CalPERS: Nuts and Bolts of Applying the New Discount Rate

Transcription

1 CalPERS: Nuts and Bolts of Applying the New Discount Rate 2:00 3:30 p.m. Pacific Time, Thursday, March 9, 2017 CSMFO Coaching Program webinar The change in PERS' discount rate will result in significant increases in required contributions. Accurate calculations will be critical for your long-term financial forecasts and budget decisions (for example, about whether your agency wishes to pay down its obligations). Invite your human resources colleagues and other managers to join you for this webinar. Advance registration required for this no-charge webinar: Webinar topics: 1. How do you calculate your PERS contributions with the new discount rate? 2. How can you communicate the information effectively? 3. What opportunities are there to pay down your agency's PERS obligations? Presenters: * Randall Dziubek, Senior Pension Actuary, PERS * Lalo Perez, Administrative Services Director and CFO, Palo Alto, CA (non-pooled plan) * Gavin Curran, Director of Finance and IT Services, Laguna Beach, CA (pooled plan) Audience: financial professionals (especially budget managers), HR professionals, and general managers Get connected with these steps. 1. Register in advance for the webinar: There is no charge for participating in the webinars, but each requires advance registration. *** Advance registration required for this no-charge webinar: Be sure to "white list" or "allow" s from customercare@gotowebinar.com to receive notices for this webinar. 2. Connect with the webinar and audio: Use your logon information from the confirmation you receive via from GoToWebinar. We recommend the telephone option dial-in number provided by GoToWebinar for sound quality. Depending upon your internet connection, VOIP option for audio (computer speakers) can have delays or sound quality issues.

2 3. Ask questions: You may submit questions anonymously via to in advance or via the webinar during the panel discussion. As moderator for the session, Don Maruska will pose the questions. 4. Presenters presentation materials: We post these with the agenda at Agendas & Archives tab of The PPT will be available 24 hours before the webinar. After a webinar occurs, a digital recording along with the PowerPoint materials and results of the polling questions will be available after 24 hours at the "Agendas & Archives" tab of CPE Credits: If you are a member of CSMFO and wish to obtain CPE credit, you need to register and attend in your name, respond to at least 75% of the live polling questions, and pay $25 to CSMFO after notice from CSMFO following the webinar. After payment, CSMFO s the CPE certificate as a PDF. Post-Webinar Group Discussions Many agencies are organizing groups to participate in the webinars (live or recorded) and discuss the topics among themselves after the webinars. Some are summarizing their discussions and distributing them to managers throughout their organizations. Use the CSMFO Coaching Program as an effective way to enhance professional development in your agency. Here are some discussion starters for this session: Post-webinar discussion questions: a. What are the projected future CalPERS contributions for our agency with the new discount rate? b. How have we alerted relevant parties about the projected impacts? c. What options do we want to consider for responding to the increased rates? MORE RESOURCES--See the "Coaching Corner" at for valuable resources to boost your career. These include a Financial Management Skills Inventory, Resource Matrix, Coaches Gallery of 24 volunteer CSMFO Coaches willing to help you on a one-to-one basis, and an archive of digital recordings and materials from past webinars at Enjoy the resources to help you succeed in local government finance. Don Maruska, MBA, JD, Master Certified Coach Director, CSMFO Coaching Program; CSMFO@donmaruska.com Author How Great Decisions Get Made and Take Charge of Your Talent

3 Randall J. Dziubek, ASA, EA, MAAA Senior Pension Actuary, Valuation Services, Actuarial Office, CalPERS Randall (Randy) Dziubek has been with CalPERS in the role of a Senior Pension Actuary since February of He works in the Valuation Services unit where he is responsible for consulting with public agencies, preparing annual valuation reports, GASB reports, and a variety of actuarial projections and studies. Previously, Randy worked for a major actuarial consulting firm providing actuarial and consulting services to a wide variety of public sector retirement systems in several states including Michigan, Ohio, New Hampshire, New York, and Florida. Randy currently serves as the vice-chair for the Society of Actuaries Pension Section Council. He received his Bachelor of Science degree in Mathematics from the University of Michigan. Gavin Curran, Director of Finance and Information Technology Services Mr. Gavin Curran began as Finance Officer for the City of Laguna Beach in 2004 and was named Director of Finance and Information Technology Services in In his current position, Gavin oversees the operations of the City s Finance, Information Technology, and Digital Communications divisions for the City of Laguna Beach. Gavin has twenty-four years of municipal finance experience. He began his career in 1992 working for a Public Accounting firm specializing in government accounting and auditing, and later served as the Assistant Finance Director of the City of El Segundo. Gavin holds a B.S. degree in Accounting and a B.A. degree in Business Administration from Loyola Marymount University. He is an active member of the California Society of Municipal Finance Officers and the Government Finance Officers Association.

