Meeting Date: September 28, From: Amy Cunningham, Administrative Services Director

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1 Town of Moraga Ordinances, Resolutions, Requests for Action Agenda Item. E Meeting Date: September, 0 TOWN OF MORAGA STAFF REPORT_ To: Honorable Mayor and Councilmembers From: Amy Cunningham, Administrative Services Director Subject: Discuss Options for Addressing Town of Moraga s California Public Employees Retirement System (CalPERS) Unfunded Pension Liability Request Consider Town of Moraga s CalPERS unfunded pension liability and discuss various options for payment. Background At the Audit and Finance Committee (AFC) meeting of December, 0, staff presented the Fiscal Year 0/ Audited Financial Reports and provided a summary of the new and expanded Governmental Accounting Standards Board (GASB) Pension Reporting requirements. At that meeting, Councilmember Arth requested staff research and present to the Town Council alternatives for reducing the Town s unfunded CalPERS pension liability. GASB requires that government employers that sponsor defined benefits plans must recognize a Net Pension Liability, previously known as the Unfunded Actuarial Accrued Liability (UAAL), on their agency s balance sheet. This liability represents the difference between the Town s total pension liability (actuarial accrued liability) and actual plan assets. The new accounting standards fundamentally changed the methods and assumptions used to project benefit payments, to discount projected benefit payments to their actuarial present value, and to attribute that present value to periods of employee service. The unfunded liability is not a new obligation, under GASB, it is simply expressed differently. In prior years, the obligation was shown as a percentage of the retirement plan; however the new rule requires the liability be expressed in dollars as well. Town of Moraga permanent employees participate in the California Public Employees Retirement System (CalPERS). Sworn employees fall under a

2 0 0 CalPERS Safety Police Plan and other (nonsworn) employees fall under a Plan. Depending upon an employee s position classification with the Town, and when an employee becomes a member of the CalPERS retirement system, a Town employee is included in one of four possible plans as follows: Retirement Plan Safety Police Retirement Plan Classic Members % at Age % at Age 0 PEPRA % at Age.% at Age Funding for the Town s CalPERS retirement plans is supported by both employees and employers. Classic member employee contribution rates are statutorily set at.0% for and.0% for Safety. New PEPRA member employee contribution rates are statutorily set at 0.0% of the normal costs, which is.% for the PEPRA Plan and.0% for the PEPRA Safety Police Plan in FY 0/. A number of years ago, it was typical for jurisdictions, including Moraga, to cover all or a portion of the employee share (e.g.,.0% for and.0% for Safety employees), rather than have that portion of funding paid by employee salaries. Over the last two employee negotiation cycles: () Moraga s CalPERS classic employees agreed to pay 00% of the employee contribution rates toward their respective retirement plans; and () effective July, 0, these employees pay % of the employer share of the contribution. Annual employer contributions are determined by annual actuarial valuation reports prepared by CalPERS for each of the Town s plans. Because of the time it takes to create the actuarial reports for all CalPERS agencies, data available on June 0 each year is used to set the employer rates two years in the future. For example, the CalPERS Annual Valuation Reports as of June 0, 0 (released in midaugust 0), apply to Fiscal Year 0/ beginning on July, PEPRA is the Public Employees Pension Reform Act of 0. PEPRA created four new retirement formulas, one (% at Age ) for new miscellaneous members and three (% at Age,.% at Age, and.% at Age ) for new safety members, as of January, 0. These formulas are lower than existing formulas for CalPERS Classic members. The expectation is that as time goes on, more employees will be hired under the PEPRA reform formulas, resulting in a decrease in a participating agency s CalPERS expense and increased contributions from members as they will presumably be active in the system longer as a result of a higher minimum retirement age. Additionally, PEPRA members are capped on the salary that can be used to calculate final compensation. Prior to PEPRA, the Town s Safety Police Retirement Plan of % at Age 0 was one of the lowest benefit formulas available. If a Classic safety employee with a % at Age 0 formula retires at age, instead of 0, that employee receives a maximum of.% at age assuming the employee has not reached the 0% of salary cap. With the establishment of PEPRA formulas, the Town must offer a lower benefit formula for new employees, which is.% at. In other words, a new safety employee must work two additional years to receive the same benefit as a classic employee.

