HomeMy WebLinkAboutCity Council Resolution 15-007 - Adjusting Budget - UAL Payment RESOLUTION NO. 15-007
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SARATOGA
AMENDING THE FISCAL YEAR 2014/15 ANNUAL BUDGET
TO INCREASE BUDGETED EXPENDITURE APPROPRIATIONS
TO MAKE A PARTIAL PAYMENT TOWARD CALPERS UNFUNDED ACCRUED LIABILITY
WHEREAS, the City Council has determined that a partial payoff of the City's $7.7 million
share of CaIPERS Unfunded Accrued Liability is both prudent and urgent, and:
WHEREAS, the City Council has directed staff to apply funding from the Working Capital,
Fiscal Stabilization, and Capital Improvement Project Fund Balance Reserves, in addition to funding
available in the current year's operating budget to make the partial payoff payment in an amount not to
exceed$3,380,000 and;
WHEREAS, it is necessary to amend the City of Saratoga's FY 2014/15 budget to increase
expenditure appropriations for this payment, and;
NOW THEREFORE,BE IT RESOLVED,that the City Council of the City of Saratoga hereby
amends the Fiscal Year 2014/15 General Fund Operating Budget as described in the Ca1PERS Unfunded
Liability and Budget Adjustment Resolution Report to City Council on February 18, 2015 to;
Increase expenditure budget: Ca1PERS UAL Account: 111.8101.52115 by$3,380,000
AND BE IT FURTHER RESOLVED,that the Finance and Administrative Services Director is
directed to record these changes into the City's accounting records in accordance with appropriate
accounting practices, and to make immediate payment for a partial pay off of the City's share of the
CalPERS Unfunded Accrued Liability.
The above and foregoing resolution was passed and adopted at a regular meeting of the Saratoga City
Council held on the 18''day of February,2015 by the following vote:
AYES: Mayor Howard A. Miller, Vice Mayor Manny Cappello, Council Member
Emily Lo, Mary-Lynne Bernald, Rishi Kumar
NOES: None
ABSENT: None
ABSTAIN: None
U
oward A. Miller, Mayor
ATTEST:
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Crys6VBothelio, City Clerk
SARATOGA CITY COUNCIL
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MEETING DATE: February 18,2015
DEPARTMENT: Administrative Services Department
PREPARED BY: Mary Furey,Administrative Services Director
SUBJECT: CalPERS Unfunded Accrued Liability and Budget Adjustment Resolution
RECOMMENDED ACTION:
Review report and approve the attached budget adjustment resolution to appropriate funding for an approximate
$3.3 million payment toward the City's share of the CalPERS Unfunded Accrued Liability, and authorize the
Administrative Services Director to issue the payment.
BACKGROUND:
The CalPERS October 2014 Actuarial Valuation report included changes to the past practice of folding cost
adjustments from revised amortization methods, actuarial assumptions, and investment gains and losses into the
Employer Contribution Rates. With this year's actuarial report, CalPERS identified and separated the annual
contribution for the unfunded cost of prior year service known as the `Unfunded Accrued Liability' (UAL) from
the annual service cost,known at the `Normal Cost' contribution.
With this change,the report now shows a breakdown of the City's total$37 million Accrued Liability(AL)at June
30,2013,(actuarial valuation reports are based on prior year information)to include a$30 million funded portion,
and a$6.9 million unfunded portion. The report also shows that the unfunded portion is expected to grow to $7.7
million by June 30,2015.
REPORT SUMMARY:
CaIPERS Pension Plan
The California Public Employees' Retirement System (CalPERS) administers pension benefits on behalf of more
than 3,000 school,local agency and state employers,and 1.6 million members participating in the retirement system.
CalPERS is the largest public pension fund in the U.S.,managing the administration and investment of almost$300
Billion in assets as of February 2015.
The CalPERS retirement plan is structured as a "defined benefit" plan, which means the pension plan provides
benefits that are calculated using a defined formula, rather than accounting for individual member's contributions
and earnings in a savings plan, such as occurs with a 401k. Retirement benefits are calculated using a member's
years of service credit, age at retirement, and final compensation (average salary for a defined period of
employment).
Actuarial Valuation
To determine the cost of providing these benefits, actuarial assumptions and fairly conservative investment risks
are factored together to calculate the cost of the pension liability. Demographic assumptions include factors such
as the member's life expectancy, age at retirement, rate of retirements, disabilities, terminations, and payroll
inflation — typically age, service, and gender related assumptions. Economic assumptions are based on salary
growth rates,inflation rates, and the asset allocation mix's assumed rate of return known as the discount rate.
