HomeMy WebLinkAboutMinutes - March 18, 2003 SSCITY OF LODI
INFORMAL INFORMATIONAL MEETING
"SHIRTSLEEVE" SESSION
CARNEGIE FORUM, 305 WEST PINE STREET
TUESDAY, MARCH 18, 2003
An Informal Informational Meeting ("Shirtsleeve" Session) of the Lodi City Council was held Tuesday,
March 18, 2003, commencing at 7:02 a.m.
A. ROLL CALL
Present: Council Members — Beckman, Hansen, Land, and Mayor Hitchcock
Absent: Council Members — Howard*
Also Present: City Manager Flynn, City Attorney Hays, and City Clerk Blackston
"Absent due to attendance at the San Joaquin Council of Governments One Voice event in
Washington, D.C.
B. CITY COUNCIL CALENDAR UPDATE
City Clerk Blackston reviewed the weekly calendar (filed).
City Manager Flynn announced that today was a historic period for the country, with the impending
war with Iraq, and he expressed hope that the President, soldiers, and public safety personnel
would remain in the forefront of citizen's thoughts through this difficult time.
C. TOPIC(S)
C-1 "Discussion of CaIPERS retirement plan funding and future actuarial projections"
Human Resources Director Narloch introduced independent actuarial consultant John
Bartel with Aon Consulting, and Bill Karch, and Ray Lane from CaIPERS.
John Bartel explained that when an actuary prepares a valuation it represents a
relationship/comparison between two items at a certain point in time: 1) actuarial liability —
the value of benefits earned by members of the plan, and 2) actuarial value of assets —
the value of contributions made including investment return reduced by benefits paid.
When assets and liabilities are equal to each other the City's contribution is what
actuaries refer to as the employer normal cost, i.e. the value of benefits being earned
during the upcoming year, not provided by the employee contribution. When assets are
equal to liabilities the City's contribution is the employer normal cost. When assets are
greater than liabilities the City gets a credit. The funded status of the City's three
CalPERS programs (Miscellaneous, Fire Safety, and Police Safety) is different.
The most recent information available from CalPERS is as of June 30, 2001. The June
30, 2001 information generates contribution information for the City for the 2003-04 fiscal
year. CaIPERS uses a "rolled forward" process that ignores the real market value rate of
return subsequent to the valuation date. In effect, CalPERS assumes the rate of return
during the two-year period will be 8.25%. The actual rates of return, however, are
significantly different than the assumed rate.
Mayor Hitchcock asked Mr. Bartel to define super funded status.
Mr. Bartel stated that the present value of benefits is the present value of all expected
benefits, i.e. those that have been earned and those that have yet to be earned. When a
plan has assets greater than the actuarial liability, there is an excess. When assets are
so large that they are greater than the present value of all benefits earned and those that
are going to be earned, the plan is categorized by CaIPERS as super funded. At that
point in time, if all assumptions are met, then the plan has more money than it would need
to take care of benefits earned and benefits that will be earned in the future. A plan being
super funded can change dramatically from one year to the next.
1
Continued March 18, 2003
In reply to Council Member Hansen, Mr. Bartel referred to pages 11 and 12 of his report
(filed). The CaIPERS market value rate of return is —7.23% and the actuarial rate of
return is 4.8%. The reason for the difference is because CalPERS is "smoothing" market
rates of return. In a bad year the smoothing process means that CalPERS does not
recognize all of the losses immediately to avoid significant contribution fluctuation from
one year to the next. The June 30, 2002 rate of return on a market value basis is
—5.97% and the actuarial rate of return is —3.7%.
Mayor Hitchcock asked whether that was a smoothed rate over 20 years.
Mr. Bartel replied that it was not, and explained that CalPERS never lets the actuarial
value get below 90% or above 110% of the market value. To determine the funded status
of the plan they calculate an actuarial value and then roughly smooth in gains and losses
over a three-year period. They roll the actuarial value forward at 8.25%, compare that to
the market value, and adjust toward the market value by approximately one-third, never
letting it get below 90% or above 110%.
City Manager Flynn noted that life insurance companies do not adjust their rates when
there are market problems and asked why the CalPERS process is different.
Mr. Bartel explained that insurance companies charge policy holders a rate conservative
enough to build in a profit. If clients live longer than they calculated, the insurance
company makes money, if the client has a shorter life span than they calculated, the
policy holder's estate makes money. CalPERS does not build in a profit. They make a
best guess on what the numbers are going to be. The nature of a best guess is that half
the time it is going to be too low and half the time it is going to be too high. In order to
make a profit, insurance companies' calculations are right significantly more than half the
time. There are two ways to get money into a retirement trust: 1) cash contribution
(employee or city), and 2) investment return. If CaIPERS is conservative about future
investment return it would mean that the contributions have to increase.
Council Member Beckman asked how "smoothing" factors in to the 1998 CaIPERS
investment return of 19.8%.
Referencing pages 13 and 14, Mr. Bartel explained that when investment return is good
the actuarial value lags behind, i.e. CalPERS is closer to 90% of market because it has
not recognized all of the gains. When the market value rate of return is poor, the
actuarial, or the recognition of that loss also lags behind. In 1996-2000 the funded status
of the plan did not take into account the full investment gains. It was at an actuarial value
below how much money was in the bank. In June 30, 2001 the actuarial value was
slightly above the market value, i.e. it had not fully recognized all of the investment losses.
From 1996-2000 the City has a "cushion," which works well with one year's worth of bad
investment return. It does not work well in the second year of downturn. In 2000 the
cushion is $3.5 million. The market value of assets went from $80.6 million to $73 million.
With an expectation of 8.25% and a real market value return of —7%, it is a 15 percentage
point difference between what CalPERS expected. At this point the City not only does not
have a cushion, but the assets that are used to determine the contribution rate are higher
than the amount of money the City has in the bank because CalPERS is smoothing a
portion of the 15% differential.
Mayor Hitchcock asked how percentages are determined.