4 Lalo Perez, Administrative Services Director and CFO, Palo Alto, CA Lalo Perez is the Chief Financial Officer for the City of Palo Alto. With over 31 years of experience at the City of Palo Alto, he is responsible for Accounting, Treasury, Real Estate, Purchasing, Utilities Risk Management, the Warehouse, the Print Shop, and a Budget of over $600 million. Lalo received his undergraduate degree from Notre Dame De Namur University and his MPA from Golden Gate University. Lalo is a member of GFOA and CSMFO and has presented various sessions and webinars on financial matters.

5 Actuarial Circular Letter California Public Employees Retirement System January 19, 2017 P.O. Box Sacramento, CA (888) CalPERS (or ) Circular Letter: TTY: (877) Distribution: VI To: Subject: All Public Agency Employers Discount Rate Change The purpose of this Circular Letter is to inform you of recent changes to the CalPERS discount rate assumption and the impact these changes are expected to have on required employer and PEPRA member contributions. This Circular Letter will assist you in calculating projected pension cost increases in future years. The June 30, 2016, annual valuations will provide updated projections of expected future year pension contributions. These reports will be available this summer. At the December 21, 2016, meeting, the CalPERS Board of Administration approved lowering the CalPERS discount rate assumption, the long-term rate of return, from 7.50 percent to 7.00 percent over the next three years. This will increase public agency employer contribution costs beginning in Fiscal Year The phase-in of the discount rate change approved by the Board for the next three Fiscal Years is as follows: Valuation Date Fiscal Year for Required Contribution Discount Rate June 30, % June 30, % June 30, % Lowering the discount rate means plans will see increases in both the normal costs (the cost of pension benefits accruing in one year for active members) and the accrued liabilities. These increases will result in higher required employer contributions. In addition, active members hired after January 1, 2013, under the Public Employees' Pension Reform Act (PEPRA) may also see their contribution rates rise.

6 Circular Letter: January 19, 2017 The benefits of reducing the discount rate include: Strengthening long-term sustainability of the fund Reducing negative cash flows; additional contributions will help to offset the cost to pay pensions Reducing the long-term probability of funded ratios falling below undesirable levels Improving the likelihood of CalPERS investments earning our assumed rate of return Reducing the risk of contribution increases in the future from volatile investment markets Results Employer contribution increases as a result of the discount rate changes are estimated below by Normal Cost and required Unfunded Accrued Liability (UAL) payment. The Total Employer Contribution is the sum of the Normal Cost Rate applied to reported payroll plus the Unfunded Accrued Liability payment. The Normal Cost portion of the Employer Contribution is expected to increase by the listed percentages of payroll. Increases to the UAL payments are provided as relative increases to be applied to the projected UAL payments in the June 30, 2015, valuation report. Valuation Date Fiscal Year Impact Misc. Plans Normal Cost Safety Plans UAL Payments Misc. Plans Safety Plans 6/30/ % % 0.5% % 2% - 3% 2% - 3% 6/30/ % - 1.5% 1.0% - 2.5% 4% - 6% 4% - 6% 6/30/ % - 3.0% 2.0% - 5.0% 10% - 15% 10% - 15% 6/30/ % - 3.0% 2.0% - 5.0% 15% - 20% 15% - 20% 6/30/ % - 3.0% 2.0% - 5.0% 20% - 25% 20% - 25% 6/30/ % - 3.0% 2.0% - 5.0% 25% - 30% 25% - 30% 6/30/ % - 3.0% 2.0% - 5.0% 30% - 40% 30% - 40% The changes to the Unfunded Accrued Liability (UAL) due to changes of actuarial assumptions are amortized over a fixed 20-year period with a 5-year ramp up at the beginning and a 5-year ramp down at the end of the amortization period. The 5-year ramp up means that the payments in the first four years of the amortization schedule are 20 percent, 40 percent, 60 percent and 80 percent of the ultimate payment, which begins in year five. The 5-year ramp down means that the reverse is true and the payments in the final four years are ramped down by the above percentages. A new ramp is established with each change to the discount rate. There will be three ramps established in the first three years. As a result of the 5-year ramp up and effective date of the increase, it will be seven years until the full impact of the discount rate change is completely phased in. The shaded rows above are the expected increases beyond the five year projection quoted in your June 30, 2015, valuation report. Page 2 of 3

