CC SR 20230801 04 - CalPERS ADP Options & Pension Guideline Review
CITY COUNCIL MEETING DATE: 08/01/2023
AGENDA REPORT AGENDA HEADING: Regular Business
AGENDA TITLE:
Consideration and possible action to review Additional Discretionary Payments (ADPs)
toward the City’s Unfunded Accrued Liability (UAL) and revisions to the Pension Plan
Guidelines.
RECOMMENDED COUNCIL ACTION:
(1) Review and, if acceptable, adopt the Finance Advisory Committee’s (FAC)
recommendation to:
a. Implement ADP Scenario 5 as a funding strategy with all conditions as
specified by the FAC to mitigate costs associated with the City’s UAL; and
b. Direct Staff to return to the City Council following the year -end closing
process with a recommended ADP amount limited to 50% of the FY 2022-
23 General Fund unallocated balance.
(2) Review and, if acceptable, approve the FAC’s following recommended revisions
to the Pension Plan Guidelines:
a. Updating the employee contribution rate for Tier 3;
b. Adding “schedule of amortization bases” to definitions;
c. Clarifying the ending fiscal year for the 10-year goal;
d. Incorporating ADP contributions and usage options; and
e. Updating the term for Annual Comprehensive Financial Report (ACFR).
FISCAL IMPACT: To be determined based on Recommendation Item No. 1-b, if
adopted.
Amount Budgeted: N/A
Additional Appropriation: N/A
Account Number(s): N/A
ORIGINATED BY: Jason Loya, Senior Administrative Analyst
REVIEWED BY: Vina Ramos, Deputy Director of Finance
Brittany Ruiz, Interim Director of Finance
APPROVED BY: Ara Mihranian, AICP, City Manager
ATTACHED SUPPORTING DOCUMENTS:
A. Revised Draft Pension Plan Guidelines (page A-1)
B. April 13, 2023 FAC staff report (page B-1)
C. February 9, 2023 FAC staff report (page C-1)
D. December 19, 2022 FAC staff report (page D-1)
1
RANCHO PALOS VERDES
BACKGROUND:
The California Public Employees’ Retirement System (CalPERS) prepares actuarial
valuations for all City pension plans on an annual basis. Consistent with transparency
and reporting requirements, results from the Annual Valuation Reports (AVR) are
presented to the City’s Finance Advisory Committee (FAC) and City Cou ncil within the
timeframe established by the City’s Pension Plan Guidelines. Findings from the most
recent AVR ending June 30, 2021 were presented to the FAC on September 8, 2022 as
specified under Item No. 3 of the FY 2022-23 Work Plan. Shortly thereafter, the 2021
AVR was presented to the City Council on October 4, 2022.
An additional discussion took place at the FAC meeting held in September 2022 despite
the positive outcomes reported at each meeting . Commensurate with the FAC’s mission
statement to review the City’s short- and long-term financial condition, members of the
FAC raised concerns regarding news about CalPERS’ FY 2021-22 preliminary
investment loss of -6.1%. This discussion ultimately led to a request for Staff to further
examine the implications of a negative investment return on the City’s UAL and strategies
to mitigate its future impact.
As requested, Staff utilized pension management tools to estimate the long-term cost of
the negative return. These tools included a contribution management spreadsheet
provided by a CalPERS actuary, and pension liability software from GovInvest. The
estimated results were presented at the FAC meeting on December 19, 2022. As
indicated in the attached report (page D-1), the City’s UAL balance is projected to
increase by approximately 50% from $10 million to $15 million ending June 30, 2022.
Consequently, required UAL contributions are also expected to rise according to the
projected 2022 amortization schedule. Around this time, it was announced that CalPERS’
had an actual investment loss of -7.5%, which was used to conduct the final analysis.
Projections were used in place of actual 2022 AVR results due to its pending release at
the end of summer 2023. Data derived from the pension tools were used to validate
projections and to conduct the cost-benefit analysis associated with making additional
payments to CalPERS. Additional discretionary payments, or ADPs, can be used to
preliminarily fund and proactively manage the City’s UAL. This particular strategy is
beneficial to the City based on its ability to stabilize pension contributions and mitigate
long-term impacts by effectively reducing the total UAL balance. As an added benefit,
ADPs are elective and can be applied at any time and in any amount.
The 2022 projection is referred to as the default option throughout the analysis and
represents a scenario where no additional action is taken by the City. Using this as the
baseline, Staff created five ADP scenarios for comparison and presented each to the FAC
as alternative options. All ADP scenarios were measured against the baseline and
designed to reach a 90% funded status within 10 years to ensure adherence to the
Pension Plan Guidelines. Additional details regarding these scenarios are provided in the
discussion section of this report.
2
FAC’s ensuing deliberation led to the formation of an ad hoc subcommittee tasked with
selecting and evaluating the final ADP scenarios for recommendation to the City Council.
The FAC Subcommittee members included Krista Johnson, (former Member) John
MacAllister, and Kevin Yourman. Overall, the Subcommittee and Staff held three
meetings that resulted in a supplemental analysis and refined evaluation criteria for three
selected scenarios.
Additionally, these actions led to the FAC’s determination that revisions to the Pension
Plan Guidelines were also warranted. On February 9, 2023, the supplemental analysis
and evaluation summary was provided to the FAC with the ad hoc subcommittee’s ADP
recommendation and proposed revisions to the pension guidelines . Details from the full
report are attached for reference (Attachment C).
Tonight, Staff presents this report to the City Council to appropriately illustrate the
anticipated impact of CalPERS’ 2022 investment loss on the City’s UAL and articulate
actions taken by the FAC to explore various solutions for the City Council’s consideration.
Furthermore, the remaining discussion section will highlight essential findings from the
various analyses, briefly elaborate on the scenarios mentioned above, and convey the
FAC’s recommendation regarding ADPs and revisions to City’s Pension Plan Guidelines.
DISCUSSION:
2021 AVR Results
According to the 2021 AVR, and as previously reported to the FAC and City Council, the
City’s UAL balance of $10 million was initially anticipated to decrease to $9.3 million by
June 30, 2023. The underlying presumption in this case was that CalPERS would meet
its target rate of return, or discount rate, of 6.8%. The 6.8% discount rate is also used by
CalPERS to determine the UAL amortization schedule and estimate future payments.
Accordingly, the $9.3 million UAL balance, amortized over 19 years, was estimated to
cost $14.2 million in total payments after accounting for $4.9 million in interest.
continued on the next page
3
Chart 1. 2021 Amortization Schedule – UAL Balance
The UAL balance illustrated in Chart 1 above corresponds with UAL payments outlined
in the 2021 AVR’s amortization schedule. Chart 2 provides a visual to reflect these
payments. However, since future pension contributions are primarily speculative, Staff
included historic UAL payments to provide further insight. Using 2021 AVR data, Chart 2
represents the City’s past required contributions to the UAL combined with projected UAL
payments based on the 2021 amortization schedule.
Most notably, required contributions from FY 2016-17 to FY 2023-24 revealed that
aggregate City UAL payments have increased at an average annual rate of 14.5%.
Looking forward, the UAL payments projected from FY 2024-25 and beyond assume a
6.8% return rate. Therefore, UAL payments appeared stable and suggested the City’s
funded status will reach 90% by FY 2029-30 and be paid in full by FY 2041-42.
Chart 2. Contribution History and 2021 Amortization Schedule
Given the -7.5% invest loss, however, it’s fair to conclude that the UAL payment trajectory
in Chart 2 may not come to fruition. This expectation is further supported when
4
vi $12.0
2
§ $10.0 ....
~ $8.0
$6.0
$4.0
$2.0
$0.0
V, $1.2
2 g $1.0 ....
~ $0.8
$0.6
$0.4
$0.2
$0.0
-2021 UAL Balance
-Required Contributions ~2021 UAL Payments
considering the unfavorable trend observed using historic actuals. These assumptions
were tested and explored as described in the next section.
2022 Projected AVR Results
Per the FAC’s request, Staff next examined the potential significance of CalPERS’ FY
2021-22 investment loss. As mentioned, the City’s UAL balance is projected to increase
from approximately $10 million to $15 million in the AVR ending June 30, 2022. The extent
of this change in UAL balance is highlighted in Chart 3 on the following page.
As a reminder, all projections were determined using data from CalPERS and GovInvest
pension management tools and are subject to change based on final 2022 AVR results.
Chart 3. 2021 Amortization Schedule vs. 2022 Projected Schedule – UAL Balance
Chart 4 below expands on the anticipated impact and compares the change in UAL
payments for each corresponding amortization schedule. UAL payments from the 2021
AVR and projected 2022 AVR results are depicted below. For reference, the 2022 AVR
results will determine the required contributions in FY 2024-25 due to the two-year lag
imposed by CalPERS. Thus, the FY 2024-25 UAL payment is estimated to increase by
approximately $132,000 for Tier 1 compared to previous assumptions and resume its
upward trend.