3 These annual reports state the agency s obligation for the specified plan in that fiscal year. Discussion Effective FY 0/, CalPERS began collecting pooled employer contributions through two mechanisms, () a Lump Sum Payment, and () an Employer Contribution Rate:. Lump Sum Payment This dollar amount is determined by CalPERS, and invoiced at the beginning of the fiscal year, to pay off the Town s Unfunded Accrued Liability (UAL) and Side Fund. This is in addition to the prior method of a contribution rate expressed as a percentage of Town payroll. For FY 0/, the employer contribution toward the unfunded liability, paid in August 0, was as follows: And Classic Members FY 0/ Unfunded Liability Unfunded Liability Payment Savings From Payment (Annual Lump Prepayment (Annualized Figure Sum Prepayment Option if Paid Monthly) OR Option) Plan $0,.0 $, $,.0 Safety Police Plan $,. $,0 $,. Totals: $,. $, $,.. Employer Contribution Rate An Employer Contribution Rate is determined and collected as a percentage of payroll to support the plan s normal costs. For FY 0/, the Town s contribution rates for Classic and PEPRA Members, paid biweekly as part of payroll processing, are outlined in the table below: The UAL is the difference between the liability estimated to pay future benefits and the Market Value of Assets (MVA) accumulated to pay those benefits. If assets are greater, a plan is overfunded and if the liability is greater, a plan is underfunded, creating an unfunded liability. An unfunded liability is an estimate that changes with each valuation depending upon changes in the MVA, investment earnings and actual results of the plan as compared to assumptions made by actuaries. Unfunded liabilities are not amounts that are actually due today but are estimates of what actuaries believe will be needed to pay future benefits. When CalPERS established the Risk Pools for employers with less than 00 active members in FY 00/0, it isolated the unfunded liability associated with each employer at that time. This unfunded liability became known as the Side Fund. The Town of Moraga paid off its Side Fund in 00 in the amount of $,,0 ($, for the Plan and $,0 for the Safety Police Plan). Therefore, the Town of Moraga no longer has a Side Fund.

4 0 0 0 Plan Classic Classic Safety PEPRA PEPRA Safety Effective Date 0/0/0 % at Age 0/0/0 % at Age 0 0/0/0 % at Age 0/0/0.% at Age Fiscal Year 0/ Benefit Formulas and Contribution Rates Formula Employee Town Employee Rate Rate Paid Share of Town Rate Net Employee Rate Total %.% % %.% %.% % %.%.%.% n/a.%.0%.%.0% n/a.%.% Beginning January, 0, public agencies that have collectively bargained in good faith and have completed impasse procedures (including mediation and fact finding) have the ability to unilaterally require Classic members to pay up to 0% of the total normal cost of their pension benefits. However the employee contribution rate may only be increased up to an % contribution rate for miscellaneous members and up to % contribution rate for safety members. CalPERS Basics The CalPERS system is funded through three mechanisms: () CalPERS Investment Earnings, () CalPERS Employers, and () CalPERS Members. Over the past twenty years, every dollar spent on public employee pensions has been sourced from the following (as of June 0): cents CalPERS Investment Earnings cents CalPERS Employers cents CalPERS members Over the past few years, CalPERS has undertaken a number of actions to stabilize and improve the system s fiscal strength and lower future risk. Pooled systems have been combined into two pools: and Safety; this ensures that the pools are properly funded, employers are paying their fair share of costs, and that the impact of members retiring, and no longer contributing to the system, is reduced (future members will participate in the lower cost PEPRA formulas with higher retirement ages). CalPERS has also made a number of changes in their actuarial assumptions, the most significant of which include the extension of member mortality rates and a downward adjustment in the projected rate of return on investment assumptions (from.% to.%, effective July, 0). Each of these actions is intended to stabilize costs and reduce liability over the longterm. Risk Pooling Moraga is in a pool of small employers (agencies with fewer than 00 active employees). Being part of a risk pool mitigates the risk for small employers in the event of unusual demographic situations, such as with an agency that has a significantly higher number of retirees than active members, or agencies that

5 experience a large ratio of disability retirements. Each member agency is allocated a piece of the entire pool s gains and losses, aggregating overall risk, and smoothing costs. Pooled plans are grouped together based on similar benefit packages, recognizing benefit similarities and further minimizing overall risk. CalPERS Facts Historic CalPERS rate of return on investments:.% for Fiscal Year 0/ 0.% for the last years 0.% for the last years.% over the last 0 years. How much does a Retiree Earn? The average CalPERS retiree pension is $0,00. The benefit varies from retiree to retiree based on: number of years the employee works in the CalPERS system; employee salary; agency retirement formula. Who participates in CalPERS?,00 Total Employers = State of California +, school districts +, public agencies 0 0 Moraga Specifics Moraga s unfunded pension liability position is better than most because of the conservative fiscal decisions made in the past. The Town s Classic Member retirement formulas are low, some of the lowest offered through CalPERS. For example, rather than offering a % at 0 years of age formula which is common in many police agencies, Moraga uses a % at 0 years of age formula for sworn police personnel; additionally the Town s plans are based on a three year average salary formula versus a single highest year formula. Moraga is also a relatively young member of CalPERS and has few retirees, resulting in a lower unfunded liability than many other agencies. Like many public agencies that participate in CalPERS, Town employees are not provided with a Social Security retirement benefit; however unlike many public agencies the Town does not offer a retiree medical benefit (Other Postemployment Benefits OPEB). Further, Moraga paid off its side fund in 00 in the amount of $,,0. This action helped to significantly reduce the Town s overall longterm liability.

