Title
Receive an Informational Report on Pension Funding and the Pension Rate Stabilization Program. (Finance 10024051) [City Council]
Body
To: Honorable Mayor and Members of the City Council
From: Jennifer Ott, City Manager
EXECUTIVE SUMMARY
In October 2022, City Council authorized a revision of the Pension Rate Stabilization Program and Other Post-Employment Benefits Funding Policy (Policy). The main revision to the Policy at that time was to clarify the language and amount the City of Alameda (City) would contribute to either a Trust Fund for future CalPERS or OPEB payments, or to pay down directly the CalPERS unfunded liability.
At this time, staff is bringing an update to City Council of the funded status of the CalPERS pension plans and the City’s 115 Pension Trust. Staff will return to City Council in April 2024 to discuss the City’s current OPEB status.
BACKGROUND
The purpose of this informational staff report is to provide a comprehensive analysis of the current funding status of the City pension plans with CalPERS. The underfunded pension plans pose a financial challenge that continues to require attention and strategic planning.
The City has partnered with GovInvest, a leading consultant in pension and OPEB planning in order to help the City clarify its current position and options for the future. They have prepared a short presentation including CalPERS pension basics, a comparison to other agencies, changes to CalPERS and their impacts to the City, and addressing the City’s unfunded liability.
DISCUSSION
The following section provides an update on the City’s CalPERS net pension liability. CalPERS bifurcates annual pension costs into two component parts:
Normal Costs -The costs earned by active employees during the current years. These costs are based on a percentage of payroll: 10.97% on average for Miscellaneous Plan employees and 20.72% on average for Safety Plan employees.
Unfunded Accrued Liability (UAL) -The funding shortfall for benefits previously earned by current employees and retirees. The UAL is effectively a “past due payment”, which is equal to the difference between the projected total benefits payments or accrued liability (in today’s dollars) less the market value of assets held and invested by CalPERS. CalPERS requires fixed dollar payments to repay this unfunded liability.
In broad terms, employer contributions, employee contributions, and investment income are the three components that are used to fund benefits and expenses that relate to pensions. A series of both economic and demographic assumptions are made by CalPERS to project future benefit payments to plan members including inflation, investment return, salary growth, retirement, disability, death, and termination from employment.
As of January 2024, the City employs 203 classic CalPERS members (members hired on or before December 31, 2012) and 329 Public Employees’ Pension Reform Act (PEPRA) members (members hired on or after January 1, 2013). Over the next few years, more and more employees will fall into the PEPRA tier. As PEPRA tier participation rises, normal cost will decrease as a percentage of pay.
The Miscellaneous (non-sworn) Plan’s Funded Percentage as of June 30, 2022 was 71.5% and its Estimated Total Employer Contribution Rate was 33.6%.
The Public Safety Plan’s Funded Percentage as of June 30, 2022 was 59.1% and its Estimated Total Employer Contribution Rate was 77.9%.
CalPERS investment return was a negative 6.1% for the Fiscal Year ending June 30, 2022 and a positive 5.8% for the Fiscal Year ending June 30, 2023. As these amounts did not meet the CalPERS target investment return of 6.8%, more contributions will be required of the City.
What This Means
As the Accrued Liability is larger than the Plan Assets, the City has a Net Unfunded Actuarial Liability between the two plans (Miscellaneous $98.14 million and Public Safety $228.85 million) of $326.99 million at June 30, 2022. Below are the previous 12 years of the Unfunded Liability amount.
Section 115 Pension Trust
The City currently participates in a Section 115 Pension Trust (Trust) with Public Agency Retirement Services (PARS). As of June 30, 2023, the Trust had a balance of $15.94 million. The primary benefit of the Trust is flexibility. While the funds in the Trust are “irrevocable” and must be used for pension costs, they can be used to defray annual required costs during tough budget years (reducing the amount needed from the General Fund), be used to pay down “extra UAL” if desired, or even left untouched to grow over time and used at a later date to extinguish a larger portion of the City’s UAL.
|
Fiscal Year |
Contributions |
Rate of Return (gross fees) |
Balance |
|
FY 2021-22 |
$1,919,000 |
-11.41% |
$12,019,783 |
|
FY 2022-23 |
$2,903,224 |
8.16% |
$15,937,624 |
Advanced Payments
Additionally, the City has made a total of $32.25 million in advanced payments towards its Unfunded Liability since 2018. If these payments had not been made, the City’s current net liability would be significantly higher.
More detailed information is provided in the attached presentation.
ALTERNATIVES
• City Council can accept this informational report.
• City Council can ask questions and provide feedback on this informational report on net pension liability.
FINANCIAL IMPACT
This report is for informational purposes only. There is no fiscal impact from hearing this item.
MUNICIPAL CODE/POLICY DOCUMENT CROSS-REFERENCE
This action is in conformance with the Alameda Municipal Code and all policy documents.
ENVIRONMENTAL REVIEW
This activity is not a project and is exempt from the California Environmental Quality Act (CEQA) pursuant to Section 15378 (b) (4) of the CEQA Guidelines because it involves governmental fiscal activities which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment.
CLIMATE IMPACTS
There are no identifiable climate impacts or climate action opportunities associated with the subject of this report.
RECCOMENDATION
Receive the informational report on pension funding and the Pension Rate Stabilization Program.
Respectfully submitted,
Margaret L. O’Brien, Director of Finance
By:
Ross McCarthy, Controller