Pension Liability Management Policy
July 16, 2024
City of Victorville
Presentation by Urban Futures, Inc.
2 Victorville Has a Strong AA- Issuer Credit Rating
S&P assigned the City an Issuer Credit Rating of “AA-” in April 2021, which reflects S&P’s forward- looking opinion of Victorville’s overall creditworthiness, focusing on the City’s capacity and willingness to meet its financial commitments as they come due
Positive Credit Considerations
– Strong Management
– Strong Budgetary Performance
– Very Strong Budgetary Flexibility
– Very Strong Liquidity
– Strong Institutional Framework
– Growing industrial economy that demonstrates unique comparative advantages within the broader freight transportation network
Credit Headwinds
– Weak economy
– Pension/OPEB liability (adequate debt and contingent liability profile) – Although City’s Pension and OPEB liabilities are manageable, the rising costs related to the City’s underfunded pension liabilities may exacerbate budgetary pressures over the longer term
3 Composition of Pension Funding (CalPERS)
EMPLOYER CONTRIBUTIONS
City contributions to CalPERS
based on negotiated agreements
and actuarial valuations
New service cost (normal cost)
expressed as %age of Payroll
UAL payment expressed as annual $
Amount
UNFUNDED ACCRUED
LIABILITY (“UAL”)
Difference between current value
of City’s assets at CalPERS and
estimated obligations to retirees
Funding target of 80-100%
Employer UAL payments amortize the
UAL balance to zero over twenty-years,
if all future actuarial assumptions are
met
EMPLOYEE CONTRIBUTIONS
Employee contributions to CalPERS
based on negotiated agreements
and actuarial valuations
Typically calculated as %age of Payroll
INVESTMENT EARNINGS
Earnings generated by CalPERS
Expected rate of return (discount rate) is
6.8%
4 City’s Combined UAL as of June 30, 2022
Miscellaneous Plan – The Miscellaneous Plan has a two-tier benefit plan structure.
Employees hired before January 1, 2013 receive a benefit formula equal to 2.5% @ 55.
Employees hired after January 1, 2013 receive a benefit formula equal to 2.0% @ 62.
Safety Plan – The Safety Plan also has a two-tier benefit plan structure. Employees hired before January 1, 2013 receive a benefit formula equal to 2.5% @ 55. Employees hired after January 1, 2013 receive a benefit formula equal to 2.0% @ 62.
Pension costs associated with each Plan are allocated across the City’s various funds and entities based on payroll.
MISCELLANEOUS SAFETY (CLASSIC) COMBINED
Accrued Liability (AL) $ 253,056,823 $ 45,145,437 298,202,260$ Market Value Assets (MVA) 175,049,251 30,643,293 205,692,544 UAL = AL-MVA 78,007,572$ 14,502,144$ 92,509,716$
69.2% 67.9% 69.0%
Unfunded Accrued Liability (UAL) 2022
5 June 30, 2022 and June 30, 2023 Valuations
June 30, 2022 Valuation (Most Recent)
Actual Experience: Investment Loss of -6.1%
Experience Loss of 12.9%
• Impact of FY22 experience loss increased
UAL payment schedule higher than June 30,
2020 valuation UAL payment schedule (i.e.,
offset the 21.3% investment return in FY21)
June 30, 2023 Valuation (Expected August
2024)
Actual Experience
: Investment Gain of 5.8%
Experience Loss of 1.0%
• Impact of FY23 experience loss will likely
slightly increase UAL payment schedule
CalPERS has reported a preliminary net
investment return for FY24 of 9.3%
Experience Gain of 2.5%
Reason Term Balance (6/30/22)
1 Benefit Change 20 275,105
2 Investment (Gain)/Loss 20 27,577,884
3 Non-Investment (Gain)/Loss 20 5,869,955
FY23-24 TOTAL 33,722,944$
Reason Term Balance (6/30/22)
1 Investment (Gain)/Loss 20 4,854,149
2 Non-Investment (Gain)/Loss 20 672,171
FY22-23 TOTAL 5,526,320$
City of Victorville - Miscellaneous Plan
City of Victorville - Safety Plan (Classic)
June 30, 2022 Valuation - New Bases
6 Annual UAL Payment Anticipated to Increase by $2.6M
7 Pension Funding Strategies
• Budget for monthly UAL payments to CalPERS, make annual prepayment, set aside savings
• Allocate “excess” General Fund operating reserves to fund pension obligations • Use portion of Enterprise Fund reserves to make Additional Discretionary Payments (ADPs) to CalPERS
• When operating surplus or one-time monies are realized, dedicate a percentage to fund pension obligations
• Consider setting up Pension Reserve and/or 115 Trust
Budgeting Approaches:
Financing Approaches:
• Structure refunding savings upfront and take savings to make ADPs • Consider financing tax-exempt projects rather than funding with Paygo, and use Paygo funds to make ADPs
• Pension Obligation Bonds (not an option to consider in current market environment)
8 ADP vs. 115 Trust vs. Pension Reserve
• ADP to CalPERS
– Reduces net pension liability in financial statements immediately – Impact on future contributions will vary
• Section 115 Trust
– Legally restricted—cannot be used for another purpose – Counts as asset on City’s financial statements but does not impact UAL – Allows City to invest outside the California Investment Code in order to meet pension/OPEB funding objectives
– Creates the ability to realize savings in the long term by making “slow and steady” ADPs • Pension Reserve
– Allows City to maintain designated amount to supplement pension costs in years with unexpected operating results or recession
Consider a Balanced Approach
CalPERS
Section
115 Trust
Debt Service Savings,
Enterprise Fund
Reserves
Surplus or one-
time monies
Pension
Reserve
Surplus or one-
time monies
(ADPs over time) (UAL or Normal
Costs in
Recessionary
Years)
9 Pension Liability Management Policy
• Policy Objectives and Goals
• Background
– Description of plans and
liabilities
• Strategies for Managing Pension
Liabilities
– Additional Discretionary
Payments (ADPs) to CalPERS
– Section 115 Trust
– Pension Stabilization Reserve
Fund
– Accelerating Payment of New
Bases
• Potential Funding Sources
– Reserves
– Operating Surplus
– Debt Service Savings from
Refinancings
– Savings from Annual
Prepayment Option
– Financing Strategies
• Reserve Target of $2.6 million
• Funding Target Level of 80%
• Annual Policy Review as Part of
Mid-Year Budget
10 Regulatory Disclosure
Conflicts of Interest and Other Matters Requiring Disclosures. Pursuant to Municipal Securities Rulemaking Board (“MSRB”) Rule G -42, on Duties of Non-Solicitor Municipal Advisors, Municipal Advisors are required to make certain written disclosures to clients which include, amongst other things, Conflicts of Interest and any Legal or Disciplinary events of Urban Futures, Inc. (UFI) and its associated persons.
