HomeMy WebLinkAboutMinutes - July 18, 2023 SSCalPERS, PARS and Pension FundingPresented by Andrew Keys, Deputy City Manager
CalPERS•History (Brief)•PEPRA•Asset Liability Management•Discount Rate•Other Assumptions•Risk Mitigation Policy•Actuarial ReportsOutline2Lodi•Plan Basics•PERS Bill•Employee Contributions•Unfunded Accrued Liability •Stabilization Policy and Fund•Funded Status History•Alternate Strategies
•CalPERS was authorized in 1932 and is the predominant pension system for California public agencies.•CalPERS serves over 2 million members in the retirement system and had nearly $440 billion market value of investments as of June 30, 2022.•1,556 public agencies, 1,335 school districts and charters and the state participate in CalPERS.•In addition, at least 6 cities, 22 counties, UC and CalSTRS have pension systems with reciprocal agreements with CalPERS.•CalPERS targeted earnings rate, known as the Discount Rate is 6.8%.•Recent History shows CalPERS earnings exceeding the 6.8%.•Poorly timed enhancements to benefit formulas in 2000 followed by substantial losses in 2000/01 earnings year led to significant underfunding.•Substantial losses in 2008/09 significantly reduced funded status leading to new legislation in 2012 and a push for further change to shore up fund finances.•Major legislative reform in 2012 known as PEPRA has improved the fund outlook, but significant legacy challenges and funding shortfalls still persist.Recent CalPERS History3
Recent CalPERS History ‐Earnings4
•The California Public Employees’ Pension Reform Act (PEPRA) was approved in 2012 and became effective January 2013.•PEPRA established minimum levels of employee participation in pension funding for both Classic (pre PEPRA) employees and PEPRA employees (employees hired on or after January 1, 2013).•A fixed % of salary was set at Classic Safety 9% and Classic MISC 7% for “Normal Cost” funding. Normal Cost is the projected cost for the benefit earned today.•PERPA employee contributions were set at 50% of normal cost.•Limits were placed on pensionable compensation to cap maximum payouts (135K with Social Security, 162k w/o), minimum retirement ages were increased, benefit formulas were reduced and capped, and controls to minimize “spiking” were put in place, among many other changes.PEPRA5
•Per CalPERS website: The Asset Liability Management (ALM) process is an integrated review of our assets and liabilities to inform decisions designed to achieve a sound and sustainable fund.The goal of the ALM process is to balance the expected cost of future pension payments with the expected future investment returns. During the process, the CalPERS board reviews its overall risks, taking into consideration the long‐term sustainability of the system.This formal process runs on a four‐year cycle and includes a review of CalPERS’ investment portfolios and retirement plan liabilities. Capital Market Assumptions are primarily based on expectations of future investment returns. Liability projections are based on demographic and economic factors and trends, including membership dynamics, future salary and payroll growth, retirement ages, inflation, and life expectancy.This innovative and transparent approach is overseen by the board and used to make sound decisions that applies to the Public Employees’ Retirement Fund (PERF) and our other affiliate funds.Asset Liability Management6
•Changes as a result of the ALM process result in changes to the City’s required contributions.•The larges recent change was to the discount rate that became effective beginning in FY 2017/18.•The discount rate was decreased in December 2016 from 7.5% to 7% over a 3 year period with each drop phased in over 5 years, paid off over 20 years with a declining contribution requirement in the last 5 years (see next slide).•Additional assumption changes from recent ALM cycles include increased life expectancy and earlier retirement ages (longer payouts), later assumed start dates (less time to earn), and decreased overall mortality rates.•ALM has historically led to cost increases, not decreases.Asset Liability Management7
ALM Discount Rate Drop8•The discount rate is the most significant factor in calculating funding requirements.FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 FY 2036 FY 2037 FY 203820%20%20% 20%7.5% to 7.375% Effective with the June 30, 2016 Actuariual Report.7.375% to 7.25% Effective with the June 30, 2016 Actuariual Report.7.25% to 7.0% Effective with the June 30, 2016 Actuariual Report.60%40%20%100% 100%100%100%80%100% 100% 100% 100% 100% 100%100%80%60%40%40%20%40%60%80%100% 100% 100% 100% 100% 100%100%80%60%40%40%60%80%100% 100% 100%100% 100% 100% 100% 100% 100%60%80%100% 100% 100%
Other Assumptions9•CalPERS defined benefit is earned today but paid out long term over a period of time in the distant future.•Significant assumptions include:•Wage growth of individuals and payroll growth of the agency•System entry age•Retirement age•Life expectancy•Pre and post retirement mortality•Investment earnings•Price inflation•Marital status and Age of spouse•Terminated members •Vested retirement age (59 and 54) •Non vested cash out immediately •Disability (industrial and non industrial)
Risk Mitigation Policy10•In 2015, CalPERS adopted a Risk Mitigation Policy to reduce discount rate and risk if earnings were above expectation.•FY 2021 earnings of 21.3% required a drop to 6.8% with excess earnings funding the drop.•This policy limited funded status improvement from FY 2021 earnings.