6 0 0 0 For reference, the table below outlines the funded ratio and unfunded accrued liability of each plan over the past four years: Funded Ratio / Unfunded Accrued Liability Plan June 0, 0 June 0, 0 June 0, 0 June 0, 0 Classic Classic Safety PEPRA.% $,,.% $,0,.% $,,0.% $,,.% ($) PEPRA Safety Source: CalPERS Annual Valuation Reports.% $,,.% $,0,00.% ($,) 0.% ($,).% $,,.% $,,00.% $0.% $, The methodology CalPERS uses to calculate the Unfunded Accrued Liability is derived from the Annual Valuation Reports (as shown in the table above), and is different from the methodology used to calculate the Town s Net Pension Liability under the new GASB Rules. In accordance with accounting valuations, CalPERS must keep items such as deficiency reserves, fiduciary selfinsurance and OPEB expenses in the fiduciary net position. CalPERS excludes these amounts for rate setting purposes in the actuarial valuations. Through application of the GASB calculation methodology and guidance from our auditors, the FY 0/ Comprehensive Annual Financial Report (CAFR) identified the Town s Total Net Pension Liability as $,,0. Payment Options If desired, and funding is available, there are a number of options that the Town could take to pay down the unfunded liability. While some of these options were presented to the Town Council at the meeting on March, 0, some new options have become available since that time:. Annual Minimum Contribution Continue to make the minimum annual required dollar amount contribution as determined by the CalPERS Annual Valuation Reports based on an amortization schedule of 0 years and a.% interest rate. a. This minimum annual required dollar amount contribution can be paid on a monthly basis; or b. This minimum annual required dollar amount contribution can be paid at the beginning of the fiscal year in one prepayment amount generating a savings. The Town has chosen to make this annual prepayment contribution at the beginning of the fiscal year, rather than pay monthly and incur interest. This approach resulted in a savings of $,. in FY 0/.

7 Shorter Amortization Schedule Work with CalPERS to establish an alternate amortization schedule (e.g., years, 0 years) to accelerate unfunded liability payments. Establishing an alternate amortization schedule would increase payments in the shortterm and would be a permanent decision. If the Town elected to establish a shorter 0 year schedule, instead of the current 0 year schedule, the schedule cannot be subsequently changed back to the 0 year amortization period.. OneTime Payments without Changing Amortization Schedule Accelerate payments above the minimum annual contributions required without establishing an alternate amortization schedule. This option could be done in different forms, including a onetime, lumpsum payment to pay down the unfunded liability or smaller annual/monthly payments. Staff would need to work with CalPERS staff to request information on the effects a lump sum payment would have on the Town s unfunded liability. CalPERS would be able to advise staff on what payment option(s) may be most financially beneficial in the longterm.. Trust Fund Prefund pension obligations through an IRS approved independent retirement plan administrator, a Pension Rate Stabilization Program (PRSP). The Trust allows agencies to safely and securely set aside funds in an irrevocable trust to reduce pension liabilities and stabilize pension costs. Agencies maintain local control of the assets invested in the Trust and determine the investment goals and risk tolerance level for investments. Assets in the Trust Fund can be reported on the Town s financial statements and will offset unfunded pension liabilities. Another advantage of this approach is that funds could be used for pension volatility mitigation (i.e. funds could be transferred to CalPERS to offset fluctuations in required annual contributions). Over 0+ agencies are now participating in this type of Trust Fund program. Staff would need to work with retirement plan administrators to obtain more information about how this program would benefit Moraga.. Designated Reserve Establish a separate Town Fund dedicated for use in stabilizing future CalPERS cost fluctuations and serve as a segregated account to accumulate funds until the Town was ready to make a onetime payment to CalPERS. The funds would stay in the Town s control and allow for flexibility if fiscal conditions changed. This option would not reduce the unfunded liability until funds were transferred to CalPERS for that specific purpose.

8 It is not desirable or advantageous to completely pay off the unfunded liability, but paying down the liability is advantageous. Paying down the liability reduces interest paid on it, resulting in some savings and an improved net position for the Town. The largest risk of completely paying off the unfunded liability is if the rate of return on CalPERS investments performs better than expected. In this instance CalPERS will not return the excess funds the Town paid or credit it toward the liability. In addition to the above options, there are other events the Town may experience that could reduce unfunded pension liability over the long term and contain future costs: Increasing numbers of PEPRA Members on payroll in the longterm, as Classic Members retire, they will be replaced with lower cost PEPRA Members (at some point in the future, all CalPERS members will be PEPRA); Increasing employee cost sharing Classic Members could continue to increase the amount of the employer share (Town Rate) of CalPERS costs they are paying; Continuing payment of the annual lump sum prepayment option for the unfunded accrued liability. Fiscal Impact This report is being presented for discussion purposes at this time. If one of the outlined options, or an alternate action, is desired, General Purpose Funds the Town anticipates receiving as reimbursement for the sinkhole repairs could be designated to reduce this obligation. Alternatives ) Consider Town of Moraga s CalPERS unfunded pension liability and discuss various options for payment and provide direction to staff. ) Decline to discuss report. Recommendation Consider Town of Moraga s CalPERS unfunded pension liability and discuss various options for payment. Report reviewed by: Robert Priebe, Interim Town Manager