CalPERS Overview. Presented by: Director of Finance, Joseph Lillio

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1 CalPERS Overview Presented by: Director of Finance, Joseph Lillio

2 Overview What is PEPRA? PERS Benefits How they have evolved What is PEPRA? The Costs Past, Present, and Future What the City has done to address the PERS liabilities 2

3 Public Employee Pension Reform Act (PEPRA)

4 Public Employee Pension Reform Act (PEPRA) What is PEPRA? Approved by Legislature in 2012 (AB 340 and AB 197) Took effect on January 1, 2013 Mostly affects new members (i.e. became members on or after 1/1/13) The Law applies to all public retirement systems in California except for those established by a charter city or charter county 4

5 Public Employee Pension Reform Act (PEPRA) Changes for New Members Only Lower Benefit Formulas (2% at 62 for non-safety, 2.7% at 57 for safety) Limit on total pensionable compensation (currently $140,424 for non-social security members & $128,000 for positions under social security benefits) Required to pay 50% of Normal Cost Currently 12.75% for Safety, 6.25% for Miscellaneous Employer Paid Member Contributions (EPMC) are prohibited Uniform allowances are not counted toward pensionable compensation Changes for Classic Members Only Beginning January 1, 2018, City can require classic members to pay up to 50% of normal cost, capped at 8% for Miscellaneous & 12% for Safety Can be imposed only after good faith bargaining, impasse, and fact finding 5

6 Public Employee Pension Reform Act (PEPRA) Changes for All Members No enhancements to better formulas Classic formulas are closed out for new contracts (i.e. we could not upgrade to 3% at 60) No new supplemental defined benefit plans (i.e. PARS) Cannot go from average of three highest years to single highest year No retroactive benefit enhancements If any benefit enhancements were available, they would only apply to future service, not past service (for example, when we went to 2.7% at 55 and 3% at 50) Working After Retirement 180-day waiting period No more than 960 hours per fiscal year New Purchases of Additional Retirement Service Credit ( air time ) are prohibited Public employees who leave the System for 6 months or more will be considered new members 6

7 City of El Segundo PERS Benefits

8 City of El Segundo Benefits Current Benefits Safety (Sworn) Classic Members (members prior to 1/1/13): 3% at 50 PEPRA Members (members on or after 1/1/13): 2.7% at 57 Miscellaneous (Non-sworn) Classic Members: 2.0% at 55 (tier I members on or before 1/1/13) and 2.0% at 60 (tier II classic members {already in the CalPERS system prior to 1/1/2013} hired into the City on or after 1/1/13) PEPRA Members: 2% at 62 (new members into the CalPERS system on or after 1/1/13) Up to 2% annual COLA for both Classic & PEPRA Disability Benefits (Industrial & Non-industrial) Death Benefits 8

9 City of El Segundo Benefits Classic Base Compensation: Highest consecutive 12-months of PERSable earnings % each year of service is worth 2.0% at 55 Age the % becomes available PEPRA Base Compensation: Annual average of highest consecutive 36-months of PERSable earnings Safety Plans Misc. Plans Safety Plans Misc. Plans Age 3% at % at % at % at 62 Age 3% at % at % at 55 2% at % 2% 1.43% N/A 59 3% 2.7% 2.21% 1.7% 51 3% 2.1% 1.52% N/A 60 3% 2.7% 2.26% 1.8% 52 3% 2.2% 1.63% 1% 61 3% 2.7% 2.31% 1.9% 53 3% 2.3% 1.74% 1.1% 62 3% 2.7% 2.37% 2% 54 3% 2.4% 1.87% 1.2% 63 3% 2.7% 2.42% 2.1% 55 3% 2.5% 2.0% 1.3% 64 3% 2.7% 2.42% 2.2% 56 3% 2.6% 2.05% 1.4% 65 3% 2.7% 2.42% 2.3% 57 3% 2.7% 2.10% 1.5% 66 3% 2.7% 2.42% 2.4% 58 3% 2.7% 2.16% 1.6% 67+ 3% 2.7% 2.42% 2.5% 9

10 City of El Segundo Benefits Example of PERS Benefit Calculations Employee Retiring at Age Years of Service Highest 12-month Pensionable Compensation (Classic) = $105,000 Annual Avg. Highest 36 months (PEPRA)= ($100,000 + $102,500 + $105,000) / 3 = $102,500 Classic Safety = 3% x 30 years = 90% x $105,000 = $94,500 ($7,875/month) PEPRA Safety = 2.5% x 30 years = 75% x $102,500 = $76,875 ($6,406/month) Classic Misc. = 2.0% x 30 years = 60% x $105,000 = $63,000 ($5,250/month) PEPRA Misc. = 1.3% x 30 years = 39% x $102,500 = $39,975 ($3,331/month) 10