•CalPERS annually publishes a Public Agency Actuarial Report for each member jurisdiction.•Reports can be found by internet search “CalPERS Public Agency Actuarial Report” or at this link: https://www.calpers.ca.gov/page/employers/actuarial‐resources/public‐agency‐actuarial‐valuation‐reports•Each agency’s assets are held in an independent account but investments, investment decisions and management is conducted at the system level.•Actuarial reports contain details about assumptions, demographics, funding status, plan details and other key information critical to each local agency’s participation in CalPERS retirement system.•Actuarial information is provided on the aggregate agency plan level, not on the individual employee level.Public Agency Actuarial Reports11
•The appendices in the Actuarial Report contain demographic data on plan participants.•The Active/Retired ratio of the Misc plan is 0.57 and the Safety plan is 0.59.Lodi Demographics12Group Name Active Employees Retirees and BeneficiariesMiscellaneous First Level (Classic) 140Miscellaneous PEPRA Level 127Miscellaneous Plan Total 267 466Safety First Level (Classic) 58Safety Second Level (Classic) 11Safety PEPRA Level 51Safety Total 120 202
•Lodi has the following benefit formulas for employees.•All new hires since 2013 are PEPRA unless they have previous and continuous PERS experience.Lodi Benefit Formulas13Employee Category Pension FormulaSafety – Classic Tier 1 3% @ 50Safety – Classic Tier 23% @ 55Safety – PEPRA 2.7% @ 57Miscellaneous – Classic 2% @ 55Miscellaneous – PEPRA 2.0% @ 62
•PERS separated into a split billing system in FY 2016/17.•Previous bills were all expressed as a % of payroll.•Current bills are an annual fixed Unfunded Accrued Liability (UAL or catch up) amount and a % of salary Normal Cost (cost of the current benefit) shown on the cover page of the Actuarial Report.Lodi PERS Bill14Plan Employer Normal Cost RateUAL PEPRA Member RateMiscellaneous 10.29% $5,118,826 8.00%Safety 20.40% $6,969,718 13.00%
Lodi Actuarial Bases ‐Misc15
Lodi Actuarial Bases ‐Safety16
•Beginning in 2013 Lodi employees have been paying a significant portion of normal pension costs.Lodi Employee Contributions17Bargaining UnitMisc or SafetyCost Share %Employee Required Contribution %Total Paid by EmployeeGeneral Services M 5712Maintenance & Operators M 6 7 13Dispatchers M 3 7 10IBEW M279LCMMA M 3 7 10POAL S 9 9 18Police Mid‐Mgmt S 9 9 18Police Mid‐Mgmt (Misc.) M 9 7 16Fire S 6 9 15Fire Mid‐Mgmt S 3 9 12Fire Chief S 3 9 12Police Chief S 9 9 18Unrepresented/ Confidental M 6 7 13Executive/Department Heads M 6 7 13Council Appointees M 6 7 13Classic Employees