5
VI $16.0
2
0 $14.0
~ ~ $12.0
$10.0
$8.0
$6.0
$4.0
$2.0
$0.0
-2021 UAL Balance --2022 Projected Balance
Chart 4. 2021 Amortization Schedule vs. 2022 Projected Schedule – UAL Payments
Results also indicated that the $15 million UAL balance projected in the 2022 AVR, or
baseline scenario, will likely lower the City’s funded status from 81% to roughly 70%. Over
the long-term, data derived from the pension management tools found that the impact
from CalPERS’ investment loss is estimated to cost the City $26.2 million in total UAL
payments. This exceeds the previous estimate of $14.2 million in total payments by $12
million. Nevertheless, changes to pension costs over time are subject to future investment
gains/losses, additional contributions, or adjustments to the UAL amortization schedule.
ADP Cost Benefit Analysis
Given the financial implications above, the FAC was presented with the default scenario
and the five ADP scenarios that Staff created to determine the costs and benefits
associated with making additional payments to CalPERS. It’s worth noting that all
schedules and figures shown below are for illustrative purposes and should not be
considered as exact representations of future experience.
For starters, the 2022 projected results point out that the City may not reach its 90%
funded status goal by FY 2030-31 as defined in the Pension Plan Guidelines. This 10-
year period began in FY 2021-22 pursuant to the guideline’s adoption. Once again, to
ensure compliance with the guidelines, each ADP scenario was evaluated against the
baseline and designed to reach a 90% funded status by FY 2030-31. The information
summarized in Table 1 on the following page focuses on the total estimated costs, as well
as the number of years it will take each scenario to reach 90% beginning in FY 2021-22.
If no action is taken, the default scenario is likely to miss this goal by three years under
the current assumptions.
6
VI $2.00
~ $1.80
3 $1.60
~ $1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
Required Contributions --2021 UAL Payments --2022 Projected Payments
Table 1. Default and ADP Scenario Overview
(In millions)
Default
Scenario
Scenario
1
Scenario
2
Scenario
3
Scenario
4
Scenario
5
Total Est. Cost $26.2 $21.2 $22.3 $20.9 $20.5 $18.5
Years to 90% FS 13 10 10 9 8 7
Table 1 also demonstrates that total estimated costs are likely to decrease as the years
to reach 90% are minimized. In other words, total payments toward the UAL balance
decrease when the amortization period is shortened using an expedited approach. The
strategies used in each ADP scenario to accomplish this are briefly explained below.
Lastly, it’s important to keep in mind that ADPs as described are in addition to the City’s
annual required UAL payments determined by CalPERS annual valuations.
Scenario 1 – One-time payment
• Scenario 1 considers a one-time ADP of $4.5 million to CalPERS to reach the 90%
funded status goal by FY 2030-31.
• This approach immediately reduces the UAL balance and is likely to lower future
payments compared to the default scenario.
• Substantial one-time payments are inherently risky due to market volatility.
Scenario 2 – Apportioned allocation
• Scenario 2 considers a total ADP amount of $4.5 million and distributes payments
of $0.5 million over nine years.
• Distributing the $4.5 million proportionally over time reduces investment risk and
reaches the 90% funded status goal by FY 2030-31.
• UAL payments would be greater than the default scenario up front and fall below
the default payments after the last ADP in year nine.
Scenario 3 – Level-Dollar (Soft Fresh Start)
• Scenario 3 considers total ADPs amounting to $8 million and reflects a self-
imposed level dollar payment plan, or “soft fresh start” across 12 years.
• Level-dollar payments are typically required after initiating a “fresh start” through
CalPERS, which allows the City to re-amortize its UAL over a shorter horizon.
• However, initiating this process through CalPERS would result in required annual
payments that increase and remain level over most of the amortization period.
• Instead, scenario 3 uses ADPs to mirror this approach without permanently altering
the amortization schedule and increasing required annual payments.
• The level-dollar amount, which includes required UAL payments and ADPs, rises
to $1.9 million annually and reaches the 90% funded status goal by FY 2029 -30.
Scenario 4 – Annual Allocation
• Scenario 4 considers total ADPs amounting to $6.5 million and allocates $1 million
over six years, and $0.5 million in year seven.
• Annual payments would rise to nearly $2 million through FY 2027-28, and
ultimately fall below the default payment by almost $0.6 million from there on.
• Scenario 4 reaches the 90% funded status goal by FY 2028 -29.
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Scenario 5 – Level-Dollar (Soft Fresh Start)
• Scenario 5 considers total ADPs amounting to $11.7 million and reflects a self-
imposed level dollar payment plan, or “soft fresh start” across eight years.
• The level-dollar amount rises to $2.7 million annually in total and reaches the 90%
funded status goal by FY 2027-28.
The five ADP scenarios discussed above provided alternatives to the default scenario
and were intended to achieve the City’s 90% funded status goal by, or prior to, FY 2030-
31. Staff’s analysis illustrated costs and benefits associated with each alternative and
described various strategies considered using ADPs. Available cash flow, investment risk,
and long-term outlook are other vital factors in need of consideration. As such, the FAC
established an ad hoc subcommittee to further evaluate and recommend three final
scenarios for consideration in advance of a formal recommendation to the City Council.
Supplemental Analysis and Scenario Evaluation
The FAC Subcommittee selected the default scenario, scenario 3 and scenario 5 for
additional review. To reiterate, both alternative scenarios use a self-imposed approach
that would enable the City to create a unique payment structure based on a level-dollar
amount that can be budgeted to ensure fiscal sustainability. Also known as a “soft fresh
start,” this strategy provides an alternative to initiating a “fresh start” through CalPERS
which permanently re-amortizes the UAL balance and creates a required level-dollar
payment. Fresh starts are typically implemented to achieve cost savings by paying off the
UAL over a shorter timeline. Instead, scenarios 3 and 5 reflect a soft fresh start and use
ADPs to supplement annual required contributions and emulate the payment structure of
an actual fresh start. Doing so reduces the amortization period and lowers costs over the
long-term.
In the default scenario, it’s assumed that only required annual UAL payments will be made
over a 22-year amortization period. This approach is fully dependent on CalPERS’ annual
investment performance and potentially exposes the City higher interest costs and
payment volatility. The $26.2 million estimate calculates total payments made based on
the projected amortization schedule and includes the interest accrued over time. In
contrast, electing to make ADPs as proposed in scenarios 3 and 5 will likely shorten the
UAL amortization period and reduce the overall cost.
The total estimated costs for scenarios 3 and 5 are projected at $20.9 million and $18.5
million, respectively. These totals are less than the default scenario by roughly $5.2
million in scenario 3, and $7.7 million in scenario 5. Scenario 3 considers making $8
million in ADPs over 12 years and is projected to lower the total required payments to
$12.9 million. Lastly, scenario 5 proposes almost $11.7 million in ADPs over eight years
and is estimated to decrease the total required payments to $6.8 million.
Chart 5 below compares all three scenarios and provides a breakdown between the total
estimated required UAL payments and proposed ADPs.
8
Chart 5. Estimated Total Contribution Comparison
To gain more insight, charts 6 and 7 detail the level-dollar strategies for each alternative
in comparison with the default scenario. Scenarios 3 and 5 are displayed as an overlay
on the default amortization schedule and show the breakdown between required UAL
payments and ADPs on an annual basis. Moreover, the proposed payment schedules
also outline the maximum contribution amounts each year under current assumptions and
begin in FY 2022-23 as originally designed.
Chart 6. 2022 Projected Schedule - Required UAL Payments (Scenario 3)
9
V)
$30
z
0 ::::;
:: $25 ~
-ADP
-Req. UAL Payment
~Total Req. Payment+ADP
c::::::::J Default Req. Payment
Scenario 3 ADP
$20
$15
$10
$5
$0
26.2
18.5
. .
Default Scenario 3 Scenario 5
c::::::::J Scenario 3 Req. Payment
~Scenario 3 Total Req. Payment+ ADP
Vl $2.0
6 $1.8
1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
~ $1.6
~ $1.4
$1.2
$1.0
$0.8
$0.6
$0.4
$0.2
$0.0
1.6 1.7
0.2
ii 0.0
◊
Chart 7. 2022 Projected Schedule - Required UAL Payments (Scenario 5)
Results from the supplemental analysis and evaluation are summarized using the criteria
in Table 2 below. The additional criteria were selected by the FAC Subcommittee and
used to validate and support earlier findings. These new measures included the Net
Present Value (NPV), interest to principal ratio and payment efficiency. A cash flow
analysis was also performed and can be viewed in the attached reports (Attachment C).
Table 2. Evaluation Summary – Selected Scenarios
Default Scenario Scenario 3 Scenario 5
Est. Total Payments 26,168,317 20,939,200 18,494,515
NPV @ 4.0% 18,925,764 16,770,965 16,006,362
Interest % of Total 42% 28% 19%
Payment Efficiency 174% 139% 123%
NPV calculations were applied to the estimated total payments and represent the present
value of future costs. A 4% discount rate was used to reflect the potential investment
returns available to the City on safe alternatives such as certificates of deposit (CDs) and
treasury bonds. This can also be viewed as the opportunity cost associated with investing
into CalPERS versus other available instruments. In any case, the NPV validated that
both alternatives are less costly and would yield a positive return on the investment. NPVs
for scenarios 3 and 5 are estimated to cost $2.2 million and $2.9 million less than the
default, respectively.