7 Circular Letter: January 19, 2017 To illustrate how this table can be used as a guide to include the change in the discount rate in the calculation of pension contributions, a Miscellaneous plan with a current normal cost of 15 percent of payroll can expect an increase to percent to percent of payroll in the first year (Fiscal Year ), and 16 percent to 18 percent in the fifth year (Fiscal Year ). For the UAL payment, a plan with a projected payment of $500,000 in Fiscal Year and $600,000 in Fiscal Year can expect the revised payment to be $510,000 - $515,000 ($500,000x2.00%/$500,000x3.00%) for Fiscal Year , and $720,000 - $750,000 ($600,000x20%/$600,000x25%) for Fiscal Year These estimated increases incorporate both the impact of the discount rate change and the ramp up. Please keep in mind the above table is a tool for you to calculate broad estimates and should only be used as a general guide. The annual valuation report that will be released this summer will provide updated projections for your specific plan. If you have any questions about the information provided or how to apply it to your current valuations, please call our CalPERS Customer Contact Center at 888 CalPERS (or ) and ask to have your plan actuary contact you. Scott Terando Chief Actuary Page 3 of 3

8 CalPERS: Nuts and Bolts of Analyzing and Explaining the Impact of the New Discount Rate Coaching Program March 9, 2017

9 Coaching Program: 19 th year as member benefit Career Development Committee 1

10 Overview of Session Topics: 1. How do you calculate your PERS contributions with the new discount rate? 2. How can you communicate the information effectively? 3. What opportunities are there to pay down your agency's PERS obligations? Presenters: Randall Dziubek, Senior Pension Actuary, PERS Gavin Curran, Director of Finance and IT Services, Laguna Beach, CA (pooled plan) Lalo Perez, Administrative Services Director and CFO, Palo Alto, CA (nonpooled plan) Moderator: * Don Maruska, Director, CSMFO Coaching Program 2

11 Types of Plans Plans Pooled Non-pooled Pooled and non-pooled Not applicable 3

12 Polling Question #1 How many persons are participating at your location? 4

13 CalPERS Nuts and Bolts of Analyzing and Explaining the Impact of the New Discount Rate March 9, 2017

14 Objectives 1. Review relevant background 2. Discuss ways to estimate the impact of the discount rate change 3. Discuss methods for accelerating unfunded liability payments 6

15 Determining the Estimated Impact of Discount Rate Changes

16 Approved Discount Rate Phase-In Valuation Date FY Required Contribution Discount Rate June 30, % June 30, % June 30, % June 30, % 8

17 Background - Required Employer Contributions Two Components 1. Normal Cost (%) 2. Unfunded Liability Payment ($) 9

18 Background - Required Employer Contributions Normal Cost Cost to fund the accrual of benefits in the upcoming year for active members Presented and billed as a percent of payroll Normal cost % expected to stay level absent unexpected changes Long-term cost of the plan Note: For CalPERS, replacement of Classic members with PEPRA members will result in lower plan normal costs 10

19 Background - Required Employer Contributions Unfunded Liability Payment Annual payment toward unfunded liability measured on the valuation date Billed as a dollar amount Determined by CalPERS amortization policies Payments increase annually at 3% (payroll growth assumption) 11

