SUBJECT: SEE BELOW DATE: April 3, 2017

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1 COUNCIL AGENDA: 04/18/17 ITEM: 3.3 TO: HONORABLE MAYOR AND CITY COUNCIL FROM: Roberto L. Peña SUBJECT: SEE BELOW DATE: SUBJECT: REVIEW OF THE RETIREMENT PLANS PENSION AND POST- EMPLOYMENT HEALTHCARE PLAN ACTUARIAL VALUATIONS AS OF JUNE 30, 2016, INCLUDING THE AUDIT OF THE ACTUARIAL VALUATIONS. RECOMMENDATION Review the following actuarial valuation reports and audit reports of the actuarial valuations: a. Police and Fire Department Retirement Plan Actuarial Valuation (Pension) as of June 30, 2016; and b. Police and Fire Department Postemployment Healthcare Plan Actuarial Valuation (Pension) as of June 30, 2016; and c. Federated City Employees Retirement System Actuarial Valuation (Pension) as of June 30, 2016; and d. Federated City Employees Retirement System Postemployment Healthcare Plan Actuarial Valuation as of June 30, 2016; and e. Audit of the Police and Fire Department Retirement Plan Actuarial Valuation (Pension) as of June 30, 2016; and f. Audit of the Police and Fire Department Postemployment Healthcare Plan Actuarial Valuation (Pension) as of June 30, 2016; and g. Audit of the Federated City Employees Retirement System Actuarial Valuation (Pension) as of June 30, 2016; and h. Audit of the Federated City Employees Retirement System Postemployment Healthcare Plan Actuarial Valuation as of June 30, 2016.

2 Page 2 of 5 OUTCOME Council review of the Police and Fire Department Retirement Plan Actuarial Valuations for the Pension Plan and Postemployment Healthcare Plan as of June 30, 2016 and the Federated City Employees Retirement System Actuarial Valuations for the Pension Plan and Postemployment Healthcare Plan as of June 30, 2016 (collectively Valuations ), including the audit reports of the actuarial valuations, will provide relevant financial information to the Council of the two retirement plans and ensure the Council is properly informed on the retirement plans funding status and retirement benefit costs. BACKGROUND The Valuations provide detailed information regarding the actuarial value of the assets and pension and Other Postemployment Employee Benefit ( OPEB ) liability of the Retirement Plans as of June 30, Postemployment Healthcare and OPEB will be used interchangeably throughout the rest of this memo. The information is used to determine the employee and employer s contribution rates in the next fiscal year and are generally divided into the following sections: A Summary Section intended to recap the most important information of the report; An Asset Section that details the calculation of the actuarial value of the plans assets; A Liability Section that discloses the present value of all future benefits, normal cost and changes in unfunded actuarial liabilities; A Contribution Section that details the effects of assumption changes on the contribution rates and amortization of unfunded liabilities; and An Accounting Statement Section which contains schedules that are required reporting by the Governmental Accounting Standards Board. The audits of the actuarial valuations provide assurance that the actuarial calculations are reasonable and the actuarial process was conducted according to generally accepted actuarial principles and practices. ANALYSIS The Valuations are prepared by the Boards Actuarial Consultant, Cheiron Inc. The report and its contents have been prepared in accordance with generally recognized and accepted actuarial principles and practices which are consistent with the Code of Professional Conduct and applicable Actuarial Standards of Practice set out by the Actuarial Standards Board. The credentialed actuaries who prepared reports meet the Qualification Standards of the American Academy of Actuaries to render the opinion contained in the reports.