Referencing pages 15 and 16, Mr. Bartel pointed out the relationship between the
actuarial value of assets and the actuarial liability in June 30, 1996. In 1993 through 1996
the assets and liability were equal to each other. From 1997 through 2000 there was a
run-up in the asset value used to determine how well funded the plan is. Assets grew
very rapidly and liabilities were growing relatively smoothly. In June 30, 2001 liabilities
continued to grow; however, the assets did not grow as much. Depending upon what
CaIPERS gets as an investment return June 30, 2003, the rates of return will have
essentially wiped out the gains that occurred at the end of the 1990s and early 2000.
2
Continued March 18, 2003
Over time the City should expect the relationship in the funded status of the plan to get
back to the point that it was at June 30, 1996. As the funded status gets eroded the City's
contribution will get back to that normal cost and then depending upon what the
investment return is in the out years, it may grow to greater than that normal cost rate.
Page 16 shows an excess asset of $14.6 million at June 30, 2001. If CalPERS used the
market value of assets to determine how well funded the plan was at June 30, 2002, then
the $14.6 million would drop by $17 million and it still would not take into account a
downturn in the market at June 30, 2003.
Council Member Beckman inquired what was "normal cost" to the City in 1996.
Referencing page 17, Mr. Bartel answered that it is relatively stable at approximately 7%
of pay. He explained that the UAL amortization is a credit or addition based upon how
well funded the plan is. In June 30, 1996 assets were modestly above liabilities and the
City's contribution was reduced for that excess in assets. The reduction continued
through June 30, 2001, so the City was contributing zero. In 1996 the City was
contributing 1.3%. Page 18 shows that CalPERS indicated that if after June 30, 2000, all
assumptions are met, the City could expect a zero contribution for 38 years. In June 30,
2001, the funded status of the plan changed and CalPERS indicated that the zero
contribution period would drop down to 17 years. Pages 19 and 20 show that the
valuation does not take into account real investment return after June 30, 2001. The
CalPERS investment return June 30, 2002 is —5.97%. He reviewed the contribution
projection on page 20 for June 30, 2003, using three different rates of return and noted
that the CaIPERS assumption is 8.25% for the next 40 years.
In reply to Council Member Hansen, Mr. Bartel reported that he has been doing actuarial
work for 30 years. He stated that only twice in the history of CalPERS did it have rates of
return below its expected rate of return. Three years of a negative return is
unprecedented. If in the third year the rate of return is zero, which he stated would be
challenging to reach, it would result in a 40% drop in three years.
Council Member Land interjected that it now appears theoretically possible to "break the
bank".
Mr. Bartel stated that the City could, through financing, choose to pay off the unfunded
liability over a period of up to 30 years. He again referred to projections on page 20,
which show that in fiscal year 2005-06 the rate will be at 20%. The contributions
generated by CalPERS are set up as a level percentage of pay with aggregate payroll
growing. If the amortization period is longer than 17 years the City would have a negative
amortization. With a 30 -year amortization the unfunded liability grows for a long period of
time. Mr. Bartel said that financing is the only option the City has to mitigate the rates.
Mayor Hitchcock referred to a report from the League of California Cities Employee
Relations Institute (filed), which indicated that the unfunded liability was smoothed over a
20 -year period.
Mr. Bartel replied that when assumptions are changed CalPERS' normal procedure is to
amortize that over 20 years; however, most Miscellaneous plans use a rolling 13 -year
period.
In answer to Mr. Flynn, Mr. Bartel explained that smoothing means that when you have
one good year your rate will remain relatively high; however, when you have two good
years you will see a marked drop off in the contribution rate. He stated that 2006-07 will
be the first year that it will be possible to be impacted by a good year.
Council Member Land asked who determined the 8.25% rate of return.
Mr. Bartel replied that the CalPERS Chief Actuary determines the rate of return and it is
approved by the CalPERS board. Under Proposition 162 the Board has the authority for
setting the assumptions. The CalPERS Chief Actuary has reported that its external
3
Continued March 18, 2003
investment advisors believe 8.25% over a long period of time is a reasonable assumption.
Mr. Bartel explained that contributions would go up if the rate was lowered and conversely
the contributions would go down if the rates were raised.
In response to Mayor Hitchcock, Mr. Bartel stated that of the 100 agencies he works for
less than five set aside in both good and bad years a reserve (contributions for its
employees) based on an 8.25% return. In answer to Mr. Flynn, Mr. Bartel acknowledged
that the amount these cities set aside was still not enough, as no one predicted the
severity of the current situation with CaIPERS.
Ray Lane introduced himself as the manager of the actuaries that do public agency cost
evaluations. In answer to questions posed by Council Member Hansen he reported that
CalPERS is the largest retirement system in the United States after the Federal
government. He stated that the PERS fund has done far better than the investment
market in general. They are invested 60% in the stock market, but it is extremely
diversified. City employees in the CalPERS system have not suffered due to the
downturn in the market because they are insured. They are promised that their benefit
will be a certain percentage (3%) times their pay, times their years of service (starting at
age 50), and paid for the rest of their lives. They are guaranteed a benefit independent of
the investment performance of the fund.
Council Member Hansen asked what is being done in terms of management to try to get
the situation controlled.
Mr. Lane conjectured that in this circumstance a private corporation would terminate the
plan, pass an amendment shutting off benefits so that they would not accrue anymore,
and cut its losses. He noted, however, that the State and CalPERS have a promise to
continue the benefits and he did not believe that the City could even reduce them
prospectively.
Mr. Flynn interjected that contributing to this problem is the expense side, e.g. an increase
in retirees, disabled retirees, and hiring more people than what was anticipated.
Mr. Lane acknowledged that the increase to Safety benefits of 3% at 50 years increased
the benefits and contributed somewhat to the situation today. He stated that it is typical
for police and fire benefits to be close to 50% of pay when projected out.
Mayor Hitchcock asked Mr. Flynn to provide Council with a report on how this situation
translates into dollars.
Mr. Lane stated that the City could apply for a hardship request which, if approved, would
decrease the Miscellaneous rate by 2% and decrease Safety by 9%.
To illustrate a point, Mr. Flynn asked whether it would be possible for the City to terminate
its relationship with CalPERS, continue to contribute for those employees who are
currently in PERS, and put all future employees in a different system.