20 Background - Amortization Policy Adopted by the CalPERS Board in April 2013 Designed to pay down unfunded liability faster 5 year direct rate smoothing 30 year amortization of experience gains/losses 20 year amortization of assumption changes Five year ramp up/down 12

21 Impact of Discount Rate Change on Contributions Three Components to Discount Rate Impact 1. Permanent Increase in Normal Cost Shared by PEPRA members (possibly Classic members in the future) 2. Additional UAL payments toward increases in accrued liability 20-year payment periods 3. Decreases to UAL payments toward existing layers of UAL CalPERS will be charging less interest on prior bases Total discount rate impact =

22 Existing UAL Payment Example Current UAL base from prior actuarial loss Remaining amount: $5,000,000 Remaining years: 15 Current annual required payment: $458,348 Recalculated payment at 7% interest: $444, % decrease to existing payment 14

23 New UAL Bases Each change to the discount rate will result in an increase in accrued liability Increases in accrued liability will be added to the existing UAL schedule Each new base will be amortized over 20 years with a 5- year ramp up/down 15

24 UAL Payments For Three Added Bases 7-Year Ramp-Up Period Amortization Year ( Starting 6/30/2016) Ramp % Discount Rate Added 6/30/2016 Ramp % Discount Rate Added 6/30/2017 Ramp % Discount Rate Added 6/30/ Year Ramp-Up Period 16

25 Circular Letter For Public Agencies Separate Circular letters for State / Schools Provides instructions for adjusting existing projections to include the estimated impact of the discount rate changes 17

26 Estimating Public Agency Contribution Increases From Circular Letter Dated January 19, 2017 (For Public Agencies) Normal Cost UAL Payments Valuation Date FY Impact Misc. Plans Safety Plans Misc. Plans Safety Plans 6/30/ % % 0.5% % 2% - 3% 2% - 3% 6/30/ % - 1.5% 1.0% - 2.5% 4% - 6% 4% - 6% 6/30/ % - 3.0% 2.0% - 5.0% 10% - 15% 10% - 15% 6/30/ % - 3.0% 2.0% - 5.0% 15% - 20% 15% - 20% 6/30/ % - 3.0% 2.0% - 5.0% 20% - 25% 20% - 25% 6/30/ % - 3.0% 2.0% - 5.0% 25% - 30% 25% - 30% 6/30/ % - 3.0% 2.0% - 5.0% 30% - 40% 30% - 40% 18

27 How to Estimate the Increase Normal Cost 1. Reference your current valuation report s normal cost (percentage of payroll) 2. Use the Public Agency Contribution Increases table and add this percentage to your current normal cost percentage 3. Repeat for all fiscal years listed on the table 4. Apply percentages to your current payroll for dollar estimates 19

28 Example 1. Current valuation report s normal cost percentage of payroll = 15% 2. Projection of increase for FY : 0.25% to 0.75% 3. Add: 15% % to 0.75% = 15.25% to 15.75% for FY Projection of increase for FY : 1% to 3% 5. Add: 15% + 1% to 3% = 16% to 18% for FY

29 How to Estimate the Increase Unfunded Accrued Liability (UAL) 1. Reference your current valuation report s UAL cost 2. Use the projected payments for each fiscal year and apply percentage increase listed on the table 3. Repeat for all fiscal years listed on the table 21

30 Example 1. Current projected UAL payment for FY = $500, Current projected UAL payment for FY = $600, Projected UAL % increase for FY : 2% to 3% 4. Multiply: $500,000 x 1.02 / $500,000 x 1.03 = $510,000 to $515,000 for FY Projected UAL percentage increase for FY : 20% to 25% 6. Multiply: $600,000 x 1.20 / $600,000 x 1.25 = $720,000 to $750,000 for FY

