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CC SR 20210119 04 - CalPERS AVR and Pension Guideline CITY COUNCIL MEETING DATE: 01/19/2021 AGENDA REPORT AGENDA HEADING: Regular Business AGENDA TITLE: Consideration and possible action to review the CalPERS annual Actuarial Valuation Report (AVR) and draft CalPERS Pension Plan Guidelines. RECOMMENDED CITY COUNCIL ACTIONS: (1) Receive and file a background report summarizing the City’s participation in the CalPERS Pension Plan; (2) Receive and file the Actuarial Valuation Report (AVR) as of June 30, 2019; and (3) Review the Finance Advisory Committee’s recommendations on the draft CalPERS Pension Plan Guidelines addressing a financial plan on the City’s pension liability and provide Staff with direction on the following: • Affirming the $900,000 contribution threshold; • Affirming the amount to stabilize payments; • Establishing Employee Pension Plan Service Fund (in an Internal Service Fund); • Establishing a Section 115 Trust; and • Accepting the initial funding contribution to the Employee Pension Plan Service Fund and Section 115 Trust. FISCAL IMPACT: N/A Amount Budgeted: N/A Additional Appropriation: N/A Account Number(s): N/A ORIGINATED BY: Christopher Browning, Senior Administrative Analyst Vina Ramos, Deputy Director of Finance REVIEWED BY: Trang Nguyen, Director of Finance APPROVED BY: Ara Mihranian, AICP, City Manager ATTACHED SUPPORTING DOCUMENTS: A. Draft Pension Plan Guidelines (page A-1) B. Actuarial Valuation Report (AVR) Tier 1 (page B-1) C. Actuarial Valuation Report (AVR) Tier 2 (page C-1) D. Actuarial Valuation Report (AVR) Tier 3 (page D-1) E. FAC minutes for October 29, 2020 (page E-1) 1 BACKGROUND: City Council Goal Number 71 states: Prepare a Pension Policy that provides a financial plan to address the City’s outstanding pension liability and CalPERS’ continuous change in valuation methodology. Pursuant to this goal, Staff is presenting to the City Council the draft Pension Guidelines recommended by the Finance Advisory Committee (FAC) and the CalPERS Actuarial Valuation Report (AVR), which determines the amount of contributions the City needs to make for the next fiscal year. DISCUSSION: 1. City’s participation in the CalPERS Pension Plan In an effort to provide guidance and context in understanding the City’s participation in the CalPERS Pension Plan, staff compiled current and historical information that was previously presented to the City Council, and will cover the following: ➢ Understanding the City’s CalPERS Pension Plan ➢ Employer (City) Contribution ➢ Actuarial Valuation System ➢ Pension Reporting Requirements Understanding the City’s CalPERS Pension Plan The City provides retirement benefits to its employees through the California Public Employees’ Retirement System (CalPERS) pursuant to a contract entered in 1974. CalPERS offers a defined benefit plan where retirement benefits are based on a formula. Retirement benefit formulas (e.g. 2.5% at 55) are calculated based on an employee's years of service credit, age at retirement, and final compensation, which is determined by an employee’s average salary, excluding overtime, for a defined period of employment. Retirement formulas for employee groups vary based on the date of entering CalPERS membership (“Classic” or “PEPRA” if entered into CalPERS after January 1, 2013). The City currently has three benefit levels offered to eligible employees: • Tier 1 – Employees hired prior to local pension reform action by the City Council on September 20, 2011 earn 2.5% of salary for each year employed with the City (single highest year) at the age of 55. The employee contribution rate for Tier 1 is 8.000% of their annual salary • Tier 2 – Employees hired after local pension reform on September 20, 2011, who previously worked for another governmental agency with a reciprocating pension plan, earn 2% of salary for each year employed with the City (based 2 on a three-year average) at the age of 60. The employee contribution rate for Tier 2 is 7.000% of their annual salary • Tier 3 – Employees hired after statewide pension reform effective January 1, 2013, who have not previously worked for another governmental agency with a reciprocating pension plan,or have not worked for such an agency within six months of being hired by the City. These employees earn 2% salary for each year employed with the City (based on a three-year average) at the age of 62. The employee contribution rate for Tier 3 is 6.250% of their annual salary. Since 1974, the City has entered into six amendments to its CalPERS contract. The table below highlights the timeline of the City’s pension plan. Year Description 1974 The City contracted with CalPERS for employees’ retirement plan at 2%@60, 3-year final compensation 1978 Amended the contract with CalPERS to add Survivor Benefit to Level 1 2000 Amended the contract with CalPERS to increase Survivor Benefit to Level 4 2001 Amended the contract with CalPERS to change the employees’ retirement plan to 2%@55, 1-year final compensation 2005 The City was required to participate in a risk pool because the CalPERS plan contained fewer than 100 active members as of June 30, 2003. 2007 Amended the contract with CalPERS to change the employees’ retirement plan to 2.5%@55, 1-year final compensation 2012 Amended the contract with CalPERS to add Tier 2 and Tier 3 for employees’ retirement plan at 2%@60 and 2%@62, respectively, 3-year final compensation Employer (City) Contribution The employer contribution is established to cover the remaining benefit after employee contributions and investment earnings are applied. Employer contributions are determined by annual actuarial valuations; whereas the employee rate is set by statute and not adjusted periodically. These valuations are based on the benefit formula the City provides and the employee groups covered. The CalPERS “Pension Buck” below displays how CalPERS currently funds retiree benefit payments. As is shown here, the majority of the payments are expected to be paid from investment earnings. However, when investment earnings do not meet expectations, the funded status of the entire retirement system is at risk with all member agencies sharing the burden. 3 Actuarial Valuation System An annual valuation is performed by the CalPERS actuary and the City receives the results of this valuation, which determines the amount of contributions the City needs to make for the next fiscal year. Three main categories are used to create the actuarial valuation results: member information, benefit provisions, and actuarial assumptions and meth ods. To begin the process, the actuary collects the current member information from our agency and the benefit provisions in the City’s contract with CalPERS are built into the valuation. Lastly, the actuarial assumptions and methods are applied; this results in the actuarial valuation results. The key actuarial valuation results are the present value of benefits, normal cost, accrued liability and funded status. Retirement benefits are valued on an annual basis by CalPERS certified actuaries and the results are reported to member agencies through an Actuarial Valuation Report (AVR). This AVR (Attachment B) informs the City of our obligation, both current and future, represented in the report as the Accrued Liability (AL). To assist in handling the unknown, the CalPERS actuaries project the AL using key assumptions that include demographic and economic factors: a. Demographic Assumptions include: a. Mortality/Longevity b. Retirement rates/ Service Termination rates c. Disability incidence rates d. Typical age, service and gender related e. May vary based upon benefit formula and member category (i.e. Police, Fire or non-safety) b. Economic Assumptions include: a. Salary growth rates b. Annual inflation 4 i. Current assumption is 2.75% c. Investment return / Discount Rate i. Current assumption is 7% Actuarial assumptions are used for the long term and are rarely realized in a given year. Gains or losses occur when actual experience s don’t match the assumptions. CalPERS actuarial staff performs an Experience Study every four years and compares actual experiences with the actuarial assumptions. An experience study measures actual plan demographic experience over a defined period of time. The results of the study are used to refine and improve actuarial assumptions used in future actuarial valuations. Based on that study, changes are recommended to the CalPERS Board of Administration. The most recent and publicized changes were to the mortality rates to estimate life expectancy for members and the discount rate used for the investment return. The Accrued Liability is then assessed against the current market value of the assets CalPERS invests on our behalf, which results in our Unfunded Accrued Liability (UAL). This represents the estimated value of unfunded benefits already ea rned. Each year, every employer contribution requirement is adjusted based upon the Funded Status. If an employer reached the 100% Funded Status in a given year , the employer would still be required to make the Normal Cost contribution, which is the benefits earned by employees during that fiscal year. Employers that are less than 100% funded must make the Normal Cost Contribution and an annual payment toward the UAL. CalPERS generally phases in significant changes in assumptions to enable employers to plan for the future increase in benefit costs. The financial status of the pension fund is updated annually in the AVR, taking into account how well the invested assets in the fund performed, as well as any changes to the future earnings expectations. Differences between actual experience and plan assumptions can also increase the City’s UAL. Retirement benefits are paid by CalPERS through contributions from both employees and the City (“normal” annual service costs) as well as investment earnings. CalPERS invests contribution payments with the goal of earning sufficient returns over the long term to pay defined benefits as promised and cover CalPERS expenses. Over the years, there have been several factors contributing to the growing pension liability both at the City and throughout the state. The most prominent of those CalPERS actions are outlined below: • CalPERS has lowered its expectations for investment returns and inflation rates to better align with the rates it has experienced over the past 10 years (from 7.5% to 7.0% discount rate). Based on the League of California Cities CalPERS report published in 2018, CalPERS’ outside investment advisors expect returns over the next decade to be about 6.1%, below anticipated returns set by CalPERS (currently at 7%). Whenever a pension system’s rate of return projection is lowered, the unfunded accrued liability goes up because the amount 5 of money in the fund is no longer expected to earn as much as it had previously been expected to earn. • CalPERS has also changed how it calculates the annual payment for the UAL from a percentage of payroll to a flat-rate dollar amount, thereby guaranteeing a certain level of contributions from member agencies. • CalPERS has implemented a smoothing policy to help “smooth out” the changes in the employer rates from year to year. The costs are phased in with a five-year ramp up period and phased out with a five-year ramp down period on the amortization schedule. The five-year ramp up means the payments in the first four years of the amortization schedule are 20%, 40%, 60%, and 80% of the ultimate payment, which begins in year five. The five-year ramp down means that the reverse is true and the payments in the final four years are ramped down by the above percentages. • Additionally, CalPERS changed the timeline for amortizing new bases (gains/losses) from investment returns from 30 years to 20 years and eliminated the ramp-up and ramp-down of these bases beginning with the valuation reports as of June 30, 2019. This shorter timeline results in higher annual contribution payments. Since 2012, the City of Rancho Palos Verdes has implemented pra ctices to better address its long-term pension liabilities. Actions taken by the City include: • In 2012, the City restructured the pension benefits offered to any new employee who previously worked for another governmental agency with a reciprocating pension plan. This established our Tier 2 plan with a formula of 2%@60, and resulted in a lower City obligation paid for new employees; • Employees hired after statewide pension reform effective January 1, 2013 who have not previously worked for another governmental agency with a reciprocating pension plan, or have not worked for such an agency within six months of being hired by the City, earn 2% salary for each year employed with the City (based on a three-year average) at the age of 62. This membership group are also referred to as PEPRA members. • Through collective bargaining, the City shifted the employee share of pension costs (also referred to as Employer Paid Member Contribution or EPMC) to the employee. Both Tier 1 and 2 employees pay 7% of their pensionable salary, and PEPRA members pay 6.25% • Employees in Tier 1 now “pick up” a percentage of the employer share of pension costs (also known as “cost sharing”) equal to 1% of their pensionable salary. 6 Pension Reporting Requirements In 2012, the Government Accounting Standards Board (GASB) issued Statement No. 68, Accounting, and Financial Reporting for Pensions. GASB 68 requires that governmental employers that sponsor Defined Benefit plans (i.e., CalPERS) must recognize a net pension liability on their balance sheet. This is the difference between the City's total pension liability (actuarial accrued liability) and actual plan assets. To reduce the GASB 68 net pension liability figure, the City's only prior option was to commit additional funds to CalPERS (in excess of its annual required contributions) to reduce its unfunded liability. However, additional funds sent to CalPERS are subject to the same market volatility risk as the CalPERS investment policy target of 7% and are never again available to the City for other CalPERS pension expenses. At the closing of the City’s fiscal year, as a municipal government, the City issues a Comprehensive Annual Financial Report (CAFR), which is a set of U.S. government financial statements that must comply with the accounting requirements promulgated by GASB. Moreover, the CAFR is audited by a firm of Certified Public Accountants in accordance with auditing standard generally accepted in the U.S. Is it important to note that the City’s reporting on pension must follow guidelines from GASB 68, and therefore, the amounts reported in the (CAFR) are based on the City’s total pension liability and actual plan assets provided by CalPERS. For that reason, staff assumptions or estimates of pension liability would not be reflected in the City’s CAFR. Instead, the information is used to provide guidance with decision making related to the City’s long - term financial planning. 2. Actuarial Valuation Report as of June 30, 2019 As mentioned previously in this staff report, retirement benefits are valued on an annual basis by CalPERS certified actuaries and the results are reported to member agencies through an Actuarial Valuation Report (AVR) each year. These reports (Attachments A, B, and C) inform the City of our obligation, both current and future, represented in the report as the Accrued Liability (AL). The AL is comprised of the liability incurred by not only active members, but also transferred members (employees that have moved to a reciprocal retirement system), terminated employees, and members or their beneficiaries who are currently receiving payments (annuitants). As expected, Tier 1 makes up the largest portion of the AL and contains nearly the entirety of the liability attributed to those receiving payments . Tier 2 and Tier 3 (PEPRA) were created more recently and are typically made up of entry or mid-range employees and employees that are new to CalPERS. The distribution of the City’s AL is detailed in Table 1 below. 7 Table 1: Accrued Liability by Member Status as of June 30, 2019 The AL is then assessed against the current market value of the assets CalPERS invests on our behalf, which results in our UAL. This represents the estimated value of unfunded benefits already earned. In the latest AVR from CalPERS, the City’s total UAL for all employee groups is $12.98 million as of June 30, 2019 as show in Table 2. The UAL is calculated by taking the City’s total accrued pension liability of $47.91 million and subtracting from it the market value of the City’s assets (contribution made by both the City and City’s employees plus any investment gains/losses), $34.93 million. Table 2: Unfunded Accrued Liability as of June 30, 2019 Despite a slight increase to the City’s funded status from 72.87% to 72.91% (see below), the overall funded status has decreased with time as the accrued liability has grown at a faster rate than the value of the City’s assets. In line with this decrease in funded status, the City’s unfunded liability has continued to grow due to investment returns failing to meet expectations. These changes over the past five years are illustrated in Table 3 below. Tier 1 Tier 2 Tier 3 Total Active Members $10,393,511 $1,396,424 $998,853 $12,788,788 Transferred Members $5,501,407 $139,049 $235,405 $5,875,861 Terminated Members $2,750,267 $103,737 $85,818 $2,939,822 Members & Beneficiaries Receiving Payments $26,051,236 $253,454 $0 $26,304,690 Total $44,696,421 $1,892,664 $1,320,076 $47,909,161 Accrued Liability Tier 1 Tier 2 Tier 3 Total Accrued Liability $44,696,421 $1,892,664 $1,320,076 $47,909,161 Market Value of Assets $32,015,078 $1,724,042 $1,192,048 $34,931,168 Unfunded Accrued Liability $12,681,343 $168,622 $128,028 $12,977,993 Funded Ratio 71.6% 91.1% 90.3% 72.9% 8 Table 3: Historical Funded Status As the City’s total UAL increases, the required annual UAL payment also increases , as shown in Table 4. Table 4: Employer Annual Unfunded Accrued Liability Payments Tier 1 makes up over 96% of the total UAL and is projected to increase to roughly 97% in the coming years. Tier 1 contains the largest number of both active and former Fiscal Year Ending 6/30/2015 6/30/2016 6/30/2017 6/30/2018 6/30/2019 Tier 1 76.5%70.7%73.2%71.8%71.6% Tier 2 96.6%90.3%94.8%92.0%91.1% Tier 3 95.7%89.9%94.8%91.8%90.3% Combined 76.7%71.2%74.1%72.9%72.9% Fiscal Year Ending 6/30/2015 6/30/2016 6/30/2017 6/30/2018 6/30/2019 $8,176,089 $10,567,808 $10,534,729 $12,100,019 $12,681,343 76.5% 70.7% 73.2% 71.8% 71.6% $9,078 $54,378 $49,555 $115,702 $168,622 96.6% 90.3% 94.8% 92.0% 91.1% $6,603 $34,131 $32,101 $80,713 $128,028 95.7% 89.9% 94.8% 91.8% 90.3% $8,191,770 $10,656,317 $10,616,385 $12,296,434 $12,977,993 76.7% 71.2% 74.1% 72.9% 72.9% Tier 1 Tier 2 Tier 3 Combined 9 employees and provides a higher retirement benefit (See Table 5). For this reason, its liability grows at a higher rate than both Tier 2 and Tier 3 employees. Table 5: Full and Part Time Employee Tier Distribution The percentage of staff in Tier 1 has decreased each year as employees either retire or end employment with the City. Employee turnover does not decrease the City’s current UAL, however, it can help contain future CalPERS costs. Table 6: Historical Full Time Employee Tier Distribution As pension plans mature, they become more sensitive to risks. Understanding plan maturity and how it affects the ability of a pension plan to tolerate risk is important in understanding how the plan is impacted by investment return volatility, other economic variables and changes in longevity or other demographic assumptions. One way to look at the maturity level of CalPERS and its plans is to look at the ratio of a plan’s retiree liability to its total liability. A pension plan in its infancy will have a very low ratio of retiree liability to total liability. As the plan matures, the ratio starts increasing. A mature plan will often have a ratio above 60%-65%. The City’s Retiree to Liability ratio is below the CalPERS benchmark across all tiers. Tier 1 Tier 2 Tier 3 Total by Status Number of Actives 28 16 52 96 Number of Retirees 91 2 0 93 Total by Tier 119 18 52 189 Tier 2016 2017 2018 2019 2020 Tier 1 30 28 25 20 18 -12 -40% Tier 2 13 16 17 16 16 3 23% Tier 3 13 18 21 24 29 16 123% Vacant 6 5 7 10 7 1 17% Total 62 67 70 70 70 8 13% Cumulative Change 10 Table 7: Retiree to Liability Ratio Another measure of the maturity level of CalPERS and its plans is to look at the ratio of active to retired members, also known as the Support Ratio. A pension plan in its infancy will have a very high ratio of active to retired members. As the plan matures, and members retire, the ratio starts declining. A mature plan will often have a ratio near or below one. The average support ratio for CalPERS public agency plans is 1.25. The City is slightly below the CalPERS average with a combined ratio across all tiers of 1.03. The City’s lower ratio can be attributed to having a relatively small workforce which has decreased over the years, leaving fewer active employees to support the plan and the retired employees. Table 8: Support Ratio Every employer makes contributions to CalPERS in two parts: Normal Cost – Pays for a year of benefit accrual (i.e. an employee works a full year of service for the City) Amortization of UAL – Pays for any deficit or surplus accrued over the prior years of service. Total Annual Contribution Rate = Normal Cost + UAL Tables 9 and 10 below provides a breakdown of the City’s total minimum annual contribution for FY 2020-21 and an estimate for FY 2021-22 based on projected payroll. Retired Accrued Liability $26,051,236 $253,454 $0 Total Accrued Liability $44,696,421 $1,892,664 $1,320,076 Ratio of Retiree AL to Total AL 0.58 0.13 0.00 Tier 1 Tier 2 Tier 3 Tier 1 Tier 2 Tier 3 Combined Number of Actives 28 16 52 96 Number of Retirees 91 2 0 93 Support Ratio 0.31 8.00 -1.03 11 Table 9: FY 2020-21 Total Annual Contribution Table 10: FY 2021-22 Total Annual Projected Contribution In its most recent valuation, CalPERS has indicated that our required annual UAL contributions are expected to increase through FY 2026-27, reaching a total of $1.3 million. Normal Cost Rate Employer Normal Cost UAL Payment Total Tier 1 12.361% $291,266 $835,213 $1,126,479 Tier 2 8.794% $188,796 $15,889 $204,685 Tier 3 7.732% $203,150 $12,837 $215,987 Total $683,212 $863,939 $1,547,151 Tier FY 20-21 Normal Cost Rate Employer Normal Cost UAL Payment Total Tier 1 12.20% $258,565 $971,580 $1,230,145 Tier 2 8.70% $181,467 $17,301 $198,768 Tier 3 7.60% $199,492 $13,868 $213,360 Total $639,524 $1,002,749 $1,642,273 FY 21-22 Tier 12 Table 11: Estimated Employer UAL Contribution Based on Projected Payroll The minimum required contribution toward the UAL for FY 2021-22 is $1,002,749. CalPERS allows employers to make Additional Discretionary Payments (ADPs) at any time and in any amount. These optional payments serve to reduce the UAL and future required contributions and can result in significant long-term savings. These ADPs can also be used to stabilize annual contributions as a fixed dollar amount, percent of payroll or percent of revenue. CalPERS provided several ADP options that would allow the City to accelerate the payment of the UAL based on projected future employer contributions (Table 11). However, it is important to note that these calculations are based on the projected UAL as of June 30, 2021 as determined in the June 30, 2019 actuarial valua tion reports. New unfunded liabilities can emerge in future years due to assumption or method changes, changes in plan provisions and actuarial experience different than assumed. The ADP options in Table 12 on the next page are divided in to four scenarios: 20 years, 15 years, 10 years, and 5 years. Each of the scenarios details a payment plan that would allow the UAL to be paid off for each tier in the stated number of years if the listed Annual ADP is made each fiscal year. For example, if an annual total ADP of $397,965 is made, the City’s total UAL could be repaid within 15 years based on the data available today. It should be noted, as explained in the previous paragraph, this information can change. Baseline Tier FY 21-22 FY 22-23 FY 23-24 FY 24-25 FY 25-26 FY 26-27 Tier 1 $971,580 $1,072,000 $1,134,000 $1,200,000 $1,236,000 $1,269,000 Tier 2 $17,301 $18,000 $19,000 $19,000 $20,000 $21,000 Tier 3 $13,868 $14,000 $15,000 $15,000 $16,000 $16,000 Total $1,002,749 $1,104,000 $1,168,000 $1,234,000 $1,272,000 $1,306,000 Projected Future Employer Contributions 13 Table 12: Additional Discretionary Employer Contributions Funding Target - Current Tier Estimated Normal Cost Minimum UAL Payment Annual ADP Total UAL Contribution Estimated Total Contribution Tier 1 $258,565 $971,580 $0 $971,580 $1,230,145 Tier 2 $181,467 $17,301 $0 $17,301 $198,768 Tier 3 $199,492 $13,868 $0 $13,868 $213,360 Total $639,524 $1,002,749 $0 $1,002,749 $1,642,273 Funding Target - 20 Years Tier Estimated Normal Cost Minimum UAL Payment Annual ADP Total UAL Contribution Estimated Total Contribution Tier 1 $258,565 $971,580 $201,467 $1,173,047 $1,431,612 Tier 2 $181,467 $17,301 $47 $17,348 $198,815 Total $440,032 $988,881 $201,514 $1,190,395 $1,630,427 Funding Target - 15 Years Tier Estimated Normal Cost Minimum UAL Payment Annual ADP Total UAL Contribution Estimated Total Contribution Tier 1 $258,565 $971,580 $392,869 $1,364,449 $1,623,014 Tier 2 $181,467 $17,301 $2,878 $20,179 $201,646 Tier 3 $199,492 $13,868 $2,218 $16,086 $215,578 Total $639,524 $1,002,749 $397,965 $1,400,714 $2,040,238 Funding Target - 10 Years Tier Estimated Normal Cost Minimum UAL Payment Annual ADP Total UAL Contribution Estimated Total Contribution Tier 1 $258,565 $971,580 $797,785 $1,769,365 $2,027,930 Tier 2 $181,467 $17,301 $8,866 $26,167 $207,634 Tier 3 $199,492 $13,868 $6,991 $20,859 $220,351 Total $639,524 $1,002,749 $813,642 $1,816,391 $2,455,915 Funding Target - 5 Years Tier Estimated Normal Cost Minimum UAL Payment Annual ADP Total UAL Contribution Estimated Total Contribution Tier 1 $258,565 $971,580 $2,059,318 $3,030,898 $3,289,463 Tier 2 $181,467 $17,301 $27,523 $44,824 $226,291 Tier 3 $199,492 $13,868 $21,863 $35,731 $235,223 Total $639,524 $1,002,749 $2,108,704 $3,111,453 $3,750,977 14 CalPERS Projected Funding Level for All Plans (COVID-19 Impacts) The COVID-19 pandemic resulted in a significant slowdown to the nation’s economy. The impact was far reaching and was also reflected in the stock market . Although the market has since recovered from its low point during the second quarter, CalPERS’ portfolio had not met its annual investment return target of 7% at the close of the fiscal year. CalPERS reported a 4.70% return as of June 30, 2020 . Due to this 2.3% shortfall, the funded status of all CalPERS plans is expected to experience a slight decrease, as illustrated in Table 13. Table 13: Projected Funded Status of All CalPERS Plans at June 30, 2020 CalPERS currently has $389 billion under management with an overall funded status of 70.8%. The City’s combined funded status currently sits slightly above that of CalPERS at 72.9%. Table 14: CalPERS Portfolio Recap Based on current assumptions including the 4.7% return experienced during the end of FY 2019-20 and a projected discount rate of 7% into the future, the City is projected to 15 reach an 80% funding level by 2027 and 100% funded by 2040 . These projections are subject to change and will be monitored and updated on an annual basis. Chart 1: Funded Ratio Projection CalPERS New Amortization Policy The CalPERS Board of Administration adopted a new amortization policy effective with this year’s actuarial valuation. The new policy shortens the period over which actuarial gains and losses are amortized from 30 years to 20 years, with the payments computed as a level dollar amount. In addition, the new policy does not utilize a five-year ramp-up and ramp-down on UAL bases attributable to assumption and method changes and non-investment gains/losses. The new policy also does not utilize a five-year ramp- down on investment gains/losses. These changes will apply only to new UAL bases established on or after June 30, 2019. 