from 2023 to 2031 ($44M)
3 UAL Payments (6/30/2021
Actuarial Valuation)
New UAL Payments from -7.5%
FY 2021-22 Returns
Historical UAL
Payments
Source: CalPERS Actuarial Reports & Outlook Tool.
UAL
Balance
(FYE):
-7.5%4.7%
2020:
$367M
2021:
$249M
2022:
$381M
2023:
$385M
21.3% 6.0% (est.)Returns:
New UAL Payments from
Hypothetical 6.0% FY
2022-23 Returns
Use Cash Reserves: Section 115 Trust
What is it? Dedicated (restricted to pension/OPEB) account managed by PARS; funds in the Section 115 Trust will eventually be sent to CalPERS
Pros:
Increased Returns - Potential for increased investment returns vs. current General Fund reserves Budgetary Flexibility – City can use funds when needed depending on circumstances (1) during tough budget years can be used as a shock absorber and lessen impact on General Fund; (2) make ADPs to PERS at any time; (3) reimburse City if significant economic challenges arise. When doing an ADP with CalPERS, that money is gone and cannot be used to stabilize budget volatility like a 115 Trust can
Investment Control
City’s 115 Trust is with PARS and has 10 different portfolio options based on risk tolerance; Over 2/3 of options are more conservative than CalPERS pension portfolio
Note: CalPERS already manages $909 million of the City’s pension funds and invests those funds in an aggressive manner Cons:
Market risk (dependent on type of investment portfolio) The Trust will show up as an asset on the City’s financial statements, but will not technically offset UAL until funds are transferred to CalPERS
City will need to use reserves or annual surplus to fund the 115 Trust 4 What is it? City makes Additional Discretionary Payment (ADP) directly to CalPERS CalPERS will eliminate payments associated with the portion of the UAL paid off, essentially giving the City credit at the discount/interest rate (currently 6.8%) Actual credit given over time will be at CalPERS’ actual future reinvestment returns Pros:
Reduced future payments
Reduced UAL and higher CalPERS funding ratio
Cons:
Market risk
No Investment Control - No options for other investment portfolios like there is with Section 115 All $909 million of City’s pension assets are with CalPERS; invested aggressively Reduced liquidity/budgetary flexibility vs. Section 115 Trust City will need to use reserves or annual surplus to fund the ADP Use Cash Reserves: CalPERS Additional Discretionary Payment 5 $-
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$45
2023
2024
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Millions
Projected UAL Payments (CalPERS Pension Outlook Tool)* ADP Net Payments Section 115 Trust Net Payments Comparison of Section 115 Trust and CalPERS ADP
Theoretical $20M of Funds Used Over 11 Years
*Assumes 6.80% Discount Rate, -7.5% FY 2022 Investment Returns, 6.0% FY 2023 Investment Returns, 6.80% Investment Returns from FY 2024 onward Trust savings more
optimally concentrated in
peak years
ADP savings distributed
across the next 11 years
6 Comparison of Section 115 Trust and CalPERS ADP
Assumptions & Savings Summary
Cost Management Strategy Section 115 Trust CalPERS ADP
Deposit Assumptions $20M over FYE 2024 - 2027 $20M over FYE 2024 - 2027 Assumed Interest Rate Benefit 5.50% 6.80%
Est. Gross Savings $27.7M $24.2M
Est. Gross Savings during Peak
Payment Years (2029 – 2033) $26.6M $13.3M
Est. Additional Budget Flexibility
from Liquidity
$20M (equal to total amount
deposited)
$0 (funds deposited cannot be
retrieved from CalPERS
Est. Average Annual Payment from
2023 - 2033 $35.8M $36.3M
7*Assumes 6.80% Discount Rate, -7.5% FY 2022 Investment Returns, 6.0% FY 2023 Investment Returns, 6.80% Investment Returns from FY 2024 onward.
Annual deposit and ADP amounts under each scenario are assumed identical. ADP assumes paydown on 12-, 11-, 10- and 9-year amortization bases.
Conclusion & Next Steps
Both Section 115 Trust and ADP are good options for managing rising pension costs It should be reiterated that these options are not mutually exclusive; funds in a Section 115 can be sent to CalPERS in the form of an ADP at any time
NHA Recommendation
Begin to send surplus funds to the Section 115 trust given the enhanced budgetary flexibility and investment control
Given credit rating and state audit concerns on City’s financial health, maintaining liquidity and reserve levels is important
Pension cost management strategies, including optimal leveraging of the Section 115 Trust, should be evaluated every year and factor in ongoing changes at CalPERS and City’s financial health As City builds the trust to more meaningful levels (>$10-$20 million for example), City can re- evaluate and determine optimal timing and method of sending that money to CalPERS 8