31 Estimating Public Agency Contribution Increases Normal Cost UAL Payments Valuation Date Fiscal Year Impact Misc. Plans Middle of Range Safety Plans Middle of Range Misc. Plans Middle of Range Safety Plans Middle of Range 6/30/ % % 0.50% 0.5% % 0.88% 2% - 3% 2.50% 2% - 3% 2.50% 6/30/ % - 1.5% 1.00% 1.0% - 2.5% 1.75% 4% - 6% 5.00% 4% - 6% 5.00% 6/30/ % - 3.0% 2.00% 2.0% - 5.0% 3.50% 10% - 15% 12.50% 10% - 15% 12.50% 6/30/ % - 3.0% 2.00% 2.0% - 5.0% 3.50% 15% - 20% 17.50% 15% - 20% 17.50% 6/30/ % - 3.0% 2.00% 2.0% - 5.0% 3.50% 20% - 25% 22.50% 20% - 25% 22.50% 6/30/ % - 3.0% 2.00% 2.0% - 5.0% 3.50% 25% - 30% 27.50% 25% - 30% 27.50% 6/30/ % - 3.0% 2.00% 2.0% - 5.0% 3.50% 30% - 40% 35.00% 30% - 40% 35.00% 23

32 Estimating Public Agency Contribution Increases Sample Miscellaneous Plan Projection on Page 5 of June 30, 2015 Valuation Report Sample Miscellaneous Plan 24

33 Estimating Public Agency Contribution Increases Sample Miscellaneous Plan Projection in Report Projected Future Employer Contributions Fiscal Year A Normal Cost % 9.00% 9.00% 9.00% 9.00% 9.00% B UAL $ 4,658,744 5,659,640 6,248,772 6,931,009 7,401,781 Middle of the Range Adjustments C Normal Cost Adjustment 0.50% 1.00% 2.00% 2.00% 2.00% D UAL Adjustment Factor 2.5% 5.0% 12.5% 17.5% 22.5% E = B x D UAL Adjustment $ 116, , ,097 1,212,927 1,665,401 Adjusted Projections Projected Future Employer Contributions Fiscal Year F = A + C Normal Cost Rate 9.50% 10.00% 11.00% 11.00% 11.00% G = B + D UAL $ 4,775,213 5,942,622 7,029,869 8,143,936 9,067,182 25

34 Available Spreadsheet Tool Duplicates the calculations on the previous slide Requires minimal input of items from the 6/30/2015 actuarial report Provides alternate sets of results based on funded status of the plan Plans 70-80% funded use middle of range for UAL payment Plans <70% funded use bottom of range for UAL payment Plans >80% funded use top of range for UAL payment Contact your actuary for a copy 26

35 Available Spreadsheet Tool Sample Miscellaneous Plan For Miscellaneous Plans Current Discount Rate % NC Rate 9.000% 9.0% 9.0% 9.0% 9.0% 9.0% NC $ 2,322,000 $ 2,392,000 $ 2,464,000 $ 2,537,000 $ 2,614,000 $ 2,692,000 UAL $ 3,711,353 $ 4,658,744 $ 5,659,640 $ 6,248,772 $ 6,931,009 $ 7,401,781 TOTAL $ 6,033,353 $ 7,050,744 $ 8,123,640 $ 8,785,772 $ 9,545,009 $ 10,093,781 Projected Payroll $ 25,801,858 $ 26,576,000 $ 27,373,000 $ 28,194,000 $ 29,040,000 $ 29,911,000 Current "Rate" 23.4% 26.5% 29.7% 31.2% 32.9% 33.7% For Plans with Funded Ratio between 70%-80% Revised Discount Rates 7.375% 7.25% 7.00% 7.00% 7.00% NC Rate 9.000% 9.5% 10.0% 11.0% 11.0% 11.0% NC - New $ 2,322,000 $ 2,525,000 $ 2,737,000 $ 3,101,000 $ 3,194,000 $ 3,290,000 UAL Factor UAL - New $ 3,711,000 $ 4,775,000 $ 5,943,000 $ 7,030,000 $ 8,144,000 $ 9,067,000 TOTAL - New $ 6,033,000 $ 7,300,000 $ 8,680,000 $ 10,131,000 $ 11,338,000 $ 12,357,000 Increase in cost 0.0% 3.5% 6.8% 15.3% 18.8% 22.4% Revised "Rate" 23.4% 27.5% 31.7% 35.9% 39.0% 41.3% Difference 0.0% 0.9% 2.0% 4.8% 6.2% 7.6% 27