3 Page 3 of 5 For the Valuations as of June 30, 2016, the following are the key actuarial results (GASB basis), as compared to the results from the June 30, 2015 Valuations: Pension Unfunded Actuarial Liability ( UAL ) increased from $1.57 billion to $1.75 billion, decreasing the funding ratio from 56.1% to 53.7% for the Federated Plan; and the UAL for the Police and Fire Plan increased from $845.6 million to $1,058.9 million, decreasing the funding ratio from 79.2% to 75.7%. Pension Actuarial Value of Assets increased by $30.3 million to $2.03 billion for the Federated Plan and by $84.3 million to $3.30 billion for the Police and Fire Plan. Pension Actuarial Liability increased by almost $217 million to $3.79 billion for the Federated Plan and about $298 million to $4.36 billion for the Police and Fire Plan. The following is a summary of the contribution rates shown in the pension actuarial valuations. Neither Board has approved contribution rates yet nor has the City notified the Board of its intent to prepay the City contributions. Federated Police Fire 6/30/18 6/30/18 6/30/18 Tier 1 Member 6.60% 10.88% 11.38% Tier 1 City 18.00% 30.20% 31.11% Tier 1 City - UAL 76.04% 65.11% 64.95% Total City Tier % 95.31% 96.06% Total Tier % % % Tier 2 Member 6.25% 11.31% 11.77% Tier 2 City 6.25% 11.31% 11.77% Total Tier % 22.62% 23.54% o The City rate for Federated System for fiscal year is 94.04% for Tier 1 or approximately $150.3 million (beginning of year amount), based on a projected payroll of $162.8 million and 6.25% for Tier 2 or approximately $6.8 million (beginning of year amount), based on a projected payroll of $111.6 million. o The City rate of 95.3% or $84.7 million (beginning of year amount) for Police Tier 1 based on a projected payroll of $90.6 million, 96.06% or $71.2 million (beginning of year amount) for Fire Tier 1 based on a projected payroll of $75.6 million, 11.31% or $2.7 million (beginning of year amount) for Police Tier 2 based on a projected payroll of $24.1 million and 11.77% or $1.2 million for Fire Tier 2 based on a projected payroll of $10.2 million.

4 Page 4 of 5 OPEB UAL decreased by $1.0 million, from $512 million to $511 million for the Federated System. This, along with changes in the discount rate, health assumptions and experiences, led to an increase in the funding ratio from 29.1% to 30.7% for the Federated System. The OPEB UAL increased by $11.6 million, from $477.4 million to $489.0 million for the Police and Fire Plan. This, along with changes in the discount rate, health assumptions and experiences led to an increase in the funded ratio from 19.4% to 21.7%. OPEB Actuarial Value of Assets increased by $16 million to $225.8 million for the Federated System and increased by $21 million to $135.2 million for the Police and Fire Plan. OPEB Actuarial Liability increased by $15.1 million to $736.7 million for the Federated System and increased by $32.2 million to $624.2 million for the Police and Fire Plan. Contribution rates for OPEB are more complicated due to negotiated caps. See summary below. Again, neither Board has approved contribution rates, but summarized below are the current rates. Federated Police and Fire 6/30/18 6/30/18 Negotiated Calculated Negotiated Calculated Members: Tiers 1 & % 10.72% N/A N/A Tier 2C 0.39% 0.69% N/A N/A Police N/A N/A 9.51% 12.10% Fire N/A N/A 9.74% 11.25% City: Tiers 1 & 2 w/ 9.41% 11.86% N/A N/A coverage Tier 2 (w/out 12.66% 16.73% N/A N/A coverage) Tier 2C (dental only) 12.86% 16.69% N/A N/A Police N/A N/A 10.31% 13.33% Fire N/A N/A 10.62% 12.39% o Total Federated City contributions for OPEB is approximately $32 million based on a rate of 11.86% for employees with coverage and 16.73% for employees without coverage on a GASB valuation basis. o Total Police and Fire contributions for OPEB is approximately $21.9 million based on a negotiated cap rate of 10.31% for Police and 10.62% for Fire. None of these valuations reflect any changes in plan provisions arising from Measure F.

5 Page 5 of 5 The audits of the Valuations were conducted by Segal Consulting. The audit scope was to review the liabilities and the contribution rates for the Tier 1 and Tier 2 plans that were included in the plans June 30, 2016 actuarial valuation reports. The audit reports include an independent reproduction of the detailed valuation results that appears in the Valuations prepared by Cheiron and were based on actuarial reports, employee data and supplemental information provided by both the plans and Cheiron. Overall, the audits confirm that the results of the actuarial calculations as of June 30, 2016 are reasonable, and that those calculations are based on generally accepted actuarial principles and practices. EVALUATION AND FOLLOW-UP The Office of Retirement Services staff will present the Retirement Plans Valuations on an annual basis to the City Council per the recommendation of the City Auditor s report on Pension Sustainability (Audit #10-10) to update the Council on the financial status of the Retirement Plans. PUBLIC OUTREACH These Valuations and audits of the valuations were presented to the Federated System and Police and Fire Boards at their meetings in December, January, February and March, which were open to the public. This memorandum will be posted on the City s Council Agenda Website for their April 18, 2017, Council Meeting. COORDINATION Production of the Valuations and audits of the Valuations was coordinated with the Board of Administration for the Federated City Employees Retirement System, the Board of Administration for the Police and Fire Department Retirement Plan, the City Manager s Office, and the Office of Employee Relations. CEQA Not a Project, File No. PP10-69(a) Annual Reports. /s/ Roberto L Peña Chief Executive Officer Office of Retirement Services For questions, please contact Donna Busse, Deputy Director, at (408)