Every year CalPERS actuaries reassess each employer plan to
determine its current valuation. The plan's `Present Value of Benefits' Future
identifies the total funding needed for member's services accrued to Normal Cost
date, and for the cost for the expected future years of service. Total Contributions
funding need is comprised of the future `Normal Cost' Present
employee/employer contribution payments and the plan's net assets Value
known as the `Accrued Liability'. Normal Cost contribution payments of
Accrued
represent the annual payments associated with one year of service Benefits Liability
accrual for years of service in the future. The Accrued Liability
represents the value of benefits earned to date by members in the plan,
and funded by prior payments and investment returns on the previously
accumulated funding.
CalPERS standards require that funds be accumulated to pay for these benefits during a member's service,meaning
the intent is to pre-fund pension plan obligations through annual contributions and investment earnings to maintain
100%funded status. Over a member's career, funding is comprised of a growing percentage of accrued liability as
previous payments accumulate and grow through the investment returns, as shown in the graph below.
Accrued Liability versus Future Normal Cost Contributions
(30 Year Career)
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■Accrued Liability ■Future NC Payments
An employer plan includes the share of a member's Accrued Liability for the time an employee worked at the
agency. If an employer plan's funded status is below 100%,there is an unfunded component within the Accrued
Liability. A plan's funded status is determined through an assessment of assets versus Accrued Liability. The City
of Saratoga's October 2014 Actuarial Valuation report shows a funded status of 81.3% at June 30,2013—a recent
improvement due to higher than assumed investment returns for the last two years. Plan underfunding can occur
due to lower than anticipated investment returns,higher than anticipated retirements, actuarial assumption changes,
or from a number of other factors.
Market Value of Assets
= Funded Status
Accrued Liability
As part of CalPERS annual review, employer contribution rates are adjusted based on the plan's funded status. If
the pension plan is less than 100% funded, employers must pay the Normal Cost employer contribution plus a
payment toward the unfunded portion of the Accrued Liability. If the pension plan is greater than 100% funded,
employers pay the Normal Cost contribution only. In the past, these UAL adjustment payments were included in
the Employer rates, and were the cause of ongoing fluctuations in employer rates.
While actuarial assumptions are designed to reduce rate volatility through long-term averaging and large member
pools, the demographic and economic assumptions in place could not support the extraordinary investment losses
that occurred during the recession years. In addition,with market losses significantly de-valuing the pension plan's
net assets during the recession years, CalPERS reassessed their rate of return assumption (discount rate), and in
March 2012 reduced the discount rate from 7.75%to 7.5%.
This change resulted in a large decrease in the Present Value of Benefits as a lower investment return assumption
requires agencies to contribute more funding to pay for the pension benefits. The rate change and prior year losses
were combined into one amortization base titled `Share of Pre-2013 Pool UAL' as shown on line 2 in the chart
below. The$3.3 million amount in the column title `Balance 6/30/15' represents the City's allocation of the pool's
UAL at the end of this fiscal year, after incurring the annual interest cost of 7.5% less payments made toward the
unfunded liability. As noted above, payments toward the unfunded liability were rolled into employer's
contribution rates in prior years,rather than stated as a separate dollar amount.
Expected Expected Scheduled Payment
Date Amortization Balance Payment Balance Payment Balance Payment for as%of
Base Established Period 6/30/13 2013/14 6/30/14 2014/15 6/30/15 2015/16 Payroll
1 SIDE FUND 06/30/13 $ - $ - $ - $ - $ - $ - 0.000%
2 SHARE OF PRE-2013 POOL UAL 06/30/13 22 $ 3,182,123 $ 109,457 $ 3,307,295 $ 167,963 $ 3,381,194 $ 240,704 4.672%
3 ASSET(GAIN)/LOSS 06/30/13 30 $ 3,791,145 $ - $ 4,075,481 $ - $ 4,381,142 $ 61,621 1.196%
4 NON-ASSET(GAIN)/LOSS 06/30/13 30 $ (36,444) $ $ (39,177) $ $ (42,115) $ (592) (0.011%)
5 NON-ASSET(GAIN)/LOSS 06/30/14 30 $ - $ $ - $ tbd tbd tbd
TOTAL $ 6,936,824 $ 109,457 $ 7,343,599 $ 167,963 $ 7,720,221 $ 301,733 5.857%
After an initial policy to smooth Employer Contribution Rates through the use of a rolling amortization period was
deemed too slow to bring plans back to an acceptable funded status, Ca1PERS revised their funding approach for
dealing with investment losses. In April of 2013, the Ca1PERS Board approved a rate smoothing policy that
amortizes investment gains and losses over a fixed 30 year period. In the future, annual gains and losses and
methodology impacts will be amortized over 30 years with a gradual ramp up during the first five years, holding
steady for 20 years, and then a gradual ramp down during the last five year period.