36 Total Projected Employer Contributions (shown as % of pay) Sample Miscellaneous Plan Based on ranges in Circular letter Percent of Payroll Fiscal Year Expected Employer Contribution Range After Discount Rate Changes Minimum Expected Employer Contribution Increase Projected Employer Contribution Not Provided in 6/30/2015 Report Projected Employer Contribution From 6/30/2015 Report 42.2% % 33.7% 28

37 Total Projected Employer Contributions (shown as % of pay) Sample Safety Plan Based on ranges in Circular letter 90 Percent of Payroll % % 60.6% Fiscal Year Expected Employer Contribution Range After Discount Rate Changes Minimum Expected Employer Contribution Increase Projected Employer Contribution Not Provided in 6/30/2015 Report Projected Employer Contribution From 6/30/2015 Report 29

38 Alternate Estimate for Discount Rate Impact on Normal Cost Circular letter estimates ultimate normal cost increase of: 1% - 3% for Miscellaneous Plans 2% - 5% for Safety Plans For possibly better estimate use sensitivity analysis in 6/30/2015 actuarial report The sample table below is provided in each actuarial valuation report Sensitivity Analysis As of June 30, % Discount Rate (-1%) 7.50% Discount Rate (assumed rate) 8.50% Discount Rate (+1%) Plan s Total Normal Cost % % % Accrued Liability $361,337,578 $318,808,719 $283,603,986 Unfunded Accrued Liability $111,340,904 $68,812,045 $33,607,312 30

39 Alternate Estimate for Discount Rate Impact on Normal Cost Plan Normal Cost at 7% can be estimated by averaging the Normal Costs at 7.5% and 6.5% In this sample case (20.684% %) / 2 = % This is an increase of 2.061% over current Normal Cost Versus range of 1% - 3% in Circular Letter Normal Cost estimates at 7.25% and 7.375% can be estimated by interpolating in a similar fashion 31

40 Alternate Estimate for Discount Rate Impact on UAL Payment Much more difficult to estimate than Normal Cost Change in Accrued Liability can be estimated from sensitivity analysis And - Payment toward change in Accrued Liability can be reasonably estimated Requires two year roll forward of Accrued Liability change But - no easy way to estimate the negative impact due to refinancing the existing bases 32

41 Benefits of Reducing the Discount Rate Strengthens long-term sustainability of the fund to pay promised benefits Reduces negative cash flow; additional contributions will help to offset growing pension payments Reduces the long-term chances of falling below an undesirable funding level Lower expected future investment losses leading to more stable required contributions 33

42 Other Consequences Required contributions from employers and members will increase Plan funded ratios will drop near-term Pension Expense under GASB 68 will increase Net Pension Liability under GASB 68 will increase nearterm 34

43 Other Consequences PEPRA Member Contributions PEPRA member contributions required by law to be half of the normal cost But - PEPRA member rates do not change until the base PEPRA normal cost changes by at least 1% So - individual discount rate changes may or may not result in increased PEPRA member rates However by the time the discount rate reaches 7%, most PEPRA members will have received an increase in their rate 35

44 Polling Question #2 Which of the following has your agency done? 36

45 Accelerated Funding

46 Accelerated Funding Multiple ways to do it 1. Additional Discretionary Payment (ADP) on an ad hoc basis 2. Fresh start over a reduced period 38

47 Accelerated Funding Ad hoc basis Employer Option Short-term Savings : Apply to Shortest Base Long-term Savings : Apply to Longest Base Flexible Extra payment of $100,000 applied to a 30-year base (with 5-year ramp) can save over $170,000 in interest payments 39

48 Accelerated Funding Fresh Start Must pay off bases faster than existing schedule Creates new higher Minimum UAL payment Significant long-term savings Inflexible See actuarial report for 2 possible fresh start schedules Interest savings shown in report 40

49 Accelerated Funding 41

50 Accelerated Funding Discuss with your CalPERS Actuary They will explain options and show financial impacts Help us understand your goals CalPERS will prepare paperwork and payment instructions Need Payment Amount & Payment Date New Amortization schedules show up in next valuation report 42

51 Next Steps Public Agency valuations distributed in July 2017 Begin Asset Liability Management cycle of reviews Capital market assumptions Experience study Asset allocation Reconsider discount rate in February