Mr. Lane replied that CaIPERS has a termination provision for agencies that go out of
business. He stated that those employees would not get future benefits.
Mr. Bartel added that the California Supreme Court has clearly said that the promise to
the employees must remain intact. A municipality could withdraw from CalPERS, but it
would still be obligated to provide that benefit promise to its employees. The City could
keep all current employees in CaIPERS, maintain the funded status of that program, and
then provide a separate system for future hires.
Mr. Flynn pointed out that it would take 15 to 20 years before there would be a sufficient
number of employees in a new system to offset CaIPERS. There would be no short-term
benefit and it could be even more expensive initially because of the cost involved in
4
Continued March 18, 2003
setting up a new system. In reply to Council Member Hansen, Mr. Flynn confirmed that
he was not considering terminating CaIPERS.
In response to comments made by Council Member Beckman, Mr. Bartel explained that
the fiduciary responsibility and cost of setting up a parallel system to CalPERS would not
be desirable or efficient for the City. He stated that, generally, only very large entities and
counties have their own retirement systems. He reported that the state is considering
borrowing money to pay its current or short-term contributions.
Mr. Flynn stated that the Governor has encouraged employees to retire by giving an
incentive package and then promising to hire them back in their existing job at the same
salary. It is a way to shift payroll from the state budget over to CalPERS. Additionally, he
pointed out that when CalPERS introduced the benefit of 3% at age 50, it was soon
considered "normal and usual" by arbitrators and was no longer really a choice for City's
to make. Mr. Bartel confirmed this by stating that 90% of the agencies he works for offer
the benefit of 3% at age 50.
In answer to Mr. Flynn, Mr. Lane explained that if the City borrowed money at 6% to pay
off its future liability, it would lose money if the actual return in CaIPERS was less than
6%.
D. COMMENTS BY THE PUBLIC ON NON -AGENDA ITEMS
None.
E. ADJOURNMENT
No action was taken by the City Council. The meeting was adjourned at 8:56 a.m.
ATTEST:
Susan J. Blackston
City Clerk
5
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mayor's 4 Council Member's Weekly Oalendar
WEEK OF MARCH 18, 2003
Tuesday, March 18, 2003
Reminder Howard. San Joaquin Council of Governments One Voice Conference,
Washington D.C., March 16 - 21, 2003.
7:00 a.m. Shirtsleeve Session
1. Discussion of CalPERS retirement plan funding and future
actuarial projections (HR)
Wednesday, March 19, 2003
11:00 -1:00 P.M. EI Concilio Coalition Meeting, Salem Methodist Church, 345
East Elm Street, Lodi. Speakers will include Lodi Police Chief
and Fire Chief.
7:00 p.m. City Council Meeting
(Note: No Closed Session)
Thursday, March 20, 2003
11:30 a.m. Hansen. The Women's Center of San Joaquin County is 23rd Annual
Luncheon, Stockton Civic Auditorium. Doors open at 11:00 a.m.
2:00 - 3:00 p.m. Land. Reception to honor California State Senator Chuck Poochigian, 703
West Pine Street, Lodi.
2:00 - 6:00 p.m. Tokay Dialysis Center Open House, 312 South Fairmont Street, Suite A, Lodi.
5:30 p.m. Joint Meeting Lodi City Council and the Lodi Broad of Trustees,
Lodi Public Library.
5:30 - 7:30 p.m. Small Business Committee Networking Mixer, Classic Living, 111 South School
Street, Lodi.
Reminder LCC 2003 Planners Institute, San Diego, CA. March 20 - 22, 2003.
Friday, March 21, 2003
Saturday, March 22, 2003
Sunday, March 23, 2003
4:30 p.m. Hitchcock and Hansen. Lodi Community Art Center's 43d Annual Spring
Art Show and Awards Ceremony, Robert Mondavi Woodbridge Winery,
5950 Woodbridge Road, Acampo. Show runs March 21 - 23, 2003.
Monday, March 24, 2003
Disclaimer: This calendar contains only information that was provided to the City Clerk's office
N:\Administration\CLERK\F'ORMS\McalndT.doc
•
:7
CITY OF LODI
MISCELLANEOUS, FIRE SAFETY & POLICE SAFETY PLANS
Ca1PERS Actuarial Issues — 6/30/01 Valuation
JOHN E. BARTEL, Aon Consulting
March 18, 2003
Miscellaneous
Tonic
Page
Definitions
1
Miscellaneous
Plan Funded Status
5
Demographic Information
7
Plan Assets & Actuarial Obligations
11
Contribution Rates
17
Fire Safety
Plan Funded Status
21
Demographic Information
23
Plan Assets & Actuarial Obligations
27
Contribution Rates
33
Police Safety
Plan Funded Status
37
Demographic Information
39
Plan Assets & Actuarial Obligations
43
Contribution Rates
49
*'CLIENTS Cily -f I,0CaIPERS6-.,hall U li All IINI:.1 A.14w
■ PVB - Present Value of all Projected Benefits:
• Discounted value (at valuation date - 6/30/01), of all future expected benefit
payments based on various (actuarial) assumptions
■ Actuarial Liability:
• Discounted value (at valuation date) of benefits earned through valuation date
[value of past service benefit]
• Portion of PVB "earned" at measurement
■ Current Normal Cost:
• Portion of PVB allocated to (or "earned" during) current year
• Value of employee and employer current service benefit
■ Target- Have money in the bank to cover Actuarial Liability (past service)
■ Unfunded Liability - Money short of target at valuation date
• Excess Assets / Surplus:
Money over and above target at that point in time.
• Doesn't mean you're done contributing.
■ Super Funded:
• Assets cover whole pie (PVB)
• if everything goes exactly like PERS calculated, you'll never have to put another
(employer or employee) dime in.
F ' �J
VA
•
Definitions
• PreNnt Value of Senalks
Fuexa NwinN
\ Cwb
Jlue \
ullllwae
Aarv.er LbWaq
■ Contribution =
• Normal Cost
• + Unfunded Liability Amortization
or
• - Excess Asset Amortization
vrnanl \•aloe n(Benele..
