In addressing some possible viable options and recommendations, the Pension Subcommittee has prepared a presentation enumerates a number of basic fina

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1 To: Honorable Mayor Sinnott and Council Member Corti Liaisons to the Finance Committee From: Jeffrey G. Sturgis Chair, Finance Committee Date: May 1, 2013 Subject: Finance Committee Recommendations regarding Pensions Recommendations: The Finance Committee recommends to the Council Liaisons and to the City Council that the City make the following actions: Build a pension reserve sufficient to cover the unfunded termination liability. Limit further growth of pension liability. Complete staff planning actions. Conduct legal assessment. Complete accounting assessment. Background: This is the second report to City Council regarding the committee s charter and assignment to analyze, evaluating, and recommend options regarding strategies to reduce future costs of City s pension obligations. Subsequent to the Finance Committee s last presentation addressing pension costs and strategies to reduce those costs going forward, the City has received financial data from CalPERS. In the reports, CalPERS has calculated the unfunded liabilities for the various covered employee groups that the City participates in, including termination liabilities. These liabilities are close to the estimates the Finance Committee originally projected, and reinforce our recommendation to begin addressing cost and liability reductions now. The Finance Committee has been focusing on providing guidance as to how the City should handle the unfunded pension liabilities, meeting our obligation to our valued employees, while maintaining the City s financial health longitudinally. Newer accounting standards and reporting requirements (GASB 68) provide more visibility as to the unfunded liabilities and annual accrual costs. The Finance Committee made a previous recommendation that the City use the GASB treatments to understand and provide metrics that are useful for the City s budgets going forward. We are maintaining and reiterating that recommendation to City Council. CalPERS has already notified their intent to increase contribution rates to achieve a fully funded status of the pension plans. This has direct and serious impacts on the City s cash flows, liability, and liquidity positions. 1 May 6, 2013 Item 18

2 In addressing some possible viable options and recommendations, the Pension Subcommittee has prepared a presentation enumerates a number of basic financial steps that the City should pursue. The specifics are included in the presentation to City Council. At the March 29 th Finance Committee Special Meeting the contents of this matter were discussed. At the May 3 rd, Special Finance Committee, assuming a quorum is present, will vote on the Subcommittee s findings and recommendations. Attachment: PPT file Del_Mar_Pension_Update_3A 2 May 6, 2013 Item 18

3 Del Mar Pension Update By Finance Committee May 6, May 6, 2013 Item 18

4 Pension Challenges for City of Del Mar How should the City pay unfunded pension liabilities? How does the City meet its obligations to our valued employees? How does the City maintain long term financial health? 4 May 6, 2013 Item 18

5 Del Mar Pension Pools Del Mar has three Cost Sharing Defined Benefit Pension Pools covering Fire, Lifeguards and Miscellaneous FYE 6/30/2011 Fire Lifeguards Miscellaneous Total Payroll $854,713 $428,149 $2,915,329 $4,198, /13 Annual Contribution $409,181 $72,439 $673,520 $1,150,040 % Payroll 47.9% 16.9% 23.1% 27.5% Cost Sharing Pool means that participating employers share pension obligations and pool assets can be used to pay benefits of any participating employer 5 May 6, 2013 Item 18

6 Example of Annual Pension Amount Misc. Pool Plan provides After 25 years of CalPERS credited service a 60- year old employee making $80,000 per year would receive Pension = 3% x 25 years x $80,000 = $60,000/yr 6 May 6, 2013 Item 18

7 CalPERS Performance 1. CalPERS Investment Returns show significant swings 2. CalPERS has not increased Required Annual Contribution Amounts to compensate for lower than expected investment returns The result: Unfunded Liability has increased FYE June 30 Returns % % % % % % % % % % % % % 7 May 6, 2013 Item 18

8 Unfunded Liability Too High FYE 6/30/2011 Actuarial Value Market Value Termination Value Liabilities $31,752,805 $31,752,805 $45,491,156 Assets $24,878,635 $22,377,415 $22,377,415 Unfunded $6,864,350 $9,438,390 $23,113,741 Funding % 78.5% 70.5% 49.2% NOTES: 1) Liabilities are calculated based upon the present value of future pension obligations less the present value of future payments by the City and the employees. 2) Actuarial Value and Market Value Liabilities are discounted at 7.5% (CalPERS Rate). 3) Termination Value Liabilities is discounted at the 30 Year Treasury rate of 4.82%. 4) The Actuarial Value of Assets is calculated at CalPERS projected Investment Return Rate, which was 7.75% (2003 to 2010) and 7.5% in 2011, adjusted for smoothing methodology, amortization period and asset corridors. 5)The Market Value of Assets is calculated based upon CalPERS actual rate of return. 8 May 6, 2013 Item 18