•Beginning in 2013 Lodi employees have been paying a significant portion of normal pension costs.Lodi Employee Contributions18Bargaining UnitMisc or SafetyCost Share %Employee Required Contribution %Total Paid by EmployeeGeneral Services M 5813Maintenance & Operators M 6 8 14Dispatchers M 3 8 11IBEW M 2 8 10LCMMA M 3 8 11POAL S 6 13 19Police Mid‐Mgmt S 6 13 19Police Mid‐Mgmt (Misc.) M 9 8 17Fire S 2 13 15Fire Mid‐Mgmt S 3 13 16Fire Chief S 3 13 16Police Chief S 9 13 22Unrepresented/ Confidental M 6 8 14Executive/Department Heads M 6 8 14Council Appointees M 6 8 14PEPRA Employees PERS Contribution
•As of the June 30, 2021, actuarial report, the City’s Unfunded Accrued Liability is shown below (page 6 actuarial report).Current Unfunded Accrued Liability19Plan Total Liability MVA UAL Funded %Miscellaneous 224,689,925 177,481,645 47,208,280 79.0%Safety 233,987,791 156,554,968 77,432,823 66.9%All Plans 458,677,716 334,036,613 $124,641,103 72.8%
•In late 2016, anticipating the significant financial impacts of the discount rate drop, Lodi City Council adopted a Pension Stabilization Policy (PSP) and created a Pension Stabilization Fund (PSF) at PARS.•The policy relied on excess fund balance from FY 2016 in the General Fund to invest in the PSF to provide a source to minimize the impact of rising pension costs and set a target of 80% combined funding for the City’s pension plans.•The PSF was first funded in April 2017 based on excess fund balance from FY 2016.•In late 2017, the PSP was enhanced to require all future reserves in excess of the target to be deposited into the PARS account and to require budgeting at the monthly (higher rate) to CalPERS but paying at the annual (lower rate) with the excess being applied as Additional Discretionary Payments (ADP) to buy down the liability. Pension Stabilization Policy and Progress20
•The PSF is an IRS section 115c trust fund for pension benefits.•By law the use is restricted to funding future pension costs.•Permits investment in higher yielding, higher risk assets.•Principal purpose is to provide financial flexibility in the face of either known or unknown upward pressures on pension costs.•Not intended to out earn CalPERS.•Adopted with knowledge of but before discount rate drop from 7.5% to 7.0%.•PERS inability to appreciably improve funded status makes risk of future and costly systemic changes likely.Pension Stabilization Fund History21
•The City has contributed $17.1 million and earned nearly $4.5 million since the PSF was initially funded in April 2017.Pension Stabilization Fund History22FY2016‐17 FY2017‐18 FY2018‐19 FY2019‐20 FY2020‐21 FY2021‐22FY2022‐23 (est.)Beginning Balance as of July 1‐3,938,615 11,095,822 13,937,524 16,607,021 20,499,725 20,037,023 PARS Contributions 3,843,954 6,907,626 1,979,931 2,160,716 ‐2,230,107 ‐Earnings/(Losses) 94,661 249,581 861,771 508,781 3,892,704 (2,692,809) 1,531,760Ending Balance as of June 30 3,938,615 11,095,822 13,937,524 16,607,021 20,499,725 20,037,023 21,568,7483 Earnings/Losses is shown net of expenses.FY 2020‐21 contribution was made as ADP to PERS.FY 2022‐23 balance and earnings are est as of June 30, 2023.
