TO: HONORABLE MAYOR FROM: Roberto L. Peña
AND CITY COUNCIL
SUBJECT: SEE BELOW DATE: April 8, 2022
SUBJECT: REVIEW OF THE RETIREMENT PLANS’ PENSION AND POST-
EMPLOYMENT HEALTHCARE PLAN ACTUARIAL VALUATIONS AS
OF JUNE 30, 2021, INCLUDING THE AUDIT OF THE ACTUARIAL
VALUATIONS
RECOMMENDATION
It is recommended that the Council review the following actuarial valuation reports:
a. Federated City Employees’ Retirement System Actuarial Valuation (Pension) as of June 30, 2021; and
b. Federated City Employees’ Retirement System Postemployment Healthcare Plan Actuarial Valuation as of June 30, 2021; and
c. Police and Fire Department Retirement Plan Actuarial Valuation (Pension) as of June 30, 2021; and
d. Police and Fire Department Postemployment Healthcare Plan Actuarial Valuation as of June 30, 2021; and
e. Audit of the Federated City Employees’ Retirement System Actuarial Valuation (Pension) as of June 30, 2021; and
f. Audit of the Federated City Employees’ Retirement System Postemployment Healthcare Plan Actuarial Valuation as of June 30, 2021; and
g. Audit of the Police and Fire Department Retirement Plan Actuarial Valuation (Pension) as of June 30, 2021; and
h. Audit of the Police and Fire Department Postemployment Healthcare Plan Actuarial Valuation (Pension) as of June 30, 2021.
COUNCIL AGENDA: 04/26/22
FILE: 22-562
ITEM: 3.4
HONORABLE MAYOR AND CITY COUNCIL
April 8, 2022
Subject: Retirement Plans’ Actuarial Valuations as of June 30, 2021, Including Audit of Actuarial Valuations
OUTCOME
Council review of the Federated City Employees’ Retirement System Actuarial Valuations for the Pension Plan and Postemployment Healthcare Plan as of June 30, 2021 and the Police and Fire Department Retirement Plan Actuarial Valuations for the Pension Plan and Postemployment Healthcare Plan as of June 30, 2021 (collectively “Valuations”), including the audit reports of the actuarial Valuations, will provide relevant financial information to the Council for the two retirement plans and ensure the Council is properly informed on the retirement plans’ funding status and retirement benefit costs.
BACKGROUND
The Valuations provide detailed information regarding the actuarial value of the assets and pension and Other Postemployment Employee Benefit (“OPEB”) liability of the Retirement Plans as of June 30, 2021. The information is used to determine the employee and employer’s contribution rates in the next fiscal year and are generally divided into the following sections:
• A Summary Section intended to recap the most important information of the report; • Risk and Certification Sections to identify, explain and assess the risks to the plan, as well as certify the report;
• An Asset Section that details the calculation of the actuarial value of the plans’ assets; • A Liability Section that discloses the present value of all future benefits, normal cost and changes in unfunded actuarial liabilities;
• A Contribution Section that details the effects of assumption changes on the contribution rates and amortization of unfunded liabilities; and
• An Actuarial Section of the Annual Comprehensive Financial Report (“ACFR”) which contains schedules that are required reporting by the Governmental Accounting Standards Board for the ACFR.
The audits of the actuarial Valuations provide assurance that the actuarial calculations are reasonable and the actuarial process was conducted according to generally accepted actuarial principles and practices.
ANALYSIS
The Valuations are prepared by the Boards’ Actuarial Consultant, Cheiron Inc. The report and its contents have been prepared in accordance with generally recognized and accepted actuarial principles and practices which are consistent with the Code of Professional Conduct and applicable Actuarial Standards of Practice set out by the Actuarial Standards Board.
The credentialed actuaries who prepared the reports meet the Qualification Standards of the American Academy of Actuaries to render the opinion contained in the reports.
HONORABLE MAYOR AND CITY COUNCIL
April 8, 2022
Subject: Retirement Plans’ Actuarial Valuations as of June 30, 2021, Including Audit of Actuarial Valuations
For the Valuations as of June 30, 2021, the following are the key actuarial results, as compared to the results from the June 30, 2020 Valuations (actuarial valuation basis for pension):
• Pension Unfunded Actuarial Liability (“UAL”) decreased from $2.10 billion to $2.05 billion, increasing the funding ratio from 52.3% to 55.1% for the Federated Plan; and the UAL for the Police and Fire Plan decreased from $1.38 billion to $1.23 billion, increasing the funding ratio from 73.6% to 77.4%.
• Pension Actuarial Value of Assets increased from $2.30 billion to $2.51 billion for the Federated Plan and from $3.85 billion to $4.21 billion for the Police and Fire Plan.
Pension Actuarial Liability increased from $4.40 billion to $4.56 billion for the Federated Plan and from $5.24 billion to $5.44 billion for the Police and Fire Plan.
• The following is a summary of the contribution rates shown in the pension actuarial valuations. Both Boards will approve contribution rates at their May meetings.
PENSION Federated Police Fire
FY22-23 FY22-23 FY22-23
Member Contribution Rates
Tier 1 Member 7.41% 11.03% 12.12%
Tier 2 Member 8.13% 14.37% 15.18%
City Contribution Amounts and Rates
Tier 1 UAL Payment $162.6 million
$76.4 million $69.7 million
Tier 1 Normal Cost / Admin $26.9 million
20.29%
$25.8 million
33.24%
$23.6 million
34.34%
Tier 2 Contribution $19.3 million
8.13%
$12.1 million
14.37%
$4.5 million
15.18%
Total City Contribution $208.8 million
56.46%
$114.2 million
70.63%
$97.8 million
99.38%
• OPEB UAL decreased by $68.9 million, from $347.1 million to $278.2 million for the Federated System. This decrease, along with contributions, investment and liability experience, and changes in the assumptions, led to the funding ratio increasing from
46.6% to 58.0% for the Federated System. The OPEB UAL decreased by $48.6 million, from $530.5 million to $481.9 million for the Police and Fire Plan. The huge investment income is the main reason for the increase in the aggregate funding ratio from 28.2% to
36.4%.