9 Recent Developments GASB 68 is a new accounting treatment for Pensions which must be implemented as of FY starting July 2014: Unfunded Liability must be shown on Balance Sheet / discount rate to be determined Annual accruals of costs (amounts greater than CalPERS) CalPERS has preliminarily approved a plan to alter the Contribution methodology Estimated that Contribution Rates will increase by 50% over the next six years Designed to increase Funding to 79% -86% over 30 years assuming Investment Return targets can be achieved (now 7.5%) 9 May 6, 2013 Item 18

10 Recommendations 1) Build a Pension Reserve Fund to sufficient to cover the Unfunded Termination Liability The Contribution to the Reserve Fund would be calculated annually based upon the Unfunded Termination Liability, prevailing rates of return and the desired payoff period. Examples of Annual Contribution levels using the 6/30/11 Unfunded Termination Liability of $23 million and various amortization periods: 17 years 2.5% $1,102, years 2.7% $882, years 2.9% $639,167 Contributions to the Pension Reserve Fund will be made each year in addition to the Annual Payments made to CalPERS (Required Contributions) 10 May 6, 2013 Item 18

11 Recommendations 2) Limit further growth of Pension Liability Use limited options available under CalPERS Plan Limit hiring (new and replacements) Consider all new resources on a contract basis Any new hires subject to Tier II under Pension reform Reduce pensionable salaries (limit work hours / increases) Focus on replacing Defined Benefit Plans with a sustainable alternative Open dialogue with labor groups for acceptable solution Terminate CalPERS by fully funding all existing employee pensions Replace with new solution (Defined Contribution plan or Other) 11 May 6, 2013 Item 18

12 Recommendations 3) Complete Staff Planning Actions: Project Staffing level requirements over 15 years Provide annual financial projections of staffing costs for next 5, 10 and 15 year horizons Use Staffing projections for 15 year Actuarial forecast of Pension Liability (may require CalPERS or consulting assistance) 4) Conduct Legal Assessment: What are CalPERS contractual obligations to Del Mar in calculating termination liability 12 May 6, 2013 Item 18

13 Recommendations 5) Complete Accounting Assessment: Determine the accounting treatment for Pensions under GASB 68 using 6/30/12 financial reporting data. Clarify the risks of commingled assets under the Cost Sharing Pool structure. 13 May 6, 2013 Item 18

14 City of Del Mar Staff Report TO: FROM: Honorable Mayor and City Council Members Scott W. Huth, City Manager DATE: May 6, 2013 SUBJECT: Pension Overview and Discussion REQUESTED ACTION/RECOMMENDATION: Receive presentation, discuss, and provide direction to staff if necessary. EXECUTIVE SUMMARY: Pension reform has been a topic of discussion for the past several years, most notably since the recent recession and stock market crash, where pension programs saw a 20-25% drop in market value of assets. The market value of assets has essentially returned to its former value; however, pension liabilities have continued to grow in the intervening years, resulting in a situation in which the value of assets is insufficient to pay accrued liabilities. New changes to improve the plan s funded status being implemented by California Public Employees' Retirement System (CalPERS) will require the City to carefully plan for the pending CalPERS cost increases in the upcoming budget process and in the years beyond. The Pension 101 report attached provides considerable background information on CalPERS pensions and helps lay the groundwork for decisions that the Council will be asked to make regarding strategies to reduce the City s pension liability and costs. DISCUSSION/ANALYSIS: The City of Del Mar has been a leader in pension reform, being one of the first two cities in the County to require the full payment by the employees to pay the Employee Share of their CalPERS pension. The City has continued to make significant reforms to reduce pension liability and control costs over the years, extending full employee share pickup by the employee to all of its employees, and implementing reduced pension benefits termed second tiers, for Miscellaneous and Fire employees. In addition, the Public Employees Pension Reform Act (PEPRA) has implemented several improvements which will help achieve long-term cost savings. However, recent actions by the CalPERS Board to improve the funded status of the plan will result in material increases in the employer share by all CalPERS member agencies. These known cost City Council Action: 14 May 6, 2013 Item 18

15 City Council Staff Report Pension Overview and Discussion May 6, 2013 Page 2 of 2 increases have already been incorporated into the City s long-range budget planning. However, there are certain other pension payment alternatives which the City Council will be asked to consider as a part of the upcoming budget process. To assist in the decision making process, staff has provided this pension overview to provide pension and actuarial basics, statutory framework, as well as strategies and options for the future. Pension Overview Staff has included a Pension 101 overview in Attachment A, in an effort to explain pension systems to those completely unfamiliar with the system, as well as provide detail on such concepts of actuarials, discount rates, and recent policy and legislation that will have an impact on local jurisdictions, including the City of Del Mar. The overview also includes details on the City s specific plans, as well as average pension benefit paid to retired Del Mar employees. Strategies for the Future Based on Council discussion regarding the pension overview, and changes in recent pension policies and legislation, this item will set a framework for options the City can undertake in the budget now to prepare for future impacts. Based on discussions and input from Council, staff will bring back financial strategies to reduce the City s pension costs at the upcoming Budget Workshop meetings for the Fiscal Year and Budgets. FISCAL IMPACT: There is no fiscal impact to this report. Pension costs and pension cost savings alternatives, if selected, will be budgeted for in the annual budget process. ATTACHMENTS: Attachment A - Pension May 6, 2013 Item 18