10
$3.0
c:::J Default Req. Payment
Scenario 5 ADP
2.7 2.7 2.7 2.7 2.7 2.7
c:::J Scenario 5 Req. Payment
-:-Scenario 5 Total Req. Payment+ ADP
VI z
0 :J $2.S
...J
~
$2.0
$1.S
$1.0
$0.S
0.0
$0.0 ◊
~~$~~~~~~~~✓~~$~~~~~~✓~~ ########~~~#~#~~###~~###
The interest-to-principal ratio revealed the proportion of total payments applied to the UAL
balance. This measure determined that 42% of total payments made under the default
scenario would go toward interest. On the other hand, approximately 28% and 19% of
total payments in scenarios 3 and 5 would go toward interest. The interest-to-principal
ratios are provided in Chart 8.
Chart 8. Interest-to-Principal Ratios
Lastly, determining payment efficiency for each scenario revealed the amount paid on top
of the principal UAL balance. The closer this rate is to 100%, the more efficient a payment
plan is. For instance, the efficiency rate of the default scenario is 174% and implies that
the City would pay 74% more than the original UAL balance. Each alternative scenario is
more efficient than the default as indicated by the lower percentages in Table 2.
FAC Recommendation
The FAC’s proposed recommendation resulted from a series of meetings and discussions
regarding the anticipated increase to the City’s UAL. Given the expected outlook, the FAC
selected ADP scenario 5 as the recommended option for City Council’s consideration.
Scenario 5 was found to be the most efficient option and provides a framework to
vigorously reduce long-term costs related to the City’s unfunded liabilities. This selection
also coincides with the FAC’s viewpoint on eliminating unfavorable debt with a variable
interest rate and sustaining the City’s strong financial position.
However, the FAC also took the City’s competing priorities and limited resources into
consideration. This thought was factored into the final recommendation and placed a limit
on the proposed funding source. In brief, the FAC, in agreement with Staff, unanimously
supported the following recommendation:
• Reduce the City’s UAL according to scenario 5 as laid out by staff using General
Fund unallocated balance, when available, each year beginning with the prior
closed year.
• Annual payments under scenario 5 should not exceed 50% of the prior year’s
General Fund unallocated balance.
• Consider ADPs during annual budget process.
11
DEFAULT SCENARIO SCENARIO 3 SCENARIO 5
Interest
42% Principal
58%
• Consider making the scheduled payment in scenario 5 of up to $1.6 million in FY
2023-24 (limited to 50% of the prior year unallocated fund balance).
• Update Pension Guidelines to include language for the optional ADPs and the
language of not exceeding 50% of the prior year’s unallocated balance.
The proposed ADPs for scenario 5 are included in Table 3. As shown, annual ADPs and
estimated UAL payments total approximately $2.7 million over most of the amortization
period. It’s critical to note that the payment schedule below, specifically with respect to
the estimated UAL payments, is contingent upon the full ADP amounts originally
proposed in scenario 5. In other words, ADPs based on 50% of the unallocated fund
balance will likely be less than the original amounts proposed.
Table 3. Proposed ADP Payment Schedule:
(In millions) 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30
Est. Payment $1.1 $1.1 $1.1 $1.0 $0.9 $0.9 $0.7
ADP $1.6 $1.6 $1.7 $1.7 $1.8 $1.7 $0.9
Total $2.7 $2.7 $2.7 $2.7 $2.7 $2.6 $1.7
The original framework of scenario 5 was ultimately intended to help the City reach its
90% funded status goal efficiently and at the lowest cost. Nevertheless, all future required
UAL payments will be subject to actual ADP amounts and CalPERS actual investment
performance.
Taking the FAC’s recommended contingencies into consideration, Staff anticipates an
ongoing review of the UAL to monitor significant changes in expected payments and to
recommend ADP amounts each fiscal year to remain consistent with desired outcome of
scenario 5, if adopted. This evening, Staff recommends the City Council approve FAC’s
recommendation regarding ADP scenario 5. The FAC’s additional recommendation for
revisions to the City’s pension guidelines are reviewed in the following section.
Pension Plan Guideline Revisions
As approved by the City Council on February 2, 2021, the pension guidelines are
designed to address and manage the costs associated with City pension plans and the
UAL. The City Council, with recommendations from the FAC, may revoke or amend the
guidelines at any time when in the best interest of the City. According to the adopted
guidelines, this document shall be reviewed every three years or as needed to determine
if changes are warranted and to ensure resources accumulate adequately.
Findings from the pension analysis revealed that standalone ADPs are not listed as an
option in the guidelines. Additionally, the FAC’s recommendation to select ADP scenario
5 would specify additional conditions for the proposed funding source, if affirmed. Other
information originally incorporated into the guidelines was also reviewed for potential
revisions. Resulting from this review, the following revisions are recommended for the
City Council’s consideration:
12
• Increase employee contribution rate for Tier 3 to 6.75% of annual salary.
The determination of California Public Employees' Pension Reform Act (PEPRA)
member contribution rates is based on 50% of the total normal cost rate from the
AVR. In FY 2023-24, the PEPRA member contribution rate will increase from
6.25% to 6.75% based on the June 30, 2021 valuation. In accordance with state
law, if the total normal cost rate changes 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. Thus, Staff recommends revising the
pension guidelines to include the required increase.
• Add “schedule of amortization bases” to definitions.
The schedule of amortization bases has been defined to specify the differences in
each individual gain or loss base. Positive or negative bases result from a plan’s
experience or change and either increase or decrease the UAL balance on an
annual basis. Each individual base is amortized in accordance with the CalPERS
amortization policy. Staff recommends adding this definition to the guidelines.
• Add FY 2030-31 as the ending fiscal year for the 10-year goal.
The second goal of the pension guidelines is “to achieve and maintain a 90%
funding level of the City’s UAL over the next seven to ten years.” For clarity, FY
2030-31 has been added as the end date for this timeline. Staff recommends
revising the pension guidelines to include the specific timeline to clarify the 90%
funded status goal.
• Incorporate ADP contributions and usage options.
ADPs have been included as an option to stabilize contributions and mitigate long-
term impacts from the UAL. The City can elect to make ADPs at any time and in
any amount to reduce the UAL. Usage and contribution options have been defined
and added to the guidelines. Staff recommends the City Council incorporate the
option of including ADPs into the pension guidelines.
• Update term for Annual Comprehensive Financial Report (ACFR).
Reference to the Comprehensive Annual Financial Report (CAFR) has been
updated to reflect current terminology. Staff recommends the City Council approve
this revision to update the current terminology in reference to the City’s annual
financial report.
To ensure consistency and updated guidance, Staff recommends the City Council
approve the proposed revisions to the Pension Plan Guidelines (Attachment A).
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ADDITIONAL INFORMATION:
The 2022 AVR
The 2022 AVR provided by CalPERS is expected to become available in August 2023. A
summary of results and analysis will be incorporated into the AVR report presented to the
FAC and City Council in September/October 2023.
Employee Pension Service Fund
Since the inception of the pension guidelines, the Employee Pension Service Fund
(EPSF) has an estimated fund balance of approximately $1 million ending FY 2023 -24.
This includes FY 2023-24 transfers-in of $291,300 from General Fund, $9,700 of interest
earning, and expenditures of $135,700 for the increases in the benefits category
approved by the City Council at the Budget Workshop on April 6. However, the 2022
projected amortization schedule estimates that required UAL payments will exceed $0.9
million through FY 2036-37. UAL payments above this threshold covered by the EPSF
are expected to average roughly $0.5 million over 15 years under current assumptions.
Consequently, without future transfers from the General Fund, projected UAL payments
will deplete the EPSF by FY 2027-28.
CONCLUSION:
With respect to the City’s approach to fiscal resiliency, the FAC worked closely with Staff
to forecast and analyze the future implications of CalPERS’ FY 2021-22 investment loss.
Details from the requested analyses revealed that the City’s UAL balance is estimated to
increase from $10 million to $15 million ending June 30, 2022. Additional payment
strategies to mitigate long-term impacts were also examined and presented as potential
alternatives to the default scenario. To advance these efforts, a subcommittee was
formed by the FAC to select and evaluate three final scenarios and to return to the full
Committee with a proposed recommendation for City Council consideration.
The City’s Pension Plan Guidelines were also reviewed during this process. Following the
FAC’s approval, proposed revisions to the Pension Plan Guidelines include increasing
the member contribution rate for Tier 3 employees based on the 2021 AVR, clarifying
definitions and timelines, incorporating optional ADPs, and updating terminology.
Actions taken by the FAC culminated in the final recommendations presented for City
Council consideration. In support of this effort, Staff recommends the City Council
approve the FAC’s recommendations as proposed. Namely, affirming the adoption of
ADP scenario 5 with all contingencies as a funding strategy to mitigate increasing pension
liabilities, and affirming the proposed revisions to the City’s pension guidelines.
