Recent: Payment towards unfunded liability November 2017

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1 CITY OF SANTA MONICA Retirement Overview Recent: Payment towards unfunded liability November 2017

2 Where does the money come from? Benefit payments come from employer contributions (what the City pays), employee contributions (what workers pay), and from CalPERS investment earnings. The graphic below demonstrates the breakdown: comes from non-taxpayer funds. 74 cents of every dollar Source: CalPERS Newsroom 10/31/17

What does the city pay? An annual contribution for all active (current) employees, plus an amount to reduce the unfunded liability. This will pay for these employees benefit payments upon retirement.

3 What does the city pay? An annual contribution for all active (current) employees, plus an amount to reduce the unfunded liability. This will pay for these employees benefit payments upon retirement. Retirement costs are also called pension costs. What makes up the annual contribution? The payment covers current costs (normal cost), and an additional amount to make up for value lost from prior contributions (unfunded liability), due to lower than expected investment returns and changes in projection assumptions. Annual contributions are sufficient to pay down the City s unfunded liabilities over 30 years.

The City also pays an Employer Contribution for employees who work at least 1,000 per year but do not have five years of service; however, these employees will not receive the defined

4 Who gets the benefit? Santa Monica City permanent employees working more than 1,000 hours per year, after five years of service. Santa Monica pays for benefits earned during an employee s time in Santa Monica only. The City also pays an Employer Contribution for employees who work at least 1,000 per year but do not have five years of service; however, these employees will not receive the defined benefit portion. 1,000hrs 5 years How much is it? In FY , the City recognized $45M in actual pension expense, or 8% of the city s operating and capital budget for that year. Do employees contribute? Yes. Employees contribute up to 30% of the total payment each year. Employees do not participate in Social Security, so this is their only retirement income.

5 Have pensions always been underfunded? No. During the mid 2000s when rates of return were high, the CalPERS portfolio was relatively well funded at over 80%; and at one point was superfunded, meaning that it had more than 100% of the assets needed to cover all liabilities. 93% 101% 89% 61% 65% 74% 70% 70% 76% 73% Source: CalPERS

What happened? Investment losses. CalPERS experienced investment losses in line with the market, including losses related to real estate and hedge fund positions.

When the fund was doing well, cities were given a holiday from makeup contributions, and in some cases added benefits to their retirement packages for which CalPERS did not require additional payment.

6 What happened? Investment losses. CalPERS experienced investment losses in line with the market, including losses related to real estate and hedge fund positions. The outcome was an over 30% loss in the portfolio s value, which decreased the funding level (amount of liabilities covered by assets) to 61%. Benefits increases. When the fund was doing well, cities were given a holiday from makeup contributions, and in some cases added benefits to their retirement packages for which CalPERS did not require additional payment. This led to more expensive future benefits (increased liabilities) without additional assets (not requiring payments). Assumption / Valuation Methodology Changes. CalPERS began to use market value instead of actuarially determined value for plan assets, updated life expectancy, and changed other assumptions. All contributed to a loss in value.

7% for miscellaneous employees, with similar increases for public safety.

7 What were major benefit increases? Greater annual amount. Most participating agencies changed the retirement formula from 2.0% to 2.7% for miscellaneous employees, with similar increases for public safety. SB 400 allowed for changes to public safety benefits: from 2.0% to 3.0% at 50 (Police); and 3% at 55 (Fire). Misc. Benefit=2.7% x salary x years of service Public Safety Benefit=3.0% x salary x years of service In Santa Monica, non-public safety employees paid for benefits increases.

8 What about now? After recovery, low returns: CalPERS investments earned 16.2% in 2013 and 18.4% 2014, so that the fund gained back the value it lost during the recession, but the funded level (ability to cover liabilities) is still below 100%. Returns dropped to 2.4% in 2015 and 0.6% in CalPERS has made adjustments: Investment. CalPERS adjusted its investment strategy, and limited exposure to hedge funds. It implemented a risk management strategy to apply any returns over target levels to reducing portfolio volatility, and values the portfolio at market versus actuarially calculated amount. Discount Rate. In December 2016, the CalPERS board voted to decrease the discount rate (expected rate of investment return used to estimate contribution requirements and obligation values) from 7.5% to 7.0% over three years. This increases the fund s long-term sustainability, but will mean higher contributions, and therefore higher costs for cities.

