MEETING DATE: February 1, 2022 PAGE 2
SUBJECT: PENSION FUNDING STRATEGIES TO ADDRESS UNFUNDED ACTUARIAL LIABILITIES (1988 and 1994). Conversely, from 2001 to 2021, there were four years with negative returns (2001, 2002, 2008, and 2009). These declines were due to the “Dot Com” crash (2001 and 2002), and the Great Recession (2008 and 2009). In addition to those four years of declines, six other years saw returns below the CalPERS target discount rate (2003, 2012, 2015, 2016, 2019, and 2020) as shown in the chart below.
This volatility is shared by all CalPERS member agencies and is reflected in escalating annual expenditures paid to CalPERS and a significant shortfall of assets to fund each agency’s obligations to retirees. There are two components of the expenditures paid to CalPERS: Normal Costs and annual amortization payments of unfunded actuarial liabilities (UAL). In nominal dollar terms, Normal Costs escalate consistent with increases in total payroll for the City. As a percentage of payroll, Normal Costs are expected to decline from over 14 percent to approximately 8 percent over the next 30 years, which is a byproduct of shifting categories of retirement benefits among City staff (classic versus PEPRA, the two employee categories will be detailed more below). UAL represents the fixed annual payment for past service; however, conversely to Normal Costs, UAL can vary greatly from year to year depending on the actual investment return from CalPERS included in the calculation. UAL represents a pension’s shortfall of assets to fund retirement benefits. When a pension is fully funded at 100 percent, there is no UAL.
Historically, there have been points in time when CalPERS has been fully funded, although it has not occurred since 2007, just before the Great Recession, per the chart below.
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MEETING DATE: February 1, 2022 PAGE 3
SUBJECT: PENSION FUNDING STRATEGIES TO ADDRESS UNFUNDED ACTUARIAL LIABILITIES
Given the additional investment return uncertainty, in 2013 the Public Employees Pension Reform Act (PEPRA) was enacted. PEPRA created two sets of employees: classic and PEPRA. In general, PEPRA employees’ retirement benefits are reduced compared to classic employees in the same job classification, which will assist CalPERS as a whole, as well as the City, in funding retirement benefits in the future.
Based on estimates from GovInvest, the City’s pension actuarial consultant, the City is not expected to be entirely PEPRA-staffed until the late 2040s.
While the additional burden of UAL is material, City staff has created two mitigation measures over the last several years. Specifically, in fall 2009, an assigned General Fund fund balance account for CalPERS expenditures was created with an initial allocation of $500,000, which was a portion of the FY 2008/09 2/1/2022 D1 Page 3 of 4
MEETING DATE: February 1, 2022 PAGE 4
SUBJECT: PENSION FUNDING STRATEGIES TO ADDRESS UNFUNDED ACTUARIAL LIABILITIES year-end fund balance utilization. This account has grown since then to $9.2 million with additional allocations and consolidation of other assigned fund balance accounts. A second step to ensure sufficient funding for future CalPERS expenditures was the establishment of a Section 115 Trust account in October 2017. Section 115 Trust accounts are tools that allow municipalities to set aside dedicated resources for pension funding. The City’s 115 Trust account had a market value of $7.1 million as of December 31, 2021. Both accounts demonstrate fiscal prudence, are congruent with Government Finance Officers Association Best Practices, and are viewed favorably by rating agencies.
After reviewing the CalPERS total pension obligation closely with the City’s pension actuarial consultant and 115 Trust financial adviser, and based on this analysis, there are two recommended actions. First, complete two Additional Discretionary Payments (ADPs) to CalPERS: a) $3 million in FY 2021/22, and b) $4 million in FY 2022/23. The $7 million in payments will stabilize the operational CalPERS expenditures that have been steadily increasing over the prior six years. The second action will be to allocate $2.2 million to the City’s 115 Trust account which historically has provided a more favorable return on investment than the City’s pooled portfolio.
By taking these steps, a savings of $2.1 million can be realized over the next decade and the opportunity to achieve greater investment returns to assist with our future pension obligations.
The City’s consultant from GovInvest will facilitate the workshop discussion and provide a detailed presentation outlining the proposed actions listed above.
FISCAL IMPACT: There is no direct fiscal impact associated with this discussion. Any future fiscal impact is dependent upon the City Council’s direction provided to staff during the workshop. Any direction provided by City Council will be brought back for formal consideration by Council with requisite fiscal impacts provided at that time.
EXHIBITS: None.
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