3. Draft CalPERS Pension Plan Guidelines As presented in detail in this report, the pension liability continues to grow, therefore, the City Council Goal Number 71 is to address the increased costs and potential future financial impacts by developing pension guidelines. The pension plan guidelines are to ensure that the City’s CalPERS pension liabilities can be paid, costs are manageable, and the City’s plan to fund pension s is clear. The guidelines are not intended or suggesting any changes to the CalPERS contract. The guidelines were developed based on best practices for local governments, the City’s financial position, and guides issued by the Government Finance Officers Association. It is also important to note that if approved, the guidelines would serve as a framework in the financial planning process for Staff. Any annual funding of the pension would be presented for the City Council’s consideration during the budget process on an annual basis. 16 On September 17, 2020, Staff presented the Finance Advisory Committee (FAC) the various options to mitigate future financial impacts of the City’s obligations to CalPERS. The options presented to the FAC focused on addressing the liability related to the City’s normal pension costs and the City’s pension AL. At the conclusion of this meeting, FAC requested that Staff prepare a document that would provide guidance on how pensions may be funded in the future. The FAC also recommended that the guidelines should be flexible and shall not constitute an obligation upon the City. More importantly, the guidelines should be in the best interest of the City and with the recommendations from the FAC, the City Council may revoke or amend the guidelines. On October 29, 2020, FAC approved recommending to the City Council the draft guidelines for consideration, as reflected in the minutes (Attachment E). The following is a summary of FAC’s feedback and recommendations that have been incorporated in the draft pension plan guidelines: • Include language that the guidelines would serve in the best interest of the City and with the recommendations from the FAC, the City Council, may revoke or amend the guidelines. • No additional payments should be made to CalPERS; instead, set aside funds using Employee Pension Plan Service Fund, an Internal Service Fund, and further research Section 115 Trust. • Use amount ranges of contributions instead of exact amounts for flexibility. • Use “guideline” instead of “policy” for less restrictive language. • To address the increasing annual payment of the UAL, the City may set aside funding in an Employee Pension Plan Service Fund to relieve the General Fund of payment in excess of $900,000. • To address the City’s long-term pension costs and the rising UAL, the City may establish a Section 115 Trust to pre-fund pension obligations. The objective of the contributions is to increase the plan’s funded status by reducing the City’s UAL. • Review the guidelines every three to five years or as needed. • Review the annual funding in Employee Pension Plan Service Fund and the Section 115 Trust during the budget process. • Regularly review the account investment activities for the Section 115 Trust . • All documents are to be posted on the City website. The draft Pension Plan Guidelines (Attachment A) is divided into four parts: Overview, Purpose and Objectives, Definitions, and Guidelines. A summary of highlights is below: ➢ Create a new Employee Pension Plan Service Fund, an Internal Service Fund, intended to stabilize the annual UAL contribution. ➢ The Employee Pension Plan Service Fund would be funded with contributions, to be determined annually during the budget process, of at least 10% but no more than 25% of the annual General Fund surplus (revenues minus expenditures, including transfers). 17 ➢ The General Fund would cover annual UAL payments up to $900,000 , which is based on the projected growth of the UAL and available funding based on the 5 - year model approved in June 2020. ➢ The Employee Pension Plan Service Fund would be used to make UAL payments in excess of $900,000 to lessen the burden on the General Fu nd. For example: for FY 2021-22, if the UAL annual lump-sum payment is $1 million, instead of impacting the General Fund, the $100,000 would be funded from the Employee Pension Plan Service Fund. If this component of the guidelines is approved, Staff will include funding options in the upcoming budget cycle (FY 2021-22) for City Council consideration. ➢ Establishing a Section 115 Trust to pre-fund pension obligations to achieve and maintain a 90% funding level of the City’s UAL over the next seven to 10 years thereby reducing the City’s UAL. If this component of the guidelines is approved, Staff will present additional information to the FAC and City Council at a future meeting for approval. ➢ Consider annually whether to contribute the annual positive variances between the projected year-end revenues and the actual revenues in the General Fund, whichever is more to the savings from making a lump -sum payment of the UAL. ➢ Use accumulated funds from the Section 115 Trust to stabilize contributions to CalPERS when the Employee Pension Plan Service Fund does not have sufficient funding to cover the excess of $900,000 in the annual lump-sum payment. ➢ Use accumulated funds from the Section 115 Trust to make ADC contributions when the General Fund has an actual loss of 10% or more. For example, for FY 2021-22, if the UAL annual lump-sum payment is $1 million, instead of impacting the General Fund, and if the Employee Pension Plan Service Fund does not have sufficient funds, the $100,000 would be funded from the Section 115 Trust. If acceptable, in order to begin funding the Employee Pension Plan Service Fund and Section 115 Trust, Staff recommends the following initial contributions: ➢ Employee Pension Plan Service Fund - equivalent to at least two years but no more than three years of the incremental increases to the annual UAL payment. The contribution may start with the FY 2021 -22 UAL payment, transferring the approved amount from the General Fund Unrestricted Excess Reserve to the Internal Service Fund. The General Fund Unrestricted Excess Reserve as reported in the Unaudited Actuals on December 15 was just over $8 million. The estimated amount of the incremental increase for two years is $307,000 for two years or $640,000 for three years. This option will be included in the FY 2021-22 budget cycle if the guidelines are approved by the City Council. ➢ Section 115 Trust - at least $500,000 but no more than 25% of the General Fund Unrestricted Excess Reserve. Based on the above, staff seeks direction from the City Council on the following: • Affirming the $900,000 contribution threshold; 18 • Affirming the amount to stabilize payments; • Establishing Employee Pension Plan Service Fund (in the Internal Service Fund); • Establishing a Section 115 Trust; and • Accepting the initial funding contribution to the Employee Pension Plan Service Fund and Section 115 Trust. In summary, and as presented to the FAC, the goals of the Pension Guidelines are to stabilize the annual unfunded liability payment as well as improve the funded level for the City’s unfunded accrued liability. If approved, the guidelines would provide guidance in making annual budget decisions, demonstrate prudent financial management practices, and show employees and the public how pensions will be funded by the City. The FAC would also be presented the additional information on the Section 115 Trust before th e final approval from the City Council. Most significantly, the funding for this program will come from surplus, therefore not impacting current programs or services that are funded in the General Fund. Any annual funding would be presented to the FAC for review and a final approval from the City Council. CONCLUSION: The City’s retirement benefits are valued on an annual basis by CalPERS certified actuaries and the results are reported through an Actuarial Valuation Report. The report is the documentation for the City’s current and future pension obligations, therefore the fiscal year payments made to CalPERS are reflected in the City’s CAFR. Any assumptions outside the report are utilized by Staff for long-term financial planning and possible future policy decisions for the City Council’s consideration. In summary, as of June 30, 2019, the Actuarial Valuation Reports indicate that the City’s Market Value of Assets increased by $1.9 million and its AL increased by $2.6 million when compared to the prior year’s reports. The variance resulted in a 5.5%, or $681,600, increase to the UAL, bringing the total to $12.98 million. The City’s funded status increased from 72.87% to 72.91%. The slight positive increase to City’s UAL is due to the accrued liability growing at a slightly slower rate than the market value of the City’s assets. CalPERS’ investment returns ended the year at 6.7%, short of its projected return of 7%. Lastly, CalPERS adopted a new amortization policy that shortened the period from 30 years to 20 years. To mitigate future financial impacts of the City’s obligations to CalPERS, the City has continued to review different options to address the City’s UAL. For FY 2020-21, in accordance with the City Council Goal No. 71, pension guidelines were drafted to address the liability related to the City’s pension accrued liability. The guidelines have been vetted and include recommendations from the Finance Advisory Committee. The guidelines would serve as framework for the financial planning tool for Staff. All funding options are to be presented to the City Council annually for final approval. 19 Based on the City Council’s discussions and direction this evening, Staff will bring back a final document for the City Council’s consideration to adopt at the next meeting as a consent calendar item. ALTERNATIVES: In addition to the Staff recommendations, the following alternative action s are available for the City Council’s consideration: 1. Identify other actions, as deemed appropriate. 2. Do not proceed with creating a CalPERS Pension Plan Guidelines document. 20 City of Rancho Palos Verdes Pension Plan Guidelines Overview The Rancho Palos Verdes Pension Plan Guidelines provide a framework to enable the City to develop sound funding policies and provide Staff a direction to adequately and appropriately monitor the City’s pension plans and obligations. Purpose and Objectives In accordance with the 2020-21 City Council Goals under “Government Efficiency and Transparency,” the goal of these Pension Guidelines is to address and manage the liability related to the City’s pension and accrued liability. The Pension Plan Guidelines document the methods the City will use to determine its annual pension contributions. The City’s annual pension contributions fund the long- term cost of benefits to the plan’s participants and annuitants. Nothing in this guideline shall constitute an obligation upon the City, nor an implied contract. The City Council, with recommendations from the City’s Finance Advisory Committee, may revoke or amend the guidelines at any time when in the best interest of the City. The objectives of the Pension Plan Guidelines are as follows: • Provide guidance in making annual budget decisions; • Demonstrate prudent financial management practices; and • Demonstrate transparency to the public and employees on how pensions will be funded. Definitions Defined Benefit – benefit plan where retirement benefits are based on a formula. The City currently has three benefit levels offered to eligible employees: • Tier 1 – Employees hired prior to local pension reform action by City Council on September 20, 2011; earn 2.5% of salary for each year employed with the City (single highest year) at the age of 55. The employee contribution rate for Tier 1 is 8.000% of their annual salary; • Tier 2 – Employees hired after local pension reform on September 20, 2011, who previously worked for another governmental agency with a reciprocating pension plan; earn 2% of salary for each year employed with the City (based on a three-year average) at the age of 60. The employee contribution rate for Tier 2 is 7.000% of their annual salary; and A-1 • Tier 3 – Employees hired after state-wide pension reform effective January 1, 2013; who have not previously worked for another governmental agency with a reciprocating pension plan or have not worked for such an agency within six months of being hired by the City. These employees earn 2% of salary for each year employed with the City (based on a three -year average) at the age of 62. The employee contribution rate for Tier 3 is 6.250% of their annual salary. Full-time Employee – a competitive service employee that is regularly scheduled to work at least 40 hours a week. Part-time Employee – an employee that is scheduled to work on an irregular basis not more than an average of 32 hours a week and worked at least 1,000 hours in a fiscal year (July 1 – June 30). Actuarial Valuation Report (AVR) – an annual valuation performed by the CalPERS actuary which determines the amount the City needs to contribute for the next fiscal year. Normal Costs – the annual cost of service accrual for the upcoming fiscal year for active employees. The normal cost should be viewed as the long -term contribution rate. Unfunded Accrued Liabilities (UAL) – when a plan's Market Value of Assets is less than its Accrued Liability, the difference is the plan's Unfunded Accrued Liability (or unfunded liability). If the unfunded liability is positive, the plan will have to pay contributions exceeding the Normal Cost. Market Value of Assets (MVA) – the value of a plan's assets in the open marketplace on a specific date. Accrued Liability (AL) – the total dollars needed as of the valuation date to fund all benefits earned in the past for current members. Amortization of UAL – a separate payment schedule for different portions of the Unfunded Liability. Payment periods are determined by Board policy and vary based on the cause of the change. Background The City of Rancho Palos Verdes provides its employees a defined benefit retirement plan through the California Public Employees’ Retirement System (CalPERS) per a City Council-approved contract dated December 1, 1974. CalPERS is a multiple-employer public employee defined benefit pension plan. All full-time and part-time employees, if they worked more than 1,000 hours per fiscal year, are eligible to participate in CalPERS. CalPERS provides retirement, disability, and death benefits and annual cost of living adjustments to plan members and their beneficiaries. CalPERS acts as a common investment and administrative agent for A-2 participating public entities with the State of California. Benefit provisions and all other requirements are established by state statute. The financial objective of a defined benefit pension plan is to fund the long -term cost of benefits provided to the plan members. To assure that the plan is financially sustainable, the plan should accumulate adequate resources in a systematic and disciplined manner over the active service life of benefitting employees. This funding guideline outlines the method the City will utilize to determine its Actuarially Determined Contributions to fund the long-term cost of benefits to the plan members and annuitants. Pension Funding: A Guide for Elected Officials, issued by eleven national groups including the U.S. Conference of Mayors, the International Agency/County Management Association, and the Government Finance Officers Association, established the following five general policy objectives for a pension funding policy: • Actuarially Determined Contributions - a pension funding plan should be based upon an actuarially determined contribution (ADC) that incorporates both the cost of benefits in the current year and the amortization of the plan’s unfunded actuarial accrued liability. • Fund Discipline - a commitment to make timely, actuarially determined contributions to the retirement system is needed to ensure that sufficient assets are available for all current and future retirees. • Intergenerational equity - annual contributions should be reasonably related to the expected and actual cost of each year of service so that the cost of employee benefits is paid by the generation of taxpayers who receives from those employees. • Contributions as a stable percentage of payroll - contributions should be managed so that employer costs remain consistent as a percentage of payroll over time. • Accountability and transparency - clear reporting of pension funding should include an assessment of whether, how, and when the plan sponsor will ensure sufficient assets are available for all current and future retirees. Guidelines A. Goals 1. To stabilize the annual unfunded accrued liability contribution (required normal cost). The City’s required contribution is determined by CalPERS, as reported in the annual Actuarial Valuation Report. A-3 2. To achieve and maintain a 90% funding level of the City’s UAL over the next seven to ten years. The City’s UAL amount is determined by CalPERS, as reported in the annual AVR. B. Actuarially Determined Contribution (ADC) • CalPERS actuaries will determine the City’s ADC to CalPERS based on annual actuarial valuations. The ADC will include the normal cost for the current service and amortization of any under-funded amount. The normal cost will be calculated using the entry age normal cost method using economic and non-economic assumptions approved by the CalPERS Board of Administration. • The City will review the CalPERS annual actuarial valuations to validate the completeness and accuracy of the member census data and the reasonableness of the actuarial assumptions. • The City will contribute the ADC as required by CalPERS. C. Employee Pension Plan Service Fund To address the increasing annual payment of the UAL, the City may set aside funding in an Employee’s Pension Plan Service Fund, as an Internal Service Fund, to relieve the General Fund of payment in excess of $900,000. 1. Employee Pension Plan Service Fund Contribution Options: • Initial contribution - the City may consider an initial contribution equivalent to at least two years but no more than three years of the incremental increases to the annual UAL payment from the General Fund Unrestricted Excess Reserve to the Employee Pension Plan Service Fund. • Annual contributions - the City may consider, on an annual basis, to contribute at least 10% but no more than 25% of the annual General Fund surplus (revenues minus expenditures, including transfers) to the Employee Pension Plan Service Fund. o The surplus is to be calculated after closing the fiscal year and will be included in the staff report to the City Council during the budget meetings. 2. Employee Pension Plan Service Fund Usage Options: A-4 • The City may use the accumulated funds in the fund to stabilize contributions to CalPERS when the annual UAL lump-sum payment exceeds $900,000 rather than utilizing the General Fund. D. Section 115 Pension Trust Contribution To address the City’s rising UAL, the City Council may consider establishing a Section 115 Trust to pre-fund pension obligations. The objective of the Section 115 Pension Trust is to achieve and maintain the 90% funded level of the City’s UAL over the next seven to ten years. 115 Trust Contribution Options: • Initial contribution - the City may consider an initial contribution of at least $500,000 but no more than 25% of the General Fund Unrestricted Excess Reserve to the 115 Pension Trust. • Annual contributions - the City may consider, on an annual basis, contributing equivalent to the savings from making a lump-sum payment of the UAL or the annual positive variances between the projected year-end revenues and the actual revenues in the General Fund, whichever is more, to the 115 Pension Trust. o The variance is to be calculated after closing of the fiscal year and will be included in the staff report to the City Council. 115 Trust Usage Options: The City shall maintain the balance in the Section 115 Trust to achieve the 90% funded level, unless: • The Employee Pension Plan Service Fund does not have sufficient funding to cover the excess of $900,000 in the annual lump-sum payment. The City may use the accumulated funds from the Section 115 Trust to stabilize the annual UAL contributions to CalPERS. • The General Fund experience a loss in revenue of 10% or more. The City may use accumulated funds from the Section 115 Trust to make ADC contributions. E. Transparency and Reporting The City’s pension plans should be transparent to vested parties , including plan members, annuitants, the City Council, and the Rancho Palos Verdes residents. In order to achieve this transparency, the following information shall be available: A-5 • An annual actuarial valuation will be presented to the City Council within 60 days but no later than 90 days after its release by CalPERS. • The City’s Comprehensive Annual Financial Report (CAFR) shall be published on the website. This report includes information on the City’s annual contributions to the pension systems, the 115 Pension Trust, and the funded status. • The City’s annual operating budget shall include the City’s contributions to CalPERS. • The City’s annual contribution, usage, and balance of the Employee Pension Plan Service Fund and the 115 Pension Trust shall be included in the City’s year-end financial report to the City Council. • The City’s Pension Plan Guidelines and actuarial valuation report shall be published on the City website. F. Review of Funding Guidelines Funding a defined benefit pension plan requires a long-term horizon. As such, the City will review the guidelines every three years or as needed to determine if changes to the guidelines are warranted to ensure adequate resources are being accumulated. A-6 California Public Employees’ Retirement System Actuarial Office 400 Q Street, Sacramento, CA 95811 |Phone: (916) 795-3000 | Fax: (916) 795-2744 888 CalPERS (or 888-225-7377) | TTY: (877) 249-7442 | www.calpers.ca.gov July 2020 Miscellaneous Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) Annual Valuation Report as of June 30, 2019 Dear Employer, Attached to this letter, you will find the June 30, 2019 actuarial valuation report of your CalPERS pension plan. Provided in this report is the determination of the minimum required employer contributions for fiscal year 2021-22. In addition, the report contains important information regarding the current financial status of the plan as well as projections and risk measures to aid in planning for the future. Because this plan is in a risk pool, the following valuation report has been separated into two sections: • Section 1 contains specific information for the plan including the development of the current and projected employer contributions, and • Section 2 contains the Risk Pool Actuarial Valuation appropriate to the plan as of June 30, 2019. Section 2 can be found on the CalPERS website (www.calpers.ca.gov). From the home page, go to “Forms & Publications” and select “View All”. In the search box, enter “Risk Pool” and from the results list download the Miscellaneous or Safety Risk Pool Actuarial Valuation Report as appropriate. Your June 30, 2019 actuarial valuation report contains important actuarial information about your pension plan at CalPERS. Your assigned CalPERS staff actuary, whose signature appears in the Actuarial Certification section on page 1, is available to discuss the report with you after August 1, 2020. Actuarial valuations are based on assumptions regarding future plan experience including investment return and payroll growth, eligibility for the types of benefits provided, and longevity among retirees. The CalPERS Board of Administration adopts these assumptions after considering the advice of CalPERS actuarial and investment teams and other professionals. Each actuarial valuation reflects all prior differences between actual and assumed experience and adjusts the contribution rates as needed. This valuation is based on an investment return assumption of 7.0% which was adopted by the board in December 2016. Other assumptions used in this report are those recommended in the CalPERS Experience Study and Review of Actuarial Assumptions report from December 2017. Required Contribution The exhibit below displays the minimum employer contributions, before any cost sharing, for fiscal year 2021-22 along with estimates of the required contributions for fiscal year 2022-23. Member contributions other than cost sharing (whether paid by the employer or the employee) are in addition to the results shown below. The employer contributions in this report do not reflect any cost sharing arrangements you may have with your employees. Fiscal Year Employer Normal Cost Rate Employer Amortization of Unfunded Accrued Liability 2021-22 12.20% $971,580 Projected Results 2022-23 12.2% $1,072,000 B-1 Miscellaneous Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) Annual Valuation Report as of June 30, 2019 Page 2 The actual investment return for fiscal year 2019-20 was not known at the time this report was