9 Public Employees Retirement Fund Performance Market Value of Assets ($B) Leveling off % value lost during recession Value recovered based on strong stock market, investment strategy adjustments Source: CalPERS

10 Public Employees Retirement Fund Financial Position 101% Funded Ratio (%) 93% 89% 76% Lost 40 percentage points. 61% 65% 74% 70% 70% 73% Funded ratio decreased in Source: CalPERS: Plan fiduciary net position as a % of total pension liability

11 How is Santa Monica doing? As of year-end 2015*: FUNDING LEVEL UNFUNDED LIABILITY MISCELLANEOUS 76% $222M FIRE POLICE FUNDING LEVEL FUNDING LEVEL UNFUNDED 72% $60M LIABILITY 74% UNFUNDED $105M LIABILITY Total Unfunded Liability: $387M * Note: CalPERS numbers run two years behind

12 How are we managing costs for the future? Payment strategies Prepayment. We prepay the City s contribution at the start of the year, which entitles the City to an annual $1.5 million rebate. The City has received about $10.6 million from this strategy through FY Voluntary Additional Payments (beyond the required annual contribution): To help lower unfunded liability, we ve used savings to pay down $31.4 million towards unfunded liability as of January We continue to pay $1.3 million annually, which results in $2.5 million decrease to our annual CalPERS contribution. Recent paydown [view full report] Lump sum payment. On June 13, 2017, the Santa Monica City Council approved an additional $45 million paydown of the City s unfunded liability, for a total paydown of $76.3 million. This is estimated to result in an additional $3.8 million in contribution savings each year, and will lower the City s unfunded liability by 11%.

13 How are we managing costs for the future? Employee contributions / Lower cost benefit plans Retirement tiers for new employees include lower benefits and higher employee contribution levels. Current City employees are contributing more towards retirement: Miscellaneous (30%); Police (20%); Fire (29%).

14 Benefit Plans Detail: Pension reform created lower benefit levels for new employees in all classifications effective January 1, Public safety employee pension benefits remain more generous than those of other employees. Tier / Level Misc. Police Fire Classic (Tier 1) Tier 2 55 New Employees (PEPRA, Tier 3)

15 How do plan costs compare? Employee Type Retirement Budget / FTE* Sworn Police $69,000 Sworn Fire $49,000 Non-Safety (Misc.) $17,000 *Average budgeted cost in FY per FTE. Net of employee contribution.

16 How do these look in the City s total budget? Sworn Police Sworn Fire All non-sworn 100% 90% 80% 70% 60% 85% 61% 50% 40% 11% 30% 20% 10% 5% 10% 28% 0% % FTE % Ret. Costs

17 How can I look this up? The amounts are included in retirement line items. You can find this in: The City s operating budget addendum Using the City s online data review tool, Open Gov

0M How to get here: santamonicaca.opengov.

18 How to view City retirement costs with Open Gov The table shows six years of retirement spending, by department. $52.0M How to get here: santamonicaca.opengov.com Select: Operating Budget Expense Type = Salaries and Wages Departments = All except non-departmental Specific Expense Types:

19 Where can I find more information? Budget Staff Reports Recent activity: See the June 13, 2017 report on Payment Towards Unfunded Pension Liability Ongoing: search Council agendas for Budget staff s biannual financial status updates to Council. Comprehensive Annual Financial Report View information in the notes to financial statements, and other areas throughout the document. The City s annual financial report reports pension liabilities on its statement of net position. This is a result of new accounting rules (GASB 68) meant to improve reporting. The detailed information is in Note 16, page 92. Questions? budget@smgov.net

CITY OF SANTA MONICA Pension Overview. February 2018

CITY OF SANTA MONICA Pension Overview February 2018 Background This presentation provides information on the City s pension plan, including its structure, cost, and actions the City has taken to mitigate