CC SR 20210202 H - CalPERS AVR and Pension Guideline
CITY COUNCIL MEETING DATE: 02/02/2021
AGENDA REPORT AGENDA HEADING: Consent Calendar
AGENDA TITLE:
Consideration and possible action to approve the CalPERS Pension Plan Guidelines.
RECOMMENDED CITY COUNCIL ACTIONS:
(1) Approve the CalPERS Pension Plan Guidelines thereby addressing a financial
plan on the City’s pension liability.
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. CalPERS Pension Plan Guidelines (page A-1)
B. Staff report of the January 19, 2021 (page B-1)
BACKGROUND AND DISCUSSION:
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 presented the draft Pension Guidelines as recommended by
the Finance Advisory Committee (FAC) to the City Council at the January 19, 2021
meeting. The City Council unanimously approved the guidelines as presented. For
additional clarification, Staff added definition language in the guidelines for the Internal
Service Fund, Employee Pension Plan Service Fund, and Section 115 Trust (highlighted
in Attachment A). The revised guidelines document (Attachment A) is presented to the
City Council for approval this evening.
1
To view the full staff report presented to the City Council on January 19, 2021, visit
https://rpv.granicus.com/MetaViewer.php?view_id=5&clip_id=3818&meta_id=89860 .
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
City of Rancho Palos Verdes CalPERS Pension Plan Guidelines
Overview
The Rancho Palos Verdes CalPERS 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 plan s 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 can 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 h ours 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.
Internal Service Funds –an accounting device used to accumulate and/or allocate costs
internally among the City’s various functions.
Employee Pension Plan Service Fund – a new fund in the Internal Service Funds. It is
a restricted fund through a City Council action for pension related costs. Likewise, any
accumulated funds can be released through a City Council action, if deemed necessary
by the City Council.
A-2
Section 115 Trust –an Internal Revenue Code Section 115 Trust that may be established
by the City Council to set aside funds for future pension costs and liabilities . Funds
accumulated in this trust are restricted to pension costs.
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
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.
A-3
• 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.
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
Employee Pension Plan Service Fund is an Internal Service Fund that is a
restricted fund through a City Council action for pension related costs. Likewise,
any accumulated funds can be released through a City Council action, if deemed
necessary by the City Council.
To address the increasing annual payment of the UAL, the City may set aside
funding in the Employee’s Pension Plan 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
A-4
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:
• 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
An Internal Revenue Code Section 115 Trust may be established by the City
Council to set aside funds for future pension costs and liabilities.
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:
A-5
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:
• 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
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)
B-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
B-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.
B-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
B-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
B-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.
B-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.
B-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%
B-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
B-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
B-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
B-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
B-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
B-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
B-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
B-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.
B-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).
B-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;
B-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.
B-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.
B-20