ALTERNATIVES:
In addition to the Staff recommendation, the following alternative action s are available for
the City Council’s consideration:
14
1. Approve Recommendation Item No. 2 only, adopting the updated pension
guideline revisions, which incorporates the proposed changes and adds ADPs as
an option for managing unfunded pension liabilities , and direct staff to continue
working with the FAC on ADP scenarios with Council input.
2. Direct Staff to evaluate pension obligations alongside other current and future
citywide priorities.
3. Take both of the above alternative actions.
4. Take other action, as deemed appropriate.
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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
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• 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
determination of PEPRA member contribution rates is based on 50% of the
total normal cost rate from the AVR. Effective July 1, 2023,for the Tier 3 rate
is 6.750250% 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.
Schedule of Amortization Bases – gain or loss bases are the plan’s allocated share of
the risk pool’s experience and assumption change. Positive or negative bases result from
a plan’s experience or change that either increases or decreases the UAL balance and
are amortized in accordance with the CalPERS amortization policy.
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.
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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.
• 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.
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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 ending in FY 2030-31. 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 n on-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.
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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. Additional Discretionary Payments (ADPs)
To stabilize contributions and mitigate long-term impacts from the UAL, the City
can elect to make ADPs at any time and in any amount to reduce the UAL.
Additional contributions may be considered either on an ad hoc basis or in
accordance with an internal funding plan during the annual budget process. ADPs
are nonobligatory and do not commit the City to any additional payment schedules.
1. ADP Contribution Options:
• The City may consider, on an annual basis, to contribute no more than 50%
of the prior year General Fund surplus (revenues minus expenditures,
including transfers) towards ADPs in accordance with ADP scenario 5.
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. ADP Usage Options:
• Ad hoc basis – ADPs can increase a plan’s funded status, stabilize future
contributions, and reduce long-term debt. As a supplement to minimum
required contributions, the City may consider making an ADP at any time
and in any amount.
• Internal funding plan– the City Council, with recommendations from the
City’s Finance Advisory Committee, may adopt an internal funding plan to
proactively manage the UAL. Given this occurrence, ADPs will be
considered during the annual budget process in accordance with the
adopted funding strategy as determined by the City Council.
D.E. 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
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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.F. 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 Comprehensive Financial Report
(CACFR) 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.
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• 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.G. 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.
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FINANCE ADVISORY COMMITTEE MEETING DATE: 04/13/2023
AGENDA REPORT
AGENDA TITLE:
Consideration and possible action to review the first revision to the City’s Pension Plan
Guidelines.
RECOMMENDED FINANCE ADVISORY COMMITTEE ACTION:
(1)Direct staff to forward the revised pension guidelines to the City Council.
FISCAL IMPACT: N/A
Amount Budgeted: N/A
Additional Appropriation: N/A
Account Number(s): N/A
ORIGINATED BY: Jason Loya, Senior Administrative Analyst
REVIEWED BY: Vina Ramos, Deputy Director of Finance
APPROVED BY: Trang Nguyen, Director of Finance
ATTACHED SUPPORTING DOCUMENTS:
A.Attachment A – Pension Plan Guidelines_Revised Draft
B.Attachment B – 2023-02-09 FAC Subcommittee ADP Recommendation
C.Attachment C – 2022-12-19 Impact of ADPs on CalPERS UAL
BACKGROUND:
In September 2022, the Finance Advisory Committee (FAC) discussed the financial
implications of CalPERS’ FY 2021-22 preliminary investment loss. The result of this
discussion led to the committee’s initial recommendation to examine additional payment
strategies and mitigate future increases to the City’s Unfunded Accrued Liability (UAL).
As requested, a cost-benefit analysis associated with making Additional Discretionary
Payments (ADPs) to reduce the UAL was conducted and presented for review.
Findings from the analysis were presented at the FAC meeting on December 19, 2022
(attachment C). As indicated in the report, the total UAL balance is projected to increase
from $10 million to $15 million, or by 50%, ending June 30, 2022. Annual required UAL
contributions are also expected to rise according to the projected 2022 amortization
schedule. In addition to these findings, five ADP options were examined and presented
as alternatives to the baseline scenario.
Following the presentation, FAC members formed an ad hoc subcommittee tasked to
further review and select the final ADP options for recommendation to the City Council.
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RANCHO PALOS VERDES
J"t--
V(L
The options selected for evaluation included the baseline scenario, ADP option 3, and
ADP option 5. Volunteers for the ad hoc subcommittee included Member Krista Johnson,
Member John MacAllister, and Member Kevin Yourman. Three meetings were held
between the subcommittee and Staff to develop a supplemental analysis and refine the
evaluation criteria. The overall findings supported the viability of scenarios 3 and 5 as
potential alternatives and noted necessary revisions to the City’s pension guidelines.
On February 9, 2023 (attachment B), the ad hoc subcommittee’s recommendation was
proposed to the FAC and approved as modified during the meeting. More specifically, the
final recommendation was adjusted to align the proposed payment schedule with the
City’s current budget cycle. Staff were also asked to return to the committee with revised
pension guidelines in support of the recommendation to City Council. This report
summarizes the first revisions to the City’s Pension Plan Guidelines.
DISCUSSION:
As approved by the City Council on February 2, 2021, the pension guidelines are
designed to address and manage the costs associated with City pension plans and the
UAL. The City Council, with recommendations from the FAC, may revoke or amend the
guidelines at any time when in the best interest of the City. Additionally, and as stated,
the guidelines shall be reviewed every three years or as needed to determine if changes
are warranted and to ensure that resources accumulate adequately.
Resulting from the committees review and proposed recommendations, the revisions
detailed below have been incorporated into the Pension Plan Guidelines:
• The employee contribution rate for Tier 3 is 6.750% of their annual salary
The determination of PEPRA member contribution rates is based on 50% of the
total normal cost rate from the AVR. In FY 2023-24, the PEPRA member
contribution rate will increase from 6.25% to 6.75% based on the June 30, 2021,
valuation. In accordance with state law, if the total normal cost rate changes 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.
• Adding “schedule of amortization bases” to definitions
The schedule of amortization bases has been defined to specify the differences in
each individual gain or loss base. Positive or negative bases result from a plan’s
experience or change and either increase or decrease the UAL balance on an
annual basis. Each individual base is amortized in accordance with the CalPERS
amortization policy.
• Including the ending fiscal year for the 10-year goal
The second goal of the pension guidelines is “to achieve and maintain a 90%
funding level of the City’s UAL over the next seven to ten years.” For clarity, FY
2030-31 has been added as the end date for this timeline.
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• Incorporating ADP contributions and usage options
ADPs have been included as an option to stabilize contributions and mitigate long-
term impacts from the UAL. The City can elect to make ADPs at any time and in
any amount in order to reduce the UAL. Usage and contribution options have been
defined and added to the guidelines.
• Updating term for Annual Comprehensive Financial Report (ACFR)
Reference to the Comprehensive Annual Financial Report (CAFR) has been
updated to reflect current terminology.
Based on the information provided, Staff is seeking the Committee’s feedback on the
revised Pension Plan Guidelines (attachment A). Any recommendations received tonight
from FAC will be incorporated into the staff report presented to the City Council in May.
CONCLUSION:
Following the formation of an ad hoc subcommittee, three meetings were held to
deliberate and propose a recommendation to the FAC at the February meeting. Actions
taken by members of the ad hoc subcommittee led to a supplemental analysis of the
selected scenarios and the recommendations presented for review and consideration. In
response to the Committee’s request, Staff has conducted a thorough review of the City’s
Pension Plan Guidelines and provided the necessary revisions to support the final ADP
recommendation to the City Council. Updates include an increase to the Tier 3 member
contribution rate based on AVR, clarifying definitions and timelines, ADP usage and
contribution options, and updated terminology. Pursuant to this discussion, the final
recommendation and draft revisions to the pension guidelines will be brought to the City
Council for consideration.
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City of Rancho Palos Verdes
FINANCE ADVISORY COMMITTEE MEETING DATE: 02/09/2023
AGENDA REPORT
AGENDA TITLE:
Consideration and possible action to review and discuss the proposed recommended
options for Additional Discretionary Payments (ADPs) towards the City’s Unfunded
Accrued Liability (UAL).
RECOMMENDED FINANCE ADVISORY COMMITTEE ACTION:
(1)Receive and file the report and provide feedback on the ad hoc subcommittee’s
recommendation, and
(2)Direct staff to revise the Pension Guidelines to include the recommended option
and return at a future meeting for review.
FISCAL IMPACT: N/A
Amount Budgeted: N/A
Additional Appropriation: N/A
Account Number(s): N/A
ORIGINATED BY: Jason Loya, Senior Administrative Analyst
REVIEWED BY: Krista Johnson, Member
John MacAllister, Member
Kevin Yourman, Member
APPROVED BY: Trang Nguyen, Director of Finance
ATTACHED SUPPORTING DOCUMENTS:
A.Attachment A – 2022-12-19 SR Impact of ADPs on CalPERS UAL
BACKGROUND:
Each year, the Finance Advisory Committee (FAC) reviews the Annual Valuation Reports
(AVR) from CalPERS to determine the financial condition of City pension plans. Results
from the 2021 valuations released in August 2022 were positive. However, around the
same time, CalPERS announced a preliminary net investment return of -6.1% for the
2021-22 Fiscal Year.