52 Polling Question #3 What is your agency doing about accelerated funding? 44

53 CalPERS: Nuts and Bolts Applying the New Discount Rate March 9, 2017

54 TOPICS HISTORY FORECAST STRATEGIES OTHER CONCERNS AND GETTING THE WORD OUT

55 STRATEGY SO FAR Unfunded liability $53 million Paid off the Side Fund with internal borrowing Additional payments above required amount Apply to base with long term savings Additional payments were expected to continue through FY Projected to save $21 million over 30 years Change in discount rate impacts current strategy REQUIRED CITY PAYMENT

56 FORECASTING Work with CalPERS actuary on forecast (always helpful) Grouped payroll by plan and by department (Muni, Fire, Police, Lifeguard) Made it easier to forecast normal cost and cost sharing Helps with budget forecasting Helps with presentations to employee groups Assumed 3% payroll growth beyond MOUs Used tools provided by CalPERS to calculate future costs Made assumptions beyond year five to show impact Impact: Miscellaneous Plan = $200,000 in year 1, $1.2M by 5 th year Impact Safety Plans = $200,000 in year 1, $1.4M by 5 th year Total $2.6M

57 FORECASTING For Miscellaneous Plans Current Discount Rate % NC Rate % 10.5% 10.5% 10.5% 10.5% 10.5% NC $ 1,322,000 $ 1,362,000 $ 1,403,000 $ 1,445,000 $ 1,488,000 $ 1,533,000 UAL $ 1,530,014 $ 1,818,407 $ 2,122,730 $ 2,314,909 $ 2,538,794 $ 2,717,107 TOTAL $ 2,852,014 $ 3,180,407 $ 3,525,730 $ 3,759,909 $ 4,026,794 $ 4,250,107 Projected Payroll $ 12,594,000 $ 12,972,000 $ 13,361,000 $ 13,762,000 $ 14,175,000 $ 14,600,000 Current "Rate" 22.6% 24.5% 26.4% 27.3% 28.4% 29.1% For Plans with Funded Ratio between 70%-80% Revised Discount Rates 7.375% 7.25% 7.00% 7.00% 7.00% NC Rate % 11.0% 11.5% 12.5% 12.5% 12.5% NC - New $ 1,322,000 $ 1,427,000 $ 1,537,000 $ 1,720,000 $ 1,772,000 $ 1,825,000 UAL Factor UAL - New $ 1,530,000 $ 1,864,000 $ 2,229,000 $ 2,604,000 $ 2,983,000 $ 3,328,000 TOTAL - New $ 2,852,000 $ 3,291,000 $ 3,766,000 $ 4,324,000 $ 4,755,000 $ 5,153,000 Increase in cost 0.0% 3.5% 6.8% 15.0% 18.1% 21.2% Revised "Rate" 22.6% 25.4% 28.2% 31.4% 33.5% 35.3% Difference 0.0% 0.9% 1.8% 4.1% 5.1% 6.2%

58 FORECASTING For Safety Plans Current Discount Rate % NC Rate % 21.5% 21.5% 21.5% 21.5% 21.5% NC $ 1,269,000 $ 1,307,000 $ 1,346,000 $ 1,386,000 $ 1,428,000 $ 1,470,000 UAL $ 842,169 $ 1,083,489 $ 1,338,531 $ 1,489,668 $ 1,653,944 $ 1,773,638 TOTAL $ 2,111,169 $ 2,390,489 $ 2,684,531 $ 2,875,668 $ 3,081,944 $ 3,243,638 Projected Payroll $ 5,900,000 $ 6,077,000 $ 6,259,000 $ 6,447,000 $ 6,640,000 $ 6,839,000 Current "Rate" 35.8% 39.3% 42.9% 44.6% 46.4% 47.4% For Plans with Funded Ratio between 70%-80% Revised Discount Rates 7.375% 7.25% 7.00% 7.00% 7.00% NC Rate % 22.5% 23.5% 25.5% 25.5% 25.5% NC - New $ 1,269,000 $ 1,367,000 $ 1,471,000 $ 1,644,000 $ 1,693,000 $ 1,744,000 UAL Factor UAL - New $ 842,000 $ 1,111,000 $ 1,405,000 $ 1,676,000 $ 1,943,000 $ 2,173,000 TOTAL - New $ 2,111,000 $ 2,478,000 $ 2,876,000 $ 3,320,000 $ 3,636,000 $ 3,917,000 Increase in cost 0.0% 3.7% 7.1% 15.5% 18.0% 20.8% Revised "Rate" 35.8% 40.8% 45.9% 51.5% 54.8% 57.3% Difference 0.0% 1.4% 3.1% 6.9% 8.3% 9.8%