prepared. The projections above assume the investment return for that year would be 7.00%. To the extent the actual investment return for fiscal year 2019-20 differs from 7.00%, the actual contribution requirements for fiscal year 2022-23 will differ from those shown above. For additional details regarding the assumptions and methods used for these projections please refer to the “Projected Employer Contributions” in the “Highlights and Executive Summary” section. This section also contains projected required contributions through fiscal year 2026-27. Changes from Previous Year’s Valuation The CalPERS Board of Administration has adopted a new amortization policy effective with the June 30, 2019 actuarial valuation. The new policy shortens the period over which actuarial gains and losses are amortized from 30 years to 20 years with the payments computed as a level dollar amount. In addition, the new policy does not utilize a 5-year ramp- up and ramp-down on Unfunded Accrued Liability (UAL) bases attributable to assumption and method changes and non-investment gains/losses. The new policy does not utilize a 5-year ramp-down on investment gains/losses. These changes apply only to new UAL bases established on or after June 30, 2019. Further descriptions of general changes are included in the “Highlights and Executive Summary” section and in Appendix A, “Actuarial Methods and Assumptions.” The effects of the changes on the required contributions are included in the “Reconciliation of Required Employer Contributions” section. Questions We understand that you might have some questions about these results. While we are very interested in discussing these results with your agency, in the interest of allowing us to give every public agency their results, we ask that you wait until after August 1, 2020 to contact us with actuarial questions. If you have other questions, you may call the Customer Contact Center at (888)-CalPERS or (888-225-7377). Sincerely, SCOTT TERANDO Chief Actuary B-2 Actuarial Valuation as of June 30, 2019 for the Miscellaneous Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) Required Contributions for Fiscal Year July 1, 2021 - June 30, 2022 B-3 Table of Contents Section 1 – Plan Specific Information Section 2 – Risk Pool Actuarial Valuation I nformation B-4 Section 1 CALIFORNIA PUBLIC EM PLOYEES’ RETIREMENT SYSTEM Plan Specific Information for the Miscellaneous Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) (Valuation Rate Plan ID: 1107) B-5 Rate Plan belonging to the Miscellaneous Risk Pool Table of Contents Actuarial Certification 1 Highlights and Executive Summary Introduction 3 Purpose of Section 1 3 Required Employer Contributions 4 Additional Discretionary Employer Contributions 5 Plan’s Funded Status 6 Projected Employer Contributions 6 Cost 7 Changes Since the Prior Year’s Valuation 8 Subsequent Events 8 Assets and Liabilities Breakdown of Entry Age Normal Accrued Liability 10 Allocation of Plan’s Share of Pool’s Experience/Assumption Change 10 Development of Plan’s Share of Pool’s Market Value of Assets 10 Schedule of Plan’s Amortization Bases 11 Amortization Schedule and Alternatives 13 Employer Contribution History 15 Funding History 15 Risk Analysis Future Investment Return Scenarios 17 Discount Rate Sensitivity 18 Mortality Rate Sensitivity 18 Maturity Measures 19 Maturity Measures History 20 Hypothetical Termination Liability 21 Participant Data 22 List of Class 1 Benefit Provisions 22 Plan’s Major Benefit Options 23 B-6 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 1 Actuarial Certification Section 1 of this report is based on the member and financial data contained in our records as of June 30, 2019 which was provided by your agency and the benefit provisions under your contract with CalPERS. Section 2 of this report is based on the member and financial data as of June 30, 2019 provided by employers participating in the Miscellaneous Risk Pool to which the plan belongs and benefit provisions under the CalPERS contracts for those agencies. As set forth in Section 2 of this report, the pool actuaries have certified that, in their opinion, the valuation of the risk pool containing your Miscellaneous Plan has been performed in accordance with generally accepted actuarial principles consistent with standards of practice prescribed by the Actuarial Standards Board, and that the assumptions and methods are internally consistent and reasonable for the risk pool as of the date of this valuation and as prescribed by the CalPERS Board of Administration according to provisions set forth in the California Public Employees’ Retirement Law. Having relied upon the information set forth in Section 2 of this report and based on the census and benefit provision information for the plan, it is my opinion as the plan actuary that the Unfunded Accrued Liability amortization bases as of June 30, 2019 and employer contribution as of July 1, 2021 have been properly and accurately determined in accordance with the principles and standards stated above. The undersigned is an actuary for CalPERS, a member of both the American Academy of Actuaries and Society of Actuaries and meets the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. STUART BENNETT, ASA, MAAA Senior Pension Actuary, CalPERS B-7 Highlights and Executive Summary • Introduction • Purpose of Section 1 • Required Employer Contributions • Additional Discretionary Employer Contributions • Plan’s Funded Status • Projected Employer Contributions • Cost • Changes Since the Prior Year’s Valuation • Subsequent Events B-8 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 3 Introduction This report presents the results of the June 30, 2019 actuarial valuation of the Miscellaneous Plan of the City of Rancho Palos Verdes of the California Public Employees’ Retirement System (CalPERS). This actuarial valuation sets the required employer contributions for fiscal year 2021-22. Purpose of Section 1 This Section 1 report for the Miscellaneous Plan of the City of Rancho Palos Verdes of CalPERS was prepared by the plan actuary in order to: • Set forth the assets and accrued liabilities of this plan as of June 30, 2019; • Determine the minimum required employer contribution for this plan for the fiscal year July 1, 2021 through June 30, 2022; and • Provide actuarial information as of June 30, 2019 to the CalPERS Board of Administration and other interested parties. The pension funding information presented in this report should not be used in financial reports subject to GASB Statement No. 68 for a Cost Sharing Employer Defined Benefit Pension Plan. A separate accounting valuation report for such purposes is available from CalPERS and details for ordering are available on our website. The measurements shown in this actuarial valuation may not be applicable for other purposes. The employer should contact their actuary before disseminating any portion of this report for any reason that is not explicitly described above. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; changes in actuarial policies; and changes in plan provisions or applicable law. Assessment and Disclosure of Risk This report includes the following risk disclosures consistent with the recommendations of Actuarial Standards of Practice No. 51 and recommended by the California Actuarial Advisory Panel (CAAP) in the Model Disclosure Elements document: • A “Scenario Test,” projecting future results under different investment income returns. • A “Sensitivity Analysis,” showing the impact on current valuation results using alternative discount rates of 6.0% and 8.0%. • A “Sensitivity Analysis,” showing the impact on current valuation results assuming rates of mortality are 10% lower or 10% higher than our current mortality assumptions adopted in 2017. • Plan maturity measures indicating how sensitive a plan may be to the risks noted above. B-9 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 4 Required Employer Contributions Fiscal Year Required Employer Contributions 2021-22 Employer Normal Cost Rate 12.20% Plus, Either 1) Monthly Employer Dollar UAL Payment $80,965.00 Or 2) Annual UAL Prepayment Option* $939,262 The total minimum required employer contribution is the sum of the Plan’s Employer Normal Cost Rate (expressed as a percentage of payroll) plus the Employer Unfunded Accrued Liability (UAL) Contribution Amount (billed monthly in dollars). * Only the UAL portion of the employer contribution can be prepaid (which must be received in full no later than July 31). Any prepayment totaling over $5 million requires a 72-hour notice email to FCSD_public_agency_wires@calpers.ca.gov. Plan Normal Cost contributions will be made as part of the payroll reporting process. If there is contractual cost sharing or other change, this amount will change. In accordance with Sections 20537 and 20572 of the Public Employees’ Retirement Law, if a contracting agency fails to remit the required contributions when due, interest and penalties may apply. Fiscal Year Fiscal Year 2020-21 2021-22 Development of Normal Cost as a Percentage of Payroll1 Base Total Normal Cost for Formula 19.695% 19.55% Surcharge for Class 1 Benefits2 a) FAC 1 0.619% 0.61% Phase out of Normal Cost Difference3 0.000% 0.00% Plan’s Total Normal Cost 20.314% 20.16% Formula's Expected Employee Contribution Rate 7.953% 7.96% Employer Normal Cost Rate 12.361% 12.20% Projected Payroll for the Contribution Fiscal Year $2,356,334 $2,119,385 Estimated Employer Contributions Based on Projected Payroll Plan’s Estimated Employer Normal Cost $291,266 $258,565 Plan’s Payment on Amortization Bases4 835,213 971,580 % of Projected Payroll (illustrative only) 35.445% 45.84% Estimated Total Employer Contribution $1,126,479 $1,230,145 % of Projected Payroll (illustrative only) 47.806% 58.04% 1 The results shown for fiscal year 2020-21 reflect the prior year valuation and may not take into account any lump sum payment, side fund payoff, or rate adjustment made after April 30, 2019. 2 Section 2 of this report contains a list of Class 1 benefits and corresponding surcharges for each benefit. 3 The normal cost difference is phased out over a five-year period. The phase out of normal cost difference is 100% for the first year of pooling and is incrementally reduced by 20% of the original normal cost difference for each subsequent year. This is non-zero only for plans that joined a pool within the past 5 years. Most plans joined a pool June 30, 2003, when risk pooling was implemented. 4 See Schedule of Plan’s Amortization Bases. B-10 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 5 Additional Discretionary Employer Contributions The minimum required employer contribution towards the Unfunded Accrued Liability (UAL) for this rate plan for the 2021-22 fiscal year is $971,580. CalPERS allows employers to make additional discretionary payments (ADPs) at any time and in any amount. These optional payments serve to reduce the UAL and future required contributions and can result in significant long-term savings. Employers can also use ADPs to stabilize annual contributions as a fixed dollar amount, percent of payroll or percent of revenue. Provided below are select ADP options for consideration. Making such an ADP during fiscal year 2021-22 does not require an ADP be made in any future year, nor does it change the remaining amortization period of any portion of unfunded liability. For information on permanent changes to amortization periods, see the “Amortization Schedule and Alternatives” section of the report. If you are considering making an ADP, please contact your actuary for additional information. Minimum Required Employer Contribution for Fiscal Year 2021-22 Estimated Normal Cost Minimum UAL Payment ADP Total UAL Contribution Estimated Total Contribution $258,565 $971,580 $0 $971,580 $1,230,145 Alternative Fiscal Year 2021-22 Employer Contributions for Greater UAL Reduction Funding Target Estimated Normal Cost Minimum UAL Payment ADP1 Total UAL Contribution Estimated Total Contribution 20 years $258,565 $971,580 $201,467 $1,173,047 $1,431,612 15 years $258,565 $971,580 $392,869 $1,364,449 $1,623,014 10 years $258,565 $971,580 $797,785 $1,769,365 $2,027,930 5 years $258,565 $971,580 $2,059,318 $3,030,898 $3,289,463 1 The ADP amounts are assumed to be made in the middle of the fiscal year. A payment made earlier or later in the fiscal year would have to be less or more than the amount shown to have the same effect on the UAL amortization. Note that the calculations above are based on the projected Unfunded Accrued Liability as of June 30, 2021 as determined in the June 30, 2019 actuarial valuation. New unfunded liabilities can emerge in future years due to assumption or method changes, changes in plan provisions and actuarial experience different than assumed. Making an ADP illustrated above for the indicated number of years will not result in a plan that is exactly 100% funded in the indicated number of years. Valuation results will vary from one year to the next and can diverge significantly from projections over a period of several years. B-11 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 6 Plan’s Funded Status June 30, 2018 June 30, 2019 1. Present Value of Projected Benefits (PVB) $45,601,156 $47,090,224 2. Entry Age Normal Accrued Liability (AL) 42,896,179 44,696,421 3. Plan’s Market Value of Assets (MVA) 30,796,160 32,015,078 4. Unfunded Accrued Liability (UAL) [(2) - (3)] 12,100,019 12,681,343 5. Funded Ratio [(3) / (2)] 71.8% 71.6% This measure of funded status is an assessment of the need for future employer contributions based on the selected actuarial cost method used to fund the plan. The UAL is the present value of future employer contributions for service that has already been earned and is in addition to future normal cost contributions for active members. For a measure of funded status that is appropriate for assessing the sufficiency of plan assets to cover estimated termination liabilities, please see “Hypothetical Termination Liability” in the “Risk Analysis” section. Projected Employer Contributions The table below shows the required and projected employer contributions (before cost sharing) for the next six fiscal years. The projection assumes that all actuarial assumptions will be realized and that no further changes to assumptions, contributions, benefits, or funding will occur during the projection period. As of the preparation date of this report, the year to date return for the 2019-20 fiscal year was well below the 7% assumed return. Actual contribution rates during this projection period could be significantly higher than the projection shown below. Required Contribution Projected Future Employer Contributions (Assumes 7.00% Return for Fiscal Year 2019-20) Fiscal Year 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 Normal Cost % 12.20% 12.2% 12.2% 12.2% 12.2% 12.2% UAL Payment $971,580 $1,072,000 $1,134,000 $1,200,000 $1,236,000 $1,269,000 For some sources of UAL, the change in UAL is amortized using a 5-year ramp up. For more information, please see “Amortization of the Unfunded Actuarial Accrued Liability” under “Actuarial Methods” in Appendix A. This method phases in the impact of the change in UAL over a 5-year period in order to reduce employer cost volatility from year to year. As a result of this methodology, dramatic changes in the required employer contributions in any one year are less likely. However, required contributions can change gradually and significantly over the next five years. In years when there is a large increase in UAL, the relatively small amortization payments during the ramp up period could result in a funded ratio that is projected to decrease initially while the contribut ion impact of the increase in the UAL is phased in. For projected contributions under alternate investment return scenarios, please see the “Future Investment Return Scenarios” in the “Risk Analysis” section. B-12 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 7 Cost Actuarial Determination of Pension Plan Cost Contributions to fund the pension plan are comprised of two components: • The Normal Cost, expressed as a percentage of total active payroll • The Amortization of the Unfunded Accrued Liability (UAL), expressed as a dollar amount For fiscal years prior to FY 2016-17, the Amortization of UAL component was expressed as a percentage of total active payroll. Starting with FY 2016-17, the Amortization of UAL component was expressed as a dollar amount and invoiced on a monthly basis. There continues to be an option to prepay this amount during July of each fiscal year. The Normal Cost component will continue to be expressed as a percentage of active payroll with employer and employee contributions payable as part of the regular payroll reporting process. The determination of both components requires complex actuarial calculations. The calculations are based on a set of actuarial assumptions which can be divided into two categories: • Demographic assumptions (e.g., mortality rates, retirement rates, employment termination rates, disability rates) • Economic assumptions (e.g., future investment earnings, inflation, salary growth rates) These assumptions reflect CalPERS’ best estimate of future experience of the plan and are long term in nature. We recognize that all assumptions will not be realized in any given year. For example, the investment earnings at CalPERS have averaged 5.8% over the 20 years ending June 30, 2019, yet individual fiscal year returns have ranged from -23.6% to +20.7%. In addition, CalPERS reviews all actuarial assumptions by conducting in-depth experience studies every four years, with the most recent experience study completed in 2017. B-13 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 8 Changes Since the Prior Year’s Valuation Benefits The standard actuarial practice at CalPERS is to recognize mandated legislative benefit changes in the first annual valuation following the effective date of the legislation. Voluntary benefit changes by plan amendment are generally included in the first valuation that is prepared after the amendment becomes effective, even if the valuation date is prior to the effective date of the amendment. This valuation generally reflects plan changes by amendments effective before the date of the report. Please refer to the “Plan’s Major Benefit Options” and Appendix B for a summary of the plan provisions used in this valuation. The effect of any mandated benefit changes or plan amendments on the unfunded liability is shown in the “(Gain)/Loss Analysis” and the effect on the employer contribution is shown in the “Reconciliation of Required Employer Contributions.” It should be noted that no change in liability or contribution is shown for any plan changes which were already included in the prior year’s valuation. Actuarial Methods and Assumptions The CalPERS Board of Administration adopted a new amortization policy effective with this actuarial valuation. The new policy shortens the period over which actuarial gains and losses are amortized from 30 years to 20 years with the payments computed as a level dollar amount. In addition, the new policy does not utilize a 5- year ramp-up and ramp-down on UAL bases attributable to assumption and method changes and non- investment gains/losses. The new policy also does not utilize a 5-year ramp-down on investment gains/losses. These changes will apply only to new UAL bases established on or after June 30, 2019. For inactive employers, the new amortization policy imposes a maximum amortization period of 15 years for all unfunded accrued liabilities effective June 30, 2017. Furthermore, the plan actuary has the ability to shorten the amortization period on any valuation date based on the life expectancy of plan members and projected cash flow needs to the plan. Subsequent Events The contribution requirements determined in this actuarial valuation report are based on demographic and financial information as of June 30, 2019. Changes in the value of assets subsequent to that date are not reflected. Investment returns below the assumed rate of return will increase future required contributions while investment returns above the assumed rate of return will decrease future required contributions. The projected employer contributions on Page 6 are calculated under the assumption that the discount rate remains at 7.0% going forward and that the realized rate of return on assets for fiscal year 2019-20 is 7.0%. This actuarial valuation report reflects statutory changes, regulatory changes and CalPERS Board actions through January 2020. Any subsequent changes or actions are not reflected. B-14 Assets and Liabilities • Breakdown of Entry Age Normal Accrued Liability • Allocation of Plan’s Share of Pool’s Experience/Assumption Change • Development of Plan’s Share of Pool’s Market Value of Assets • Schedule of Plan’s Amortization Bases • Amortization Schedule and Alternatives • Employer Contribution History • Funding History B-15 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 10 Breakdown of Entry Age Normal Accrued Liability Active Members $10,393,511 Transferred Members 5,501,407 Terminated Members 2,750,267 Members and Beneficiaries Receiving Payments 26,051,236 Total $44,696,421 Allocation of Plan’s Share of Pool’s Experience/Assumption Change It is the policy of CalPERS to ensure equity within the risk pools by allocating the pool’s experience gains/losses and assumption changes in a manner that treats each employer equitably and maintains benefit security for the members of the System while minimizing substantial variations in employer contributions. The Pool’s experience gains/losses and impact of assumption/method changes is allocated to the plan as follows: 1. Plan’s Accrued Liability $44,696,421 2. Projected UAL balance at 6/30/2019 12,351,521 3. Pool’s Accrued Liability1 18,394,114,919 4. Sum of Pool’s Individual Plan UAL Balances at 6/30/20191 4,268,374,183 5. Pool’s 2018/19 Investment (Gain)/Loss1 68,711,010 6. Pool’s 2018/19 Non-Investment (Gain)/Loss1 70,985,020 7. Plan’s Share of Pool’s Investment (Gain)/Loss: [(1) - (2)] ÷ [(3) - (4)] × (5) 157,333 8. Plan’s Share of Pool’s Non-Investment (Gain)/Loss: (1) ÷ (3) × (6) 172,489 9. Plan’s New (Gain)/Loss as of 6/30/2019: (7) + (8) 329,822 10. Other Changes in the UAL2 0 1 Does not include plans that transferred to Pool on the valuation date. 2 May include Golden Handshakes, Service Purchases, etc. See Schedule of Plan’s Amortization Bases for details. Development of the Plan’s Share of Pool’s Market Value of Assets 11. Plan’s UAL: (2) + (9) + (10) $12,681,343 12. Plan’s Share of Pool’s MVA: (1) - (11) $32,015,078 B-16 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 11 Schedule of Plan’s Amortization Bases Note that there is a two-year lag between the valuation date and the start of the contribution fiscal year. • The assets, liabilities, and funded status of the plan are measured as of the valuation date: June 30, 2019. • The required employer contributions determined by the valuation are for the fiscal year beginning two years after the valuation date: fiscal year 2021-22. This two-year lag is necessary due to the amount of time needed to extract and test the membership and financial data, a nd the need to provide public agencies with their required employer contribution well in advance of the start of the fiscal year. The Unfunded Accrued Liability (UAL) is used to determine the employer contribution and therefore must be rolled forward two years from the valuation date to the first day of the fiscal year for which the contribution is being determined. The UAL is rolled forward each year by subtracting the expected payment on the UAL for the fiscal year and adjusting for interest. The expected payment on the UAL for a fiscal year is equal to the Expected Employer Contribution for the fiscal year minus the Expected Normal Cost for the year. The Employer Contribution for the first fiscal year is determined by the actuarial valuation two ye ars ago and the contribution for the second year is from the actuarial valuation one year ago. Additional discretionary payments are reflected in the Expected Payments column in the fiscal year they were made by the agency. Reason for Base Date Est. Ramp Level 2021-22 Ramp Shape Escala- tion Rate Amort. Period Balance 6/30/19 Expected Payment 2019-20 Balance 6/30/20 Expected Payment 2020-21 Balance 6/30/21 Minimum Required Payment 2021-22 Share of Pre-2013 Pool UAL 6/30/13 No Ramp 2.75% 15 4,080,002 340,537 4,013,348 345,573 3,936,819 355,076 Non-Investment (Gain)/Loss 6/30/13 100% Up/Down 2.75% 24 (37,698) (2,529) (37,721) (2,559) (37,714) (2,629) Investment (Gain)/Loss 6/30/13 100% Up/Down 2.75% 24 4,087,157 274,154 4,089,671 277,431 4,088,971 285,060 Non-Investment (Gain)/Loss 6/30/14 100% Up/Down 2.75% 25 3,367 179 3,418 226 3,423 232 Investment (Gain)/Loss 6/30/14 100% Up/Down 2.75% 25 (2,947,571) (156,463) (2,992,054) (197,855) (2,996,835) (203,296) Assumption Change 6/30/14 100% Up/Down 2.75% 15 1,891,819 140,703 1,878,702 178,644 1,825,420 183,557 Non-Investment (Gain)/Loss 6/30/15 100% Up/Down 2.75% 26 (156,051) (6,228) (160,532) (8,396) (163,084) (10,784) Investment (Gain)/Loss 6/30/15 100% Up/Down 2.75% 26 1,846,046 73,673 1,899,061 99,329 1,929,249 127,575 Non-Investment (Gain)/Loss 6/30/16 80% Up/Down 2.75% 27 (282,967) (7,644) (294,868) (11,588) (303,522) (15,875) Investment (Gain)/Loss 6/30/16 80% Up/Down 2.75% 27 2,198,432 59,390 2,290,889 90,029 2,358,125 123,340 Assumption Change 6/30/16 80% Up/Down 2.75% 17 695,104 25,657 717,221 39,049 727,034 53,497 Non-Investment (Gain)/Loss 6/30/17 60% Up/Down 2.75% 28 (60,460) (840) (63,823) (1,697) (66,535) (2,615) Investment (Gain)/Loss 6/30/17 60% Up/Down 2.75% 28 (1,135,495) (15,776) (1,198,661) (31,862) (1,249,609) (49,108) Assumption Change 6/30/17 60% Up/Down 2.75% 18 783,953 14,808 823,512 30,030 850,095 46,283 Non-Investment (Gain)/Loss 6/30/18 40% Up/Down 2.75% 29 174,575 0 186,795 2,551 197,232 5,243 Investment (Gain)/Loss 6/30/18 40% Up/Down 2.75% 29 (341,098) 0 (364,975) (4,985) (385,367) (10,244) Assumption Change 6/30/18 40% Up/Down 2.75% 19 1,211,556 (15,750) 1,312,657 24,474 1,379,227 50,294 B-17 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 12 Schedule of Plan’s Amortization Bases (continued) Reason for Base Date Est. Ramp Level 2021-22 Ramp Shape Escala- tion Rate Amort. Period Balance 6/30/19 Expected Payment 2019-20 Balance 6/30/20 Expected Payment 2020-21 Balance 6/30/21 Minimum Required Payment 2021-22 Method Change 6/30/18 40% Up/Down 2.75% 19 340,850 (1,042) 365,787 6,820 384,337 14,015 Non-Investment (Gain)/Loss 6/30/19 No Ramp 0.00% 20 172,489 