In September 2022, members of the FAC reviewed and discussed the financial
implications of CalPERS’ FY 2021-22 preliminary investment loss. This discussion led to
an initial recommendation by the committee to examine additional payment strategies
given the likely increase to the City’s UAL balance. The recommendation requested an
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analysis specific to the costs and benefits associated with making ADPs to reduce the
total unfunded liability.
Findings from the recommended analysis were presented to FAC at the December
meeting. By this time, CalPERS also reported a revised net investment return of -7.5%
for FY 2021-22 which was included in the analysis. As indicated in the report, the total
UAL balance was projected to increase from $10 million to $15 million, or 50%, ending
June 30, 2022. The results also revealed a rise in annual required UAL contributions
based on the projected 2022 amortization schedule. Additionally, five ADP options were
presented as alternatives to the baseline scenario.
At the conclusion of this discussion, the FAC proposed the creation of an ad hoc
subcommittee tasked to review and recommend three options for the FAC to consider at
a future meeting before the committee makes a recommendation to the City Council. The
three options, which referenced ADP scenarios 3 and 5, were intended to provide the City
Council with an assortment of payment strategies ranging from moderate to aggressive.
The voluntary ad hoc subcommittee included Member Krista Johnson, Member John
MacAllister, and Member Kevin Yourman. This report summarizes the actions and
outcomes from the ad hoc subcommittee meetings and includes additional criteria to
further evaluate the selected scenarios.
DISCUSSION:
Summary of Subcommittee Meetings
The first meeting held on January 11 began with a discussion of the goal to select three
ADP scenarios for consideration at the February FAC meeting. As presumed, the ad hoc
subcommittee reaffirmed the selection of ADP scenarios 3 and 5 for further consideration.
Moreover, it was agreed that the 2022 projected results, or default scenario, should be
included as one of the three options.
To better evaluate each scenario and justify the final recommendation, members of the
ad hoc subcommittee requested a supplemental analysis. The requested measures
provide additional criteria to validate and compare each of the selected scenarios. As
such, Staff performed the following calculations and analysis:
• Time value of money
o Concept accounting for the value of future cash inflows and outflows
• Discounted Cash Flow (DCF)
o Calculates the present value of future cash flows based on discount rate
• Net Present Value (NPV)
o Calculates the difference between the present value of cash flows
• Efficiency / Interest Rates
o Analyzing efficiency helps reduce costs and manage resources
Results of the supplemental analysis were presented at the second meeting held on
January 25. Following the presentation, members in attendance (Johnson and Yourman)
continued to discuss the financial implications posed by the projected outlook in addition
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to interest in paying-off the UAL balance expeditiously based on feasibility. At the third
and final meeting held on February 1, all three members of the subcommittee (Johnson,
Yourman, and MacAllister) discussed and supported the following recommendations:
• Council should approve to pay off Pension UAL according to scenario 5 as laid out
by staff from the General Funds Surplus each year beginning with the previous
closed year.
o The proposed ADP schedule is as follows:
2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 TOTAL
500,000 1,644,469 1,637,752 1,668,753 1,719,752 1,806,753 1,741,753 934,000 11,653,232
• The annual payment under scenario 5 shall not exceed 50% of the prior year’s
surplus.
• Recommend ADPs during annual budget process.
• Recommend making the second scheduled payment in scenario 5 of $1.6 million
in place of the $0.5 million proposed in year 1 of FY 22-23.
• Update Pension Guidelines to include language for the optional ADPs and the
language of not exceeding 50% of the prior year’s surplus.
All ADPs considered in these scenarios are optional and do not obligate the City to make
such payments in accordance with the schedule above. The City can choose to forego
optional payments at any time and is only obligated to make the annual required UAL
payment. Staff will annually assess changes to the amortization schedule based on the
AVR results and the actual impact from making ADPs. This information will be reported
on an annual basis and incorporated into the annual budget cycle.
Scenario Overview
The supplementary analysis focuses on three scenarios selected by the subcommittee.
All projections are based on current assumptions and subject to change based on actua l
results. In review of the key data, the first chart breaks down the total estimated costs by
required UAL payment and ADP.
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Chart 1. Estimated Total Contributions
According to current projections, the default amortization schedule is estimated to cost
approximately $26.2 million in total payments. Scenarios 3 and 5 fall short of this total by
roughly $5.2 million and $7.7 million. Scenario 3 is comprised of about $8 million in ADPs
and is projected to lower total required payments to $12.9 million. Lastly, scenario 5
proposes almost $11.7 million in ADPs and is estimated to reduce total required payments
to $6.8 million over the amortization period.
To recall other key points, the table below summarizes the anticipated number of years it
will take to reach a 90% funded status. The funded status of City pension plans is
expected to fall from 81% in 2021 to roughly 70% in 2022. As stated in the City’s Pension
Plan Guidelines, one of the primary goals is to achieve a 90% funded status within seven
to 10 years. This period began in FY 2021-22 and ends in FY 2030-31.
Table 1. Projected Number of Years to Reach 90% Funded Status
Default Scenario Scenario 3 Scenario 5
Years to 90% Funded 13 9 7
Fiscal Year 2033-34 2029-30 2027-28
Charts 2 and 3 expand on the first chart by illustrating annual payments from the projected
amortization schedules. Scenarios 3 and 5 are shown as an overlay on the default
schedule and distinguish between required UAL payments and ADPs. Moreover, the
proposed level dollar strategies in scenarios 3 and 5 outline the maximum contribution
amounts each year under current assumptions.
26.2
12.9
6.8
8.0
11.7
26.2
20.9
18.5
$0
$5
$10
$15
$20
$25
$30
Default Scenario 3 Scenario 5MILLIONSADP
Req. UAL Payment
Total Req. Payment + ADP
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Chart 2. 2022 Projected Schedule - Required UAL Payments (Scenario 3)
Chart 3. 2022 Projected Schedule - Required UAL Payments (Scenario 5)
Supplemental Analysis and Evaluation
Each scenario is next assessed using an interest to principal ratio in terms of total
estimated contributions. Chart 4 provides a side-by-side look at the percentages and
demonstrates how interest and principal are allocated. The default scenario is projected
to pay 42% interest, the highest amount of all options. On the other hand, almost 81% of
total contributions are applied to the principal balance in scenario 5. The proportions in
Scenario 3 fall between the two other options with 28% of payments going towards
interest and 72% going towards principal.
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Default Req. Payment -opt 3 Req. Payment -opt 3 ADP -opt 3 Total Req. Payment+ ADP
Vl $2.0 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
2
0 $1.8 1.7 .6 1 ~ :j 1
~ $1.6
$1.4
$1.2
$1.0
$0.8
$0.6
$0.4
$0.2
$0.0
.
,~
I.,.....
l,"
I/
--1..--I/ _.
0 .2
I o.o
Default Req. Payment -Opt 5 Req. Payment -Opt 5 ADP -Opt 5 Total Req. Payment+ ADP
Vl $3.0
2
0
~ $2.5
~
$2.0
$1.5
$1.0
$0.5
$0.0
2 .7 2 .7 2.7 2 .7 2 .7 2 .7
0.0
Chart 4. Percentage of Interest to Principal
A cash flow analysis was performed to determine the effects of ADPs on required UAL
payments. As ADPs are made each year, the analysis suggests that doing so reduce s
the annual amounts required by CalPERS and seen in scenarios 3 and 5. The projected
amortization schedules for scenarios 3 and 5 in table 2 are contingent upon the City
making ADPs. The projected default schedule assumes no ADPs are made.
Table 2. Estimated Required UAL Payments – All Scenarios
FY Default Req. UAL
Payment
Option 3 Req. UAL
Payment
Option 5 Req. UAL
Payment
2022-23 1,077,244 1,077,244 1,077,244
2023-24 1,070,317 1,039,283 1,039,283
2024-25 1,196,000 1,104,000 1,046,000
2025-26 1,292,000 1,142,000 1,015,000
2026-27 1,385,000 1,177,000 964,000
2027-28 1,460,000 1,191,000 877,000
2028-29 1,627,000 1,295,000 942,000
2029-30 1,663,000 1,269,000 958,000
2030-31 1,700,000 1,234,000 -
2031-32 1,738,000 1,191,000 -
2032-33 1,728,000 1,088,000 -
2033-34 1,716,000 961,000 -
2034-35 1,684,000 208,000 -
2035-36 1,627,000 - -
2036-37 990,000 - -
2037-38 915,000 - -
2038-39 835,000 - -
2039-40 772,000 - -
2040-41 731,000 - -
2041-42 609,000 - -
2042-43 481,000 - -
2043-44 877,000 - -
2044-45 72,000 - -
Total Est. Payments 26,168,317 12,899,283 6,841,283
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DEFAULT SCENARIO SCENARIO 3 SCENARIO 5
Interest
42% Principal
58%
When compared to the default option, scenarios 3 and 5 are estimated to increase
projected savings by a total of $13.3 million and $19.3 million, respectively. However,
after accounting for the total proposed ADPs, projected net savings are about $5.2 million
and $7.7 million. ADPs must be applied in order to achieve the estimated results.