16 CalPERS Overview What s a Pension? A pension is a sum of money paid regularly upon retirement based on past service. A pension is a form of compensation. How does it work? In public pensions, Employers, and in Del Mar s pension benefit, Employees, both contribute a certain amount of money that is set aside to be drawn from upon retirement. Who administers Del Mar s Pensions? The California Public Employees' Retirement System (CalPERS) is an agency in the California executive branch that manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families. CalPERS began as the State Employees Retirement System (SERS) in 1932, until in 1939, legislature allowed cities, counties and school districts to join, and renamed the system to Public Employees Retirement System. In Del Mar s case, CalPERS only manages Del Mar s Employee Pension Benefit. Del Mar manages its own Health Benefit Program and does not provide any retiree health benefits. In 1967, CalPERS was allowed to invest 25% of its portfolio in stocks; in 1984, Proposition 21 removed the 25% limitation. In 1991, California s Governor wished to use CalPERS funds to help cover a state budget deficit; however, Proposition 162, also known as the "California Pension Protection Act of 1992," gave the CalPERS board "the sole and exclusive fiduciary responsibility over the assets of CalPERS. Today, CalPERS is the nation s largest state public pension fund with assets totaling $255 Billion (2/2013). How is the Pension Benefit administered? CalPERS offers a "defined benefit" plan which provides benefits that are calculated using a "defined formula," rather than contributions and earnings to a savings plan. Benefits are based on a member s years of service, age, and highest three-year average compensation. In addition, benefits are provided for disability and death, with payments in some cases going to survivors or beneficiaries of eligible members. 16 May 6, 2013 Item 18 1

17 How is the Pension Benefit Calculated? Service Credit (Years) 0 Benefit Factor (% per Year), based on age at retirement Final Compensation (average pay rate highest three years) Unmodified Allowance If any of these three factors increase, the pension increases. The City has different pension formula contracts depending on the employee group and time of entry into CalPERS Pension System, and member status. Fire Classic: 3% at age 50 Lifeguard Classic: 2% at age 50 Misc Classic: 3% at age 60 Effective 1970 Effective 2011 Fire 2 nd Tier: 3% at age 55 Misc 2 nd Tier: 2% at age 60 Effective 2012 Fire PEPRA Tier: 2.7% at age 57 LG PEPRA Tier: 2.7% at age 57 Misc PEPRA Tier: 2% at age 62 Effective 2013 The Public Employees Pension Reform Act of 2013 (PEPRA) is legislation that brings a statewide uniformity to pension plans (PEPRA is explained in more detail further on in this report). These new State or PEPRA tiers, puts new members into a lower defined benefit formula, and does not allow the agency (Del Mar) to contract for an enhanced benefit for new members. The member definitions are below: New Members: A new member includes an individual who becomes a member of a public retirement system (CalPERS) for the first time on or after January 1, 2013, and who was not a member of another public retirement system prior to that date, and who is not subject to reciprocity with another public retirement system. Classic Members: An individual who became a CalPERS member prior to January 1, 2013 is considered a "Classic" member under PEPRA. If the individual takes a 6-month or longer break in between CalPERS employers, that individual will be considered a New member and will be subject to the lowest Pension Tier. *Del Mar Retirement Pension Fact: The Average Del Mar Retirement Pension Benefit paid is $1,788 per month or $21,461 per year. For example, if Classic Member Fire employee Bob retires at age 50 with 10 years of service, and with a final three year average annual salary of $60,000 ($5,000/mo), his unmodified pension allowance is: 10 years 3% $60,000 ($5,000/mo) $18,000 ($1,500/mo) Unmodified 17 May 6, 2013 Item 18 2