11 The Costs Past, Present, and Future

12 How is PERS Paid for? GLOSSARY OF TERMS Discount Rate expected annual rate of return on investments. Actuarial Accrued Liability (AAL) The total amount of money needed right now in order to pay benefits in the future. In other words, the value of the pension that each employee has earned up to this point in time. Market Value of Assets (MVA) the value of all assets held by CalPERS as of the current time. Unfunded Actuarial Accrued Liability (UAAL) the difference between the AAL and MVA. Amortization a schedule of payments to pay off a debt (for example, like on a 30-year home mortgage). Smoothing softens the impact of gains and losses on assets. For 30-year amortization bases, the amount is ramped up for 5 years, steady for 20 years, then ramped down 5 years. 12

13 Value of PERS benefits? Salary Growth Benefit Formula Value of Benefits Demographics Inflation Investment Returns Discount Rate 13

14 CalPERS Income by Source 14

15 History of the CalPERS Discount Rate? Year Discount Rate % % % % % % % % Discount Rate (assumed nominal annual rate of return on investments) Actuarial Accrued Liability (a.k.a. Accumulated assets needed right now) 15

16 How is PERS Paid for? In theory, pensions are earned while working Normal Cost = cost of what is earned in current year Expressed as a % of pay Cost is paid by both employee and City Put another way, this is the amount of money we need to set aside for the current year of service to pay for the anticipated benefit in the future What happens when contributions & interest fall short? Unfunded Liability Employer (City) must make up the difference Present Value of Pension Benefits Market Value of Accumulated Assets Unfunded Liability 16

17 How is PERS Paid for? The Unfunded Liability is really the sum of many smaller liability bases. Below is the smaller bases from the Police 1 st Tier Classic report: 17

18 The Cost of PERS Estimated Normal Cost Payments Next 5 Years Fiscal Year Safety Misc. Total $3,024,000 $1,115,000 $4,139, $3,013,000 $1,200,000 $4,213, $3,241,000 $1,290,000 $4,531, $3,393,000 $1,368,000 $4,761, $3,497,000 $1,426,000 $4,923,000 City Unfunded Liability Payments Next 5 Years Fiscal Year Safety Misc. Total $6,045,824 $2,014,997 $8,060, $6,976,000 $2,421,000 $9,397, $7,485,000 $2,472,000 $9,957, $8,332,000 $2,607,000 $10,939, $9,240,000 $2,830,000 $12,070,000 18

19 The Cost of PERS Estimated Total City PERS Costs This Year and Next 5 Years Fiscal Year Safety Misc. Total % of General Fund $9,069,824 $3,129,997 $12,199, % $9,989,000 $3,621,000 $13,610, % $10,726,000 $3,762,000 $14,488, % $11,725,000 $3,975,000 $15,700, % $12,737,000 $4,256,000 $16,993, % $13,467,000 $4,500,000 $17,967, % Contribution Rate as a % of Pay Safety Misc. 62.5% 23.2% 71.4% 26.7% 74.8% 27.1% 79.6% 27.8% 84.2% 29.0% 86.6% 29.9% 19

20 What the City of El Segundo has done to address the PERS liabilities

21 Pension Strategies That Have Been Implemented Total cost savings of $6,153,000 implemented over the past two years through being proactive & strategic at addressing the rising pension costs: $5.6M in long-term savings & $548k in immediate savings Additional Payment towards Unfunded Pension Liabilities in FY in the amount of $1,901,141 (direct reduction of principal) resulting in a savings of $2,587,000 in interest payments to CalPERS over the next 30 years Additional Payment towards Unfunded Pension Liabilities in FY in the amount of $1,500,000 (direct reduction of principal) resulting in a savings of $1,158,000 in interest payments to CalPERS over the next 25 years Complete Fresh Start (Refinance) In December 2017 City Council approved staff recommendations to refinance the Miscellaneous Plan (refinanced from 30 years to 22 years), PD 2 nd Tier Plan (refinanced to 10 years), and PD PEPRA Plan (refinanced to 10 years). The City saved $1.86 million in interest payments to CalPERS over the next 30 years 21

22 Pension Strategies continued Pre-payment of the Annual Unfunded Liability (UAL) Prepaid the UAL for FY , saving $258k (immediate savings) Prepaid the UAL for FY , saving $290k (immediate savings) Set-up IRS Section 115 Pension Trust Pension Stabilization Fund with PARS Initial deposit of $1,000,000 made in April 2018 Additional $1,000,000 deposit made in October 2018 $2,000,000 principal plus interest at an annual rate of ~5%-6% All Miscellaneous (non-sworn) employees are paying the full employee share of 7% as of January 1, 2018 All Public Safety employees (except police management) are paying the full employee share of 9% as of June 1, 2017 All Public Safety employees (except police management) are paying the full employee share of 9% + an additional 3% (total of 12%) as of December 1,