0 184,563 0 197,482 18,021 Investment (Gain)/Loss 6/30/19 20% Up Only 0.00% 20 157,333 0 168,346 0 180,130 3,938 Total 12,681,343 722,829 12,821,336 835,214 12,854,878 971,580 The (gain)/loss bases are the plan’s allocated share of the risk pool’s (gain)/loss for the fiscal year as disclosed in “Allocation of Plan’s Share of Pool’s Experience/Assumption Change” earlier in this section. These (gain)/loss bases will be amortized in accordance with the CalPERS amortization policy in effect at the time the base was established. B-18 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 13 Amortization Schedule and Alternatives The amortization schedule on the previous page shows the minimum contributions required according to the CalPERS amortization policy. Many agencies have expressed interest in paying off the unfunded accrued liabilities more quickly than required. As such, we have provided alternative amortization schedules to help analyze the current amortization schedule and illustrate the potential savings of accelerating unfunded liability payments. Shown on the following page are future year amortization payments based on 1) the current amortization schedule reflecting the individual bases and remaining periods shown on the previous page, and 2) alternative “fresh start” amortization schedules using two sample periods that would both result in interest savings relative to the current amortization schedule. The Current Amortization Schedule typically contains both positive and negative bases. Positive bases result from plan changes, assumption changes, method changes or plan experience that increase unfunded liability. Negative bases result from plan changes, assumption changes, method changes, or plan experience that decrease unfunded liability. The combination of positive and negative bases within an amortization schedule can result in unusual or problematic circumstances in future years, such as: • When a negative payment would be required on a positive unfunded actuarial liability; or • When the payment would completely amortize the total unfunded liability in a very short time period, and results in a large change in the employer contribution requirement. In any year when one of the above scenarios occurs, the actuary will consider corrective action such as replacing the existing unfunded liability bases with a single “fresh start” base and amortizing it over a reasonable period. The Current Amortization Schedule on the following page may appear to show that, based on the current amortization bases, one of the above scenarios will occur at some point in the future. It is impossible to know today whether such a scenario will in fact arise since there will be additional bases added to the amortization schedule in each future year. Should such a scenario arise in any future year, the actuary will take appropriate action based on guidelines in the CalPERS amortization policy. B-19 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 14 Amortization Schedule and Alternatives Alternate Schedules Current Amortization Schedule 15 Year Amortization 10 Year Amortization Date Balance Payment Balance Payment Balance Payment 6/30/2021 12,854,878 971,580 12,854,878 1,364,449 12,854,878 1,769,365 6/30/2022 12,749,712 1,071,588 12,343,322 1,364,448 11,924,474 1,769,365 6/30/2023 12,533,732 1,133,674 11,795,959 1,364,448 10,928,942 1,769,365 6/30/2024 12,238,415 1,200,137 11,210,280 1,364,449 9,863,723 1,769,365 6/30/2025 11,853,673 1,236,152 10,583,603 1,364,449 8,723,938 1,769,365 6/30/2026 11,404,746 1,269,110 9,913,058 1,364,448 7,504,368 1,769,365 6/30/2027 10,890,302 1,302,974 9,195,576 1,364,448 6,199,428 1,769,365 6/30/2028 10,304,819 1,337,768 8,427,870 1,364,449 4,803,143 1,769,365 6/30/2029 9,642,358 1,373,518 7,606,424 1,364,448 3,309,118 1,769,366 6/30/2030 8,896,547 1,410,254 6,727,478 1,364,449 1,710,510 1,769,365 6/30/2031 8,060,529 1,447,997 5,787,004 1,364,448 6/30/2032 7,126,948 1,437,303 4,780,698 1,364,448 6/30/2033 6,139,076 1,424,956 3,703,951 1,364,449 6/30/2034 5,094,826 1,391,839 2,551,831 1,364,449 6/30/2035 4,011,738 1,333,300 1,319,062 1,364,448 6/30/2036 2,913,385 688,815 6/30/2037 2,404,807 612,633 6/30/2038 1,939,430 531,768 6/30/2039 1,525,124 467,817 6/30/2040 1,147,968 425,803 6/30/2041 787,872 301,584 6/30/2042 531,062 281,817 6/30/2043 276,722 218,309 6/30/2044 70,272 72,690 6/30/2045 6/30/2046 6/30/2047 6/30/2048 6/30/2049 6/30/2050 Total 22,943,386 20,466,727 17,693,651 Interest Paid 10,088,508 7,611,849 4,838,773 Estimated Savings 2,476,659 5,249,735 B-20 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 15 Employer Contribution History The table below provides a recent history of the required employer contributions for the plan, as determined by the annual actuarial valuation. It does not account for prepayments or benefit changes made during a fiscal year. [ Fiscal Year Employer Normal Cost Unfunded Liability Payment ($) 2016 - 17 10.069% $413,568 2017 - 18 10.110% 495,784 2018 - 19 10.609% 613,118 2019 - 20 11.432% 739,621 2020 - 21 12.361% 835,213 2021 - 22 12.20% 971,580 Funding History The funding history below shows the plan’s actuarial accrued liability, share of the pool’s market value of assets, share of the pool’s unfunded liability, funded ratio, and annual covered payroll. Valuation Date Accrued Liability (AL) Share of Pool’s Market Value of Assets (MVA) Plan’s Share of Pool’s Unfunded Liability Funded Ratio Annual Covered Payroll 06/30/2011 $25,552,394 $19,543,745 $6,008,649 76.5% $5,093,868 06/30/2012 28,080,069 20,206,710 7,873,359 72.0% 5,447,523 06/30/2013 30,369,005 23,138,924 7,230,081 76.2% 5,026,814 06/30/2014 32,822,157 26,128,062 6,694,095 79.6% 4,349,951 06/30/2015 34,740,823 26,564,734 8,176,089 76.5% 3,599,187 06/30/2016 36,088,996 25,521,188 10,567,808 70.7% 3,009,689 06/30/2017 39,354,331 28,819,602 10,534,729 73.2% 2,750,098 06/30/2018 42,896,179 30,796,160 12,100,019 71.8% 2,172,158 06/30/2019 44,696,421 32,015,078 12,681,343 71.6% 1,953,729 B-21 Risk Analysis • Future Investment Return Scenarios • Discount Rate Sensitivity • Mortality Rate Sensitivity • Maturity Measures • Maturity Measures History • Hypothetical Termination Liability B-22 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 17 Future Investment Return Scenarios Analysis was performed to determine the effects of various future investment returns on required employer contributions. The projections below provide a range of results based on five investment return scenarios assumed to occur during the next four fiscal years (2019-20, 2020-21, 2021-22 and 2022-23). The projections also assume that all other actuarial assumptions will be realized and that no further changes to assumptions, contributions, benefits, or funding will occur. For fiscal years 2019-20, 2020-21, 2021-22, and 2022-23, each scenario assumes an alternate fixed annual return. The fixed return assumptions for the five scenarios are 1.0%, 4.0%, 7.0%, 9.0% and 12.0%. These alternate investment returns were chosen based on stochastic analysis of possible future investment returns over the four-year period ending June 30, 2023. Using the expected returns and volatility of the asset classes in which the funds are invested, we produced five thousand stochastic outcomes for this period based on the most recently completed Asset Liability Management process. We then selected annual returns that approximate the 5th, 25th, 50th, 75th, and 95th percentiles for these outcomes. For example, of all the 4 -year outcomes generated in the stochastic analysis, approximately 25% had an average annual return of 4.0% or less. Required contributions outside of this range are also possible. In particular, whereas it is unlikely that investment returns will average less than 1.0% or greater than 12.0% over this four-year period, the likelihood of a single investment return less than 1.0% or greater than 12.0% in any given year is much greater. Assumed Annual Return From 2019-20 through 2022-23 Projected Employer Contributions 2022-23 2023-24 2024-25 2025-26 1.0% Normal Cost 12.2% 12.2% 12.2% 12.2% UAL Contribution $1,120,000 $1,278,000 $1,490,000 $1,720,000 4.0% Normal Cost 12.2% 12.2% 12.2% 12.2% UAL Contribution $1,096,000 $1,207,000 $1,348,000 $1,486,000 7.0% Normal Cost 12.2% 12.2% 12.2% 12.2% UAL Contribution $1,072,000 $1,134,000 $1,200,000 $1,236,000 9.0% Normal Cost 12.5% 12.7% 13.0% 13.2% UAL Contribution $1,058,000 $1,097,000 $1,127,000 $1,114,000 12.0% Normal Cost 12.5% 12.7% 13.0% 13.2% UAL Contribution $1,034,000 $1,022,000 $972,000 $843,000 These projections reflect the impact of the CalPERS risk mitigation policy, which reduces the discount rate when investment returns exceed specified trigger points. B-23 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 18 Discount Rate Sensitivity The discount rate assumption is calculated as the sum of the assumed real rate of return and the assumed annual price inflation, currently 4.50% and 2.50%, respectively. Changing either the price inflation assumption or the real rate of return assumption will change the discount rate. The sensitivity of the valuation results to the discount rate assumption depends on which component of the discount rate is changed. Shown below are various valuation results as of June 30, 2019 assuming alternate discount rates by changing the two components independently. Results are shown using the current discount rate of 7.0% as well as alternate discount rates of 6.0% and 8.0%. The rates of 6.0% and 8.0% were selected since they illustrate the impact of a 1.0% increase or decrease to the 7.0% assumption. Sensitivity to the Real Rate of Return Assumption As of June 30, 2019 1% Lower Real Return Rate Current Assumptions 1% Higher Real Return Rate Discount Rate 6.0% 7.0% 8.0% Inflation 2.5% 2.5% 2.5% Real Rate of Return 3.5% 4.5% 5.5% a) Total Normal Cost 25.21% 20.16% 16.30% b) Accrued Liability $50,586,099 $44,696,421 $39,846,248 c) Market Value of Assets $32,015,078 $32,015,078 $32,015,078 d) Unfunded Liability/(Surplus) [(b) - (c)] $18,571,021 $12,681,343 $7,831,170 e) Funded Status 63.3% 71.6% 80.3% Sensitivity to the Price Inflation Assumption As of June 30, 2019 1% Lower Inflation Rate Current Assumptions 1% Higher Inflation Rate Discount Rate 6.0% 7.0% 8.0% Inflation 1.5% 2.5% 3.5% Real Rate of Return 4.5% 4.5% 4.5% a) Total Normal Cost 21.53% 20.16% 18.56% b) Accrued Liability $47,261,321 $44,696,421 $41,410,215 c) Market Value of Assets $32,015,078 $32,015,078 $32,015,078 d) Unfunded Liability/(Surplus) [(b) - (c)] $15,246,243 $12,681,343 $9,395,137 e) Funded Status 67.7% 71.6% 77.3% Mortality Rate Sensitivity The following table looks at the change in the June 30, 2019 plan costs and funded ratio under two different longevity scenarios, namely assuming post-retirement rates of mortality are 10% lower or 10% higher than our current mortality assumptions adopted in 2017. This type of analysis highlights the impact on the plan of improving or worsening mortality over the long-term. As of June 30, 2019 10% Lower Mortality Rates Current Assumptions 10% Higher Mortality Rates a) Total Normal Cost 20.50% 20.16% 19.85% b) Accrued Liability $45,545,080 $44,696,421 $43,912,267 c) Market Value of Assets $32,015,078 $32,015,078 $32,015,078 d) Unfunded Liability/(Surplus) [(b) - (c)] $13,530,002 $12,681,343 $11,897,189 e) Funded Status 70.3% 71.6% 72.9% B-24 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 19 Maturity Measures As pension plans mature they become more sensitive to risks. Understanding plan maturity and how it affects the ability of a pension plan to tolerate risk is important in understanding how the plan is impacted by investment return volatility, other economic variables and changes in longevity or other demographic as sumptions. One way to look at the maturity level of CalPERS and its plans is to look at the ratio of a plan’s retiree liability to its total liability. A pension plan in its infancy will have a very low ratio of retiree liability to total liability. As the plan matures, the ratio starts increasing. A mature plan will often have a ratio above 60%-65%. Ratio of Retiree Accrued Liability to Total Accrued Liability June 30, 2018 June 30, 2019 1. Retired Accrued Liability 22,510,289 26,051,236 2. Total Accrued Liability 42,896,179 44,696,421 3. Ratio of Retiree AL to Total AL [(1) / (2)] 0.53 0.58 Another measure of maturity level of CalPERS and its plans is to look at the ratio of actives to retirees, also called the Support Ratio. A pension plan in its infancy will have a very high ratio of active to retired members. As the plan matures, and members retire, the ratio starts declining. A mature plan will often have a ratio near or below one. The average support ratio for CalPERS public agency plans is 1.25. Support Ratio June 30, 2018 June 30, 2019 1. Number of Actives 32 28 2. Number of Retirees 81 91 3. Support Ratio [(1) / (2)] 0.40 0.31 B-25 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 20 Maturity Measures (Continued) The actuarial calculations supplied in this communication are based on various assumptions about long-term demographic and economic behavior. Unless these assumptions (e.g., terminations, deaths, disabilities, retirements, salary growth, and investment return) are exactly realized each year, there will be differences on a year-to-year basis. The year-to-year differences between actual experience and the assumptions are called actuarial gains and losses and serve to lower or raise required employer contributions from one year to the next. Therefore, employer contributions will inevitably fluctuate, especially due to the ups and downs of investment returns. Asset Volatility Ratio (AVR) Shown in the table below is the asset volatility ratio (AVR), which is the ratio of market value of assets to payroll. Plans that have higher AVR experience more volatile employer contributions (as a percentage of payroll) due to investment return. For example, a plan with an asset-to-payroll ratio of 8 may experience twice the contribution volatility due to investment return volatility than a plan with an asset-to-payroll ratio of 4. It should be noted that this ratio is a measure of the current situation. It increases over time but generally tends to stabilize as the plan matures. Liability Volatility Ratio (LVR) Also shown in the table below is the liability volatility ratio (LVR), which is the ratio of accrued liability to payroll. Plans that have a higher LVR experience more volatile employer contributions (as a percentage of payroll) due to investment return and changes in liability. For example, a plan with LVR ratio of 8 is expected to have twice the contribution volatility of a plan with LVR of 4. It should be noted that this ratio indicates a longer-term potential for contribution volatility. The AVR, described above, will tend to move closer to the LVR as a plan matures. Contribution Volatility June 30, 2018 June 30, 2019 1. Market Value of Assets $30,796,160 $32,015,078 2. Payroll 2,172,158 1,953,729 3. Asset Volatility Ratio (AVR) [(1) / (2)] 14.2 16.4 4. Accrued Liability $42,896,179 $44,696,421 5. Liability Volatility Ratio (LVR) [(4) / (2)] 19.7 22.9 Maturity Measures History Valuation Date Ratio of Retiree Accrued Liability to Total Accrued Liability Support Ratio Asset Volatility Ratio Liability Volatility Ratio 06/30/2017 0.48 0.57 10.5 14.3 06/30/2018 0.53 0.40 14.2 19.7 06/30/2019 0.58 0.31 16.4 22.9 B-26 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 21 Hypothetical Termination Liability The hypothetical termination liability is an estimate of the financial position of the plan had the contract with CalPERS been terminated as of June 30, 2019. The plan liability on a termination basis is calculated differently compared to the plan’s ongoing funding liability. For the hypothetical termination liability calculation, both compensation and service are frozen as of the valuation date and no future pay increases or service accruals are assumed. This measure of funded status is not appropriate for assessing the need for future employer contributions in the case of an ongoing plan, that is, for an employer that continues to provide CalPERS retirement benefits to active employees. A more conservative investment policy and asset allocation strategy was adopted by the CalPERS Board for the Terminated Agency Pool. The Terminated Agency Pool has limited funding sources since no future employer contributions will be made. Therefore, expected benefit payments are secured by risk-free assets and benefit security for members is increased while limiting the funding risk. However, this asset allocation has a lower expected rate of return than the PERF and consequently, a lower discount rate is assumed. The lower discount rate for the Terminated Agency Pool results in higher liabilities for terminated plans. The effective termination discount rate will depend on actual market rates of return for risk-free securities on the date of termination. As market discount rates are variable, the table below shows a range for the hypothetical termination liability based on the lowest and highest interest rates observed during an approximate 19-month period from 12 months before the valuation date to 7 months after. Market Value of Assets (MVA) Hypothetical Termination Liability1,2 @ 1.75% Funded Status Unfunded Termination Liability @ 1.75% Hypothetical Termination Liability1,2 @ 3.25% Funded Status Unfunded Termination Liability @ 3.25% $32,015,078 $91,556,011 35.0% $59,540,933 $73,568,425 43.5% $41,553,347 1 The hypothetical liabilities calculated above include a 5% mortality contingency load in accordance with Board policy. Other actuarial assumptions can be found in Appendix A of the Section 2 report. 2 The current discount rate assumption used for termination valuations is a weighted average of the 10-year and 30-year U.S. Treasury yields where the weights are based on matching asset and liability durations as of the termination date. The discount rates used in the table are based on 20-year Treasury bonds, rounded to the nearest quarter percentage point, which is a good proxy for most plans. The 20-year Treasury yield was 2.31% on June 30, 2019, and was 1.83% on January 31, 2020. In order to terminate the plan, you must first contact our Retirement Services Contract Unit to initiate a Resolution of Intent to Terminate. The completed Resolution will allow the plan actuary to give you a preliminary termination valuation with a more up-to-date estimate of the plan liabilities. CalPERS advises you to consult with the plan actuary before beginning this process. B-27 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 22 Participant Data The table below shows a summary of your plan’s member data upon which this valuation is based: June 30, 2018 June 30, 2019 Reported Payroll $2,172,158 $1,953,729 Projected Payroll for Contribution Purposes $2,356,334 $2,119,385 Number of Members Active 32 28 Transferred 47 39 Separated 103 103 Retired 81 91 List of Class 1 Benefit Provisions This plan has the additional Class 1 Benefit Provisions: • One Year Final Compensation (FAC 1) B-28 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 23 Plan’s Major Benefit Options Shown below is a summary of the major optional benefits for which your agency has contracted. A description of principal standard and optional plan provisions is in Section 2. Benefit Group Member Category Misc Misc Misc Demographics Actives No Yes No Transfers/Separated Yes Yes No Receiving Yes Yes Yes Benefit Group Key 103140 103141 207228 Benefit Provision Benefit Formula 2% @ 55 2.5% @ 55 Social Security Coverage No No Full/Modified Full Full Employee Contribution Rate 8.00% Final Average Compensation Period One Year One Year Sick Leave Credit Yes Yes Non-Industrial Disability Standard Standard Industrial Disability No No Pre-Retirement Death Benefits Optional Settlement 2 Yes Yes 1959 Survivor Benefit Level Level 4 Level 4 Special No No Alternate (firefighters) No No Post-Retirement Death Benefits Lump Sum $500 $500 $500 Survivor Allowance (PRSA) No No No COLA 2% 2% 2% B-29 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 24 Section 2 CALIFORNIA PUBLIC EM PLOYEES’ RETIREMENT SYSTEM Risk Pool Actuarial Valuation Information Section 2 may be found on the CalPERS website (www.calpers.ca.gov) in the Forms and Publications section B-30 California Public Employees’ Retirement System Actuarial Office 400 Q Street, Sacramento, CA 95811 |Phone: (916) 795-3000 | Fax: (916) 795-2744 888 CalPERS (or 888-225-7377) | TTY: (877) 249-7442 | www.calpers.ca.gov July 2020 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) Annual Valuation Report as of June 30, 2019 Dear Employer, Attached to this letter, you will find the June 30, 2019 actuarial valuation report of your CalPERS pension plan. Provided in this report is the determination of the minimum required employer contributions for fiscal year 2021-22. In addition, the report contains important information regarding the current financial status of the plan as well as projections and risk measures to aid in planning for the future. Because this plan is in a risk pool, the following valuation report has been separated into two sections: • Section 1 contains specific information for the plan including the development of the current and projected employer contributions, and • Section 2 contains the Risk Pool Actuarial Valuation appropriate to the plan as of June 30, 2019. Section 2 can be found on the CalPERS website (www.calpers.ca.gov). From the home page, go to “Forms & Publications” and select “View All”. In the search box, enter “Risk Pool” and from the results list download the Miscellaneous or Safety Risk Pool Actuarial Valuation Report as appropriate. Your June 30, 2019 actuarial valuation report contains important actuarial information about your pension plan at CalPERS. Your assigned CalPERS staff actuary, whose signature appears in the Actuarial Certification section on page 1, is available to discuss the report with you after August 1, 2020. Actuarial valuations are based on assumptions regarding future plan experience including investment return and payroll growth, eligibility for the types of benefits provided, and longevity among retirees. The CalPERS Board of Administration adopts these assumptions after considering the advice of CalPERS actuarial and investment teams and other professionals. Each actuarial valuation reflects all prior differences between actual and assumed experience and adjusts the contribution rates as needed. This valuation is based on an investment return assumption of 7.0% which was adopted by the board in December 2016. Other assumptions used in this report are those recommended in the CalPERS Experience Study and Review of Actuarial Assumptions report from December 2017. Required Contribution The exhibit below displays the minimum employer contributions, before any cost sharing, for fiscal year 2021-22 along with estimates of the required contributions for fiscal year 2022-23. Member contributions other than cost sharing (whether paid by the employer or the employee) are in addition to the results shown below. The employer contributions in this report do not reflect any cost sharing arrangements you may have with your employees. Fiscal Year Employer Normal Cost Rate Employer Amortization of Unfunded Accrued Liability 2021-22 8.65% $17,301 Projected Results 2022-23 8.7% $18,000 C-1 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) Annual Valuation Report as of June 30, 2019 Page 2 The actual investment return for fiscal year 2019-20 was not known at the time this report was prepared. The projections above assume the investment return for that year would be 7.00%. To the extent the actual investment return for fiscal year 2019-20 differs from 7.00%, the actual contribution requirements for fiscal year 2022-23 will differ from those shown above. For additional details regarding the assumptions and methods used for these projections please refer to the “Projected Employer Contributions” in the “Highlights and Executive Summary” section. This section also contains projected required contributions through fiscal year 2026-27. Changes from Previous Year’s Valuation The CalPERS Board of Administration has adopted a new amortization policy effective with the June 30, 2019 actuarial valuation. The new policy shortens the period over which actuarial gains and losses are amortized from 30 years to 20 years with the payments computed as a level dollar amount. In addition, the new policy does not utilize a 5-year ramp- up and ramp-down on Unfunded Accrued Liability (UAL) bases attributable to assumption and method changes and non-investment gains/losses. The new policy does not utilize a 5-year ramp-down on investment gains/losses. These changes apply only to new UAL bases established on or after June 30, 2019. Further descriptions of general changes are included in the “Highlights and Executive Summary” section and in Appendix A, “Actuarial Methods and Assumptions.” The effects of the changes on the required contributions are included in the “Reconciliation of Required Employer Contributions” section. Questions We understand that you might have some questions about these results. While we are very interested in discussing these results with your agency, in the interest of allowing us to give every public agency their results, we ask that you wait until after August 1, 2020 to contact us with actuarial questions. If you have other questions, you may call the Customer Contact Center at (888)-CalPERS or (888-225-7377). Sincerely, SCOTT TERANDO Chief Actuary C-2 Actuarial Valuation as of June 30, 2019 for the Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) Required Contributions for Fiscal Year July 1, 2021 - June 30, 2022 C-3 Table of Contents Section 1 – Plan Specific Information Section 2 – Risk Pool Actuarial Valuation I nformation C-4 Section 1 CALIFORNIA PUBLIC EM PLOYEES’ RETIREMENT SYSTEM Plan Specific Information for the Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) (Valuation Rate Plan ID: 23274) C-5 Rate Plan belonging to the Miscellaneous Risk Pool Table of Contents Actuarial Certification 1 Highlights and Executive Summary Introduction 3 Purpose of Section 1 3 Required Employer Contributions 4 Additional Discretionary Employer Contributions 5 Plan’s Funded Status 6 Projected Employer Contributions 6 Cost 7 Changes Since the Prior Year’s Valuation 8 Subsequent Events 8 Assets and Liabilities Breakdown of Entry Age Normal Accrued Liability 10 Allocation of Plan’s Share of Pool’s Experience/Assumption Change 10 Development of Plan’s Share of Pool’s Market Value of Assets 10 Schedule of Plan’s Amortization Bases 11 Amortization Schedule and Alternatives 12 Employer Contribution History 14 Funding History 14 Risk Analysis Future Investment Return Scenarios 16 Discount Rate Sensitivity 17 Mortality Rate Sensitivity 17 Maturity Measures 18 Maturity Measures History 19 Hypothetical Termination Liability 20 Participant Data 21 List of Class 1 Benefit Provisions 21 Plan’s Major Benefit Options 22 C-6 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 1 Actuarial Certification Section 1 of this report is based on the member and financial data contained in our records as of June 30, 2019 which was provided by your agency and the benefit provisions under your contract with CalPERS. Section 2 of this report is based on the member and financial data as of June 30, 2019 provided by employers participating in the Miscellaneous Risk Pool to which the plan belongs and benefit provisions under the CalPERS contracts for those agencies. As set forth in Section 2 of this report, the pool actuaries have certified that, in their opinion, the valuation of the risk pool containing your Miscellaneous Second Tier Plan has been performed in accordance with generally accepted actuarial principles consistent with standards of practice prescribed by the Actuarial Standards Board, and that the assumptions and methods are internally consistent and reasonable for the risk pool as of the date of this valuation and as prescribed by the CalPERS Board of Administration according to provisions set forth in the California Public Employees’ Retirement Law. Having relied upon the information set forth in Section 2 of this report and based on the census and benefit provision information for the plan, it is my opinion as the plan actuary that the Unfunded Accrued Liability amortization bases as of June 30, 2019 and employer contribution as of July 1, 2021 have been properly and accurately determined in accordance with the principles and standards stated above. The undersigned is an actuary for CalPERS, a member of both the American Academy of Actuaries and Society of Actuaries and meets the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. STUART BENNETT, ASA, MAAA Senior Pension Actuary, CalPERS C-7 Highlights and Executive Summary • Introduction • Purpose of Section 1 • Required Employer Contributions • Additional Discretionary Employer Contributions • Plan’s Funded Status • Projected Employer Contributions • Cost • Changes Since the Prior Year’s Valuation • Subsequent Events C-8 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 3 Introduction This report presents the results of the June 30, 2019 actuarial valuation of the Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes of the California Public Employees’ Retirement System (CalPERS). This actuarial valuation sets the required employer contributions for fiscal year 2021-22. Purpose of Section 1 This Section 1 report for the Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes of CalPERS was prepared by the plan actuary in order to: • Set forth the assets and accrued liabilities of this plan as of June 30, 2019; • Determine the minimum required employer contribution for this plan for the fiscal year July 1, 2021 through June 30, 2022; and • Provide actuarial information as of June 30, 2019 to the CalPERS Board of Administration and other interested parties. The pension funding information presented in this report should not be used in financial reports subject to GASB Statement No. 68 for a Cost Sharing Employer Defined Benefit Pension Plan. A separate accounting valuation report for such purposes is available from CalPERS and details for ordering are available on our website. The measurements shown in this actuarial valuation may not be applicable for other purposes. The employer should contact their actuary before disseminating any portion of this report for any reason that is not explicitly described above. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; changes in actuarial policies; and changes in plan provisions or applicable law. Assessment and Disclosure of Risk This report includes the following risk disclosures consistent with the recommendations of Actuarial Standards of Practice No. 51 and recommended by the California Actuarial Advisory Panel (CAAP) in the Model Disclosure Elements document: • A “Scenario Test,” projecting future results under different investment income returns. • A “Sensitivity Analysis,” showing the impact on current valuation results using alternative discount rates of 6.0% and 8.0%. • A “Sensitivity Analysis,” showing the impact on current valuation results assuming rates of mortality are 10% lower or 10% higher than our current mortality assumptions adopted in 2017. • Plan maturity measures indicating how sensitive a plan may be to the risks noted above. C-9 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 4 Required Employer Contributions Fiscal Year Required Employer Contributions 2021-22 Employer Normal Cost Rate 8.65% Plus, Either 1) Monthly Employer Dollar UAL Payment $1,441.75 Or 2) Annual UAL Prepayment Option* $16,726 The total minimum required employer contribution is the sum of the Plan’s Employer Normal Cost Rate (expressed as a percentage of payroll) plus the Employer Unfunded Accrued Liability (UAL) Contribution Amount (billed monthly in dollars). * Only the UAL portion of the employer contribution can be prepaid (which must be received in full no later than July 31). Any prepayment totaling over $5 million requires a 72-hour notice email to FCSD_public_agency_wires@calpers.ca.gov. Plan Normal Cost contributions will be made as part of the payroll reporting process. If there is contractual cost sharing or other change, this amount will change. In accordance with Sections 20537 and 20572 of the Public Employees’ Retirement Law, if a contracting agency fails to remit the required contributions when due, interest and penalties may apply. Fiscal Year Fiscal Year 2020-21 2021-22 Development of Normal Cost as a Percentage of Payroll1 Base Total Normal Cost for Formula 15.712% 15.57% Surcharge for Class 1 Benefits2 None 0.000% 0.00% Phase out of Normal Cost Difference3 0.000% 0.00% Plan’s Total Normal Cost 15.712% 15.57% Formula's Expected Employee Contribution Rate 6.918% 6.92% Employer Normal Cost Rate 8.794% 8.65% Projected Payroll for the Contribution Fiscal Year $2,146,877 $2,097,888 Estimated Employer Contributions Based on Projected Payroll Plan’s Estimated Employer Normal Cost $188,796 $181,467 Plan’s Payment on Amortization Bases4 15,889 17,301 % of Projected Payroll (illustrative only) 0.740% 0.82% Estimated Total Employer Contribution $204,685 $198,768 % of Projected Payroll (illustrative only) 9.534% 9.47% 1 The results shown for fiscal year 2020-21 reflect the prior year valuation and may not take into account any lump sum payment, side fund payoff, or rate adjustment made after April 30, 2019. 2 Section 2 of this report contains a list of Class 1 benefits and corresponding surcharges for each benefit. 3 The normal cost difference is phased out over a five-year period. The phase out of normal cost difference is 100% for the first year of pooling and is incrementally reduced by 20% of the original normal cost difference for each subsequent year. This is non-zero only for plans that joined a pool within the past 5 years. Most plans joined a pool June 30, 2003, when risk pooling was implemented. 4 See Schedule of Plan’s Amortization Bases. C-10 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 5 Additional Discretionary Employer Contributions The minimum required employer contribution towards the Unfunded Accrued Liability (UAL) for this rate plan for the 2021-22 fiscal year is $17,301. CalPERS allows employers to make additional discretionary payments (ADPs) at any time and in any amount. These optional payments serve to reduce the UAL and future required contributions and can result in significant long-term savings. Employers can also use ADPs to stabilize annual contributions as a fixed dollar amount, percent of payroll or percent of revenue. Provided below are select ADP options for consideration. Making such an ADP during fiscal year 2021-22 does not require an ADP be made in any future year, nor does it change the remaining amortization period of any portion of unfunded liability. For information on permanent changes to amortization periods, see the “Amortization Schedule and Alternatives” section of the report. If you are considering making an ADP, please contact your actuary for additional information. Minimum Required Employer Contribution for Fiscal Year 2021-22 Estimated Normal Cost Minimum UAL Payment ADP Total UAL Contribution Estimated Total Contribution $181,467 $17,301 $0 $17,301 $198,768 Alternative Fiscal Year 2021-22 Employer Contributions for Greater UAL Reduction Funding Target Estimated Normal Cost Minimum UAL Payment ADP1 Total UAL Contribution Estimated Total Contribution 20 years $181,467 $17,301 $47 $17,348 $198,815 15 years $181,467 $17,301 $2,878 $20,179 $201,646 10 years $181,467 $17,301 $8,866 $26,167 $207,634 5 years $181,467 $17,301 $27,523 $44,824 $226,291 1 The ADP amounts are assumed to be made in the middle of the fiscal year. A payment made earlier or later in the fiscal year would have to be less or more than the amount shown to have the same effect on the UAL amortization. Note that the calculations above are based on the projected Unfunded Accrued Liability as of June 30, 2021 as determined in the June 30, 2019 actuarial valuation. New unfunded liabilities can emerge in future years due to assumption or method changes, changes in plan provisions and actuarial experience different than assumed. Making an ADP illustrated above for the indicated number of years will not result in a plan that is exactly 100% funded in the indicated number of years. Valuation results will vary from one year to the next and can diverge significantly from projections over a period of several years. C-11 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 6 Plan’s Funded Status June 30, 2018 June 30, 2019 1. Present Value of Projected Benefits (PVB) $4,746,244 $5,032,033 2. Entry Age Normal Accrued Liability (AL) 1,446,497 1,892,664 3. Plan’s Market Value of Assets (MVA) 1,330,795 1,724,042 4. Unfunded Accrued Liability (UAL) [(2) - (3)] 115,702 168,622 5. Funded Ratio [(3) / (2)] 92.0% 91.1% This measure of funded status is an assessment of the need for future employer contributions based on the selected actuarial cost method used to fund the plan. The UAL is the present value of future employer contributions for service that has already been earned and is in addition to future normal cost contributions for active members. For a measure of funded status that is appropriate for assessing the sufficiency of plan assets to cover estimated termination liabilities, please see “Hypothetical Termination Liability” in the “Risk Analysis” section. Projected Employer Contributions The table below shows the required and projected employer contributions (before cost sharing) for the next six fiscal years. The projection assumes that all actuarial assumptions will be realized and that no further changes to assumptions, contributions, benefits, or funding will occur during the projection period. As of the preparation date of this report, the year to date return for the 2019-20 fiscal year was well below the 7% assumed return. Actual contribution rates during this projection period could be significantly higher than the projection shown below. Required Contribution Projected Future Employer Contributions (Assumes 7.00% Return for Fiscal Year 2019-20) Fiscal Year 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 Normal Cost % 8.65% 8.7% 8.7% 8.7% 8.7% 8.7% UAL Payment $17,301 $18,000 $19,000 $19,000 $20,000 $21,000 For some sources of UAL, the change in UAL is amortized using a 5-year ramp up. For more information, please see “Amortization of the Unfunded Actuarial Accrued Liability” under “Actuarial Methods” in Appendix A. This method phases in the impact of the change in UAL over a 5-year period in order to reduce employer cost volatility from year to year. As a result of this methodology, dramatic changes in the required employer contributions in any one year are less likely. However, required contributions can change gradually and significantly over the next five years. In years when there is a large increase in UAL, the relatively small amortization payments during the ramp up period could result in a funded ratio that is projected to decrease initially while the contribut ion impact of the increase in the UAL is phased in. For projected contributions under alternate investment return scenarios, please see the “Future Investment Return Scenarios” in the “Risk Analysis” section. C-12 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 7 Cost Actuarial Determination of Pension Plan Cost Contributions to fund the pension plan are comprised of two components: • The Normal Cost, expressed as a percentage of total active payroll • The Amortization of the Unfunded Accrued Liability (UAL), expressed as a dollar amount For fiscal years prior to FY 2016-17, the Amortization of UAL component was expressed as a percentage of total active payroll. Starting with FY 2016-17, the Amortization of UAL component was expressed as a dollar amount and invoiced on a monthly basis. There continues to be an option to prepay this amount during July of each fiscal year. The Normal Cost component will continue to be expressed as a percentage of active payroll with employer and employee contributions payable as part of the regular payroll reporting process. The determination of both components requires complex actuarial calculations. The calculations are based on a set of actuarial assumptions which can be divided into two categories: • Demographic assumptions (e.g., mortality rates, retirement rates, employment termination rates, disability rates) • Economic assumptions (e.g., future investment earnings, inflation, salary growth rates) These assumptions reflect CalPERS’ best estimate of future experience of the plan and are long term in nature. We recognize that all assumptions will not be realized in any given year. For example, the investment earnings at CalPERS have averaged 5.8% over the 20 years ending June 30, 2019, yet individual fiscal year returns have ranged from -23.6% to +20.7%. In addition, CalPERS reviews all actuarial assumptions by conducting in-depth experience studies every four years, with the most recent experience study completed in 2017. C-13 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 8 Changes Since the Prior Year’s Valuation Benefits The standard actuarial practice at CalPERS is to recognize mandated legislative benefit changes in the first annual valuation following the effective date of the legislation. Voluntary benefit changes by plan amendment are generally included in the first valuation that is prepared after the amendment becomes effective, even if the valuation date is prior to the effective date of the amendment. This valuation generally reflects plan changes by amendments effective before the date of the report. Please refer to the “Plan’s Major Benefit Options” and Appendix B for a summary of the plan provisions used in this valuation. The effect of any mandated benefit changes or plan amendments on the unfunded liability is shown in the “(Gain)/Loss Analysis” and the effect on the employer contribution is shown in the “Reconciliation of Required Employer Contributions.” It should be noted that no change in liability or contribution is shown for any plan changes which were already included in the prior year’s valuation. Actuarial Methods and Assumptions The CalPERS Board of Administration adopted a new amortization policy effective with this actuarial valuation. The new policy shortens the period over which actuarial gains and losses are amortized from 30 years to 20 years with the payments computed as a level dollar amount. In addition, the new policy does not utilize a 5- year ramp-up and ramp-down on UAL bases attributable to assumption and method changes and non- investment gains/losses. The new policy also does not utilize a 5-year ramp-down on investment gains/losses. These changes will apply only to new UAL bases established on or after June 30, 2019. For inactive employers, the new amortization policy imposes a maximum amortization period of 15 years for all unfunded accrued liabilities effective June 30, 2017. Furthermore, the plan actuary has the ability to shorten the amortization period on any valuation date based on the life expectancy of plan members and projected cash flow needs to the plan. Subsequent Events The contribution requirements determined in this actuarial valuation report are based on demographic and financial information as of June 30, 2019. Changes in the value of assets subsequent to that date are not reflected. Investment returns below the assumed rate of return will increase future required contributions while investment returns above the assumed rate of return will decrease future required contributions. The projected employer contributions on Page 6 are calculated under the assumption that the discount rate remains at 7.0% going forward and that the realized rate of return on assets for fiscal year 2019-20 is 7.0%. This actuarial valuation report reflects statutory changes, regulatory changes and CalPERS Board actions through January 2020. Any subsequent changes or actions are not reflected. C-14 Assets and Liabilities • Breakdown of Entry Age Normal Accrued Liability • Allocation of Plan’s Share of Pool’s Experience/Assumption Change • Development of Plan’s Share of Pool’s Market Value of Assets • Schedule of Plan’s Amortization Bases • Amortization Schedule and Alternatives • Employer Contribution History • Funding History C-15 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 10 Breakdown of Entry Age Normal Accrued Liability Active Members $1,396,424 Transferred Members 139,049 Terminated Members 103,737 Members and Beneficiaries Receiving Payments 253,454 Total $1,892,664 Allocation of Plan’s Share of Pool’s Experience/Assumption Change It is the policy of CalPERS to ensure equity within the risk pools by allocating the pool’s experience gains/losses and assumption changes in a manner that treats each employer equitably and maintains benefit security for the members of the System while minimizing substantial variations in employer contributions. The Pool’s experience gains/losses and impact of assumption/method changes is allocated to the plan as follows: 1. Plan’s Accrued Liability $1,892,664 2. Projected UAL balance at 6/30/2019 152,855 3. Pool’s Accrued Liability1 18,394,114,919 4. Sum of Pool’s Individual Plan UAL Balances at 6/30/20191 4,268,374,183 5. Pool’s 2018/19 Investment (Gain)/Loss1 68,711,010 6. Pool’s 2018/19 Non-Investment (Gain)/Loss1 70,985,020 7. Plan’s Share of Pool’s Investment (Gain)/Loss: [(1) - (2)] ÷ [(3) - (4)] × (5) 8,463 8. Plan’s Share of Pool’s Non-Investment (Gain)/Loss: (1) ÷ (3) × (6) 7,304 9. Plan’s New (Gain)/Loss as of 6/30/2019: (7) + (8) 15,767 10. Other Changes in the UAL2 0 1 Does not include plans that transferred to Pool on the valuation date. 2 May include Golden Handshakes, Service Purchases, etc. See Schedule of Plan’s Amortization Bases for details. Development of the Plan’s Share of Pool’s Market Value of Assets 11. Plan’s UAL: (2) + (9) + (10) $168,622 12. Plan’s Share of Pool’s MVA: (1) - (11) $1,724,042 C-16 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 11 Schedule of Plan’s Amortization Bases Note that there is a two-year lag between the valuation date and the start of the contribution fiscal year. • The assets, liabilities, and funded status of the plan are measured as of the valuation date: June 30, 2019. • The required employer contributions determined by the valuation are for the fiscal year beginning two years after the valuation date: fiscal year 2021-22. This two-year lag is necessary due to the amount of time needed to extract and test the membership and financial data, a nd the need to provide public agencies with their required employer contribution well in advance of the start of the fiscal year. The Unfunded Accrued Liability (UAL) is used to determine the employer contribution and therefore must be rolled forward two years from the valuation date to the first day of the fiscal year for which the contribution is being determined. The UAL is rolled forward each year by subtracting the expected payment on the UAL for the fiscal year and adjusting for interest. The expected payment on the UAL for a fiscal year is equal to the Expected Employer Contribution for the fiscal year minus the Expected Normal Cost for the year. The Employer Contribution for the first fiscal year is determined by the actuarial valuation two ye ars ago and the contribution for the second year is from the actuarial valuation one year ago. Additional discretionary payments are reflected in the Expected Payments column in the fiscal year they were made by the agency. Reason for Base Date Est. Ramp Level 2021-22 Ramp Shape Escala- tion Rate Amort. Period Balance 6/30/19 Expected Payment 2019-20 Balance 6/30/20 Expected Payment 2020-21 Balance 6/30/21 Minimum Required Payment 2021-22 Fresh Start 6/30/18 No Ramp 2.75% 14 152,855 (12,191) 176,165 15,889 172,061 16,326 Non-Investment (Gain)/Loss 6/30/19 No Ramp 0.00% 20 7,304 0 7,815 0 8,362 763 Investment (Gain)/Loss 6/30/19 20% Up Only 0.00% 20 8,463 0 9,055 0 9,689 212 Total 168,622 (12,191) 193,035 15,889 190,112 17,301 The (gain)/loss bases are the plan’s allocated share of the risk pool’s (gain)/loss for the fiscal year as disclosed in “Allocation of Plan ’s Share of Pool’s Experience/Assumption Change” earlier in this section. These (gain)/loss bases will be amortized in accordance with the CalPERS amortization policy in effect at the time the base was established. C-17 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 12 Amortization Schedule and Alternatives The amortization schedule on the previous page shows the minimum contributions required according to the CalPERS amortization policy. Many agencies have expressed interest in paying off the unfunded accrued liabilities more quickly than required. As such, we have provided alternative amortization schedules to help analyze the current amortization schedule and illustrate the potential savings of accelerating unfunded liability payments. Shown on the following page are future year amortization payments based on 1) the current amortization schedule reflecting the individual bases and remaining periods shown on the previous page, and 2) alternative “fresh start” amortization schedules using two sample periods that would both result in interest savings relative to the current amortization schedule. The Current Amortization Schedule typically contains both positive and negative bases. Positive bases result from plan changes, assumption changes, method changes or plan experience that increase unfunded liability. Negative bases result from plan changes, assumption changes, method changes, or plan experience that decrease unfunded liability. The combination of positive and negative bases within an amortization schedule can result in unusual or problematic circumstances in future years, such as: • When a negative payment would be required on a positive unfunded actuarial liability; or • When the payment would completely amortize the total unfunded liability in a very short time period, and results in a large change in the employer contribution requirement. In any year when one of the above scenarios occurs, the actuary will consider corrective action such as replacing the existing unfunded liability bases with a single “fresh start” base and amortizing it over a reasonable period. The Current Amortization Schedule on the following page may appear to show that, based on the current amortization bases, one of the above scenarios will occur at some point in the future. It is impossible to know today whether such a scenario will in fact arise since there will be additional bases added to the amortization schedule in each future year. Should such a scenario arise in any future year, the actuary will take appropriate action based on guidelines in the CalPERS amortization policy. C-18 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 13 Amortization Schedule and Alternatives Alternate Schedules Current Amortization Schedule 15 Year Amortization 10 Year Amortization Date Balance Payment Balance Payment Balance Payment 6/30/2021 190,112 17,301 190,112 20,179 190,112 26,167 6/30/2022 185,524 17,962 182,547 20,179 176,352 26,167 6/30/2023 179,931 18,635 174,452 20,179 161,629 26,167 6/30/2024 173,251 19,320 165,790 20,179 145,876 26,167 6/30/2025 165,393 20,019 156,522 20,179 129,020 26,167 6/30/2026 156,263 20,520 146,605 20,179 110,984 26,168 6/30/2027 145,975 21,034 135,994 20,179 91,684 26,167 6/30/2028 134,435 21,562 124,640 20,179 71,035 26,168 6/30/2029 121,542 22,105 112,491 20,179 48,939 26,167 6/30/2030 107,185 22,663 99,492 20,179 25,297 26,167 6/30/2031 91,245 23,236 85,583 20,179 6/30/2032 73,596 23,825 70,700 20,178 6/30/2033 54,103 24,431 54,777 20,179 6/30/2034 32,619 25,052 37,738 20,178 6/30/2035 8,989 1,824 19,507 20,178 6/30/2036 7,731 1,822 6/30/2037 6,387 1,822 6/30/2038 4,949 1,823 6/30/2039 3,410 1,824 6/30/2040 1,762 1,822 6/30/2041 6/30/2042 6/30/2043 6/30/2044 6/30/2045 6/30/2046 6/30/2047 6/30/2048 6/30/2049 6/30/2050 Total 308,602 302,682 261,672 Interest Paid 118,490 112,570 71,560 Estimated Savings 5,920 46,930 C-19 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 14 Employer Contribution History The table below provides a recent history of the required employer contributions for the plan, as determined by the annual actuarial valuation. It does not account for prepayments or benefit changes made during a fiscal year. [ Fiscal Year Employer Normal Cost Unfunded Liability Payment ($) 2016 - 17 7.159% $0 2017 - 18 7.200% 198 2018 - 19 7.634% 1,413 2019 - 20 8.081% 3,107 2020 - 21 8.794% 15,889 2021 - 22 8.65% 17,301 Funding History The funding history below shows the plan’s actuarial accrued liability, share of the pool’s market value of assets, share of the pool’s unfunded liability, funded ratio, and annual covered payroll. Valuation Date Accrued Liability (AL) Share of Pool’s Market Value of Assets (MVA) Plan’s Share of Pool’s Unfunded Liability Funded Ratio Annual Covered Payroll 06/30/2013 $10,846 $9,146 $1,700 84.3% $193,164 06/30/2014 112,112 117,095 (4,983) 104.4% 789,242 06/30/2015 267,196 258,118 9,078 96.6% 1,214,520 06/30/2016 557,863 503,485 54,378 90.3% 1,636,677 06/30/2017 945,109 895,554 