,lune Wf. 21x11 Nrvx
A 3
i
Future Rate Fluctuations
■ Asset Gains/Losses:
CAPERS Historical Market Value Rates of Return -June 30 Year Ends
Actuarial Assumed Imrstment Win-= 8.25%
25•/.i ' I
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9b_L.,J.Y<.I 9yJ•;M1_aJa.l 19 _. irs_IR� q,? Li.iY 1 ..los,
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■
Actuarial Assumption changes:
■
Experience Gains/Losses
■
Pooling
i■
Benefit Improvements
Am
4
r� 00
June 30, 2000 June 30, 2001
$ (1,700,000) (Super Excess) /
Unfunded PVB $ 5,000,000
18,900,000 Excess Assets 14,600,000
57,600,000 Actuarial Liability 64,000,000
74,900,000 PVB 83,600,000
5
Plan Funded Status
Miscellaneous
■ What happened between 6/30/00 and 6/30/01?
• Asset gain/(loss): = (2.7) million
• Actuarial gain/(loss): = (2.3) million
❑ Number of Actives 312 — 340
❑ Number of Inactives 192 — 178
❑ Number of Retirees 288 — 303
is
•
•
Members Included in Valuation
Miscellaneous
Average Age/Service
Miscellaneous
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
1996 1997 1998 1999 2000 2001 .
❑Average Age 43.1 43.1 43.5 43.8 44.2 43.8
'0 Average Service 8.6 9.2 9.5 9.6 10.3 99
2
rt
la
■
E
Average Age/Service
Miscellaneous
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
1996 1997 1998 1999 2000 2001 .
❑Average Age 43.1 43.1 43.5 43.8 44.2 43.8
'0 Average Service 8.6 9.2 9.5 9.6 10.3 99
2
y9
45,000
40,000
Average Pay
Y
Miscellaneous
.. ....... . ...... _... ........_. . _.... .... ....._.....
9
Total Annual Covered Payroll (Millions)
Miscellaneous
4
I
IL
L,
I
j
0.
1996
199'
1998
1999
2000
2001
OAnwaIC ercd Pay.
�. _ ...
--11.0
11.3 _
11.9
__.._..
.._-12,6
;.. .. U.2
..2 ,
15.0
.0 .......-.
.__.......
O Proj. G—d Pay
12.5
12.7
13.2
14.1
14.8
167
•
C,
•
r�
Am
1]
Actuarial Investment Return
Miscellaneous
I
■ Above assumes contributions, payments, etc. received evenly throughout
year.
■ 6/30/01:
• Market Value return = (7.23)%
• Actuarial Value return = 4.8%
■ 6/30/02:
• Market Value return = (5.97)%
• Actuarial Value return = (3.7)%
■ 6/30/03:
• Market Value return through 1/31/03 = (6.8)%
Actuarial Investment Return
Miscellaneous
20.09
i
16.07
14.07
12.07 -.
.
10.07,
8.D7
f
4.07
2.(17
0.07
1997
1998 1999 2000 2001
131nwstment Return
15.97
19.87 12.0% 11.27 4.87
r�
Am
1]
Actuarial Investment Return
Miscellaneous
I
■ Above assumes contributions, payments, etc. received evenly throughout
year.
■ 6/30/01:
• Market Value return = (7.23)%
• Actuarial Value return = 4.8%
■ 6/30/02:
• Market Value return = (5.97)%
• Actuarial Value return = (3.7)%
■ 6/30/03:
• Market Value return through 1/31/03 = (6.8)%
Asset Values (Millions)
Miscellaneous
90
80
70
60
rlr*7
13
Asset Values
Miscellaneous
■ 6/30/00 Actuarial Value = 95% Market
■ 6/30/01 Actuarial Value = 107% Market
■ 6/30/02 Actuarial Value will be z 110% Market
AbN 14
is
is
Funded Status (Millions)
Miscellaneous
=0
15
Funded Status
Miscellaneous
■ 6/30/97
actuarial assumption changes:
•
Interest rate
6/30/96
6/30/97
❑ General inflation
4.50%
3.50%
❑ Real rate of return
4.00
4.75
❑ Total
8.50
8.25
•
Payroll growth
4.50%
3.75%
■ Investment losses — Impact on funded status:
•
6/30/02 [-5.97% compared to +8.25%]
-14.3%
•
Actuarial asset "reserve"
-7.3%
•
Total estimated % loss
-21.6%
•
Total estimated $ loss
$ 17.0 million
[21.6% x $78.6]
i
Am
16
F.. a
Contribution Rates
Miscellaneous
87 �-
Contribution Rates
Miscellaneous
r,7
i
6/30/01
2002/2003
2003/2004
■ Normal cost
7.2%
47 :�
i
■ Amortization bases:
• Fresh Start 6/30/00
-7.2%
0.0%
i
0.0%
-7.3%
Sub -total
-7.2%
-7.3%
• Total:
I
0.0%
• Amortization period
39 years
—___
1996
1997
1998
1999 2000
2001
❑Normal C'm
7.37
5.37
5.37
: 7.17: 7.29
7.3%
OUALAmorr
-6.07
-5.37
-5.37
-7.17 -7.27
: -7.39(
OToral
1.37
0.07
0.07
0.07 0.07
0.07
17
■ 6/30/02:
• Significant asset loss
• Actuarial gains or losses?
AM 18
•
•
C7
Contribution Rates
Miscellaneous
6/30/00
6/30/01
2002/2003
2003/2004
■ Normal cost
7.2%
7.3%
■ Amortization bases:
• Fresh Start 6/30/00
-7.2%
0.0%
• Fresh Start 6/30/01
0.0%
-7.3%
Sub -total
-7.2%
-7.3%
• Total:
0.0%
0.0%
• Amortization period
39 years
17 years
■ 6/30/02:
• Significant asset loss
• Actuarial gains or losses?
AM 18
•
•
C7
Contribution Projection
Miscellaneous
•
■ Market Value Investment Return:
• June 30, 2002
-5.97%
• Expected June 30, 2003
8.25%
0.00%
-5.00%
• Expected June 30, 2004 and subsequent
8.25%
■ Fresh Starts:
• No Fresh Starts
■ No Other:
• Gains or Losses
• Method or Assumption Changes
• Benefit Improvements
Am
19
Contribution Projection
Miscellaneous
6/30/03 Market Value Return Varies
Includes City and Employee Contribution Rates
i
A.
