South San Francisco City Council
November 16, 2022

Pension Funding
DiscussionPresentation to City CouncilKaren Chang, Director of FinanceJason Wong, Deputy Finance DirectorWing-See Fox, UFINovember 16, 2022 AGENDA
1 OVERVIEW2 UPDATE ON CITY’S PENSION LIABILITY3 PENSION OBLIGATION FUNDING STRATEGIES4 RECOMMENDATIONS AND NEXT STEPS 2 Composition of Pension Funding (CalPERS)
CITY CONTRIBUTION: ~ 29 cents
Based on negotiated agreements
and actuarial valuations
UNFUNDED ACTUARIAL LIABILITY (“UAL”)Difference between current value of City’s assets at CalPERS andestimated obligations to retireesSouth San Francisco UAL as of June 30, 2022 is estimated to be $230 million (67% Funded) EMPLOYEE CONTRIBUTIONS: ~ 11 cents
Based on negotiated agreements
and actuarial valuations
CalPERS INVESTMENT EARNINGS: ~ 60 centsEarnings generated by CalPERSEffective 7/1/2021, expected rate of return reduced from 7.0% to 6.8% 3 Estimated UAL Payments
4 How Does SSF Compare?
5 UAL Balance
%
Funded UAL Balance
%
Funded
Daly City 82,610,000 78% 130,300,000 68%Redwood City 118,780,000 71% 173,760,000 64%San Mateo 91,170,000 72% 187,700,000 61%South San Francisco 95,890,000 66% 134,730,000 67% Miscellaneous Plan Safety Plan
 CalPERS Fund is estimated to be 72% Funded
Past Actions Taken by City to Address Pension
 Tiered Plans (Classic Tier 1, Classic Tier 2, PEPRA)
 Miscellaneous:
 Classic Tier 1: 2.7% @ 55 [hired prior to April 25, 2010]  Classic Tier 2: 2.0% @ 60 [hired after April 25, 2010] PEPRA: 2.0% @ 62 [new hires on or after January 1, 2013]  Safety:
 Classic Tier 1: 3.0% @ 50 [hired prior to April 25, 2010] Classic Tier 2: 3.0% @ 55 [hired after April 25, 2010] PEPRA: 2.7% @ 57 [new hires on or after January 1, 2013]  Bargaining Unit Concessions  Pension Stabilization Reserve Fund ($5.5 million) Successful Judicial Validation for Future Pension Obligation Bond Issuances (tool is now in toolbox but current market is unfavorable) 6 Strategies for Addressing Pension Obligations
7 Make Additional Discretionary Payments (ADPs) to CalPERSPension Stabilization Reserve FundSection 115 TrustPension Obligation Bonds 2134
Make Additional Discretionary Payments to CalPERS
above and beyond Annually Required Contribution
8  Prepay small amounts of “principal” on the UAL and save the 6.80% associated “interest” cost
 Requires long-term budgetary discipline and prioritization  Benefits of making Additional Discretionary Payments to CalPERS  Chip away at UAL and can result in significant savings over time Less risky compared to POBs (no borrowing of funds and mitigates market timing risk)
 Improves the City’s funded status over time
1 Pension Stabilization Reserve Fund
9  City has created a designated Pension Stabilization Reserve of $5.5M  No impact on UAL unless funds are transferred to CalPERS Invested within California Investment Code  Current LAIF Rate (Quarter Ended 9/30/22): 1.35% 3-Month Treasury Rate (as of 11/3/22): 4.25%  1-Year Treasury Rate (as of 11/3/22): 4.78%  Benefits of Pension Reserve
 Investment return has lower risk City has maximum control over assets Budget stabilization Available in years with unexpected operating results or recession 2 Section 115 Trust
10  Legally restricted fund - Can only be used for pension costs  No impact on UAL unless funds are transferred to CalPERS  Benefits of 115 Trust
 Assets in the 115 Trust will offset liabilities on the City’s balance sheet Investment flexibility (perhaps greater investment return, but higher risk)  City can choose conservative, moderate, or aggressive investments Long term strategy so the fund can grow over time  City has control over assets Flexibility to access trust assets at any time if used for pension costs Addresses unfunded pension liabilities over time when using assets to make “slow and steady” ADPs to achieve UAL savings
 Risk: Investments can be in a negative position at a time when City may need to make a withdrawal to offset pension costs
3 Pension Obligation Bonds (POBS)
11  October 2021: City Council Study Session on Pension Funding Strategies July 2022: City Obtained Judicial Validation for Issuance of POBs POBs Refinance the UAL Benefits of POBs  Significant Budgetary Savings when POB Borrowing Rate is Low Stabilize UAL Payments (level payments) Restore Funded Status  Risks of POBs
 Market Timing Risk Impact of Returns is Magnified Returns in Initial Years Critical 4 Unfavorable Market Conditions
Recommended Strategies
12 Make Additional Discretionary Payments to CalPERSIncrease Pension Stabilization Reserve Fund BalanceExplore Section 115 Trust Opportunities 3 12
Potential Funding Sources for Recommended Strategies
13  Apply the annual discount prepayment savings to CalPERS as ADP
 Budget allocation in FY24 = $581,740
 Reduce FY 2023 General Fund operating reserve
 For example, 20% to 18% and dedicate the 2% to fund pension obligations (~$2M)
 When operating surplus or one-time monies are realized, designate a percentage to fund pension obligations
 For example, 50% up to a cap of $2 million
Questions/Comments
14