HONORABLE MAYOR AND CITY COUNCIL
April 8, 2022
Subject: Retirement Plans’ Actuarial Valuations as of June 30, 2021, Including Audit of Actuarial Valuations
• OPEB Market/Actuarial Value of Assets increased by $81.3 million from $303.3 million to $384.6 million for the Federated System and increased by $67.8 million from $208.5 million to $276.3 million for the Police and Fire Plan. OPEB Actuarial Liability increased by $12.5 million from $650.4 million to $662.9 million for the Federated System and increased by $19.2 million from $739.0 million to $758.2 million for the Police and Fire Plan.
• With the implementation of Measure F in 2017, health contribution rates were fixed at
7.5% of pensionable pay for Federated members and 8.0% of pensionable pay for Police and Fire members. The City’s contribution toward the explicit subsidy is actuarially determined on an annual basis; and the City will also pay the implicit subsidy based on a pay-as-you-go basis as a part of active health premiums. In addition, the City has an option to limit its contribution to 14% of pensionable payroll for Federated and 11% of pensionable payroll for Police and Fire.
OPEB Federated Police Fire
FY22-23 FY22-23 FY22-23
Member Contribution Rates
Federated Member 7.50% N/A N/A
Police and Fire Member N/A 8.0% 8.0%
Explicit Subsidy Members $8.8 million $5.6 million $5.0 million
City Contribution Amounts and Rates
Actuarially Determined Amount
(Explicit Subsidy)
$18.8 million $18.0 million $11.2 million
Estimated City Optional Cap
(Explicit Subsidy – 14% for Fed and 11% for
PF of pensionable payroll)
$49.0 million $28.7 million
City’s Implicit Subsidy Payment $5.2 million $2.1 million $1.0 million City’s Total Payment for Healthcare
(Explicit and Implicit Subsidy)
$23.5 million $20.1 million $12.2 million
The audits of the valuations were conducted by Segal Consulting. The audit scope was to review the liabilities and the contribution rates for the Tier 1 and Tier 2 plans that were included in the plans’ June 30, 2021 actuarial valuation reports. The audit reports include an independent reproduction of the detailed valuation reports, employee data and supplemental information provided by both plans and Cheiron. For the pension plans, Segal’s calculation of total present value of future benefits ranged from 100-101% of Cheiron’s total present value of future benefits. For the OPEB plans, Segal’s calculation of total present value of benefits ranged from
98.7-99.6% for explicit subsidy and 96.4%-102.3% for the implicit subsidy of Cheiron’s total present value of future benefits. Overall, the audits confirm that the results of the actuarial
HONORABLE MAYOR AND CITY COUNCIL
April 8, 2022
Subject: Retirement Plans’ Actuarial Valuations as of June 30, 2021, Including Audit of Actuarial Valuations
calculations as of June 30, 2021 are reasonable, and that those calculations are based on generally accepted actuarial principles and practices.
EVALUATION AND FOLLOW-UP
The Office of Retirement Services staff will present the Retirement Plans’ Valuations on an annual basis to the City Council per the recommendation of the City Auditor’s report on Pension Sustainability (Audit #10-10) to update the Council on the financial status of the Retirement Plans.
PUBLIC OUTREACH
These Valuations and audits of the Valuations were presented to the Federated System and Police and Fire Boards at their meetings from December through April, which were open to the public. This memorandum will be posted on the City’s Council Agenda website for their April 26, 2022 Council Meeting.
COORDINATION
Production of the Valuations and audits of the Valuations was coordinated with the Board of Administration for the Federated City Employees Retirement System, the Board of Administration for the Police and Fire Department Retirement Plan, the City Manager’s Office, and the Office of Employee Relations.
CEQA
Not a Project, File No. PP17-009, Staff Reports, Assessments, Annual Reports, and Informational Memos that involve no approvals of any City action.
Roberto L Peña
Chief Executive Officer
Office of Retirement Services
For questions, please contact Benjie Chua Foy, Division Manager, at benjie.chua- [email protected].
Attachments:
a. Federated City Employees’ Retirement System Actuarial Valuation (Pension) as of June 30, 2021
b. Federated City Employees’ Retirement System Postemployment Healthcare Plan Actuarial Valuation as of June 30, 2021
HONORABLE MAYOR AND CITY COUNCIL
April 8, 2022
Subject: Retirement Plans’ Actuarial Valuations as of June 30, 2021, Including Audit of Actuarial Valuations
c. Police and Fire Department Retirement Plan Actuarial Valuation (Pension) as of June 30, 2021
d. Police and Fire Department Postemployment Healthcare Plan Actuarial Valuation as of June 30, 2021
e. Audit of the Federated City Employees’ Retirement System Actuarial Valuation (Pension) as of June 30, 2021
f. Audit of the Federated City Employees’ Retirement System Postemployment Healthcare Plan Actuarial Valuation as of June 30, 2021
g. Audit of the Police and Fire Department Retirement Plan Actuarial Valuation (Pension) as of June 30, 2021
h. Audit of the Police and Fire Department Postemployment Healthcare Plan Actuarial Valuation (Pension) as of June 30, 2021