®
- A
A..._.
r
0
0%
f
02103 03/04 04/05 05/06 06/07
07108
08/09
0 _5.00% 0.0% 7.0% 13.6% 20.0% 20.8%
_....:.... ........... .. .. .. .. _........
21.0%
--....-
20.9%
- ....
A. 0.00% 0.0% 7.0% 13.6% 17.4% 18.4%
18.9%
18.9%
®- 8.25% 0.0% 7.0% 13.6% 14.9% 15.6%
15.9%
15.9%
Am
20
Plan Funded Status
Fire Safety
311, 2M I
June 30, 2000 June 30, 2001
$ 2,900,000 Unfunded PVB $ 6,200,000
2,500,000 Excess Assets 500,000
24,900,000 Actuarial Liability 27,400,000
30,300,000 PVB 34,000,000
21
Plan Funded Status
Fire Safety
■ What happened between 6/30/00 and 6/30/01?
• Asset gain/(loss): = (0.9) million
• Actuarial gain/(loss): = (0.9) million
❑ Average Salary 53,600 60,900
• Law Change: 0.1 million
❑ 85%-90%
MN 22
•
•
•
Members Included in Valuation
Fire Safety
50 ;
45
40
35
30
25
20
15
10
5
1996
1997
1998
1999
2000
2001
❑ Active
_
44
44
42 ----.-;
.. _. 44
46
48
-
O Transfers
7
9
10
11
10
11
® Vested Terminations
3
2
2
2
2
3
Receiving Payments .
37
38
41
41
40
42
23
Average Age/Service
Fire Safety
24
0
65,000
60,000
55,000
Average Pay
Fire Safety
25
Total Annual Covered Payroll (Millions)
Fire Safety
4 `
3
3
2
1
--
1
0 .
1996
- - - ----
1997 1998 1999 2000 2001
_..- -----
---
-
❑Annual Covered Pay 1.9
10 Annual
2.1 2.0 2.2 2.5 2.9
❑Pro' Covered Pa 2.2
2.3 2.2 2.5 2.8 3.3
Am
26
•
•
•
� J
Actuarial Investment Return
Fire Safety
Am 27 0
•
!Am
28
Actuarial Investment Return
Fire Safety
■ Above assumes contributions, payments, etc. received evenly throughout
year.
■ 6/30/01:
•
Market Value return
= (7.23)%
•
Actuarial Value return
= 4.7%
■ 6/30/02:
•
Market Value return
z (5.97)%
•
Actuarial Value return
= (3.6)%
■ 6/30/03:
•
Market Value return through 1/31/03
= (6.8)%
•
!Am
28
Am
29
Asset Values
Fire Safety
■ 6/30/00 Actuarial Value = 95% Market
■ 6/30/01 Actuarial Value 107% Market
■ 6/30/02 Actuarial Value will be = 110% Market
6
-2
•
Asset Values (Millions)
Fire Safety
30 T
25
20
15
10
5
0
Ai
; 1996
1997 ' 1998 1999 2000 2001
OActuarial 16.8
19.3 22.4 25.5 27.4 27.9
[Market ` 18.0
21.4 24.9 27.1 28.9 26.0
Am
29
Asset Values
Fire Safety
■ 6/30/00 Actuarial Value = 95% Market
■ 6/30/01 Actuarial Value 107% Market
■ 6/30/02 Actuarial Value will be = 110% Market
6
-2
•
25.0
20.0
15.0
10.0
5.0
1
LJ
1996
1997
1998
1999
2000
2001
❑ Actuarial Liability
16.5
17.7
19.6
23.1
24.9
27.4
M Actuarial Asset Value
16.8
19.3
22.4
25.5
27.4
27.9
1
LJ
•
Am 32
Funded Status
Fire Safety
■ 6/30/97 actuarial assumption changes:
•
Interest rate
6/30/96
6/30/97
❑ General inflation
4.50%
3.50%
❑ Real rate of return
4.00
4.75
❑ Total
8.50
8.25
•
Payroll growth
4.50%
3.75%
■ Investment losses — Impact on funded status:
•
6/30/02 [-5.97% compared to +8.25%]
-14.3%
•
Actuarial asset "reserve"
-7.3%
•
Total estimated % loss
-21.6%
•
Total estimated $ loss
$ 6.0 million
[21.6% x $27.9]
•
Am 32
Contribution Rates
Fire Safety
20%
15%
.. ..... . ..
10%
5%
0%
-15%
-20%
1996 1997
1998 1999 2000
2001
0 Normal Cost 11.8% 10.0%
.. . ... ....
11.7% 16.6% 17.1%
7_
16.2%
0 Amort Bases. -11.0% -10.0%
-11.7% -16.6% -17.1%
1.2%
'M Total 0.9% 0.0%
0.0% 0.0% 0.0%
17.4%
AOM
33
Contribution Rates
Fire Safety
6/30100
6/30/01
2002/2003 2003/2004
0 Normal cost
17.1%
16.2%
M Amortization bases:
0 Fresh Start 6/30/00
-17.1%
0.0%
0 Fresh Start 6/30/01
0.0%
1.2%
Sub -total
-17.1%
1.2%
0 Total:
0.0%
17.4%
0 Amortization period
5 years
20 years
0 6/30/02:
0 Significant asset loss
* Actuarial gains or losses?
Am 34
0
0
0
Contribution Projections
i
j
Fire Safety
•
■ Market Value Investment Return:
• June 30, 2002
-5.97%
• Expected June 30, 2003
8.25%
0.00%
�
-5.00%
• Expected June 30, 2004 and subsequent
8.25%
■ Fresh Starts:
• No Fresh Starts
■ No Other:
I
• Gains or Losses
• Method or Assumption Changes
• Benefit Improvements
AM
35
Contribution Projections
Fire Safety
6/30/03 Market Value Return Varies
Includes City and Employee Contribution Rates
604b_....... ._...... ...-_........... _..... _... ...... ......... -._....... _.............__.......... _........... ........_..............._.._....._.........-_..........._........_......_......_._.
