Pension & OPEB Policies
San Leandro
Two Major Retirement Benefit Obligations
Pension Benefits
Administered by
Retiree Health Benefits
(OPEB) Self Administered by
• Multi-Employer System
• Multi-Employer Funding Trust
• Single Employer Plan
• Multi-Employer Funding Trust
Objective
3 • Update funding policy for OPEB and pension liabilities adopted November 2022.
• Propose two separate policies with different strategic approaches:
Pension Funding Policy
OPEB Funding Policy
Relative Size of Pension vs. OPEB Obligation
as of 6/30/2023
4 $236,000,000
$4,474,741
$-
$100,000,000
$200,000,000
$300,000,000
$400,000,000
$500,000,000
$600,000,000
$700,000,000
$800,000,000
Pension OPEB
Accrued Liability Assets with Plan Adminstrator Volatilty Reserve Unfunded Liability Funded Ratio with Volatility Reserve 67%
Funded Ratio without Volatility Reserve 65%
Funded Ratio 82%
Assumptions Set Future Cost & Funding Expectations
5 Economic
• Inflation
• Investment Return
• Salary Growth
• Health Care Costs
Demographic
• Retirement
• Disability
• Death
• Termination
Major Driver of
Plan Cost and
Affordability
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 EE & ER Contributions (Normal Cost Only) Actual Investment Earnings Target Balance (Accrued Liability) Accrued Liability (AL)
(Target funding progress at
a static point in time)
Investment
Earnings
+
Cumulative
Normal Cost
Contributions
Estimated amount necessary at the
end of active employment to fund
benefit throughout retirement years.
Employee Age
Illustration Only
Hypothetical Prefunding Example for Individual Employee’s Retirement Benefit
6 When benefits are “prefunded,”
investment earnings are
assumed to offset 50% -60% of
the promised benefit.
Benefits of Policy Development
7 Financial Responsibility: It ensures that local governments set aside adequate funds to meet future pension obligations, demonstrating fiscal prudence and responsibility.
Risk Management: A well-structured policy helps manage and mitigate investment risks, ensuring that the pension fund remains solvent even during economic downturns.
Employee Trust and Retention: A well-funded pension plan builds trust among employees, ensuring they feel secure about their future benefits. This can enhance employee morale and aid in retaining experienced and valuable staff.
Budget Stability: Reduces volatility in annual budget allocations by smoothing out contribution requirements over time, which aids in more predictable and stable financial planning.
Credit Rating: A well-funded pension plan can positively impact the local government’s credit rating, potentially leading to lower borrowing costs and better access to financial markets.
Transparency and Accountability: Promotes transparency and accountability in how pension funds are managed, enhancing public trust and confidence in the local government's financial management practices.
What is a Risk Based Capital Reserve (RBC) Policy
8 A risk-based capital reserve policy is a regulatory framework used by financial institutions, such as banks and insurance companies, to ensure they have enough capital to cover potential losses from their risk exposures. The idea is to maintain a buffer of capital that can absorb losses and protect the institution from insolvency.
1. Purpose: The primary goal is to ensure financial stability by requiring institutions to hold capital proportional to the risks they take.
2. Risk Weights: Different types of assets and activities are assigned risk weights, which determine the amount of capital required. For example, loans with higher risk of default require more capital than safer investments.
3. Regulatory Standards: Institutions must meet minimum capital requirements set by regulatory bodies, such as the Basel Committee on Banking Supervision for banks and various state insurance regulators for insurers.
4. Capital Ratios: Institutions are evaluated based on capital ratios, such as Tier 1 and Tier 2 capital ratios, which measure the adequacy of their capital relative to their risk-weighted assets.
Pension Risks
10 Pension Risks – Which Can a Local Agency Control?
Investment Risk (Most Impactful Risk)
Contribution Rate Volatility
Actuarial Risk
Longevity Risk
Legislative and Regulatory Risk
Demographic Losses
Liquidity Risk
Credit and Insolvency Risk
Funding Risk
Reputation Risk
No
Yes
-3.1%
35.4%
24.6%
13.8%
3.9%
15.7%
9.7%
6.5%
12.5%
14.5%
2.0%
16.3%
15.3%
20.1%
19.5%
12.5%
10.5%
-7.2% -6.1%
3.7%
16.6%
12.3%
11.8%
19.1%
-5.1%
-24.0%
13.3%
21.7%
0.1%
18.4%
18.4%
2.4%
0.6%
11.2%
8.6%
6.7%
4.7%
21.3%
-6.1%
5.8%
9.3%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
19841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015201620172018201920202021202220232024 Plan Year Ending June 30
Investment Return Discount Rate 5 per. Mov. Avg. (Investment Return) Dot Com Crash
Great Recession
CalPERS Historical Investment Returns
11 Compound Annual Return
1 Year 5 Year 10 Year 20 Year 30 Year
June 30, 2024 9.3% 6.6% 6.2% 6.7% 7.7%
June 30, 2023 5.8% 6.1% 7.1% 7.0% 7.5%
Covid Pandemic
Just How Significant is Investment Risk to San Leandro? Investment Losses
Rarely
Most of the Time
Some of the Time
Pension Policy
Pension Risk Management Goals
Preservation of
Liquidity & Budget
Flexibility
Strategic
Governance
Solvency
Adequate Reserves and
Continuity of Service to Citizenry
Maximize Interest
Savings
Maximize Principal and
Payment Reduction
Regular
Review,
Transparent
Disclosures
15 Pension Policy Strategy
16 Key Pension Policy Reserve Targets
17 Buffer / Reserve Target Calculations
20-Yr. UAL Repayment Schedule, 5-Yr. Smoothing Ramp
(Accommodative Pmt. But Inefficient Amortization)
Default UAL Repayment Schedule
20 Yr. UAL Repayment Schedule, No Smoothing Ramp
(No Negative Amortization but Higher Payments)
Alternative UAL Repayment Schedule
Proposed Reserve Framework
Recommend Actions Based on CalPERS Funded Status
19 Suggested but Flexible Reserve Schedule
20 OPEB Policy
OPEB Plan
22 1. Well-funded OPEB Plan
2. Legacy Benefits Closed to New Participants
3. Current Promise to New Employees Limited to PHEMCA Minimum Only
4. Liability Growth Should Taper Off
5. Relatively Insignificant Unfunded Liability
6. Kudos to the City Staff & Governing boards and committees! Very few OPEB Plans are as well funded!
7. Resulting OPEB Policy is relatively basic in comparison to the Pension Policy Key Elements of OPEB Funding Policy
23 OPEB Prefunding Trust (Trust)
As is best-practice, the City endeavors to appropriate the ADC* each year during the annual budget process and contribute an equal amount to the OPEB Trust. Optionally, to avoid potential investment risk, the City may contribute to the Trust an amount equal to the ADC but net of the current year estimated retiree benefit payments and implied subsidy to the Trust. At its discretion, the City may reimburse itself from the Trust for all benefits paid to retirees and beneficiaries as well as any implied subsidy contributed to the Trust.
2. Pay-Go Funding
From time to time, budgetary hurdles may impede the City’s ability to contribute the full ADC the Trust.
However, at a minimum, the City is fully committed to fully funding its ongoing promised benefit to eligible retirees and their beneficiaries on a Pay-Go basis.
3.Surplus Proceeds
Nothing in this policy shall preclude the City from making additional discretionary contributions to the trust to increase the funded status of the long-term OPEB obligation. *Actuarial Determined Contribution(ADC)
Recommendations
Recommendation
25 • With the Finance Committee’s concurrence or as otherwise modified, recommend the Pension and OPEB Funding policies for Council Consideration
Questions
26