Table 3. Projected Net Savings – Required UAL Payment Schedule with ADPs
Default Scenario 3 Scenario 5
Projected Savings 0 13,269,034 19,327,034
Proposed ADPs 0 (8,039,917) (11,653,232)
Projected Net Savings 0 5,229,117 7,673,802
Table 4 adds to the cash flow analysis by recognizing total net outflows and inflows
according to projections. Expected cash flows represent the net amount of dollars coming
in and going out across the full amortization period. This is determined by finding the
difference between ADPs and gross cash flow on an annual basis.
Table 4. Projected Net Cash Flows – Scenarios 3 & 5
Scenario 3 Scenario 5 Difference
Total Est. Outflow (4,210,883) (8,801,198) (4,590,315)
Total Est. Inflow 9,440,000 16,475,000 7,035,000
Projected Net Savings 5,229,117 7,673,802 2,444,685
Scenario 3, for example, potentially results in $4.2 million flowing out over the first 11
years of the amortization schedule. Just over $9.4 million would flow into the City over the
final 12 years and results in an estimated net savings of $5.2 million. In scenario 5,
approximately $8.8 million flows out over 8 years and nearly $16.5 million flow s in over
15 years. Without factoring in the discount rate and calculating NPV, there is a difference
of $2.4 million between these two scenarios. Net cash flow is illustrated in chart 5.
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Chart 5. Net Cash Flows
NPV or DCF is the difference between the present value of cash inflows and present
value of cash outflows over time. A dollar today is worth more than a dollar in the future
because inflation erodes the value of money over time . However, growth opportunities
such as investing in a safe asset helps to off-set the erosion. In reference to cash flows,
NPV calculates the current value of future inflows using a particular discount rate. The
selected rate for this analysis is based on the current two-year treasury yield.
A 4% discount rate reflects the potential returns available on alternative investments. In
other words, its assumed that the City could earn at least 4% by investing in a safe asset
like CDs and treasury bonds. More importantly, a positive NPV suggests that the rate of
return will be above the discount rate and is a viable option. Taking this into account, the
NPV of $1.4 million and $2.2 million in each scenario indicate that projected earnings
exceed anticipated costs.
Table 5. Net Present Value of Projected Savings – Scenarios 3 & 5
Scenario 3 Scenario 5 Difference
Projected Net Savings 5,229,117 7,673,802 2,444,685
Net Present Value 1,426,885 2,191,488 764,603
Based on the time value of money, table 5 reveals that the present value of $5.2 million
and $7.7 million (future savings) is worth more today than in the future. Another notable
observation is the difference between each scenario when calculating NPV. The
difference between the two options of $0.76 million shows us that the net benefit is much
smaller than the $2.4 million initially leads us to believe.
Results from the supplemental analysis and evaluation are summarized using the criteria
in table 6. The difference in estimated total payments is mostly attributable to shortened
amortization periods. NPV is applied to the estimated totals as well and is used to show
C-8
■ Scenario 3 ■ Scenario 5
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the present value of future costs. In this case, the NPV validates that both alternatives
are less than the default option when discounted at 4%. Scenarios 3 and 5 are estimated
to cost around $2.2 million and $2.9 million less than the default, respectively. Similar to
above, the difference between either alternative is roughly $0.76 million.
Table 6. Evaluation Summary – All Scenarios
Default Scenario Scenario 3 Scenario 5
Est. Total Payments 26,168,317 20,939,200 18,494,515
NPV @ 4.0% 18,925,764 16,770,965 16,006,362
Interest % of Total 42% 28% 19%
Payment Efficiency 174% 139% 123%
Once again, the interest to principal ratio measures the proportion of total payments
applied to the UAL balance. A lower percentage of interest reflects a higher percentage
of principal. Separately, payment efficiency points to the amount of interest paid above
the principal balance. Under the default scenario, a 174% efficiency rate implies that
accumulated interest exceeds the principal UAL balance by 74%. A lower percentage
equates to more efficiency and less accumulated interest.
ADDITIONAL INFORMATION:
Managing Employer Contributions
According to CalPERS, every dollar that is set aside earlier than necessary is expected
to increase the amount of investment earnings available to pay benefits and reduce total
contributions. Whether on an ad hoc basis or as an ongoing plan, the benefits of making
additional payments include reducing the City’s UAL and increasing the total assets
available to earn an investment return on. At the same time, exposing more assets to the
market can also come at a cost during economic downturns.
Historical General Fund Surplus FY 2018 – 2022
For historical reference, table 7 highlights the previous 5 years of general fund surplus,
net of transfers. This information can be taken into consideration as it relates to the
recommended changes and use of general fund surplus to fund ADPs.
Table 7. Five-Year Historical GF Surplus Totals
FY 2017-18
Actual
2018-19
Actual
2019-20
Actual
2020-21
Actual
2021-22
Unaudited
Total Surplus 1,253,557 2,709,587 960,162 4,050,064 4,593,127
50% 626,779 1,354,794 480,081 2,025,032 2,296,564
C-9
CONCLUSION:
Following the formation of an ad hoc subcommittee, three meetings were held to
deliberate and propose a recommendation to the FAC at the February meeting. Actions
taken by members of the ad hoc subcommittee led to a supplemental analysis of the
selected scenarios and the recommendations presented for review and consideration.
The overall findings from the analysis help support the viability of scenarios 3 and 5 as
potential alternatives to the default option. Pursuant to this discussion, a final
recommendation and revisions to the pension guidelines will be brought back to the
Committee for final approval and recommendation to the City Council.
C-10
City of Rancho Palos Verdes
FINANCE ADVISORY COMMITTEE MEETING DATE: 12/19/2022
AGENDA REPORT
AGENDA TITLE:
Consideration and possible action regarding the impact of making Additional
Discretionary Payments (ADPs) toward the City’s Unfunded Accrued Liability (UAL).
RECOMMENDED FINANCE ADVISORY COMMITTEE ACTION:
(1)Receive and file the report and provide Staff with direction on the optional ADPs.
FISCAL IMPACT: N/A
Amount Budgeted: N/A
Additional Appropriation: N/A
Account Number(s): N/A
ORIGINATED BY: Jason Loya, Senior Administrative Analyst
REVIEWED BY: Vina Ramos, Deputy Director of Finance
APPROVED BY: Trang Nguyen, Director of Finance
ATTACHED SUPPORTING DOCUMENTS:
A.N/A
BACKGROUND:
Each year, actuaries from the California Public Employees' Retirement System
(CalPERS) prepare Annual Valuation Reports (AVR) to disclose the financial condition of
City pension plans. On September 8, 2022, the most recent valuations were presented to
the City’s Finance Advisory Committee (FAC) as part of the FY 2022-23 Work Plan. The
ensuing discussion led to a request made by the Committee for staff to conduct an
analysis on the impact of making one-time or ongoing ADPs toward the City’s UAL. This
report presents the findings from this analysis and potential strategies for consideration.
As determined in the June 2021 AVR, the estimated required contribution for all
miscellaneous plans in FY 2023-24 totals $1.8 million. This total includes the normal cost
of $0.7 million and UAL payment of $1.1 million. Through June 30, 2021, the city
maintained a total UAL balance of $10 million, which is expected to decrease to $9.3
million by June 30, 2023, based on actuarial assumptions. CalPERS also determined that
the City’s overall funded status increased from 71.8% in 2020 to 81.4% in 2021.
The latest valuations further reveal that the City’s funded status is projected to reach 90%
by FY 2029-30 when applying the assumptions and discount rate of 6.8% recently
adopted by CalPERS. One of the primary goals defined in the City’s Pension Plan
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Guidelines is to achieve a 90% funded status within seven to 10 years. This 10-year
period began in FY 2021-22 and ends in FY 2030-31 following implementation of the
guidelines in February 2021. As of the 2021 AVR, the City is on target to meet this goal.
Considering the City’s approach to fiscal resiliency, the committee members also
discussed CalPERS’ FY 2021-22 investment loss of -6.1% at the September meeting.
The actual impact from a negative return has yet to be determined, however, the FAC
found it prudent to examine additional payment strategies that may help manage probable
increases to the City’s UAL balance. The committee’s recommendations include:
• Perform an analysis to determine the costs and benefits of an ADP toward the
City’s UAL balance.
• Present findings from the analysis to FAC at a future meeting.
This report adheres to the primary goals of stabilizing annual contributions and increasing
the funded ratio to 90% within seven to 10 years, consistent with the pension guidelines.
With respect to the stated goals and committee’s request, the subsequent discussion is
summarized to include:
• An analysis of current and projected amortization schedules;
• ADP scenario evaluations and strategies;
• Amortization payoff priority options; and
• Impacts to the Employee Pension Service Fund.
