Fiscal Sustainability Task Force Meeting #3 March 22, 2017

Retirement Funding

Retirement Benefits Funding Pension (CalPERS or other) Defined Benefit Plan uses formula Ex. 2.7% @ 55 Defined Contribution Plan uses specific contribution amount Other Post Employment Benefits (OPEB) Retiree Health Medical, dental, vision, etc. Anything non-pension Both are promises of benefits in return for service today Liabilities of agencies Long-term in nature

Retirement Benefits Funding Funded: contributions from employer (and sometimes employee) are invested towards meeting the benefits Known as “Pre-funded”, whether partially or wholly Also can be called “Underfunded” Interest earnings help pay the benefit Requires actuarial study, assumptions about the future Pensions are typically funded this way, i.e., through CalPERS More agencies are starting to fund OPEB this way

Retirement Benefits Funding Unfunded: no assets set aside, so benefits are paid by employer as they come due for payment Paid out of current revenue sources Known as “Pay-As-You-Go” or “PayGo”

Retirement Benefits Funding Nothing wrong with having an unfunded liability As long as you are making payments to account for benefits accrued It’s not good to have an unfunded plan Unfunded Plan: current benefits are paid out of tax revenues (“Pay-As-You-Go”) Pay-Go transfers today’s cost to the next generation Very few agencies have 100% funded plan Lot of media discussion about UNFUNDED LIABILITIES Dublin example – reporter called out the Mayor on $10 mil unfunded liability! Wanted to tie that to our ability to balance our budget Nothing wrong with this, intrinsically, any more than its wrong to have an mortgage

Pension = Final comp * yrs. of service * benefit factor Example 1: Classic PERS Pension = Final comp * yrs. of service * benefit factor Example Calculation Retirement age: 55 Total years of service: 35 Retired at $100,000 salary Agency 1: Final comp: $100,000 2.7% @ 55, single highest 10 yrs service Agency 2: 3 year average final compensation: $97,116 2.0% @ 55, avg. 3 yrs 25 years Comp Used Years of Svc Benefit Factor Pension 2.7% @ 55 $100,000 10 .027 $27,000 2.0% @ 55 $97,116 25 .020 $48,558 Total $75,558

Pension Reform CA Public Employee’s Pension Reform (PEPRA) approved in 2012, into effect 1/1/13 Reduced benefits for new members (non-safety): 2% @ 62 Created new maximum benefit for safety Capped annual salary that can be used ($136,440) Required employees to share equally in cost Disallowed Employer-Paid Member Contributions Required Three-Year Final Compensation Placed restrictions on retirees returning to work for CalPERS agency Lot of media discussion about UNFUNDED LIABILITIES Dublin example – reporter called out the Mayor on $10 mil unfunded liability! Wanted to tie that to our ability to balance our budget Nothing wrong with this, intrinsically, any more than its wrong to have an mortgage

Example 2: Pension Reform Pension = Final comp * yrs. of service * benefit factor Example Calculation Retirement age: 62 Total years of service: 36 Agency 1: Final avg comp: $97,116 2.0% @ 62 35 yrs service Final comp Years of Svc Benefit Factor Pension 2.0% @ 62 $97,116 35 .020 $67,981 Total $72,000 Difference: Retirement age $7,577 less per year

Pension Funding Balancing Act Interest Earnings Benefits Paid Expenses Contributions

Pension Funding Contributions (Employer and Employee, calc’d by Actuary) Interest Earnings (estimated by CalPERS – can be extremely volatile)

The Payments Annual Required Contribution (ARC) An annual payment that is calculated to pay current costs and prior year service costs Will theoretically pay off unfunded liabilities over time Normal Cost + Amortization of Unfunded Liability

Total PV of Projected Benefits Dublin Pension Normal Cost: Benefits earned in current year $1.2 mil Future Normal Costs $11.7 mil ARC City Normal Costs Unfunded Liability (Amortized payment) $481,000 + $554,000 = $1,035,000 UNFUNDED LIABILITY $10.9 mil Total PV of Projected Benefits $63.4 mil Accrued Liability: Benefits earned for past service $50.5 mil Value of Plan Assets $39.6 mil

Dublin Pension Accrued Liability $ (50,508,032) Value of benefits earned to date Plan Assets $ 39,585,764 Held in a trust, otherwise doesn't count UL $ (10,912,268) Funded Ratio 78.4% Pretty good! The ARC has worked (though with some volatility) to pre-fund pension benefits

PERS Rates Rates change with any change to assumptions Investment returns Payroll growth CPI Level of benefits Life expectancy Etc, etc.

PERS Earnings

PERS Rates City of Dublin Projected future rates

PERS Rates City of Dublin Investment Return Scenarios Earnings rate other than projected 7.5% changes contribution to the Unfunded Liability

PERS Rates Financial crisis saw CalPERS lose about 25% of assets. In 10-11: CalPERS needed an extra $600 million from state taxpayers to help it cope with its losses from 2008. CalPERS reported returns of 2.4% for the fiscal year 2014-15, preliminary numbers show. CalPERS estimates it is 77% funded, according to the system's annual financial report for the fiscal year ending June 30, 2014.

PERS News Dec 2016 – CalPERS board lowers discount rate to 7.0%, phased in over 3 years Impact on City budget: Minimal first year Ramps up to $500k+ annually by FY 2022-23 Cumulative $1.3 mil increase We have factored into forecast Major hit if discount rate goes to 6.5% $750k+ increase annually

OPEB (Retiree Health) Example benefit: Fully paid health premiums, after 5 years employment When Jane retires at age 55, with 25 years service, the City pays her monthly health premiums: $1,700 / month?

OPEB Problem In 2007, GASB 45 said that agencies must report OPEB the way pensions are reported Must calculate the agency’s total liability for future benefits Must calculate a funded status How well is your plan funded? Impact on credit rating Agencies making Annual Required Contribution (ARC) are on track Goal is 80%-100% funded Any payments less than the ARC create a liability

Amortized Payment (UUAL) Dublin OPEB Dublin pre-funds OPEB the same way it pre-funds pension Annual required contribution = Normal Cost + Amortized Payment (UUAL)

Total PV of Projected Benefits Dublin OPEB Normal Cost: Benefits earned in current year $0.9 mil Future Normal Costs $5.9 mil ARC Normal Costs Unfunded Liability (Amortized payment) $884,000 + $462,000 = $1,346,000 UNFUNDED LIABILITY $4.5 mil Total PV of Projected Benefits $24.4 mil Accrued Liability: Benefits earned for past service $17.7 mil Value of Plan Assets $13.1 mil

Dublin OPEB Accrued Liability $ (17,567,000) Value of benefits earned to date Plan Assets $ 13,154,000 Held in a trust, otherwise doesn't count UL $ (4,503,000) Funded Ratio 74.5% Pretty good! * Last June the CC approved $1 million lump sum to OPEB to bring funding to 80%

KEY POINTS Nothing wrong with having an unfunded liability Target 80+% funded Health of plan is not determined by the unfunded liability ARC is working Balancing Act Contributions + Interest fund a plan Importance of economic and actuarial assumptions Lump Sum Contributions Use reserves now that are earning low interest to pay down the liability

Thanks