59 STRATEGIES 1. These changes are significant for Laguna Beach, $2.6 million annually by year 5 2. Use savings for additional payments to CalPERS 3. Program additional payments in budget Budget to expected future payment Use amount beyond required CalPERS payment toward unfunded liability 4. If feasible considering: Lower General Fund Reserve for one-time payment repay with future savings Borrowing internally: evaluate reserves (Vehicle Replacement, Insurance) repay with future savings. 5. Showing normal cost and unfunded as separate line items in budget

60 OTHER CONCERNS Future Discount Rate Changes: CalPERS will continue to lower discount rates if investment returns are good. For example, a 20% investment return would lower the assumed rate by 20 basis points. Don t get the benefit of high returns Possible impacts on services Higher employee contributions Funding Sources

61 GETTING THE WORD OUT Getting the word out is critical to decision making What we are doing: January, mentioned CalPERS changes at mid-year budget update March, five year forecast, discussing potential impact of CalPERS changes. In May, will be discussing as part of the two year budget Meeting with departments to discuss impacts Including updates in future budget reports

62 Polling Question #4 How is your agency addressing increased contributions in its planning? 54

63 CalPERS: Nuts and Bolts Applying the New Discount Rate CSMFO Webinar March 9,

64 Contribution Calculations Miscellaneous 56

65 Contribution Calculations Safety 57

66 Combined Impacts All Funds from $1.1 million first year to $10.5 Million in 5 th year General Fund from $.7 million first year to $6.7 million in 5 th year Unfunded pension liability $338 million of which $222 million is in the General Fund 58

67 Funding Options Accelerate rate impact instead of phasing in Budget additional pension funding to CalPERS Set-up IRS Section 115 Pension Trust Amend General Fund Reserve Policy Dedicate employee contribution of employer rate to the UAL and/or Section 115 Pension Trust 59

68 Other Options Adjust payroll to current level since CalPERS figures will be as of June 30, 2016 Actuary assistance to determine timing of benefits of second and third tier employees Miscellaneous Safety 38 percent 21 percent Negotiate for additional employee contribution towards the employer pension rate 60

69 Other Factors PEPRA employees rates are increasing: Miscellaneous.75%; Safety 1.75% Further discount rate change impacts Workforce and service delivery models Political will to move forward with funding plan Identifying new funding sources Complete or Partial Fresh Start 61

70 Miscellaneous Plan 62

71 Safety Plan 63

72 Schedule of Amortization Bases Miscellaneous 64

73 Polling Question #5 What other actions is your agency planning? 65

74 Post-Webinar Discussion Questions a. What are the projected future CalPERS contributions for our agency with the new discount rate? b. How have we alerted relevant parties about the projected impacts? c. What options do we want to consider for responding to the increased rates? 66

75 Contacts for today s webinar Presenters: Randall Dziubek, Senior Pension Actuary, PERS randall.dziubek@calpers.ca.gov Gavin Curran, Director of Finance and IT Services, Laguna Beach, CA (pooled plan) gcurran@lagunabeachcity.net Lalo Perez, Administrative Services Director and CFO, Palo Alto, CA (nonpooled plan) lalo.perez@cityofpaloalto.org Moderator: * Don Maruska, Director, CSMFO Coaching Program CSMFO@donmaruska.com 67

76 Polling Question #6 How was the webinar of value for you and your agency? 68

77 Resources and Feedback A digital audio recording of the session and an Agenda packet with PDF of the PPT with polling results and other materials will become available in ~ 24 hours at the Agendas & Archives tab of Other coaching resources, including volunteer one-to-one coaches are available at Please complete the follow up survey, including suggested topics for future webinars. 69