•PARS Compounded Annual Returns have exceed both PERS discount rate (6.8%) and PERS experienced rates of return.•Comparisons are as of June 30, 2021.•The City’s selected PARS fund has a lower risk profile than PERS due to lower equity exposure.•All City assets at PARS are invested in the Balanced Fund.Pension Stabilization Fund History23Investment Strategy Equity %1 Year 5 Years 10 YearsPARS – Capital Appreciation Fund65‐85% 32.31% 12.64% 9.75%PARS – Balanced Fund50‐70% 27.05% 11.26% 8.67%PERS ~75% 21.3% 10.3% 8.5%
•On June 7, 2023, City Council adopted a revised pension stabilization policy that is temporarily suspended in order to consider FY 2021/22 fund balances.•Revisions include:•Capping annual contributions to 5% of General Fund revenue.•Setting a target of 5% of the total PERS liability to be invested at PARS with the excess to be used as ADP to PERS. •Requiring the General Fund to pay the costs for Parks and Library PSP contributions.Pension Stabilization Policy Update24
•In addition to PSF contributions, the City has made significant ADP contributions totaling nearly $6.4 million over this time period.•Information through FY 2020‐21 is contained on page 21 of Actuarial Reports.FY 2020‐21 includes $4,246,277 in ADP made in lieu of PARS deposits.ADP is made in proportion to the pension bill in any given year.Additional Discretionary Payments History25FY2018‐19 FY2019‐20 FY2020‐21 FY2021‐22 FY2022‐23 FY2023‐24 TotalsSafety 151,021 188,083 2,642,028 193,039 339,113 225,531 3,738,815 Miscellaneous 122,421 156,589 1,963,043 157,941 76,040 165,639 2,641,674 Totals 273,442 344,672 4,605,071 350,980 415,153 391,170 6,380,488
•As a result of the City’s PSF balance, the City is approximately 4.4% better funded as of December 31, 2022. Pension Funding Current Status26PERS Valuation DatePERS Funded StatusPARS Assets (as of 12.31 + one year)City's Funded Status% improvement due to PARS6.30.16 63.4% 5,229,493 64.8% 1.5%6.30.17 64.9% 10,685,927 67.8% 3.0%6.30.18 63.8% 17,023,582 68.0% 4.2%6.30.19 64.2% 18,946,524 68.8% 4.6%6.30.20 63.2% 21,245,657 68.1% 4.9%6.30.21 72.8% 20,023,091 77.2% 4.4%
•As of the most recently available actuarial data, Lodi Ranks 415 out of the 430 cities in terms of reported funded status. •PARS assets improve status by 5.2% and comparative ranking by 70.•Data comes from State Controller’s Office reporting on funded status.Comparative Funding Current Status27
•Lodi’s PERS relationship is long.•Older agencies with a long PERS relationship are worse funded system wide.•Lodi has a 0.58 Active/Retiree ratio; each active employee supports 1.73 retirees.•Historically and financially necessary workforce reductions mean less money was flowing into the system to support future benefit payouts.•Historical salary increases have not followed the slow and steady 2.8% annual wage inflation and change in payroll assumptions and instead have been “lumpy”.•Large increases to achieve current market competitiveness create funding gaps.•Employees who leave often get outsized raises and we do not lose the obligation to pay the retirement benefit from our plan.•Lodi took advantage of three CalPERS allowed programs that substantially increased liability.•2001 benefit formula increases for safety and miscellaneous increased % of salary and decreased retirement age retroactively.•Lodi took pension holidays when its plan was super funded.•Lodi offered “Golden Handshakes” for short term budget savings. Substantial ADP payments have eliminated these liabilities.Why is Lodi Poorly Funded?28
•One strategy touted as a solution to pension funding is Pension Obligation Bonds.•At least 60 since 2017 have issued POBs as a strategy •POB’s fundamentally swap the 6.8% projected earnings rate at PERS for a lower taxable municipal bond rate.•Ideally, the difference in rates results in savings for the local agency.•The agency is subject to significant market risk, most acute in the early years: If PERS earns less than 6.8% in the first few years, the agency will end up paying more for the combined POB + debt payment than for just the PERS payment.•The impact of changes to pension funding are more pronounced when the agency is better funded.Pension Obligation Bonds29
•Should the City wish to terminate its plan with CalPERS, CalPERS would assign a risk free rate to calculate the termination liability (page 29 actuarial report).•Termination closes the system but keeps currently accrued benefits.•PERS gets no new money and must continue to pay all future benefits with only existing assets.•Current funds are invested in “risk free” assets with substantially lower potential earnings. Hypothetical Termination Liability30Plan 1% Risk Free Rate 2.25% Risk Free RateMiscellaneous $314,923,414 $232,578,607Safety $400,852,804 $296,272,397Total $715,776,218 $528,851,004
Questions?31
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