49,555 94.8% 1,905,466 06/30/2018 1,446,497 1,330,795 115,702 92.0% 1,979,072 06/30/2019 1,892,664 1,724,042 168,622 91.1% 1,933,912 C-20 Risk Analysis • Future Investment Return Scenarios • Discount Rate Sensitivity • Mortality Rate Sensitivity • Maturity Measures • Maturity Measures History • Hypothetical Termination Liability C-21 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 16 Future Investment Return Scenarios Analysis was performed to determine the effects of various future investment returns on required employer contributions. The projections below provide a range of results based on five investment return scenarios assumed to occur during the next four fiscal years (2019-20, 2020-21, 2021-22 and 2022-23). The projections also assume that all other actuarial assumptions will be realized and that no further changes to assumptions, contributions, benefits, or funding will occur. For fiscal years 2019-20, 2020-21, 2021-22, and 2022-23, each scenario assumes an alternate fixed annual return. The fixed return assumptions for the five scenarios are 1.0%, 4.0%, 7.0%, 9.0% and 12.0%. These alternate investment returns were chosen based on stochastic analysis of possible future investment returns over the four-year period ending June 30, 2023. Using the expected returns and volatility of the asset classes in which the funds are invested, we produced five thousand stochastic outcomes for this period based on the most recently completed Asset Liability Management process. We then selected annual returns that approximate the 5th, 25th, 50th, 75th, and 95th percentiles for these outcomes. For example, of all the 4 -year outcomes generated in the stochastic analysis, approximately 25% had an average annual return of 4.0% or less. Required contributions outside of this range are also possible. In particular, whereas it is unlikely that investment returns will average less than 1.0% or greater than 12.0% over this four-year period, the likelihood of a single investment return less than 1.0% or greater than 12.0% in any given year is much greater. Assumed Annual Return From 2019-20 through 2022-23 Projected Employer Contributions 2022-23 2023-24 2024-25 2025-26 1.0% Normal Cost 8.7% 8.7% 8.7% 8.7% UAL Contribution $21,000 $26,000 $35,000 $46,000 4.0% Normal Cost 8.7% 8.7% 8.7% 8.7% UAL Contribution $19,000 $23,000 $27,000 $33,000 7.0% Normal Cost 8.7% 8.7% 8.7% 8.7% UAL Contribution $18,000 $19,000 $19,000 $20,000 9.0% Normal Cost 8.8% 9.0% 9.2% 9.4% UAL Contribution $17,000 $17,000 $16,000 $14,000 12.0% Normal Cost 8.8% 9.0% 9.2% 9.4% UAL Contribution $16,000 $13,000 $0 $0 These projections reflect the impact of the CalPERS risk mitigation policy, which reduces the discount rate when investment returns exceed specified trigger points. C-22 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 17 Discount Rate Sensitivity The discount rate assumption is calculated as the sum of the assumed real rate of return and the assumed annual price inflation, currently 4.50% and 2.50%, respectively. Changing either the price inflation assumption or the real rate of return assumption will change the discount rate. The sensitivity of the valuation results to the discount rate assumption depends on which component of the discount rate is changed. Shown below are various valuation results as of June 30, 2019 assuming alternate discount rates by changing the two components independently. Results are shown using the current discount rate of 7.0% as well as alternate discount rates of 6.0% and 8.0%. The rates of 6.0% and 8.0% were selected since they illustrate the impact of a 1.0% increase or decrease to the 7.0% assumption. Sensitivity to the Real Rate of Return Assumption As of June 30, 2019 1% Lower Real Return Rate Current Assumptions 1% Higher Real Return Rate Discount Rate 6.0% 7.0% 8.0% Inflation 2.5% 2.5% 2.5% Real Rate of Return 3.5% 4.5% 5.5% a) Total Normal Cost 19.24% 15.57% 12.74% b) Accrued Liability $2,235,230 $1,892,664 $1,617,279 c) Market Value of Assets $1,724,042 $1,724,042 $1,724,042 d) Unfunded Liability/(Surplus) [(b) - (c)] $511,188 $168,622 ($106,763) e) Funded Status 77.1% 91.1% 106.6% Sensitivity to the Price Inflation Assumption As of June 30, 2019 1% Lower Inflation Rate Current Assumptions 1% Higher Inflation Rate Discount Rate 6.0% 7.0% 8.0% Inflation 1.5% 2.5% 3.5% Real Rate of Return 4.5% 4.5% 4.5% a) Total Normal Cost 16.66% 15.57% 14.27% b) Accrued Liability $2,038,665 $1,892,664 $1,731,313 c) Market Value of Assets $1,724,042 $1,724,042 $1,724,042 d) Unfunded Liability/(Surplus) [(b) - (c)] $314,623 $168,622 $7,271 e) Funded Status 84.6% 91.1% 99.6% Mortality Rate Sensitivity The following table looks at the change in the June 30, 2019 plan costs and funded ratio under two different longevity scenarios, namely assuming post-retirement rates of mortality are 10% lower or 10% higher than our current mortality assumptions adopted in 2017. This type of analysis highlights the impact on the plan of improving or worsening mortality over the long-term. As of June 30, 2019 10% Lower Mortality Rates Current Assumptions 10% Higher Mortality Rates a) Total Normal Cost 15.85% 15.57% 15.31% b) Accrued Liability $1,929,350 $1,892,664 $1,858,660 c) Market Value of Assets $1,724,042 $1,724,042 $1,724,042 d) Unfunded Liability/(Surplus) [(b) - (c)] $205,308 $168,622 $134,618 e) Funded Status 89.4% 91.1% 92.8% C-23 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 18 Maturity Measures As pension plans mature they become more sensitive to risks. Understanding plan maturity and how it affects the ability of a pension plan to tolerate risk is important in understanding how the plan is impacted by investment return volatility, other economic variables and changes in longevity or other demographic as sumptions. One way to look at the maturity level of CalPERS and its plans is to look at the ratio of a plan’s retiree liability to its total liability. A pension plan in its infancy will have a very low ratio of retiree liability to total liability. As the plan matures, the ratio starts increasing. A mature plan will often have a ratio above 60%-65%. Ratio of Retiree Accrued Liability to Total Accrued Liability June 30, 2018 June 30, 2019 1. Retired Accrued Liability 252,729 253,454 2. Total Accrued Liability 1,446,497 1,892,664 3. Ratio of Retiree AL to Total AL [(1) / (2)] 0.18 0.13 Another measure of maturity level of CalPERS and its plans is to look at the ratio of actives to retirees, also called the Support Ratio. A pension plan in its infancy will have a very high ratio of active to retired members. As the plan matures, and members retire, the ratio starts declining. A mature plan will often have a ratio near or below one. The average support ratio for CalPERS public agency plans is 1.25. Support Ratio June 30, 2018 June 30, 2019 1. Number of Actives 17 16 2. Number of Retirees 2 2 3. Support Ratio [(1) / (2)] 8.50 8.00 C-24 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 19 Maturity Measures (Continued) The actuarial calculations supplied in this communication are based on various assumptions about long-term demographic and economic behavior. Unless these assumptions (e.g., terminations, deaths, disabilities, retirements, salary growth, and investment return) are exactly realized each year, there will be differences on a year-to-year basis. The year-to-year differences between actual experience and the assumptions are called actuarial gains and losses and serve to lower or raise required employer contributions from one year to the next. Therefore, employer contributions will inevitably fluctuate, especially due to the ups and downs of investment returns. Asset Volatility Ratio (AVR) Shown in the table below is the asset volatility ratio (AVR), which is the ratio of market value of assets to payroll. Plans that have higher AVR experience more volatile employer contributions (as a percentage of payroll) due to investment return. For example, a plan with an asset-to-payroll ratio of 8 may experience twice the contribution volatility due to investment return volatility than a plan with an asset-to-payroll ratio of 4. It should be noted that this ratio is a measure of the current situation. It increases over time but generally tends to stabilize as the plan matures. Liability Volatility Ratio (LVR) Also shown in the table below is the liability volatility ratio (LVR), which is the ratio of accrued liability to payroll. Plans that have a higher LVR experience more volatile employer contributions (as a percentage of payroll) due to investment return and changes in liability. For example, a plan with LVR ratio of 8 is expected to have twice the contribution volatility of a plan with LVR of 4. It should be noted that this ratio indicates a longer-term potential for contribution volatility. The AVR, described above, will tend to move closer to the LVR as a plan matures. Contribution Volatility June 30, 2018 June 30, 2019 1. Market Value of Assets $1,330,795 $1,724,042 2. Payroll 1,979,072 1,933,912 3. Asset Volatility Ratio (AVR) [(1) / (2)] 0.7 0.9 4. Accrued Liability $1,446,497 $1,892,664 5. Liability Volatility Ratio (LVR) [(4) / (2)] 0.7 1.0 Maturity Measures History Valuation Date Ratio of Retiree Accrued Liability to Total Accrued Liability Support Ratio Asset Volatility Ratio Liability Volatility Ratio 06/30/2017 0.00 N/A 0.5 0.5 06/30/2018 0.18 8.50 0.7 0.7 06/30/2019 0.13 8.00 0.9 1.0 C-25 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 20 Hypothetical Termination Liability The hypothetical termination liability is an estimate of the financial position of the plan had the contract with CalPERS been terminated as of June 30, 2019. The plan liability on a termination basis is calculated differently compared to the plan’s ongoing funding liability. For the hypothetical termination liability calculation, both compensation and service are frozen as of the valuation date and no future pay increases or service accruals are assumed. This measure of funded status is not appropriate for assessing the need for future employer contributions in the case of an ongoing plan, that is, for an employer that continues to provide CalPERS retirement benefits to active employees. A more conservative investment policy and asset allocation strategy was adopted by the CalPERS Board for the Terminated Agency Pool. The Terminated Agency Pool has limited funding sources since no future employer contributions will be made. Therefore, expected benefit payments are secured by risk-free assets and benefit security for members is increased while limiting the funding risk. However, this asset allocation has a lower expected rate of return than the PERF and consequently, a lower discount rate is assumed. The lower discount rate for the Terminated Agency Pool results in higher liabilities for terminated plans. The effective termination discount rate will depend on actual market rates of return for risk-free securities on the date of termination. As market discount rates are variable, the table below shows a range for the hypothetical termination liability based on the lowest and highest interest rates observed during an approximate 19-month period from 12 months before the valuation date to 7 months after. Market Value of Assets (MVA) Hypothetical Termination Liability1,2 @ 1.75% Funded Status Unfunded Termination Liability @ 1.75% Hypothetical Termination Liability1,2 @ 3.25% Funded Status Unfunded Termination Liability @ 3.25% $1,724,042 $4,146,014 41.6% $2,421,972 $3,062,179 56.3% $1,338,137 1 The hypothetical liabilities calculated above include a 5% mortality contingency load in accordance with Board policy. Other actuarial assumptions can be found in Appendix A of the Section 2 report. 2 The current discount rate assumption used for termination valuations is a weighted average of the 10-year and 30-year U.S. Treasury yields where the weights are based on matching asset and liability durations as of the termination date. The discount rates used in the table are based on 20-year Treasury bonds, rounded to the nearest quarter percentage point, which is a good proxy for most plans. The 20-year Treasury yield was 2.31% on June 30, 2019, and was 1.83% on January 31, 2020. In order to terminate the plan, you must first contact our Retirement Services Contract Unit to initiate a Resolution of Intent to Terminate. The completed Resolution will allow the plan actuary to give you a preliminary termination valuation with a more up-to-date estimate of the plan liabilities. CalPERS advises you to consult with the plan actuary before beginning this process. C-26 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 21 Participant Data The table below shows a summary of your plan’s member data upon which this valuation is based: June 30, 2018 June 30, 2019 Reported Payroll $1,979,072 $1,933,912 Projected Payroll for Contribution Purposes $2,146,877 $2,097,888 Number of Members Active 17 16 Transferred 3 5 Separated 2 3 Retired 2 2 List of Class 1 Benefit Provisions This plan has the additional Class 1 Benefit Provisions: • None C-27 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 22 Plan’s Major Benefit Options Shown below is a summary of the major optional benefits for which your agency has contracted. A description of principal standard and optional plan provisions is in Section 2. Benefit Group Member Category Misc Demographics Actives Yes Transfers/Separated Yes Receiving Yes Benefit Group Key 110655 Benefit Provision Benefit Formula 2% @ 60 Social Security Coverage No Full/Modified Full Employee Contribution Rate 7.00% Final Average Compensation Period Three Year Sick Leave Credit Yes Non-Industrial Disability Standard Industrial Disability No Pre-Retirement Death Benefits Optional Settlement 2 Yes 1959 Survivor Benefit Level Level 4 Special No Alternate (firefighters) No Post-Retirement Death Benefits Lump Sum $500 Survivor Allowance (PRSA) No COLA 2% C-28 CALPERS ACTUARIAL VALUATION - June 30, 2019 Miscellaneous Second Tier Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 23 Section 2 CALIFORNIA PUBLIC EM PLOYEES’ RETIREMENT SYSTEM Risk Pool Actuarial Valuation Information Section 2 may be found on the CalPERS website (www.calpers.ca.gov) in the Forms and Publications section C-29 California Public Employees’ Retirement System Actuarial Office 400 Q Street, Sacramento, CA 95811 |Phone: (916) 795-3000 | Fax: (916) 795-2744 888 CalPERS (or 888-225-7377) | TTY: (877) 249-7442 | www.calpers.ca.gov July 2020 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) Annual Valuation Report as of June 30, 2019 Dear Employer, Attached to this letter, you will find the June 30, 2019 actuarial valuation report of your CalPERS pension plan. Provided in this report is the determination of the minimum required employer contributions for fiscal year 2021-22. In addition, the report contains important information regarding the current financial status of the plan as well as projections and risk measures to aid in planning for the future. Because this plan is in a risk pool, the following valuation report has been separated into two sections: • Section 1 contains specific information for the plan including the development of the current and projected employer contributions, and • Section 2 contains the Risk Pool Actuarial Valuation appropriate to the plan as of June 30, 2019. Section 2 can be found on the CalPERS website (www.calpers.ca.gov). From the home page, go to “Forms & Publications” and select “View All”. In the search box, enter “Risk Pool” and from the results list download the Miscellaneous or Safety Risk Pool Actuarial Valuation Report as appropriate. Your June 30, 2019 actuarial valuation report contains important actuarial information about your pension plan at CalPERS. Your assigned CalPERS staff actuary, whose signature appears in the Actuarial Certification section on page 1, is available to discuss the report with you after August 1, 2020. Actuarial valuations are based on assumptions regarding future plan experience including investment return and payroll growth, eligibility for the types of benefits provided, and longevity among retirees. The CalPERS Board of Administration adopts these assumptions after considering the advice of CalPERS actuarial and investment teams and other professionals. Each actuarial valuation reflects all prior differences between actual and assumed experience and adjusts the contribution rates as needed. This valuation is based on an investment return assumption of 7.0% which was adopted by the board in December 2016. Other assumptions used in this report are those recommended in the CalPERS Experience Study and Review of Actuarial Assumptions report from December 2017. Required Contribution The exhibit below displays the minimum employer contributions, before any cost sharing, for fiscal year 2021-22 along with estimates of the required contributions for fiscal year 2022-23. Member contributions other than cost sharing (whether paid by the employer or the employee) are in addition to the results shown below. The employer contributions in this report do not reflect any cost sharing arrangements you may have with your employees. Fiscal Year Employer Normal Cost Rate Employer Amortization of Unfunded Accrued Liability PEPRA Employee Rate 2021-22 7.59% $13,868 6.75% Projected Results 2022-23 7.6% $14,000 TBD D-1 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) Annual Valuation Report as of June 30, 2019 Page 2 The actual investment return for fiscal year 2019-20 was not known at the time this report was prepared. The projections above assume the investment return for that year would be 7.00%. To the extent the actual investment return for fiscal year 2019-20 differs from 7.00%, the actual contribution requirements for fiscal year 2022-23 will differ from those shown above. For additional details regarding the assumptions and methods used for these projections please refer to the “Projected Employer Contributions” in the “Highlights and Executive Summary” section. This section also contains projected required contributions through fiscal year 2026-27. Changes from Previous Year’s Valuation The CalPERS Board of Administration has adopted a new amortization policy effective with the June 30, 2019 actuarial valuation. The new policy shortens the period over which actuarial gains and losses are amortized from 30 years to 20 years with the payments computed as a level dollar amount. In addition, the new policy does not utilize a 5-year ramp- up and ramp-down on Unfunded Accrued Liability (UAL) bases attributable to assumption and method changes and non-investment gains/losses. The new policy does not utilize a 5-year ramp-down on investment gains/losses. These changes apply only to new UAL bases established on or after June 30, 2019. Further descriptions of general changes are included in the “Highlights and Executive Summary” section and in Appendix A, “Actuarial Methods and Assumptions.” The effects of the changes on the required contributions are included in the “Reconciliation of Required Employer Contributions” section. Questions We understand that you might have some questions about these results. While we are very interested in discussing these results with your agency, in the interest of allowing us to give every public agency their results, we ask that you wait until after August 1, 2020 to contact us with actuarial questions. If you have other questions, you may call the Customer Contact Center at (888)-CalPERS or (888-225-7377). Sincerely, SCOTT TERANDO Chief Actuary D-2 Actuarial Valuation as of June 30, 2019 for the PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) Required Contributions for Fiscal Year July 1, 2021 - June 30, 2022 D-3 Table of Contents Section 1 – Plan Specific Information Section 2 – Risk Pool Actuarial Valuation I nformation D-4 Section 1 CALIFORNIA PUBLIC EM PLOYEES’ RETIREMENT SYSTEM Plan Specific Information for the PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes (CalPERS ID: 3846845523) (Valuation Rate Plan ID: 26567) D-5 Rate Plan belonging to the Miscellaneous Risk Pool Table of Contents Actuarial Certification 1 Highlights and Executive Summary Introduction 3 Purpose of Section 1 3 Required Employer Contributions 4 Additional Discretionary Employer Contributions 5 Plan’s Funded Status 6 Projected Employer Contributions 6 Cost 7 Changes Since the Prior Year’s Valuation 8 Subsequent Events 8 Assets and Liabilities Breakdown of Entry Age Normal Accrued Liability 10 Allocation of Plan’s Share of Pool’s Experience/Assumption Change 10 Development of Plan’s Share of Pool’s Market Value of Assets 10 Schedule of Plan’s Amortization Bases 11 Amortization Schedule and Alternatives 12 Employer Contribution History 14 Funding History 14 Risk Analysis Future Investment Return Scenarios 16 Discount Rate Sensitivity 17 Mortality Rate Sensitivity 17 Maturity Measures 18 Maturity Measures History 19 Hypothetical Termination Liability 20 Participant Data 21 List of Class 1 Benefit Provisions 21 Plan’s Major Benefit Options 22 PEPRA Member Contribution Rates 23 D-6 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 1 Actuarial Certification Section 1 of this report is based on the member and financial data contained in our records as of June 30, 2019 which was provided by your agency and the benefit provisions under your contract with CalPERS. Section 2 of this report is based on the member and financial data as of June 30, 2019 provided by employers participating in the Miscellaneous Risk Pool to which the plan belongs and benefit provisions under the CalPERS contracts for those agencies. As set forth in Section 2 of this report, the pool actuaries have certified that, in their opinion, the valuation of the risk pool containing your PEPRA Miscellaneous Plan has been performed in accordance with generally accepted actuarial principles consistent with standards of practice prescribed by the Actuarial Standards Board, and that the assumptions and methods are internally consistent and reasonable for the risk pool as of the date of this valuation and as prescribed by the CalPERS Board of Administration according to pro visions set forth in the California Public Employees’ Retirement Law. Having relied upon the information set forth in Section 2 of this report and based on the census and benefit provision information for the plan, it is my opinion as the plan actuary that the Unfunded Accrued Liability amortization bases as of June 30, 2019 and employer contribution as of July 1, 2021 have been properly and accurately determined in accordance with the principles and standards stated above. The undersigned is an actuary for CalPERS, a member of both the American Academy of Actuaries and Society of Actuaries and meets the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. STUART BENNETT, ASA, MAAA Senior Pension Actuary, CalPERS D-7 Highlights and Executive Summary • Introduction • Purpose of Section 1 • Required Employer Contributions • Additional Discretionary Employer Contributions • Plan’s Funded Status • Projected Employer Contributions • Cost • Changes Since the Prior Year’s Valuation • Subsequent Events D-8 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 3 Introduction This report presents the results of the June 30, 2019 actuarial valuation of the PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes of the California Public Employees’ Retirement System (CalPERS). This actuarial valuation sets the required employer contributions for fiscal year 2021-22. Purpose of Section 1 This Section 1 report for the PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes of CalPERS was prepared by the plan actuary in order to: • Set forth the assets and accrued liabilities of this plan as of June 30, 2019; • Determine the minimum required employer contribution for this plan for the fiscal year July 1, 2021 through June 30, 2022; and • Provide actuarial information as of June 30, 2019 to the CalPERS Board of Administration and other interested parties. The pension funding information presented in this report should not be used in financial reports subject to GASB Statement No. 68 for a Cost Sharing Employer Defined Benefit Pension Plan. A separate accounting valuation report for such purposes is available from CalPERS and details for ordering are available on our website. The measurements shown in this actuarial valuation may not be applicable for other purposes. The employer should contact their actuary before disseminating any portion of this report for any reason that is not explicitly described above. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; changes in actuarial policies; and changes in plan provisions or applicable law. Assessment and Disclosure of Risk This report includes the following risk disclosures consistent with the recommendations of Actuarial Standards of Practice No. 51 and recommended by the California Actuarial Advisory Panel (CAAP) in the Model Disclosure Elements document: • A “Scenario Test,” projecting future results under different investment income returns. • A “Sensitivity Analysis,” showing the impact on current valuation results using alternative discount rates of 6.0% and 8.0%. • A “Sensitivity Analysis,” showing the impact on current valuation results assuming rates of mortality are 10% lower or 10% higher than our current mortality assumptions adopted in 2017. • Plan maturity measures indicating how sensitive a plan may be to the risks noted above. D-9 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 4 Required Employer Contributions Fiscal Year Required Employer Contributions 2021-22 Employer Normal Cost Rate 7.59% Plus, Either 1) Monthly Employer Dollar UAL Payment $1,155.67 Or 2) Annual UAL Prepayment Option* $13,407 The total minimum required employer contribution is the sum of the Plan’s Employer Normal Cost Rate (expressed as a percentage of payroll) plus the Employer Unfunded Accrued Liability (UAL) Contribution Amount (billed monthly in dollars). * Only the UAL portion of the employer contribution can be prepaid (which must be received in full no later than July 31). Any prepayment totaling over $5 million requires a 72-hour notice email to FCSD_public_agency_wires@calpers.ca.gov. Plan Normal Cost contributions will be made as part of the payroll reporting process. If there is contractual cost sharing or other change, this amount will change. In accordance with Sections 20537 and 20572 of the Public Employees’ Retirement Law, if a contracting agency fails to remit the required contributions when due, interest and penalties may apply. Fiscal Year Fiscal Year 2020-21 2021-22 Development of Normal Cost as a Percentage of Payroll1 Base Total Normal Cost for Formula 14.482% 14.34% Surcharge for Class 1 Benefits2 None 0.000% 0.00% Phase out of Normal Cost Difference3 0.000% 0.00% Plan’s Total Normal Cost 14.482% 14.34% Plan's Employee Contribution Rate4 6.750% 6.75% Employer Normal Cost Rate 7.732% 7.59% Projected Payroll for the Contribution Fiscal Year $2,627,397 $2,628,350 Estimated Employer Contributions Based on Projected Payroll Plan’s Estimated Employer Normal Cost $203,150 $199,492 Plan’s Payment on Amortization Bases5 12,837 13,868 % of Projected Payroll (illustrative only) 0.489% 0.53% Estimated Total Employer Contribution $215,987 $213,360 % of Projected Payroll (illustrative only) 8.221% 8.12% 1 The results shown for fiscal year 2020-21 reflect the prior year valuation and may not take into account any lump sum payment, side fund payoff, or rate adjustment made after April 30, 2019. 