The following are potential conflicts of interest to be considered. • UFI represents that in connection with the issuance of municipal securities, UFI may receive compensation from an Issuer or O bligated Person for services rendered, which compensation is contingent upon the successful closing of a transaction and/or is based on the size of a transaction. Consist ent with the requirements of MSRB Rule G-42, UFI hereby discloses, that such contingent and/or transactional compensation may present a potential conflict of interest reg arding UFI's ability to provide unbiased advice to enter into such transaction. The contingent fee arrangement creates an incentive for UFI to recommend unnecessary f inancings or financings that are disadvantageous to the client, or to advise the client to increase the size of the issue. This potential conflict of interest will not impair UFI's ability to render unbiased and competent advice or to fulfill its fiduciary duty to the client. • UFI fees under this potential agreement may be based on hourly fees of UFI's personnel, with the aggregate amount equaling the n umber of hours worked by such personnel times an agreed-upon hourly billing rate. This form of compensation presents a potential conflict of interest because it could create an incentive for UFI to recommend alternatives that would result in more hours worked. This conflict of interest will not impair UFI's ability to re nder unbiased and competent advice or to fulfill its fiduciary duty to its clients.
• UFI's fees under this potential agreement, may be a fixed amount established at the outset of the Agreement. The amount is us ually based upon an analysis by the client and UFI of, among other things, the expected duration and complexity of the transaction and the Scope of Services to be performe d by UFI. This form of compensation presents a potential conflict of interest because, if the transaction requires more work than originally contemplated, UFI ma y suffer a loss. Thus, UFI may recommend less time-consuming alternatives, or fail to do a thorough analysis of alternatives. This conflict of interest will not impair UFI's ability to render unbiased and competent advice or to fulfill its fiduciary duty to the client.
• The fee paid to UFI increases the cost of investment to client. The increased cost occurs from compensating UFI for municipa l advisory services provided. • UFI serves a wide variety of other clients that may from time to time have interests that could have a direct or indirect imp act on the interests of another UFI client. For example, UFI serves as municipal advisor to other municipal advisory clients and, in such cases, owes a regulatory duty to su ch other clients. These other clients may, from time to time and depending on the specific circumstances, have competing interests. In acting in the interests of its various clients, UFI could potentially face a conflict of interest arising from these competing client interests. UFI fulfills its regulatory duty and mitigates such conflicts through dealing honestly and with the utmost good faith with its clients.
• UFI does not have any affiliate that provides any advice, service, or product to or on behalf of the client that is directly or indirectly related to the municipal advisory activities to be performed by UFI;
• UFI has not made any payments directly or indirectly to obtain or retain its clients municipal advisory business; • UFI has not received any payments from third parties to enlist UFI's recommendation to its clients of its services, any munic ipal securities transaction or any municipal finance product;
• UFI has not engaged in any fee-splitting arrangements involving UFI and any provider of investments or services to its clients; • UFI does not have any legal or disciplinary event that is material to its clients evaluation of the municipal advisory or the integrity of its management or advisory personnel. • UFI does not act as principal in any of the transaction(s) related to this Agreement. • Randall Merritt, a Managing Principal, previously worked at Raymond James & Associates, Inc. from December 2015 until Decembe r 2023. Urban's relationships with Raymond James and all other investment banks are conducted in an arm's length manner, and any recommendations are independent of any prior employment or other relationships.
Legal Events and Disciplinary History. UFI does not have any legal events and disciplinary history on its Form MA and Form MA -I, which includes information about any criminal actions, regulatory actions, investigations, terminations, judgments, liens, civil judicial actions, customer compla ints, arbitrations and civil litigation. The District may electronically access UFI’s the most recent Form MA and each most recent Form MA -I filed with the Commission at the following website:
www.sec.gov/edgar/searchedgar/companysearch.html. There have been no material changes to a legal or disciplinary event disclosure on any Form MA or Form MA -I filed with the SEC.