50%
®....._ .......--.'a ............._.._.
e3.
®..............
m .... --
.._..®
._...�
40%
o.
.... ........
A
30%
-—_...... ...--------
--- --
20%
20%
10%
®:
0%
--
02103 03104 04/05 05/06 06107
07/08
08/09
-® -5.00% • 9.0% 26.4% 38.3% 49.9% 51.3%
51.8%
51.6%
--OAO% 9.1)% 26.4% 38.3% 45.3% 47.1%
47.9%
48.0%
0 8.25% 9.0% 26.4% 38.3% 40.696 41.9%
42.5%
42.5%
A
36
Plan Funded Status
June 30, 2000
June 30, 2001
$ 7,900,000
Unfunded PVB
$ 11,100,000
1,400,000
Excess Assets /
(Unfunded Liability)
(400,000)
31,200,000
Actuarial Liability
34,400,000
40,600,000
PVB
45,100,000
Am
37
Plan Funded Status
Police Safety
■ What happened between 6/30/00 and 6/30/01?
• Asset gain/(loss): (1.2) million
• Actuarial gain/(loss): = (0.7) million
0 Number of Retirees 39 44
• Law Change: = 0.2 million
0 85%-90%
Am 38
•
•
• Members Included in Valuation
Police Safety
80
70
60
. . ..............
50
40
30
20
to
1996 1997 1998 1999 2000 2001
0 Active 71 74 74 76 77 78
0 Transfers 11 12 10 11 11 12
®Vested Terminations 4 7 7 5 4 5
lqReceiving ,-Payments .- -37. 38 39 39 39 44
•
F� =
39
Average Age/Service
Police Safety
40
=,•
60,000
Average Pay
Police Safety
41
Total Annual Covered Payroll (Millions)
Police Safety
Am
42
YIN
•
•
Actuarial Investment Return
Police Safety
43
•
44
Actuarial Investment Return
Police Safety
■ Above assumes contributions, payments, etc. received evenly throughout
year.
■ 6/30/01:
•
Market Value return
= (7.23)%
•
Actuarial Value return
= 4.7%
■ 6/30/02:
•
Market Value return
(5.97)%
•
Actuarial Value return
(3.7)%
■ 6/30/03:
•
Market Value return through 1/31/03
(6.8)%
•
44
Asset Values (Millions)
Police Safety
45
Asset Values
Police Safety
i
■ 6/30/00 Actuarial Value 95% Market
■ 6/30/01 Actuarial Value 107% Market
■ 6/30/02 Actuarial Value will be = 110% Market
Am
46
•
•
0
Funded Status (Millions)
Police Safety
35.0
30.0
Am
47
Funded Status
Police Safety
■
6/30/97 actuarial assumption changes:
•
Interest rate 6/30/96
6/30/97
❑ General inflation 4.50%
3.50%
0 Real rate of return 4.00
4.75
❑ Total 8.50
8.25
•
Payroll growth 4.50%
3.75%
■
Investment losses — Impact on funded status:
•
6/30/02 [-5.97% compared to +8.25%]
-14.3%
•
Actuarial asset "reserve"
-7.4%
•
Total estimated % loss
-21.7%
•
Total estimated $ loss
$ 7.4 million
[21.7% x $34]
AOM
48
Contribution Rates
Police Safety
20%
10%
-5%-!
1996 1997 1998
1999
2000 2001
IONormal Cost 11.6% 9.3% 10.7%
16.1%
16.4% 16.1%
0 Amort Bases: -1.8% -8.7% -10.0%
-3.9%
5.]% 1.3%
1p Total. 9.8% 0.6% 0.7%
12.2%
11.4% 17.4%
49
Contribution
Rates
Police Safety
6/30/00
6/30/01
2002/2003
2003/2004
■ Normal cost
16.4%
16.1%
■ Amortization bases:
• Gain/Loss
-13.0%
-
• Benefit Change 6/30/98
5.9%
-
• Benefit Change 6/30/00
1.4%
-
• Assumption Change 6/30/97
-2.0%
-
• Assumption Change 6/30/98
2.6%
-
• Fresh Start 6/30/01
0.0%
1.3%
Sub -total
MLM
1.3%
• Total:
11.4%
17.4%
• Amortization period
Multiple
20 years
■ 6/30/02:
• Significant asset loss
• Actuarial gains or losses?
Am
50
YI:
•
•
Contribution Projections
Police Safety
•
■ Market Value Investment Return:
• June 30, 2002
-5.97%
• Expected June 30, 2003
8.25%
0.00%
-5.00%
• Expected June 30, 2004 and subsequent
8.25%
■ Fresh Starts:
• No Fresh Starts
■ No Other:
• Gains or Losses
• Method or Assumption Changes
• Benefit Improvements
AM
AIM
51
Contribution Projections
Police Safety
6/30/03 Market Value Return Varies
Includes City and Employee Contribution Rates
®
®
....
-..
4096 .._._........
-...__ �...Y
30%
15%
- -- -
- --
-----
10%
---
— ----
5%
02/03 03104 04/05 05/06 06107
07/08
08109 1
®- -5.00% 20.4% 26.4% 35.8% 44.9% 46.0%
46.3%
46.2%
-u- 0.00% 20.4% 26.4% 35.8% 41.2% 42.6%
43.3%
43.4%
A 8.25% 20.4% 26.4% 35.8% 37.6% 38.6%
39.0%
39.1%
AM
52
1./ -� e -( S
Actuarial, Projections: Crystal
Chief Actuary, CaIPERS
Thursday January 30, 2003
Monterey, CA
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Impact. of Recent Investment
Performance
Distribution of Employer Contribution Rates
Miscellaneous Plans -
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0
c�
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v 50%
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,° 30%
c
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m
1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
■ 0% ❑ 0 to 2.5% ■ 2.5 to 5% E 5 to 7.5%
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ta 80%
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n 50%
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Impact of Recent Investment
Performance
Distribution of Employer Contribution Rates
Safety Plans
1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
■0% ❑Oto 5% 05to10% 010 to 15%
■ 15 to 20% p 20 to 25% ® 25% to 30% ■ Greater than 300/
4
Actuarial Projections
ON
There Are Lots of Unknowns
• What's happened in the past is known. What will happen in the
future is not.