2 Section 2 of this report contains a list of Class 1 benefits and corresponding surcharges for each benefit. 3 The normal cost difference is phased out over a five-year period. The phase out of normal cost difference is 100% for the first year of pooling and is incrementally reduced by 20% of the original normal cost difference for each subsequent year. This is non-zero only for plans that joined a pool within the past 5 years. Most plans joined a pool June 30, 2003, when risk pooling was implemented. 4 For detail regarding the determination of the required PEPRA employee contribution rate see Section on PEPRA Member Contribution Rates. 5 See Schedule of Plan’s Amortization Bases. D-10 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 5 Additional Discretionary Employer Contributions The minimum required employer contribution towards the Unfunded Accrued Liability (UAL) for this rate plan for the 2021-22 fiscal year is $13,868. CalPERS allows employers to make additional discretionary payments (ADPs) at any time and in any amount. These optional payments serve to reduce the UAL and future required contributions and can result in significant long-term savings. Employers can also use ADPs to stabilize annual contributions as a fixed dollar amount, percent of payroll or percent of revenue. Provided below are select ADP options for consideration. Making such an ADP during fiscal year 2021-22 does not require an ADP be made in any future year, nor does it change the remaining amortization period of any portion of unfunded liability. For information on permanent changes to amortization periods, see the “Amortization Schedule and Alternatives” section of the report. If you are considering making an ADP, please contact your actuary for additional information. Minimum Required Employer Contribution for Fiscal Year 2021-22 Estimated Normal Cost Minimum UAL Payment ADP Total UAL Contribution Estimated Total Contribution $199,492 $13,868 $0 $13,868 $213,360 Alternative Fiscal Year 2021-22 Employer Contributions for Greater UAL Reduction Funding Target Estimated Normal Cost Minimum UAL Payment ADP1 Total UAL Contribution Estimated Total Contribution 15 years $199,492 $13,868 $2,218 $16,086 $215,578 10 years $199,492 $13,868 $6,991 $20,859 $220,351 5 years $199,492 $13,868 $21,863 $35,731 $235,223 1 The ADP amounts are assumed to be made in the middle of the fiscal year. A payment made earlier or later in the fiscal year would have to be less or more than the amount shown to have the same effect on the UAL amortization. Note that the calculations above are based on the projected Unfunded Accrued Liability as of June 30, 2021 as determined in the June 30, 2019 actuarial valuation. New unfunded liabilities can emerge in future years due to assumption or method changes, changes in plan provisions and actuarial experience different than assumed. Making an ADP illustrated above for the indicated number of years will not result in a plan that is exactly 100% funded in the indicated number of years. Valuation results will vary from one year to the next and can diverge significantly from projections over a period of several years. D-11 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 6 Plan’s Funded Status June 30, 2018 June 30, 2019 1. Present Value of Projected Benefits (PVB) $4,595,581 $4,875,582 2. Entry Age Normal Accrued Liability (AL) 987,801 1,320,076 3. Plan’s Market Value of Assets (MVA) 907,088 1,192,048 4. Unfunded Accrued Liability (UAL) [(2) - (3)] 80,713 128,028 5. Funded Ratio [(3) / (2)] 91.8% 90.3% This measure of funded status is an assessment of the need for future employer contributions based on the selected actuarial cost method used to fund the plan. The UAL is the present value of future employer contributions for service that has already been earned and is in addition to future normal cost contributions for active members. For a measure of funded status that is appropriate for assessing the sufficiency of plan assets to cover estimated termination liabilities, please see “Hypothetical Termination Liability” in the “Risk Analysis” section. Projected Employer Contributions The table below shows the required and projected employer contributions (before cost sharing) for the next six fiscal years. The projection assumes that all actuarial assumptions will be realized and that no further changes to assumptions, contributions, benefits, or funding will occur during the projection period. As of the preparation date of this report, the year to date return for the 2019-20 fiscal year was well below the 7% assumed return. Actual contribution rates during this projection period could be significantly higher than the projection shown below. Required Contribution Projected Future Employer Contributions (Assumes 7.00% Return for Fiscal Year 2019-20) Fiscal Year 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 Normal Cost % 7.59% 7.6% 7.6% 7.6% 7.6% 7.6% UAL Payment $13,868 $14,000 $15,000 $15,000 $16,000 $16,000 For some sources of UAL, the change in UAL is amortized using a 5-year ramp up. For more information, please see “Amortization of the Unfunded Actuarial Accrued Liability” under “Actuarial Methods” in Appendix A. This method phases in the impact of the change in UAL over a 5-year period in order to reduce employer cost volatility from year to year. As a result of this methodology, dramatic changes in the required employer contributions in any one year are less likely. However, required contributions can change gradually and significantly over the next five years. In years when there is a large increase in UAL, the relatively small amortization payments during the ramp up period could result in a funded ratio that is projected to decrease initially while the contribut ion impact of the increase in the UAL is phased in. For projected contributions under alternate investment return scenarios, please see the “Future Investment Return Scenarios” in the “Risk Analysis” section. D-12 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 7 Cost Actuarial Determination of Pension Plan Cost Contributions to fund the pension plan are comprised of two components: • The Normal Cost, expressed as a percentage of total active payroll • The Amortization of the Unfunded Accrued Liability (UAL), expressed as a dollar amount For fiscal years prior to FY 2016-17, the Amortization of UAL component was expressed as a percentage of total active payroll. Starting with FY 2016-17, the Amortization of UAL component was expressed as a dollar amount and invoiced on a monthly basis. There continues to be an option to prepay this amount during July of each fiscal year. The Normal Cost component will continue to be expressed as a percentage of active payroll with employer and employee contributions payable as part of the regular payroll reporting process. The determination of both components requires complex actuarial calculations. The calculations are based on a set of actuarial assumptions which can be divided into two categories: • Demographic assumptions (e.g., mortality rates, retirement rates, employment termination rates, disability rates) • Economic assumptions (e.g., future investment earnings, inflation, salary growth rates) These assumptions reflect CalPERS’ best estimate of future experience of the plan and are long term in nature. We recognize that all assumptions will not be realized in any given year. For example, the investment earnings at CalPERS have averaged 5.8% over the 20 years ending June 30, 2019, yet individual fiscal year returns have ranged from -23.6% to +20.7%. In addition, CalPERS reviews all actuarial assumptions by conducting in-depth experience studies every four years, with the most recent experience study completed in 2017. D-13 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 8 Changes Since the Prior Year’s Valuation Benefits The standard actuarial practice at CalPERS is to recognize mandated legislative benefit changes in the first annual valuation following the effective date of the legislation. Voluntary benefit changes by plan amendment are generally included in the first valuation that is prepared after the amendment becomes effective, even if the valuation date is prior to the effective date of the amendment. This valuation generally reflects plan changes by amendments effective before the date of the report. Please refer to the “Plan’s Major Benefit Options” and Appendix B for a summary of the plan provisions used in this valuation. The effect of any mandated benefit changes or plan amendments on the unfunded liability is shown in the “(Gain)/Loss Analysis” and the effect on the employer contribution is shown in the “Reconciliation of Required Employer Contributions.” It should be noted that no change in liability or contribution is shown for any plan changes which were already included in the prior year’s valuation. Actuarial Methods and Assumptions The CalPERS Board of Administration adopted a new amortization policy effective with this actuarial valuation. The new policy shortens the period over which actuarial gains and losses are amortized from 30 years to 20 years with the payments computed as a level dollar amount. In addition, the new policy does not utilize a 5- year ramp-up and ramp-down on UAL bases attributable to assumption and method changes and non- investment gains/losses. The new policy also does not utilize a 5-year ramp-down on investment gains/losses. These changes will apply only to new UAL bases established on or after June 30, 2019. For inactive employers, the new amortization policy imposes a maximum amortization period of 15 years for all unfunded accrued liabilities effective June 30, 2017. Furthermore, the plan actuary has the ability to shorten the amortization period on any valuation date based on the life expectancy of plan members and projected cash flow needs to the plan. Subsequent Events The contribution requirements determined in this actuarial valuation report are based on demographic and financial information as of June 30, 2019. Changes in the value of assets subsequent to that date are not reflected. Investment returns below the assumed rate of return will increase future required contributions while investment returns above the assumed rate of return will decrease future required contributions. The projected employer contributions on Page 6 are calculated under the assumption that the discount rate remains at 7.0% going forward and that the realized rate of return on assets for fiscal year 2019-20 is 7.0%. This actuarial valuation report reflects statutory changes, regulatory changes and CalPERS Board actions through January 2020. Any subsequent changes or actions are not reflected. D-14 Assets and Liabilities • Breakdown of Entry Age Normal Accrued Liability • Allocation of Plan’s Share of Pool’s Experience/Assumption Change • Development of Plan’s Share of Pool’s Market Value of Assets • Schedule of Plan’s Amortization Bases • Amortization Schedule and Alternatives • Employer Contribution History • Funding History D-15 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 10 Breakdown of Entry Age Normal Accrued Liability Active Members $998,853 Transferred Members 235,405 Terminated Members 85,818 Members and Beneficiaries Receiving Payments 0 Total $1,320,076 Allocation of Plan’s Share of Pool’s Experience/Assumption Change It is the policy of CalPERS to ensure equity within the risk pools by allocating the pool’s experience gains/losses and assumption changes in a manner that treats each employer equitably and maintains benefit security for the members of the System while minimizing substantial variations in employer contributions. The Pool’s experience gains/losses and impact of assumption/method changes is allocated to the plan as follows: 1. Plan’s Accrued Liability $1,320,076 2. Projected UAL balance at 6/30/2019 117,082 3. Pool’s Accrued Liability1 18,394,114,919 4. Sum of Pool’s Individual Plan UAL Balances at 6/30/20191 4,268,374,183 5. Pool’s 2018/19 Investment (Gain)/Loss1 68,711,010 6. Pool’s 2018/19 Non-Investment (Gain)/Loss1 70,985,020 7. Plan’s Share of Pool’s Investment (Gain)/Loss: [(1) - (2)] ÷ [(3) - (4)] × (5) 5,852 8. Plan’s Share of Pool’s Non-Investment (Gain)/Loss: (1) ÷ (3) × (6) 5,094 9. Plan’s New (Gain)/Loss as of 6/30/2019: (7) + (8) 10,946 10. Other Changes in the UAL2 0 1 Does not include plans that transferred to Pool on the valuation date. 2 May include Golden Handshakes, Service Purchases, etc. See Schedule of Plan’s Amortization Bases for details. Development of the Plan’s Share of Pool’s Market Value of Assets 11. Plan’s UAL: (2) + (9) + (10) $128,028 12. Plan’s Share of Pool’s MVA: (1) - (11) $1,192,048 D-16 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 11 Schedule of Plan’s Amortization Bases Note that there is a two-year lag between the valuation date and the start of the contribution fiscal year. • The assets, liabilities, and funded status of the plan are measured as of the valuation date: June 30, 2019. • The required employer contributions determined by the valuation are for the fiscal year beginning two years after the valuation date: fiscal year 2021-22. This two-year lag is necessary due to the amount of time needed to extract and test the membership and financial data, a nd the need to provide public agencies with their required employer contribution well in advance of the start of the fiscal year. The Unfunded Accrued Liability (UAL) is used to determine the employer contribution and therefore must be rolled forward two years from the valuation date to the first day of the fiscal year for which the contribution is being determined. The UAL is rolled forward each year by subtracting the expected payment on the UAL for the fiscal year and adjusting for interest. The expected payment on the UAL for a fiscal year is equal to the Expected Employer Contribution for the fiscal year minus the Expected Normal Cost for the year. The Employer Contribution for the first fiscal year is determined by the actuarial valuation two ye ars ago and the contribution for the second year is from the actuarial valuation one year ago. Additional discretionary payments are reflected in the Expected Payments column in the fiscal year they were made by the agency. Reason for Base Date Est. Ramp Level 2021-22 Ramp Shape Escala- tion Rate Amort. Period Balance 6/30/19 Expected Payment 2019-20 Balance 6/30/20 Expected Payment 2020-21 Balance 6/30/21 Minimum Required Payment 2021-22 Fresh Start 6/30/18 No Ramp 2.75% 14 117,082 (16,485) 142,330 12,837 139,014 13,190 Non-Investment (Gain)/Loss 6/30/19 No Ramp 0.00% 20 5,094 0 5,451 0 5,833 532 Investment (Gain)/Loss 6/30/19 20% Up Only 0.00% 20 5,852 0 6,262 0 6,700 146 Total 128,028 (16,485) 154,043 12,837 151,547 13,868 The (gain)/loss bases are the plan’s allocated share of the risk pool’s (gain)/loss for the fiscal year as disclosed in “Allocation of Plan ’s Share of Pool’s Experience/Assumption Change” earlier in this section. These (gain)/loss bases will be amortized in accordance with the CalPERS amortization policy in effect at the time the base was established. D-17 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 12 Amortization Schedule and Alternatives The amortization schedule on the previous page shows the minimum contributions required according to the CalPERS amortization policy. Many agencies have expressed interest in paying off the unfunded accrued liabilities more quickly than required. As such, we have provided alternative amortization schedules to help analyze the current amortization schedule and illustrate the potential savings of accelerating unfunded liability payments. Shown on the following page are future year amortization payments based on 1) the current amortization schedule reflecting the individual bases and remaining periods shown on the previous page, and 2) alternative “fresh start” amortization schedules using two sample periods that would both result in interest savings relative to the current amortization schedule. The Current Amortization Schedule typically contains both positive and negative bases. Positive bases result from plan changes, assumption changes, method changes or plan experience that increase unfunded liability. Negative bases result from plan changes, assumption changes, method changes, or plan experience that decrease unfunded liability. The combination of positive and negative bases within an amortization schedule can result in unusual or problematic circumstances in future years, such as: • When a negative payment would be required on a positive unfunded actuarial liability; or • When the payment would completely amortize the total unfunded liability in a very short time period, and results in a large change in the employer contribution requirement. In any year when one of the above scenarios occurs, the actuary will consider corrective action such as replacing the existing unfunded liability bases with a single “fresh start” base and amortizing it over a reasonable period. The Current Amortization Schedule on the following page may appear to show that, based on the current amortization bases, one of the above scenarios will occur at some point in the future. It is impossible to know today whether such a scenario will in fact arise since there will be additional bases added to the amortization schedule in each future year. Should such a scenario arise in any future year, the actuary will take appropriate action based on guidelines in the CalPERS amortization policy. D-18 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 13 Amortization Schedule and Alternatives Alternate Schedules Current Amortization Schedule 15 Year Amortization 10 Year Amortization Date Balance Payment Balance Payment Balance Payment 6/30/2021 151,547 13,868 151,547 16,086 151,547 20,859 6/30/2022 147,810 14,378 145,516 16,086 140,579 20,859 6/30/2023 143,284 14,897 139,063 16,086 128,843 20,859 6/30/2024 137,904 15,427 132,158 16,085 116,285 20,859 6/30/2025 131,600 15,967 124,771 16,086 102,848 20,859 6/30/2026 124,296 16,371 116,865 16,085 88,471 20,860 6/30/2027 116,063 16,787 108,407 16,086 73,086 20,859 6/30/2028 106,823 17,215 99,356 16,085 56,625 20,859 6/30/2029 96,493 17,651 89,672 16,085 39,012 20,859 6/30/2030 84,989 18,104 79,311 16,086 20,166 20,860 6/30/2031 72,212 18,567 68,223 16,085 6/30/2032 58,060 19,041 56,360 16,086 6/30/2033 42,428 19,530 43,666 16,086 6/30/2034 25,196 20,033 30,083 16,085 6/30/2035 6,237 1,265 15,550 16,085 6/30/2036 5,365 1,265 6/30/2037 4,432 1,265 6/30/2038 3,433 1,264 6/30/2039 2,366 1,266 6/30/2040 1,222 1,264 6/30/2041 6/30/2042 6/30/2043 6/30/2044 6/30/2045 6/30/2046 6/30/2047 6/30/2048 6/30/2049 6/30/2050 Total 245,425 241,283 208,592 Interest Paid 93,878 89,736 57,045 Estimated Savings 4,142 36,833 D-19 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 14 Employer Contribution History The table below provides a recent history of the required employer contributions for the plan, as determined by the annual actuarial valuation. It does not account for prepayments or benefit changes made during a fiscal year. [ Fiscal Year Employer Normal Cost Unfunded Liability Payment ($) 2016 - 17 6.555% $90 2017 - 18 6.533% 214 2018 - 19 6.842% 1,011 2019 - 20 6.985% 2,239 2020 - 21 7.732% 12,837 2021 - 22 7.59% 13,868 Funding History The funding history below shows the plan’s actuarial accrued liability, share of the pool’s market value of assets, share of the pool’s unfunded liability, funded ratio, and annual covered payroll. Valuation Date Accrued Liability (AL) Share of Pool’s Market Value of Assets (MVA) Plan’s Share of Pool’s Unfunded Liability Funded Ratio Annual Covered Payroll 06/30/2013 $3,810 $5,112 ($1,302) 134.2% $128,274 06/30/2014 34,829 37,902 (3,073) 108.8% 469,813 06/30/2015 153,966 147,363 6,603 95.7% 859,764 06/30/2016 339,576 305,445 34,131 89.9% 1,351,084 06/30/2017 616,259 584,158 32,101 94.8% 1,628,257 06/30/2018 987,801 907,088 80,713 91.8% 2,422,034 06/30/2019 1,320,076 1,192,048 128,028 90.3% 2,422,912 D-20 Risk Analysis • Future Investment Return Scenarios • Discount Rate Sensitivity • Mortality Rate Sensitivity • Maturity Measures • Maturity Measures History • Hypothetical Termination Liability D-21 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 16 Future Investment Return Scenarios Analysis was performed to determine the effects of various future investment returns on required employer contributions. The projections below provide a range of results based on five investment return scenarios assumed to occur during the next four fiscal years (2019-20, 2020-21, 2021-22 and 2022-23). The projections also assume that all other actuarial assumptions will be realized and that no further changes to assumptions, contributions, benefits, or funding will occur. For fiscal years 2019-20, 2020-21, 2021-22, and 2022-23, each scenario assumes an alternate fixed annual return. The fixed return assumptions for the five scenarios are 1.0%, 4.0%, 7.0%, 9.0% and 12.0%. These alternate investment returns were chosen based on stochastic analysis of possible future investment returns over the four-year period ending June 30, 2023. Using the expected returns and volatility of the asset classes in which the funds are invested, we produced five thousand stochastic outcomes for this period based on the most recently completed Asset Liability Management process. We then selected annual returns that approximate the 5th, 25th, 50th, 75th, and 95th percentiles for these outcomes. For example, of all the 4 -year outcomes generated in the stochastic analysis, approximately 25% had an average annual return of 4.0% or less. Required contributions outside of this range are also possible. In particular, whereas it is unlikely that investment returns will average less than 1.0% or greater than 12.0% over this four-year period, the likelihood of a single investment return less than 1.0% or greater than 12.0% in any given year is much greater. Assumed Annual Return From 2019-20 through 2022-23 Projected Employer Contributions 2022-23 2023-24 2024-25 2025-26 1.0% Normal Cost 7.6% 7.6% 7.6% 7.6% UAL Contribution $16,000 $20,000 $26,000 $34,000 4.0% Normal Cost 7.6% 7.6% 7.6% 7.6% UAL Contribution $15,000 $18,000 $21,000 $25,000 7.0% Normal Cost 7.6% 7.6% 7.6% 7.6% UAL Contribution $14,000 $15,000 $15,000 $16,000 9.0% Normal Cost 7.8% 7.9% 7.4% 7.5% UAL Contribution $14,000 $14,000 $13,000 $12,000 12.0% Normal Cost 7.8% 7.9% 7.4% 7.5% UAL Contribution $13,000 $11,000 $0 $0 These projections reflect the impact of the CalPERS risk mitigation policy, which reduces the discount rate when investment returns exceed specified trigger points. D-22 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 17 Discount Rate Sensitivity The discount rate assumption is calculated as the sum of the assumed real rate of return and the assumed annual price inflation, currently 4.50% and 2.50%, respectively. Changing either the price inflation assumption or the real rate of return assumption will change the discount rate. The sensitivity of the valuation results to the discount rate assumption depends on which component of the discount rate is changed. Shown below are various valuation results as of June 30, 2019 assuming alternate discount rates by changing the two components independently. Results are shown using the current discount rate of 7.0% as well as alternate discount rates of 6.0% and 8.0%. The rates of 6.0% and 8.0% were selected since they illustrate the impact of a 1.0% increase or decrease to the 7.0% assumption. Sensitivity to the Real Rate of Return Assumption As of June 30, 2019 1% Lower Real Return Rate Current Assumptions 1% Higher Real Return Rate Discount Rate 6.0% 7.0% 8.0% Inflation 2.5% 2.5% 2.5% Real Rate of Return 3.5% 4.5% 5.5% a) Total Normal Cost 17.78% 14.34% 11.71% b) Accrued Liability $1,612,009 $1,320,076 $1,092,531 c) Market Value of Assets $1,192,048 $1,192,048 $1,192,048 d) Unfunded Liability/(Surplus) [(b) - (c)] $419,961 $128,028 ($99,517) e) Funded Status 73.9% 90.3% 109.1% Sensitivity to the Price Inflation Assumption As of June 30, 2019 1% Lower Inflation Rate Current Assumptions 1% Higher Inflation Rate Discount Rate 6.0% 7.0% 8.0% Inflation 1.5% 2.5% 3.5% Real Rate of Return 4.5% 4.5% 4.5% a) Total Normal Cost 15.33% 14.34% 13.16% b) Accrued Liability $1,412,320 $1,320,076 $1,209,038 c) Market Value of Assets $1,192,048 $1,192,048 $1,192,048 d) Unfunded Liability/(Surplus) [(b) - (c)] $220,272 $128,028 $16,990 e) Funded Status 84.4% 90.3% 98.6% Mortality Rate Sensitivity The following table looks at the change in the June 30, 2019 plan costs and funded ratio under two different longevity scenarios, namely assuming post-retirement rates of mortality are 10% lower or 10% higher than our current mortality assumptions adopted in 2017. This type of analysis highlights the impact on the plan of improving or worsening mortality over the long-term. As of June 30, 2019 10% Lower Mortality Rates Current Assumptions 10% Higher Mortality Rates a) Total Normal Cost 14.61% 14.34% 14.09% b) Accrued Liability $1,347,439 $1,320,076 $1,294,738 c) Market Value of Assets $1,192,048 $1,192,048 $1,192,048 d) Unfunded Liability/(Surplus) [(b) - (c)] $155,391 $128,028 $102,690 e) Funded Status 88.5% 90.3% 92.1% D-23 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 18 Maturity Measures As pension plans mature they become more sensitive to risks. Understanding plan maturity and how it affects the ability of a pension plan to tolerate risk is important in understanding how the plan is impacted by investment return volatility, other economic variables and changes in longevity or other demographic as sumptions. One way to look at the maturity level of CalPERS and its plans is to look at the ratio of a plan’s retiree liability to its total liability. A pension plan in its infancy will have