Staff will return to the City Council with any recommendations from FAC resulting from
these findings. As technical note, the scenarios evaluated in this report do not include
future UAL costs for the City’s Tier 2 and Tier 3 pension plans. This is mainly due to each
plan’s current UAL balance of $0, and the City’s focus on Tier 1 liabilities. Future impacts
to Tier 2 and Tier 3 will be assessed when new information becomes available.
DISCUSSION:
Analysis of Amortization Schedules
Due to the two-year lag, this analysis starts by examining the 2021 amortization schedule
for the UAL balance of $9.3 million as of June 30, 2023. The 2021 AVR uses a discount
rate of 6.8% per year to forecast the amortization period and annual UAL payments. Table
1 references the required UAL payment of $1.1 million in FY 2023-24 and projects the
next five years of payments through FY 2028-29 as determined by CalPERS.
Table 1. Projected UAL Payments (Assumes 6.8% Return)
Required
Contribution Projected Future Employer Contributions
Fiscal Year 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29
2021 Schedule (Tier 1) $1,070,317 $1,064,000 $1,027,000 $988,000 $931,000 $966,000
D-2
Under these assumptions, the UAL balance of $9.3 million is amortized over 19 years
and estimated to cost $14.2 million in total payments, which includes $4.9 million in
interest. Additionally, and as mentioned, the City’s funded status is anticipated to reach
90% by FY 2029-30 and be paid in full by FY 2041-42 according to the current schedule.
Using data from the 2021 AVR, chart 1 illustrates the City’s historical trend in annual UAL
payments combined with the current amortization schedule. From FY 2016-17 to FY
2023-24, aggregate UAL payments have grown at an average annual rate of 14.5%. This
is partly due to the 5-year ramp up in the CalPERS Amortization Policy whereas a single-
year investment gain or loss increases or decreases the required UAL contribution
incrementally over each of the next five years. The second segment of the line chart
represents the remaining payments according to the 2021 amortization schedule.
Chart 1. Contribution History and 2021 Amortization Schedule
While the chart above illustrates where the City is now, it does not reflect where the City
is heading. To account for the -6.1% loss, Staff utilized pension management tools to
estimate the financial implications of a negative return and evaluate potential payment
strategies. These tools included a contribution management spreadsheet provided by a
CalPERS actuary, and pension liability software from GovInvest.
The next table compares the expected UAL payments from the 2021 amortization
schedule to the projected results for 2022. Projections are necessary because the AVR
ending June 30, 2022, will not be released until August 2023. Table 2 considers the -6.1%
loss and projects future payments through FY 2028-29.
Table 2. Projected UAL Payments (Assumes -6.1% Return)
Required
Contribution Projected Future Employer Contributions
Fiscal Year 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29
2021 Schedule $1,070,317 $1,064,000 $1,027,000 $988,000 $931,000 $966,000
2022 Projection $1,070,317 $1,183,000 $1,266,000 $1,346,000 $1,408,000 $1,563,000
Variance $0 $119,000 $239,000 $358,000 $477,000 $597,000
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Required contributions are estimated to initially increase by $119,000 in FY 2024-25 and
continue to rise through FY 2028-29. The 2022 projected schedule does not affect
required contributions until FY 2024-25 because of the two-year lag.
Chart 2 expands on the projected impact by comparing each amortization schedule in full.
As observed, a -6.1% investment loss increases the required UAL contributions and
extends the amortization schedule by three years to FY 2044-45.
Chart 2. 2021 Amortization Schedule vs 2022 Projected Schedule (UAL Payments)
Consequently, the UAL balance of $10 million ending June 30, 2021, is now estimated to
increase rather than decrease to $9.3 million as previously anticipated. The UAL balance
projected in 2022 is estimated to increase by $4.9 million, or 50%, to $14.6 million ending
June 30, 2022. For additional reference, table 3 highlights the estimated short-term
impacts as it relates to the change in UAL balance from June 2021 to June 2023.
Table 3. Estimated Change in UAL Balance
Valuation Date Balance 6/30/21 Balance 6/30/22 Balance 6/30/23
6/30/2021 10,031,559 9,738,322 9,287,260
(Projected) 6/30/2022 10,031,559 14,608,000 14,488,000
Net Change ($) 0 4,869,678 5,200,740
Net Change (%) 0% 50% 56%
With a new UAL balance of $14.6 million, the City’s funded status is estimated to drop
from 81% in 2021 to roughly 70% in 2022 based on the given outlook. Another short-term
impact includes the potential rise in annual UAL contributions over the 5-year ramp-up
period. This rise in costs can be offset by future investment gains, additional contributions,
or adjustments to the amortization schedule.
In totality, CalPERS’ investment loss may cost an estimated $25 million in total payments
towards the new UAL balance. This exceeds the current estimate of $14.2 million in total
payments by $10.8 million. For broader perspective, chart 3 on the following page
compares the anticipated change in total UAL balance based on 2022 projections.
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Required Contributions --2021 UAL Payments --2022 Projected Payments
Chart 3. 2021 Amortization Schedule vs 2022 Projected Schedule (UAL Balance)
ADP Scenarios
Given the financial implications above, ADP scenarios were created to help determine
the costs and benefits of making additional payments to CalPERS. The 2022 projected
schedule is considered as the default option and sets the baseline for comparison. Each
ADP scenario considered is measured against the default option and is intended to arrive
at a 90% funded status within a 10-year period.
In connection with this analysis, the following information is also worth noting:
• This analysis uses a -6.1% return rate in 2022 and a 6.8% return rate for 2023 and
beyond.
• ADPs made during FY 2022-23 will not be applied to the projected June 30, 2022,
and 2023 investment gain or loss bases.
• ADPs made prior to FY 2023-24 will be applied to existing UAL bases as of the
2021 AVR.
• Schedules and figures below are for illustrative use and should not be considered
as an exact representation of actual future experience.
Lastly, actual contribution requirements may increase to the extent future CalPERS
investment returns are lower than the discount rate. Similarly, invest returns higher than
the discount rate may reduce future contributions. The net change between rates can be
used to help indicate the extent of a gain or loss. Table 4 recaps the net change in 2021
and 2022 and includes the investment return assumptions used for this analysis.
Table 4. Net Change in CalPERS Investment Return Assumptions
Valuation Date 6/30/2021 6/30/2022 6/30/2023 +
Investment Return 21.3% -6.1% 6.8%
Discount Rate 6.8% 6.8% 6.8%
Net Change 14.5% -12.9%
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-2.02.1 UAL Balance -2.02.2. Projected Balance
As stated, the UAL balance of $14.6 million is estimated to cost $25 million in total
payments over the full amortization period. The 2022 projected schedule also indicates
that it may now take 13 years to reach a 90% funded status, three years after the target
deadline. Alternatively, the ADP scenarios below use various strategies to reduce the
number of years it will take to reach 90%. A high-level overview of the estimated total
payments and timelines are shown in Table 5.
Table 5. 2022 Default Schedule and ADP Option Summary
Default
Scenario
Scenario
1
Scenario
2
Scenario
3
Scenario
4
Scenario
5
Total Payments 25,001,317 20,545,589 21,430,283 20,141,759 19,704,026 17,935,621
Yrs. to 90% FS 13 10 10 9 8 7
Correspondingly, estimated total payments decrease as the years to reach 90% are
reduced. Estimated total payments listed above, which include interest paid and ADPs,
represent the potential costs of each alternative over the full amortization period.
Alternative amortization schedules for each ADP scenario are estimated to cost less and
help the City reach it’s funded status goal.
To breakdown each scenario further, table 6 lays out a proposed payment schedule
exclusive to ADPs. This schedule considers making additional payments in FY 2022-23
and extends into future fiscal years depending on the methodology. Once again, total
ADP amounts are included in the estimated total payments.
Table 6. Proposed ADP Payment Schedule
FY Default
Schedule
Scenario
1
Scenario
2
Scenario
3
Scenario
4
Scenario
5
2022-23 $0 $4,000,000 $500,000 $500,000 $1,000,000 $500,000
2023-24 0 0 500,000 745,693 1,000,000 1,451,806
2024-25 0 0 500,000 688,976 1,000,000 1,445,089
2025-26 0 0 500,000 658,976 1,000,000 1,473,089
2026-27 0 0 500,000 631,976 1,000,000 1,517,089
2027-28 0 0 500,000 625,976 1,000,000 1,599,089
2028-29 0 0 500,000 531,976 0 1,606,089
2029-30 0 0 500,000 551,976 0 1,760,089
2030-31 0 0 0 581,976 0 0
2031-32 0 0 0 619,976 0 0
2032-33 0 0 0 715,976 0 0
2033-34 0 0 0 700,000 0 0
Totals $0 $4,000,000 $4,000,000 $7,553,477 $6,000,000 $11,352,339
The next section summarizes the strategies used within each ADP scenario. Charts
included combine the required UAL contributions with ADPs scheduled above and
illustrate differences between the default option and other alternatives.