• Consider the following:
— There are over -300 possible ways for a person just hired at
age 25 to end their active career. In each year in the future
for the next 50 years or so, this individual could:
e Quit and take a refund of their own contributions (plus 6%
interest)
• Quit and, if vested after 5 years of service, leave their own
contributions on deposit and draw a pension starting at or after
age 50
• Become disabled due to a job related event
• Become disabled due to a non -job related event
Die due to a job related event
• Die due to a non job related event
• Retire and commence their pension at or after age 50 with 5 or
more years of service.
5
There Are Lots of Unknowns
— An inactive member, i.e. one who terminated and left money on
deposit, can at any time decide to withdraw their contributions or
after age 50 start their pension.
— In almost every case, the amount of the benefit to be paid is
currently not known because it will depend on the age and
service as of that unknown future date and, in most cases will
also depend on the employee's final salary (also unknown until
that unknown date in the future).
— Once the benefit is known and.has'begun, whether for
retirement, disability,: or survivor benefits,. it is unknown. how long
that benefit will be paid. It depends on how long the individual
will live and perhaps on how long a beneficiary lives.
— All of the points made above are about liability (i.e. benefits). A
bigger unknown is the return on assets (current assets as well as
future contributions) from the time' received until the last
individual currently in the plan draws their last benefit and dies.
C1
Attacking the Unknown
Actuarial Valuations and. Rate Setting
• So, what's an actuary to do?
— Make assumptions about all of these unknowns. These are not
haphazard assumptions.
By studying past experience and taking potential future economic
and demographic changes into account, the actuary develops
demographic (or non -economic) assumptions which assign
probabilities to each potential future for each active, inactive, and
retired member of your plan.
— By studying past experience and taking potential future economic
changes into account, the actuary develops economic assumptions
which provide projected salary growth for active employees, cost -
of -living increases for retirees, and. most importantly the assumed
investment return for many years into the future.
h
Attacking the Unknown
Actuarial Valuations and Rate Setting
• How does the actuary use these assumptions to set rates?
— The actuary uses these assumptions as follows:
+ a probability of occurrence is assigned to each and every possible
future outcome for each member of your plan.
• The assumption about salary growth is used to estimate future
member contributions as well as all future benefits that are to be
paid.
• the assumed investment return is used to estimate how much of
those future benefits will be paid by interest earned on existing
assets as well as future employee and employer contributions.
— The process described above is accomplished by a complex
computer program called an actuarial valuation system.
Ef
Attacking the Unknown
Actuarial Valuations and Rate Setting
- Based on all of the actuarial assumptions, the actuarial valuation
program computes a "bunch of stuff' which when added up across all
members of your plan can be summarized as:
1) if all assumptions are exactly realized (never going to happen exactly
year by year), how much money would be sufficient to pay for all future
benefits if neither employee nor employer contributed for these members in the
future.[Present Value of Benefits- if your assets are at least this big; you're
superfunded].
2) if all assumptions are exactly realized, what percent of pay must the
employer contribute on behalf of existing active employees in order to
accumulate just the right amount just in time to pay all benefits in the future.
[Normal Cost - or annual premium if there is no surplus nor unfunded liability].
3) if all assumptions are exactly realized, how much money is necessary to be
on schedule, i.e. this amount together with future employee contributions and
employer normal costs will accumulate to just the right amount just in time to
pay all benefits in the future. [Accrued Liability - if your assets are less than
this you have unfunded liability and if your assets are more than this, you have
surplus].
9
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Attacking the Unknown
Does It Work?
[` x = Sometimes
• On the liability side, it works a lot better for large plans than for small
ones because the liabilities for large plans are much more predictable
than those for small plans. A recent study by CalPERS actuaries
shows that the difference in liability between what was predicted by the
assumptions and what really happened was 2 to 6 times larger for
small plans than for large plans.
• On the asset side, plan size doesn't really matter at CaIP.ERS because
assets are commingled for investment purposes (but not for the
purpose of paying benefits).
• When events with very low probability occur there is little that the
actuary can do. During fiscal years 2000-01 and 2001-02 liabilities
grew 8.25% (the assumed investment return) while the market value of
assets went down -7.2% and -5.9% respectively. This is about' a 30%
swing in market value funded status over two years.
With CalPERS asset mix, there was about a 10% chance of getting a
return of -7.2% or less for fiscal 2000-01 and about a 12% chance of
getting a -5.9% or less return for fiscal 2001-02. So, there was only
about a 1 % chance of having these past two years' returns. 11
Attacking the Unknown
Try to MAKE it work
• While the calculations and concepts are very scientific, unless reality is
"close" to what's assumed, it's only about as good as using a crystal
ball.
• To compensate for the fact that the actuarial assumptions are
expected long term averages NOT what is expected each and every
year, the actuary does several things:-
— Performs this valuation annually, determines actuarial "gains and
losses" (Le. differences between what was expected for the past
year and what really happened) and amortizes these gains/losses
over time to smooth out their impact on employer rates.
— Amortizes increases in accrued liability due to changes in plan
benefits, or changes in actuarial methods or assumptions over 20
years to smooth out their impact.
12
Attacking the Unknown
Try to MAKE it work
• To compensate...
— Uses a "smoothed" actuarial value of assets rather than market value to set
rates. This dampens swings in the market value of assets.
Market Value of Assets versus Actuarial Value of Assets
(Billions)
Projected Future
Known Past Results
Results Assuming
350 — 8.25% Return
300
250
Market Value
200 of Assets
150 Actuarial Value will grow
less rapidly than 8.25% in
100 order to move towards
market value. Employer
Actuarial Value rates will continue to rise
50 Of Assets even if the fund earns 8.25%.
annually.
0
01
13
Attacking the Unknown
r�.
Try to MAKE it work
• Unfortunately, there is little additional that can be done about the volatility
in assets.
— Different asset allocation - more conservative with higher more stable rates vs
more aggressive with lower more volatile rates.