The accumulated market gains and losses are accounted for in the UAL base titled`Asset(Gain)/Loss at 6/30/2013'.
In total, the years of historic investment losses during the recession and assumption changes added a substantial
unfunded component to the accrued liability. This almost $4.4 million dollar unfunded accrued liability base is
shown on the Asset(Gain)/Loss line(line#3)in the above chart under the column titled `Balance 6/30/15'.
Actuarial valuation changes and historic Future Future
investment losses have caused the funded Normal Cost Normal Cost
status of pension plans across the State to
drop significantly. As seen in the graph on Contributions Contributions
the right, the City's $37 million Accrued Present Unfunded
Liability is now comprised of both a $30 Value �♦ Liability
million funded portion and a $6.9 million of Accrued
unfunded portion as of June 30, 2013. Per Benefits Liability
the Ca1PERS October 2014 actuarial Funded
report, the unfunded portion is expected to Liability
grow to $7.7 million by June 30,2015.
Future Changes
In 2014 Ca1PERS completed a 2 year asset liability management study incorporating actuarial assumptions and
strategic asset allocation. In February 2014, the Ca1PERS Board adopted recommendations which resulted from
this study, including slight changes in the asset mix to reduce volatility. The current economic assumptions
remained unchanged,including the discount rate of 7.5%,the price inflation,wage inflation,and the payroll growth
rates, however, the experience study on CaIPERS demographic data for the years 1997 to 2011 revealed the
Ca1PERS Board needed to change some of the demographic assumptions in the contribution rate calculations.
The data revealed that on average,men were living two years longer and women a year and a half longer. The study
also showed there were lower rates of disability and higher rates of service retirements for certain groups,including
police and fire members. And,members are serving longer,which has resulted in higher salary growth rates. With
pensioners living longer and retiring with higher salaries, pension benefits were costing more than CalPERS had
assumed or planned for. These new assumptions resulted in another reassessment and subsequently, another
increase in the Unfunded Accrued Liability. The new assumptions will be included in the FY 2016/17 Normal Cost
contribution rates. Any additional Ca1PERS assumption changes and Asset(Gains)/Losses will be amortized in the
same manner and added to the schedule as a new amortization base in the years that follow.
Scheduled Rate Increases
Due to changes resulting from the State's Pension Reform Laws (PEPRA), all risk pools will be combined into
either a Miscellaneous or Public Safety Pool in the future as a result of the declining member base from closed
benefit plans. With the upcoming changes, and with an effort to increase transparency in contribution rates,
Ca1PERS determined the UAL portion of employer payments would be shown separately and charged as dollar
amounts rather than percentages. With the 30 year smoothing policy, the UAL payment totals $301,733. This is
shown in the chart above in the pink column titled `Scheduled Payment for FY 2015/16 on the TOTAL line.
Ca1PERS also provided a 5 year projection which shows an increase as the UAL payments ramp up. This is
illustrated in the following chart, along with the Normal Cost contribution rate by Tier category:
Pension
Year 1 Year 2 Year 3 Year 4 Year 5
Plan FY FY FY FY FY
2015/16 2016/17 2017/18 2018/19 2019/20
Tier I 9.35% 9.70% 9.70% 9.70% 9.70%
Plus UAL $301,733 $362,702 $427,057 $494,947 $566,527
Tier II 7.51% 8.00% 8.00% 8.00% 8.00%
Plus UAL $3 $36 $71 $108 $147
Tier III 6.73% 6.73% 6.73% 6.73% 6.73%
(Plus UAL I n/a I n/a I n/a I n/a I n/a
As the chart illustrates, the payments are increasingly painful—the full UAL contribution payment at year 5 will,
by itself,be equal to the normal cost contribution,and is more than the City's current contribution of about$500,000
per year. Also, as shown in the chart,the Tier II has a minimal UAL as the Tier II plan began with our first hire in
July 2012. With only a few members in this tier to date,there is very little unfunded liability impact. Tier III does
not have a UAL as this plan began in January 2013, and there are no reportable impacts to date.
Benefits of Valuation Changes
As noted above, Ca1PERS now separates the Normal Cost contribution from the unfunded liability contribution.