a very low ratio of retiree liability to total liability. As the plan matures, the ratio starts increasing. A mature plan will often have a ratio above 60%-65%. Ratio of Retiree Accrued Liability to Total Accrued Liability June 30, 2018 June 30, 2019 1. Retired Accrued Liability 0 0 2. Total Accrued Liability 987,801 1,320,076 3. Ratio of Retiree AL to Total AL [(1) / (2)] 0.00 0.00 Another measure of maturity level of CalPERS and its plans is to look at the ratio of actives to retirees, also called the Support Ratio. A pension plan in its infancy will have a very high ratio of active to retired members. As the plan matures, and members retire, the ratio starts declining. A mature plan will often have a ratio near or below one. The average support ratio for CalPERS public agency plans is 1.25. Support Ratio June 30, 2018 June 30, 2019 1. Number of Actives 54 52 2. Number of Retirees 0 0 3. Support Ratio [(1) / (2)] N/A N/A D-24 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 19 Maturity Measures (Continued) The actuarial calculations supplied in this communication are based on various assumptions about long-term demographic and economic behavior. Unless these assumptions (e.g., terminations, deaths, disabilities, retirements, salary growth, and investment return) are exactly realized each year, there will be differences on a year-to-year basis. The year-to-year differences between actual experience and the assumptions are called actuarial gains and losses and serve to lower or raise required employer contributions from one year to the next. Therefore, employer contributions will inevitably fluctuate, especially due to the ups and downs of investment returns. Asset Volatility Ratio (AVR) Shown in the table below is the asset volatility ratio (AVR), which is the ratio of market value of assets to payroll. Plans that have higher AVR experience more volatile employer contributions (as a percentage of payroll) due to investment return. For example, a plan with an asset-to-payroll ratio of 8 may experience twice the contribution volatility due to investment return volatility than a plan with an asset-to-payroll ratio of 4. It should be noted that this ratio is a measure of the current situation. It increases over time but generally tends to stabilize as the plan matures. Liability Volatility Ratio (LVR) Also shown in the table below is the liability volatility ratio (LVR), which is the ratio of accrued liability to payroll. Plans that have a higher LVR experience more volatile employer contributions (as a percentage of payroll) due to investment return and changes in liability. For example, a plan with LVR ratio of 8 is expected to have twice the contribution volatility of a plan with LVR of 4. It should be noted that this ratio indicates a longer-term potential for contribution volatility. The AVR, described above, will tend to move closer to the LVR as a plan matures. Contribution Volatility June 30, 2018 June 30, 2019 1. Market Value of Assets $907,088 $1,192,048 2. Payroll 2,422,034 2,422,912 3. Asset Volatility Ratio (AVR) [(1) / (2)] 0.4 0.5 4. Accrued Liability $987,801 $1,320,076 5. Liability Volatility Ratio (LVR) [(4) / (2)] 0.4 0.5 Maturity Measures History Valuation Date Ratio of Retiree Accrued Liability to Total Accrued Liability Support Ratio Asset Volatility Ratio Liability Volatility Ratio 06/30/2017 0.00 N/A 0.4 0.4 06/30/2018 0.00 N/A 0.4 0.4 06/30/2019 0.00 N/A 0.5 0.5 D-25 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 20 Hypothetical Termination Liability The hypothetical termination liability is an estimate of the financial position of the plan had the contract with CalPERS been terminated as of June 30, 2019. The plan liability on a termination basis is calculated differently compared to the plan’s ongoing funding liability. For the hypothetical termination liability calculation, both compensation and service are frozen as of the valuation date and no future pay increases or service accruals are assumed. This measure of funded status is not appropriate for assessing the need for future employer contributions in the case of an ongoing plan, that is, for an employer that continues to provide CalPERS retirement benefits to active employees. A more conservative investment policy and asset allocation strategy was adopted by the CalPERS Board for the Terminated Agency Pool. The Terminated Agency Pool has limited funding sources since no future employer contributions will be made. Therefore, expected benefit payments are secured by risk-free assets and benefit security for members is increased while limiting the funding risk. However, this asset allocation has a lower expected rate of return than the PERF and consequently, a lower discount rate is assumed. The lower discount rate for the Terminated Agency Pool results in higher liabilities for terminated plans. The effective termination discount rate will depend on actual market rates of return for risk-free securities on the date of termination. As market discount rates are variable, the table below shows a range for the hypothetical termination liability based on the lowest and highest interest rates observed during an approximate 19-month period from 12 months before the valuation date to 7 months after. Market Value of Assets (MVA) Hypothetical Termination Liability1,2 @ 1.75% Funded Status Unfunded Termination Liability @ 1.75% Hypothetical Termination Liability1,2 @ 3.25% Funded Status Unfunded Termination Liability @ 3.25% $1,192,048 $2,976,621 40.1% $1,784,573 $2,086,263 57.1% $894,215 1 The hypothetical liabilities calculated above include a 5% mortality contingency load in accordance with Board policy. Other actuarial assumptions can be found in Appendix A of the Section 2 report. 2 The current discount rate assumption used for termination valuations is a weighted average of the 10-year and 30-year U.S. Treasury yields where the weights are based on matching asset and liability durations as of the termination date. The discount rates used in the table are based on 20-year Treasury bonds, rounded to the nearest quarter percentage point, which is a good proxy for most plans. The 20-year Treasury yield was 2.31% on June 30, 2019, and was 1.83% on January 31, 2020. In order to terminate the plan, you must first contact our Retirement Services Contract Unit to initiate a Resolution of Intent to Terminate. The completed Resolution will allow the plan actuary to give you a preliminary termination valuation with a more up-to-date estimate of the plan liabilities. CalPERS advises you to consult with the plan actuary before beginning this process. D-26 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 21 Participant Data The table below shows a summary of your plan’s member data upon which this valuation is based: June 30, 2018 June 30, 2019 Reported Payroll $2,422,034 $2,422,912 Projected Payroll for Contribution Purposes $2,627,397 $2,628,350 Number of Members Active 54 52 Transferred 3 8 Separated 8 13 Retired 0 0 List of Class 1 Benefit Provisions This plan has the additional Class 1 Benefit Provisions: • None D-27 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 22 Plan’s Major Benefit Options Shown below is a summary of the major optional benefits for which your agency has contracted. A description of principal standard and optional plan provisions is in Section 2. Benefit Group Member Category Misc Demographics Actives Yes Transfers/Separated Yes Receiving No Benefit Group Key 110656 Benefit Provision Benefit Formula 2% @ 62 Social Security Coverage No Full/Modified Full Employee Contribution Rate 6.75% Final Average Compensation Period Three Year Sick Leave Credit Yes Non-Industrial Disability Standard Industrial Disability No Pre-Retirement Death Benefits Optional Settlement 2 Yes 1959 Survivor Benefit Level Level 4 Special No Alternate (firefighters) No Post-Retirement Death Benefits Lump Sum $500 Survivor Allowance (PRSA) No COLA 2% D-28 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 23 PEPRA Member Contribution Rates The California Public Employees’ Pension Reform Act of 2013 (PEPRA) established new benefit formulas, final compensation period, and contribution requirements for “new” employees (generally those first hired into a CalPERS -covered position on or after January 1, 2013). In accordance with Government Code Section 7522.30(b), “new members … shall have an initial contribution rate of at least 50% of the normal cost rate.” The normal cost rate is dependent on the plan of retirement benefits, actuarial assumptions and demographics of the risk pool, particularly members’ entry age. Should the total normal cost rate change by more than 1% from the base total normal cost rate, the new member rate shall be 50% of the new normal cost rate rounded to the nearest quarter percent. The table below shows the determination of the PEPRA member contribution rates effective July 1, 2021, based on 50% of the total normal cost rate as of the June 30, 2019 valuation. Basis for Current Rate Rates Effective July 1, 2021 Rate Plan Identifier Benefit Group Name Total Normal Cost Member Rate Total Normal Cost Change Change Needed Member Rate 26567 Miscellaneous PEPRA Level 13.735% 6.75% 14.34% 0.605% No 6.75% D-29 CALPERS ACTUARIAL VALUATION - June 30, 2019 PEPRA Miscellaneous Plan of the City of Rancho Palos Verdes CalPERS ID: 3846845523 Rate Plan belonging to the Miscellaneous Risk Pool Page 24 Section 2 CALIFORNIA PUBLIC EM PLOYEES’ RETIREMENT SYSTEM Risk Pool Actuarial Valuation Information Section 2 may be found on the CalPERS website (www.calpers.ca.gov) in the Forms and Publications section D-30 FAC Minutes October 29, 2020 Page 1 of 7 DRAFT MINUTES CITY OF RANCHO PALOS VERDES FINANCE ADVISORY COMMITTEE (FAC) OCTOBER 29, 2020 Pursuant to Section 3 of Executive Order N-29-20, issued by Governor Gavin Newsom on March 17, 2020, the meeting of the Finance Advisory Committee on October 29, 2020, at 7:00 PM was conducted via teleconference using the Zoom platform. Chair Brown called the meeting to order at 7:00 p.m. for the purpose of conducting business pursuant to the Agenda. Roll call answered as follows: PRESENT: Chair Raquel Brown, Vice-Chair George Lewis, John MacAllister, John Stillo, Krista Johnson, Donald Seal ABSENT: Jessica Vlaco City Staff: Trang Nguyen (Director of Finance), Vina Ramos (Deputy Director of Finance), Lukasz Buchwald (Information Technology Manager) APPROVAL OF AGENDA Member Johnson moved for approval of the agenda and Vice-Chair Lewis seconded the motion. The motion passed unanimously by acclamation. PUBLIC COMMENTS FOR ITEMS NOT ON THE AGENDA None. APPROVAL OF DRAFT MINUTES FOR THE MEETING CONDUCTED SEPTEMBER 17, 2020. Member MacAllister moved for approval of the minutes with minor amendments and Member Stillo seconded the motion. The motion passed unanimously by acclamation. Microsoft 365 Overview Information Technology Manager, Lukasz Buchwald gave a brief overview of the Microsoft 365 and asked the Committee to begin migrating to the new program as soon as possible. The Committee will have to login to outlook.office365.com in order to utilize the City of Rancho Palos Verdes email. Draft Pension Guideline Finance Director Nguyen provided an overview of the Draft Pension Guideline as a continued item from the September 17, 2020 meeting. Based on the last meeting, Director Nguyen reported that the draft includes the suggestions and changes from the Committee. Director Nguyen proceeded with highlighting the Draft Pension Guideline in these key areas: goals, funding options and usage, transparency and reporting, and review of funding guideline. E-1 FAC Minutes October 29, 2020 Page 2 of 7 Goals Member MacAllister asked about maintaining a 90% funded level and the City’s current status. Director Nguyen responded that the current funding status is at 71%. Chair Brown asked about the methodology for the 90%. Director Nguyen responded that the 90% is the ideal target recommended by CalPERS and most government agencies are in the ranges of 60% to 90%. Member Johnson asked how many cities are at 90% and how is the City compared to the other cities. Member Johnson is concerned that having reached the 90% ahead of other cities may have a negative impact, as that money may be used to offset other cities shortfall. Director Nguyen answered that at a recent CalPERS annual conference, the average is at 71%, and is not aware of any cities that are at the 90% level. Director Nguyen said that it is not legally possible for other cities to use the City’s funding for their shortfall. Director Nguyen also added that to achieve the 90% goal, the City would deposit money in the 115 Trust (a City’s account) and not sending the funds directly to CalPERS. Member Stillo and Member MacAllister suggested to use “achieve” instead of “maintain” for more flexibility for the City. Staff will update per Committee’s suggestion. Funding Options and Usage The two funding options are Internal Service Fund (short-term goal, to stabilize payment) and Section 115 Trust (long-term goal to achieve the 90% funding level). Member MacAllister asked for clarification if the goal is to do both funding for the Internal Service Fund and Section 115 Trust. Director Nguyen clarified that the guideline would be for both. Chair Brown agreed it is both. Member MacAllister wanted to know how the funds would be apportioned between the two options. Director Nguyen explained that at year-end closing, the City would designate a portion of the surplus to the Internal Service Fund as needed, to help with unfunded liability payment for the following year. The 115 Trust is for long-term, and it would be funded from excess revenues, surplus from projected minus actual revenues. Member Johnson asked about access to both funds. Director Nguyen explained for Internal Service Fund, it is easily accessible through normal budget process as it is located in the City’s funds allocation. For the 115 Trust, Director Nguyen reported that the City can use the funds anytime as long as the funds are pension expenses. Transparency, Reporting, and Review Since the guideline is a new process, Director Nguyen said that the funding would be reviewed and approved every year to make sure the City is using the funds as planned to reach the 90% goal. For transparency purposes, the City will disclose the annual valuation reports as soon as it is available. Member E-2 FAC Minutes October 29, 2020 Page 3 of 7 MacAllister also suggested that in addition to the Treasury Reports, it would be good to present the account activities of the Internal Service and 115 Trust. For the guideline language, Member Stillo is concerned about reviewing the language every 5 years and suggested it should be sooner. The Committee members all agreed to change from 5 years to every 3 years and include the language “as needed”. Under transparency and reporting, Director Nguyen asked if the Committee would like to add another line to this section to include annual review of the Internal Service Fund and the 115 Trust. All Members agreed to this addition. Director Nguyen asked if the Committee would like to see a final version before the guideline is presented to the City Council. The Committee decided that it is not necessary to bring it back. Member MacAllister moved to accept the draft Pension Guideline as presented, subject to the modification offered by the Committee. Chair Brown seconded the motion. The motion passed unanimously by acclamation. In closing, Chair Brown wanted clarification on how the percentages were decided on. Director Nguyen reviewed the data and her methodology included the CalPERS’ estimated future payments. Additionally, as suggested by the Committee before, the funding options are in ranges instead of set amounts. FY 2020-21 First Quarter Review 38:41 Director Nguyen reported that the expenditure chart in the staff report, page 24 table 5, is incorrect due to error in the tables, however, the grand total is the same. Vice-Chair Lewis asked that we include the correct table in the minutes. The correct chart is the following: Director Nguyen reported on the first quarter, the revenue comparison between FY 2019-20 and FY 2020-21, the largest decrease was in the Transient Occupancy Tax (TOT) at $557,700. On the other hand, Miscellaneous Revenue increased by over $436,000 which helped reduce the shortfall for the first quarter. E-3 FAC Minutes October 29, 2020 Page 4 of 7 Member MacAllister commented that the decline in TOT does not have a serious impact on the general fund. The direct impact is in the CIP fund. Director Nguyen reported that there’s no significant change in Property Tax compared to the same period as last year. The amount for FY 2019-20 is $338,600 and $386,500 in FY 2018-19. The small variance is attributed to the timing of revenues. Director Nguyen also added that the bulk of property tax is received between December through June. This revenue source is estimated to stay the most stable revenue source for the City. For TOT, Director Nguyen reported that the FY 2019-20 budget is $3.76 million, which is a decrease of $1.7 million from the same period in FY 2019-20. This is mainly due to Terranea’s temporary closures and the decreased capacity when opened. Revenue. Based on the original projections, Director Nguyen reported that Terranea outperformed estimates by 138% coming in at $875,700. Based on actual revenue through the first quarter and Terranea’s conservative estimates for the second quarter, Staff projects that TOT revenue will outpace budget by $315,000 at the end of second quarter. Sales tax had a 35% drop compared to the same period as last year. Director Nguyen said that this category is currently difficult to project due to the current temporary closure of Terranea Resort along with a decrease in demand to retail and restaurants throughout the City. Additionally, the payments are expected to be delayed due to the approved payment extensions from the State. Director Nguyen reported that the permits and fees outperformed the estimates compared to the first quarter of last year and revenue has outpaced projections with 34% of total budget received compared to approximately 30%. Staff will continue to monitor with Community Development to see if the trend will continue. For other taxes and miscellaneous revenue, Director Nguyen reported that these are higher than usual due to the $257,000 in COVID-19 relief funds and $298,000 in revenue recorded early for RDA repayment of consolidated loans. Director Nguyen also added that the Abalone Cove parking lot fees brought in over $140,000, which is greater than the budgeted amount of $138,000. The activities and demand for parking have increased. The increase helped with the revenue loss for facility rentals. Director Nguyen reported that at this time, no adjustments are recommended due to the uncertainty of the current situation. Member MacAllister commented that it is outstanding that the City already collected 54% of the budgeted numbers for Trump Golf Course and Terranea. Member Stillo is also glad to see that the revenues are performing well. E-4 FAC Minutes October 29, 2020 Page 5 of 7 For expenditures, Director Nguyen reported a decrease of $1.8 million or 31% compared to the same period last year. The decrease is expected and aligned to the reduced budget and activities. All categories were lower than last year except for the City Attorney contract. The higher amount is due to the timing of invoices. Member Johnson asked about the increase in Attorney’s fees . She asked if the City renegotiated for lower fees, if so, it seems that the amount is still high. Director Nguyen answered that the increase compared to the prior year is due to the timing of invoices. Also, the City Attorney reduced their fees by 10% to help with loss of revenues this year. Director Nguyen also shared that the legal costs in the past year increased due to litigations and increased public records requests. Salaries and benefits are lower compared to last year for the same period mainly due to unfilled vacancies, park and facility closures. Director Nguyen added that Staff anticipates that there are potential year-end savings in the areas of salaries and benefits, professional technical, supplies, training, and repairs and maintenance. In closing, Director Nguyen asked the Committee to make a motion to receive and file if there are no objections. Member Johnson moved to receive and file the FY 2020-21 First Quarter Review, Member MacAllister seconded the motion. The motion passed unanimously by acclamation. Discussion of the biannual report and possible action items Member MacAllister provided the following highlights regarding the Recreation and Parks Fee Study Subcommittee (Member MacAllister, Member Stillo, and Member Johnson) and their meeting with Recreation and Parks Director, Cory Linder and Deputy Director, Daniel Trautner. Member MacAllister shared that Recreation and Parks have been affected the most by the closures, especially facility rentals.  City’s current rates at Abalone Cove parking lot are below the Los Angeles County rates by $1. The Subcommittee urged staff to continue to work on increasing the rates.  Advised to look into charging a COVID-19 compliance surcharge to cover the increased costs.  Pointed out that one of the main reasons that the annual subsidy for Recreation and Parks is high is due to the replacement costs accounted for in the calculation.  Provided positive feedback for the Recreation and Parks Department that they came prepared for the meeting and provided helpful information. Also, ensuring that even with current limitations, the department is doing what is necessary to make everything work. Member Johnson learned a lot and was impressed by the department and the breadth of knowledge that they had. Also, their creativity with programs by E-5 FAC Minutes October 29, 2020 Page 6 of 7 constantly updating their program models to increase participants. Member Johnson also suggested to include a footnote regarding the soft costs for the replacement costs. Member Stillo would like to see if there was a way for the report to show direct and indirect costs which would be helpful and also the COVID-19 related costs. Chair Brown thanked the subcommittee’s work on this item . Chair Brown took a lead on discussing biannual report and possible action items moving forward for the Committee:  TOT fees  Review of Redevelopment obligation bond  More information for FAC regarding Civic Center, Landslide litigation, and Ladera Linda.  Ideally would like Chairs for the Committees to come and share more information on the projects in order for FAC to be more prepared to give input as projects progressed further. Vice-Chair Lewis shared about the recent Mayor’s breakfast and the Civic Center Committee asking for expertise from FAC regarding the funding models. Vice-Chair Lewis volunteered to assist and also open if someone else from FAC would like to volunteer. Member MacAllister volunteered to help Vice-Chair Lewis with the funding models. Member Vlaco may have expertise with funding models as well. Chair Brown informed the Committee that based on the meetings she has been attending, the three major projects are moving along. There was a consensus that the Committee have concerns on the current status of the Civic Center project and that currently, believes that there should be more public input and other options should still be considered such as improving the current City Hall. The major concern that the Committee discussed in length was the funding for the project. Due to the price tag, the Committee believes that it’s important that the public should have a say on the project before moving forward. Vice-Chair Lewis and all Members agreed that any debt incurred by a government entity is a future tax unless it can generate revenue from outside sources. Member MacAllister suggested Chair Brown to meet with Chair of the IMAC and discuss the three projects and then jointly have a conversation with Public Works and City Manager. Director Nguyen recommended to also attend the Civic Center Committee meeting as the Committee discusses the details of the project. Based on the last meeting, the Committee pulled back with the design due to funding options not yet selected. At this point, Staff is still trying to learn about the three different approaches before a design can be chosen. Director Nguyen shared that the program is still in early stages and believes that if the Committee’s desire is to be more involved, she suggested that a good start is to get involved with IMAC and the Civic Center Advisory meetings. Finally, Member MacAllister advised that Chair Brown should have a conversation with Mayor Pro E-6 FAC Minutes October 29, 2020 Page 7 of 7 Tem Alegria regarding the project and Member Johnson suggested to possibly invite him in the next meeting. Vice-Chair Lewis suggested that to be more productive, the Committee should probably have more facts in order to discuss. Member MacAllister agreed with having more facts but an early conversation with Mayor Pro Tem would also be helpful by sharing the Committee’s concerns on the potential financial impact of the project for the City. Chair Brown followed up with Member MacAlliser regarding the redevelopment obligation bond update. Member MacAllister asked to roll this forward for next time. Committee Members Oral Reports/Mayor’s Breakfast Report The reports have been provided under the biannual report. Member Stillo and Member Vlaco’s terms will end on 12/23/20. Director Nguyen announced that the application period is still open. Director of Finance Report The next IMAC meeting is November 16th. Lastly, Director Nguyen announced that the City Clerk’s office sent out a memo regarding changes to the current meeting minutes. The City Clerk asked that the format for all the Committees should be consistent with the City Council meetings. This means that the minutes will be in a summary version and instead of the detailed minutes, the meeting will be recorded. Most of the Members agreed that the current minutes are preferred than the recording of the meeting. A member of the City Clerk office will attend the next FAC meeting to explain and answer questions regarding the new process. ADJOURNMENT The next meeting is scheduled on December 03, 2020. The agenda for the next meeting will include the FY 2019-20 Year-End Report and the Treasury Report. Member MacAllister move for the meeting to adjourn and Vice-Chair Lewis seconded the motion. The meeting adjourned at 7:56 p.m. ___________________________ Raquel Brown, Chair, Finance Advisory Committee ATTEST: _____________________________ Sovanna Proch, Recording Staff E-7