1. Fiscal Sustainability Task Force
Meeting #3
March 22, 2017

2. Retirement Funding

3. Retirement Benefits Funding
Pension (CalPERS or other)
Defined Benefit Plan uses formula
Ex. 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

4. 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

5. 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”

6. 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

7. 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
55, single highest
10 yrs service
Agency 2:
3 year average final compensation: $97,116
55, avg. 3 yrs
25 years
Comp Used
Years of Svc
Benefit Factor
Pension 55
$100,000 10
.027
$27,000 55
$97,116 25
.020
$48,558
Total
$75,558

8. Pension Reform
CA Public Employee’s Pension Reform (PEPRA) approved in 2012, into effect 1/1/13
Reduced benefits for new members (non-safety): 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

9. 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 62
35 yrs service
Final comp
Years of Svc
Benefit Factor
Pension 62
$97,116 35
.020
$67,981
Total
$72,000
Difference:
Retirement age
$7,577 less per year

10. Pension Funding Balancing Act Interest Earnings Benefits Paid Expenses
Contributions

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

15. 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

16. 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

17. Dublin Pension
Accrued Liability
$ (50,508,032)
Value of benefits earned to date
Plan Assets
$ ,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

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

19. PERS Earnings

20. PERS Rates
City of Dublin Projected future rates

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

22. 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 , 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.

23. 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
Cumulative $1.3 mil increase
We have factored into forecast
Major hit if discount rate goes to 6.5%
$750k+ increase annually

24. 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?

25. 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

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

27. 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

28. Dublin OPEB
Accrued Liability
$ (17,567,000)
Value of benefits earned to date
Plan Assets
$ ,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%

29. 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

30. Thanks