Budget Standing Committee of the City Council
January 29, 2025

OPEB and Pension
Discussion
Presentation to Budget Standing
Committee
Karen Chang, Director of Finance
January 29, 2025
AGENDA
1 UPDATE ON CITY’S OTHER POST EMPLOYMENT BENEFITS
(OPEB)
2 UPDATE ON CITY’S PENSION LIABILITY
3 PENSION OBLIGATION FUNDING STRATEGIES
4 DISCUSSION OF PENSION FUNDING POLICY
2 Past Actions Taken by City to Address OPEB
 Closed System [hired prior to April 25, 2010]
 Participate in CERBT to let fund grow over time
 2013/14 (initial investment $4.2M)
 2014/15 - $11.2M
 2015/16 - $1.2M
 Annually thereafter $802K
 Current CERBT balance $38.2M
 Projected UAL as of June 30, 2024 $51.7M
3 OPEB 10 Year Contribution Projection Summary
4 OPEB – 30 year pay-off projection
5 Composition of Pension Funding (CalPERS)
CITY CONTRIBUTION: ~ 34 cents
Based on negotiated agreements
and actuarial valuations

UNFUNDED ACTUARIAL
LIABILITY (“UAL”)
Difference between current value of
City’s assets at CalPERS and
estimated obligations to retirees
South San Francisco UAL as
of June 30, 2024 is estimated
to be $264 million
(65.5% Funded)
EMPLOYEE CONTRIBUTIONS: ~ 11 cents
Based on negotiated agreements
and actuarial valuations
CalPERS INVESTMENT EARNINGS:
~ 55 cents
Earnings generated by CalPERS
Effective 7/1/2021, expected rate of return
reduced from 7.0% to 6.8%
6 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]  Compensation limit ($155,081)
 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) 7 Actions Taken by City to Address Pension Liability
 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] (City)  PEPRA: 2.0% @ 62 [new hires on or after January 1, 2013] (State)  Safety:
 Classic Tier 1: 3.0% @ 50 [hired prior to April 25, 2010]  Classic Tier 2: 3.0% @ 55 [hired after April 25, 2010] (City)  PEPRA: 2.7% @ 57 [new hires on or after January 1, 2013] (State)  Compensation limit ($155,081)
 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) 8 Actions Taken by State to Address Pension Liability
 Pension Reform
 Miscellaneous:
 PEPRA: 2.0% @ 62 [new hires on or after January 1, 2013]  Safety:
 PEPRA: 2.7% @ 57 [new hires on or after January 1, 2013]  Compensation limit ($155,081)
 Ended rolling amortization
 Reduced amortization period from 30 years to 20 years  Reduces interest expense
9 SSF - Unfunded Pension Liability and Funded Status
10 CalPERS History of Investment Returns
Investment return 2024 ~9.3% 11
Estimated Annual Payments (NC + UAL)
12 Source: CalPERS Outlook tools
Comparison of Funded Ratio – San Mateo County
13 How Does SSF Compare?
14  CalPERS Fund is estimated to be 72% Funded
UAL Balance
%
Funded UAL Balance
%
Funded
Daly City 110,376,411 73% 149,590,511 65%
Redwood City 132,369,133 70% 195,952,209 62%
San Mateo 101,414,805 70% 198,803,821 60%
South San Francisco 111,188,891 63% 153,332,993 65%
Miscellaneous Plan Safety Plan
Source: CalPERS Summary of Valuation Results
Why Pension Funding Policy
15 Maintain the City’s sound financial position;
Ensure the City has the flexibility to respond to changes in future service priorities, revenue levels, and operating expenditures;
Provide guidance in making annual budget decisions;
Protect the City’s creditworthiness;
Ensure that all pension funding decisions are structured to protect both current and future taxpayers, ratepayers, employees, and residents of the City; and
Ensure that the structure of Pension Obligation Bonds, if authorized and issued, is consistent with the City’s strategic planning goals, objectives, capital improvement program, budget, and Debt Management Policy.

Strategies for Addressing Pension Obligations
16 Make Additional
Discretionary
Payments (ADPs)
to CalPERS
1 Pension
Stabilization
Reserve Fund
2 Section 115 Trust
3 Pension
Obligation
Bonds
4 Make Additional Discretionary Payments to CalPERS
above and beyond Annually Required Contribution
17  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
 Cons
• Market Risk if making one-time big payment
1 Pension Stabilization Reserve Fund
18  City has created a designated Pension Stabilization Reserve of $5.5M  No impact on UAL unless funds are transferred to CalPERS  Invested with Chandler within California Investment Code  Yield since Inception: 4.5%
 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  Cons:
 Lower Investment return
 Not receiving credit from CalPERS to reduce Unfunded Liabilities • reducing interest rate environment
2 Section 115 Trust
19  Legally restricted fund - Can only be used for pension costs  No impact on UAL unless funds are transferred to CalPERS  Benefits of 115 Trust
 CalPERS CEPPT similar to the OPEB CERBT
 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
 Cons: 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)
20  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
Funding strategies
21 CalPERS
Section 115
Trust
Surplus or one-time Recycled Savings
monies
Pension
Reserve
Surplus or one-time
monies
(ADPs over time) or
Use to offset
additional pension
costs due to
investment/actuarial
deviation
(UAL or Normal
Costs in
Recessionary Years)
(ADPs)
Feedback from Council
22 • Set target funding ratio for UAL
• Preset strategies
• Set Reserves Limits
• Preset criteria for designating a % of General Fund Surplus or one time revenue to fund pension obligations
• Example: 50% up to cap of $2 million
• Review and oversight by Council
Questions/Comments
23