D-6
Scenarios 1 and 2
Both ADP scenarios 1 and 2 have a total ADP of $4 million where scenario 1 represents
a one-time lump-sum payment made in FY 2022-23 and scenario 2 apportions the
payment across multiple years. Scenario 1, lump-sum payment, results in an immediate
reduction to the total UAL balance and future required payments compared to the 2022
default schedule. However, a substantial lump-sum payment carries greater investment
risk due to market volatility. No other ADPs are considered beyond the initial payment.
Scenario 2 apportions the $4 million across multiple years. Spreading payments out
lowers the investment risk and is an alternative to scenario 1. This scenario would allocate
$0.5 million in ADPs over an eight-year period from FY 2022-23 to FY 2029-30. Annual
UAL payments would be greater than the 2022 default schedule to start and would drop
below the default in FY 2030-31. Both ADP options are expected to achieve a 90% funded
status by year 10.
Chart 4. ADP Scenarios 1 and 2: Lump-Sum vs Installment
Scenarios 3, 4, and 5
Scenario 3 exemplifies a “level dollar” payment strategy and begins with an initial ADP of
$0.5 million in FY 2022-23. A level dollar payment structure is typically implemented after
initiating a “Fresh Start” and re-amortizing the UAL over a shorter horizon. This method
is exhibited in the CalPERS amortization policy and often implemented to minimize
variations in contribution rates. However, this scenario reflects a self-imposed level dollar
payment plan which is viewed as a “Soft Fresh Start” strategy.
A soft fresh start does not permanently alter the amortization period or required payments.
Staff does not recommend a “Fresh Start” at this time because doing so increases
required contributions to a fixed amount, rather than allowing for the City to use its
discretion. Nonetheless, scenario 3 entails a higher optional UAL payment compared to
the default schedule but is projected to reach a 90% funded status within 9 years.
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Scenario 4 considers additional payments of $1 million per year between FY 2022-23 and
FY 2027-28, six years total. The total annual payments would rise to just over $2 million
through FY 2027-28, averaging close to $0.8 million above the required payments in the
default schedule. Nevertheless, remaining payments would fall below the 2022 schedule
by an average of $0.5 million beginning in FY 2028-29. This scenario is projected to
achieve the 90% funded status within 8 years.
Scenario 5 also creates a self-imposed level dollar payment structure or “Soft Fresh
Start.” This scenario shortens the amortization period to seven years beginning in FY
2023-24 and hypothetically eliminates the UAL balance by FY 2029-30. Yet, annual
payments would exceed the default schedule by an average of $1.43 million each year
following an initial ADP of $0.5 million in FY 2022-23. Lastly, this scenario is projected to
arrive at a 90% funded status within 7 years.
Chart 5. ADP Scenarios: Level Dollar vs Annual Allocation
In summary, the scenarios above demonstrate potential outcomes and multiple strategies
available for consideration. Example scenarios demonstrating similar approaches were
provided in the 2021 AVR and discussed in the annual Staff report. The intended outcome
of all strategies reviewed is consistent with goals of the pension guidelines; however, they
are considered as supplementary options. Table 7 presents the projected total annual
UAL payments for all scenarios to provide a short-term comparison.
Table 7. Projected Change in Future Contributions (UAL + ADP)
Fiscal Year 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 Totals
2022
Projection $1,077,244 $1,070,317 $1,183,000 $1,266,000 $1,346,000 $1,408,000 $7,350,561
Scenario 1 5,077,244 796,589 899,000 974,000 1,046,000 1,100,000 9,892,833
Scenario 2 1,577,244 1,539,283 1,613,000 1,658,000 1,697,000 1,717,000 9,801,527
Scenario 3 1,577,244 1,784,976 1,784,976 1,784,976 1,784,976 1,784,976 10,502,124
Scenario 4 2,077,244 2,005,026 2,043,000 2,048,000 2,044,000 2,013,000 12,230,270
Scenario 5 $1,577,244 $2,491,089 $2,491,089 $2,491,089 $2,491,089 $2,491,089 $14,032,689
D-8
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2022 Projected Payments -:-ADP 3 ~ADP 4 -x-ADP 5
Amortization Payoff Priority Option
The City may also prioritize the order in which to pay down the UAL schedule. As an
additional strategy, ADPs can be applied to a specific amortization base depending on
the goal of the funding plan. There are three payoff strategies available: Longest to
Shortest, Shortest to Longest, or Custom.
To maximize greater cash savings, i.e., interest, the City can use ADPs to pay down the
UAL by prioritizing bases from longest to shortest. The schedule and amounts referenced
in the analysis above reflect this strategy. Payments are generally higher as a result.
To maximize initial savings, i.e., reduce annual payments, the City could opt to prioritize
bases from shortest to longest when making an ADP. As such, the advantage of lower
payments in this schedule is offset by longer amortization periods and less savings. The
last option is to specify the order of payoff. ADPs can be applied to a single base, or to
multiple basis, depending on the desired outcome. Results are unique and will vary. Chart
6 uses ADP Option 3 as an example to illustrate amortization payoff priority.
Chart 6. Amortization Payoff Priority
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-202.2 Projected Payments ~ Long-Term Priority ~Short-Term Priority
ADDITIONAL INFORMATION:
Historical Investment Returns
CalPERS’ annualized investment returns as of June 30, 2022, are listed in Table 8. As
indicated below, the Public Employees’ Retirement Fund (PERF) has realized investment
gains above the discount rate of 6.8% when viewed over 10 years and beyond. This long-
term perspective can be useful when contemplating future investments in the PERF.
Table 8. Net Investment Returns as of June 30, 2022
CalPERS Annualized Investment Returns
1 Year -6.1%
5 Year 6.7%
10 Year 7.7%
20 Year 6.9%
30 Year 7.7%
According to CalPERS, every dollar that is set aside earlier than necessary is expected
to increase the amount of investment earnings available to pay benefits and reduce total
contributions. Whether on an ad hoc basis or as an ongoing plan, the benefits of making
additional payments include reducing the City’s UAL and increasing the total assets
available to earn an investment return on. At the same time, exposing more assets to the
market can also come at a cost during economic downturns.
Pension Plan Guidelines
The ADP scenarios included in this analysis identify some, but not all, available options
related to management of the UAL. Despite any limitations, all options reviewed adhere
to the current pension guidelines with respect to the primary goals. In addition, no option
is intended to impede on the City’s existing obligations as required by CalPERS.
The pension guidelines do not explicitly list ADPs as a usage option. Under the current
Employee Pension Service Fund (EPSF) usage options, available funding may be used
to stabilize contributions. Although a nexus exists between the usage options and
strategy, this factor may also need to be considered. A review of the guidelines will occur
every three years or as needed to determine if changes are warranted.
Employee Pension Service Fund (EPSF)
The City’s pension guidelines state that available funding in the EPSF may be applied
toward UAL payments greater than $0.90 million to offset costs to the General Fund (GF).
By way of this strategy, the 2022 amortization schedule projects ongoing payments to
remain above $0.9 million through FY 2036-37. UAL payments funded by the EPSF are
expected to average roughly $0.5 million over 14 years under current assumptions.
EPSF Fund Balance as of June 30, 2023, totals $0.8 million. Without future transfers from
the GF, projected UAL payments shown in chart 7 will deplete this fund by FY 2026-27.
D-10
Chart 7. Future UAL Payments from EPSF
CONCLUSION:
Based on results from the 2021 AVR, the City is on target to reach a 90% funded status
within a 9-year period. In light of a -6.1% investment loss by CalPERS, this goal is now
expected to take 13 years due to the increase to the UAL balance. Staff performed an
analysis to determine the pros and cons of making ADPs based on a request made by
the City’s FAC.
Initial findings indicated that the UAL balance is projected to increase to $14.6 million
ending June 30, 2022. While impacts to the UAL balance are more immediate, the
required contribution in FY 2024-25 is estimated to increase by $119,000 due to the two-
year lag. The investment loss is estimated to cost $25 million in total payments according
to the projected 2022 amortization schedule and will likely raise annual UAL payments
incrementally over a 5-year period. This rise in costs can be offset by future investment
gains, additional contributions, or adjustments to the amortization schedule. The 2022
amortization schedule also projects UAL payments to remain above $0.90 million through
FY 2036-37. This implies that payments from the EPSF towards the UAL balance could
average $0.5 million over the next 14 years under current assumptions.
The ADP scenarios reviewed provide alternative strategies that are intended to achieve
a 90% funded status over a 10-year, 9-year, 8-year, and 7-year period. This analysis
illustrates the costs and benefits for each option. Available cashflow, investment risk, and
long-term outlook are vital factors to consider when choosing an option. In addition,
amortization payoff priority can also be considered if seeking a lower payment over larger
interest savings. All things considered, the impending economic slowdown will play a
significant role in the upcoming decision, as well as CalPERS 2023 return.
D-11
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$0.00
$0.70 $0.74 $0.77 $0.76 $0.75 $0.72
23-24 24-25 25-26 26-27 27-28 28-29 29-30 30-31 31-32 32-33 33-34 34-35 35-36 36-37
c::::J GF Limit ~2022 Projected Payments ~Payments From EPSF