This approach will keep the employer contribution rates stable in the future, and will allow employers the
opportunity to address payment toward the UAL as applicable to their circumstances. Ca1PERS'policy to amortize
the investment gains and losses over a 30 year period at the discount rate represents the minimum annual payment
option.
By breaking out the unfunded portion from the annual Normal Cost payment,agencies can now decide to pay down
some or all of their UAL,at any point in the future,using methods of their choice. Payment could be made through
the use of available funds, from reserves, or by borrowing/obtaining debt(i.e.bonds) at lower interest rates.
Benefit of immediate payment
The benefit of immediate payment is similar to paying off a 30 year mortgage loan. A difference to note however,
is that unlike a mortgage, the UAL balance will change with the fluctuation of investment market returns. Future
gains and losses will create, increase, decrease, or eliminate future unfunded accrued liability balances. The key
factor is that the unfunded liability will grow in alignment with CalPERS actuarial assumption of 7.5%. This
investment growth is key as it contributions significantly toward funding the accumulated net present value of
benefits.
With this 7.5% discount rate factor, the $7.7 million dollar UAL would in the end, cost the City approximately
$10.4 million in interest over 30 years—in addition to the$7.7 million UAL principal payment—if payment is made
in accordance with the Ca1PERS payment schedule,. In total,the UAL will cost more than$18 million. The long
term impact of the annual payments is another consideration. Forecasted revenues do not support this level of
annual expense in future years.
The City's assessment of cash flow and funding needs versus the cost of interest for the UAL debt will drive this
decision. And, with LAIF interest earnings at historic lows of one-quarter of 1% (.25%), the 7.5% discount rate
cost appears very expensive,thereby some level of payoff appears most prudent, and urgent.
Payment Funding Options
Over the last few years, the City has developed financial policies and practices to ensure the City has sustainable
working capital and emergency reserve funds, as well as ensuring proper funding for liabilities and infrastructure
maintenance. With the City now in a healthier fiscal condition, Council could consider an option to utilize these
reserves for a short period of time to reduce the cost of the UAL over the long term. In addition, a review of the
FY 2014/15 General Fund budget for the mid-year status report shows the City is receiving more revenue than
anticipated,particularly in Property Tax revenues. With these increased revenues,the General Fund is expected to
end the year with approximately$1.2 million of revenues over expenditures.
During the discussion of the Unfunded Accrued Liability at the Council Retreat meeting on January 23rd, 2015,
Council was presented with several options which would fund or partially fund the UAL. At the continuation of
the Retreat on February 4th,Council directed staff to partially fund the UAL debt with the payoff of the amortization
base titled`Share of Pre-2013 Pool UAL'. This base is not subject to the 5 year gradual ramp up payment schedule.
It has established payments of approximately$240,000 annual payments which grow by payroll growth assumption
factors each year. Payoff of this base will reduce annual payments by $240,000 plus each year, thereby leaving
only the gradually increasing UAL portion debt. This lump sum payoff will save the City approximately $3.6
million dollars in interest,and allow the City to both rebuild and repay borrowed funds from the Fiscal Stabilization
Fund Balance Reserves without a 7.5% interest charge.
At the February 4th meeting,Council directed staff to bring back a resolution to amend the General Fund Operating
Budget with an appropriation to fund the partial UAL payment in the amount not to exceed$3,380,000. The payoff
amount is expected to be less than the amount shown in the Amortization Base schedule because the City is making
payment before June 30, 2015. Ca1PERS will be submitting the exact payoff amount to staff prior to Thursday,
February 19th,the date payment will be made to Ca1PERS.
Council directed the use of the following funding sources to fund a current year expenditure appropriation not to
exceed$3,380,000 from the following sources:
FY 2014/15 General Fund appropriation(approximate): $ 949,816
Capital Improvement Reserve: $ 500,000
Fiscal Stabilization Reserve: $1,000,000
Working Capital Reserve over$2 million base: $ 930,184
Total Appropriation(approximate): $3,380,000
Repayment of Reserve Borrowing
With Council's approval to pay off the approximate$3.3 million`Share of Pre-2013 Pool UAL' amortization base,
staff will bring the Fund Balance Reserve repayment discussion to the Finance Committee to develop options and
recommendations. The repayment discussion will be brought back to Council at the Budget Study Session in April
for further direction.
CONSEQUENCES OF NOT FOLLOWING RECOMMENDED ACTION:
The City would not approve the resolution to make an immediate payment for a partial pay off of the City's share
of the CalPERS Unfunded Accrued Liability.
ATTACHMENTS:
Attachment A: Budget Adjustment Resolution