1. 1 Understanding Coronado’s CalPERS Rates

2. 2 Agenda  Basic Concepts  How Rates are Set  What causes rates to rise and fall?  Coronado Rates – historically  What makes up our Unfunded Liability  FY 2005-06 Rates  What does this mean?/conclusion

3. 3 Basic Concepts Accrued Liability or the “desired” level of assets – the amount of assets needed right now which would accumulate at the assumed interest rate to equal the funding target at retirement This is an estimated value based on the assumptions used to calculate the funding target to begin with, but also based on the assumption that the fund will earn interest before and after retirement at the assumed rate

4. 4 Basic Concepts  Actuarial Value of Assets – the current value of assets in the plan  Unfunded Liability - When the actual assets fall below the desired level.  Excess Assets/Surplus - When the actual value of assets exceeds the desired level

5. 5 Basic Concepts  Employer Rate: Normal Cost – all things being equal, the annual contribution needed to fund the benefits Amortized Cost – the amount of payment needed to fund the unfunded liability or the credit for excess assets. Normal Cost rate + Amortized Cost rate = Employer Contribution Rate

6. 6 Basic Concepts  Employee Rate: The employee Share is a FIXED percent. Coronado, like many npublic agencies, pays both the employer and employee share. Misc. Plan = 8% Safety Plan = 9%

7. 7 What causes rates to rise and fall?  Benefit changes  Actual liabilities inconsistent with assumptions due to: early retirements, people living longer than projected, unexpected disability retirements (these types of changes are more strongly felt the smaller the plan), pay increases at greater rate than anticipated, etc.  Changes in Value of Assets – Portfolio performance, gains and losses  Changes in actuarial assumptions CalPERS recently changed its assumptions re: CPI and for investment returns.

8. 8 Accrued Liability vs. Value of Assets Coronado Miscellaneous Plan at 6/30/03 Assets = $26.5 mil Accrued Lib = $31.9 mil

9. 9 Accrued Liability vs. Value of Assets Coronado Safety Plan at 6/30/03 Assets = $37.3 mil Accured Liability = $42.9 mil

10. 10 FY 2005-06 Rates as a % of payroll  Miscellaneous Employer Share Normal Rate: 10.492% Amort. Rate: 7.737% Subtotal: 18.229% Employee Share Fixed Rate: 8.000% Total Rate: 26.339%  Safety Employer Share Normal Rate: 17.247% Amort. Rate: 9.354% Subtotal: 26.601% Employee Share Fixed Rate: 9.000% Total Rate: 35.601% Misc and Safety plans are currently 83% and 87% funded respectively, similar to all other CalPERS agencies

11. 11 What Makes up Coronado’s Unfunded Liability, as projected for FY 2005-06 ?  Misc. Plan=$5.9 mil., Safety Plan = $6.7 mil. Roughly 45% due to amortization of benefit increases Roughly 55% due to amortization of investment losses  Amortized over 17-20 years but will be offset by future surpluses or losses  As of FY 2005-06, safety plan participation in 3% @ 50 risk pool with 174 other agencies

12. 12 What does this mean?  Coronado not unique – all public agencies in similar situation  Investment returns are primary reason for cost growth.  Over time, CalPERS has earned 8.8% return. Future returns will mitigate current liabilities  Our situation is NOT like San Diego Coronado meeting ALL its annual obligations- not shifting assets to fund other obligations San Diego is to 65% funded

13. 13 Ways to mitigate City’s CalPERS rate  Pre-pay the Employer share at the beginning of each fiscal year. Saves approximately 4% (about $120k p/yr for both plans)  Pay off all or portion of unfunded liability Effectively erasing the unfunded liability in order to reduce the Employer rate – i.e. making contributions in excess of required contribution  Accomplished through cash contribution OR  Pension Obligation Bonds (recommended for safety plan only) Improved cash flow, short term reduction in reserves and/or creates new debt obligation

14. 14 Mitigation Measures  Always pay Normal Rate…even when the fund has a surplus CalPERS is currently considering this as a future requirement.  Two-tier benefits No likely savings for at least 10 years…could cost more in the short run. Creates Potential recruitment problem

15. 15 CalPERS Investment Return Over Last 11+ Years

16. 16 Basic Concepts  Funding Target - The amount of assets needed at retirement to pay all benefits due to the employee over his/her lifetime This is an estimated value, based on assumptions including age at retirement, pay increases, life expectancy and also on the assumption that the fund will earn interest after retirement at an assumed rate

17. 17 Basic Concepts  Accrued Liability or the “desired” level of assets – the amount of assets needed right now which would accumulate at the assumed interest rate to equal the funding target at retirement This is an estimated value based on the assumptions used to calculate the funding target to begin with, but also based on the assumption that the fund will earn interest before and after retirement at the assumed rate

18. 18 Basic Concepts . CalPERS rate setting process attempts to smooth out the peaks and valleys of through rate smoothing….or amortizing surpluses and unfunded liabilities over time.