— Change smoothing technique - could produce pressure on the CaIPERS Board
to use this to push for benefit improvements.
• To compensate for liability swings CaIPERS will pool small plans which will
really help.
14
Distribution of Plans by Active Members as
Number of
Number of
Total Number
1,800
Actives in Plan
Plans
of Actives
E
1-10
513
2,464
900
11-20
254
3,803
z
300
21-50
352
11,907
101-250 251-500 501-1000 '1001 +
51-100
267
18,824
Subtotal
1,485
36,998
0-100
1,485
36,998
101-250
224
35,153
251-500
116
39,568
501-1000
47
32,454
1001 +
39
90,359
Total
1,911
234,532
14
Distribution of Plans by Active Members as
of June 30, 2001
1,800
1,500
E
1,200
900
600
z
300
224 116 47 39
0-100
101-250 251-500 501-1000 '1001 +
Active Menbecs
14
What's important in the Actuarial Report
• The most important thing to know and remember is that the actuarial
report is a "snap shot" based on participants, assets, and benefits
under contract as of the valuation date.
• There is a lot of information in the report that addresses "What has
happened since last year." and very little that addresses the unknown
"What will happen. in the future."
• The other very important thing to remember is that the report is
predicated upon the fact that each and every actuarial assumption
will be realized exactly in the future.
• Even if the assumptions are good long term predictors of the average
future experience of the plan, each year's experience will
undoubtedly deviate from the average (a lot or a little) and produce
variances in the plan's funded status and employer contributions.
15
What's important in the Actuarial Report
• As far as reading the report to see the current status of the plan and
how things changed from the previous valuation the important
information is as follows:
— The Executive Summary of pages 2 and 3 gives the'major
results of the valuation, including a section entitled "Changes
Since Prior Valuation".
— Page 4 of your report contains a comparison of all key results
from the last valuation and this one.
— Page 6 shows a technical calculation of the gains/losses that
occurred over the past year.
— Page 8 provides a breakdown of the change in employer,
contributions by cause of the change.
— Page 9 gives a reconciliation of your plan's market value of
assets over the past year.
— Page 7 provides a historic breakdown of the plan's unfunded
liability/surplus, gives a reason for each "base" and provides
amortization information about each "base''.
10�
What's important in the Actuarial Report
• As far as trying to look into the future from reading the report, you
should know the following.
While your rates will change in the future, there are only a few
causes for the changes:
• You change benefits
• CalPERS changes actuarial methods or assumptions
• Amortization bases drop off as they are completed
• New actuarial gains and losses occur
• Changes in benefits or actuarial methods or assumptions should not
come as surprises. You need to be watchful for legislatively
mandated benefit changes. CalPERS will endeavor in the future to
give advanced warning when it makes changes in actuarial methods
or assumptions.
• Carefully analyzing page 7 in your actuarial valuation report will help
you plan for bases that drop off. Your actuary can "fresh start" but
should discuss this with you first.
• An exception is that the amortization of gains and losses which,
without new gains or losses, is actually a declining percentage of pay
over time.
17
11 What's important in the Actuarial Report
Future gains and losses are unpredictable, but a few words are in
order.
Whenever actual experience differs from the actuarial assumptions, there
are gains or losses. New hires, pay increases, terminations, disabilities,
deaths, or retirements will all affect the rate.
— Small plans are much more volatile and unpredictable. `
— Plans whose assets and or liabilities are very large compared to their
payroll are much more susceptible to rate swings than plans with
assets and liabilities that are not as large compared to their payroll.
— Pay attention to the actuarial value of assets compared to market value.
Asset smoothing will always move the actuarial value towards 100% of
market value. If the plan has an actuarial value greater than market value,
smoothing will produce asset losses when the market value return is
exactly 8.25%. The reverse is also true, smoothing produces asset gains
when the actuarial value of assets are less than market value and 8.25%
is earned.
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Actuarial Projections
• The potential for future volatility from year to year will now
be demonstrated by our model.
• We will show what can happen to employer rates due to
typical gains and losses.
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MEMORANDUM FROM THE
O F F I C E O F T H E
CITY ATTORN EY
DATE: March 13, 2003
TO: Honorable Mayor & City Council Members
FROM: Randy Hays, City Attorney
,t
RE: Retirement System
At a recent City Council meeting Council Member Beckman framed a broad question regarding
the existence of/necessity for/authority for a City to have a retirement system. This memo is
intended to respond to that generic inquiry.
Lodi, being what is termed a general law city, not a charter city, finds its operation guided to a
large extent by the provisions of the California Government Code (G.C.). Much of what is in
that code provides authority for a City to do something but does not require that it be done.
Such is the case relative to a retirement system. Once the choice to have a system is made
there are rules to follow since such a choice brings reliance on that system into play.
G.C. §45300 titled Legislative Intent states:
It is the intent of this article to enable any city to adopt such a retirement
system as is adaptable to its size and type.
That section is followed by G.C. §45301 titled:
Establishment of System which reads as follows:
By ordinance, any city may establish a retirement system for its officers
and employees and provide for the payment of retirement allowances,
pensions, disability payments, and death benefits, or any of them.
From these two sections it is clear that a city is authorized to set up, fund, operate and
administer it own retirement program. Certainly some cities could implement their own system.
I believe that is the case with Los Angeles. However, most cities are not a size which would
allow them to fund and staff such a system. This was recognized by the legislature as
evidenced by G. C.§45345 titled "Alternative method; contract with State Employee's
Retirement System" which reads:
J:\CA\CITY\COUN C IL\CO RRES\M -RETIRE MENT SYSTEM.DOC
As an alternate method of providing a retirement system, the city may
contract with the Board of Administration of the State Employee's
Retirement System and enter all or any portion of its employees under
such system pursuant to law and under the terms and conditions of such
contract.
Note that the name of the State system was changed in 1967 to "Public Employee's Retirement
System." Section 45345 simply does not reflect that name change. This allowed alternative is
the course of action most often followed by cities. The provisions of the Public Employee's
Retirement System law beginning at §20000 apply at such time as the alternative method of
establishing a retirement system is chosen by a city.
cc: Dixon Flynn
Z