18 If Public Works worker Sally, who is a Classic Member retires at age 60 with 15 years of service, and a final three year average salary of $48,000, her unmodified pension allowance is: 15 years 3% $48,000 ($4,000/mo) $21,600 ($1,800/mo) Unmodified How is the Pension Benefit funded? CalPERS pension plans have three sources of funding: employee contributions, employer contributions, and investment earnings. Sources of Funding Employee Contributions Employer Contributions Investment Earnings Employee Contributions Employer Contributions Basic Employee contribution: Employee pays fixed amount (fixed by Statute through the Public Employees Retirement Law), (e.g. 7%-8% of total salary for miscellaneous and 9% of total salary for safety). Employer contribution: Employer pays fixed amount (normal cost) plus remainder to keep the system whole (responsible for the unfunded liability, leveraged payment ). Who is eligible for a pension? Generally, employees are mandatory participants in CalPERS if they work at least half time in a position that is eligible for CalPERS membership. Members become vested after 5 years of service. Once a member is vested, they become eligible to receive a retirement benefit upon reaching retirement age. CalPERS also has reciprocity agreements with many California public retirement systems. Reciprocity agreements allow public employees to move from one retirement system to another without loss of benefits, using their highest average compensation and age at retirement for benefit calculations of reciprocal retirement plans. The City s CalPERS contract excludes several of its seasonal part time positions from CalPERS membership. How do pensions coordinate with Social Security? In California, approximately two-thirds of CalPERS members participate in retirement plans coordinated with Social Security and are eligible to receive 18 May 6, 2013 Item 18 3

19 Social Security benefits in addition to their CalPERS pension. In addition to CalPERS contributions, the employee and employer must each contribute to Social Security 6.2 percent of salary above a set amount to pay for these benefits. The remaining one-third of CalPERS members that participate in retirement plans do not contribute to Social Security and are not eligible to receive Social Security retirement, or death and disability benefits. The City of Del Mar does not participate in Social Security. Therefore, those employees that have worked their entire career for Del Mar will only have their pension from Del Mar to support them in retirement. Who pays for CalPERS Member Pensions? Employer and Employee contributions flow into a trust fund that is dedicated for the purpose of paying benefits. Those contributions are invested and earn investment returns. Benefits and expenses are paid out of the fund. Pension fund assets are invested in stocks, bonds, real estate, and other investments, which mean the values of the assets are constantly fluctuating. CalPERS s long-term assumed investment rate of return is 7.5 percent. *CalPERS Retirement Pension Fact: CalPERS Actual Investment Rate of Return for the last 20 years ( ) is 8.9%. As of June 2012, CalPERS investments now pay 64 cents of every dollar in pensions paid. Participating employers contribute 22 cents of every pension dollar paid. 19 May 6, 2013 Item 18 4

20 Pension plans are prefunded (not pay as you go). The advantage of prefunding is that over time the majority of benefit costs are paid by investment returns rather than by contributions from the employer or employees. The importance of prefunding is: 1) it costs less in the long term; 2) it secures benefits because an unfunded benefit is not a secure promise ; and 3) historically, about 65 to 75 percent of CalPERS benefits are paid from investment earnings. For most pension plans, including CalPERS, prefunding of benefits is done over a level percentage of payroll to help employers budget for the future and strive for inter-generational equality. The funding is called the Entry-Age Normal Funding Method, designed to fund a member s total plan benefit over the course of his or her career. What is an Actuarial Valuation? A pension actuary is a person who is responsible for the calculations necessary to properly fund a pension plan. CalPERS Actuaries produce annual actuarial reports called actuarial valuations. These valuations are done each year on a fiscal year basis, as of June 30th each year. An actuarial valuation is a financial examination at a specific point in time of a pension plan to determine whether contributions and investment earnings are sufficient to provide the funds to pay promised pensions when they are due. The valuation reports provide employers with their retirement plan s funded status, contribution rate, and annual required contribution to maintain sound funding over the long term, if all actuarial assumptions are met. How is the Employer Contribution Rate determined? An Actuary uses assumptions to put together information that is then used to determine future benefit payments. These actuarial assumptions can be broken down into two categories: Demographic and Economic. Demographics include mortality, disability, and retirement rates. Economic assumptions include the expected rate of return, salary growth, and inflation. Employee Demographics: Age of members and expected retirement age How long members are expected to live Economic Factors: Investment rate of return Inflation rate Assumed increase in payroll The demographics and economic assumptions are then used to calculate the future benefit costs for the employer s plan. Those future benefit costs are then discounted back in today s dollars to obtain what is called the present value of future benefits. The present value of future benefits is the total dollars needed as of the valuation date to fund all benefits earned in the past or expected to be earned in the future for current members. 20 May 6, 2013 Item 18 5

21 What is the History of CalPERS Investment Returns? CalPERS has a long history of solid returns, recording gains in 21 of the past 25 years. CalPERS has assumed a 7.5 percent return on investment. This 7.5 percent expected return on investment includes 4.75% in estimated return on investment and 2.75% in inflation. In the period from 1990 to 2012 has achieved an average of 8.7 percent annual returns, or 8.4 percent compound annual growth rate. As a comparison the Standard & Poor 500 annual return rate for the same period was 8.55 percent. In calendar year 2012, CalPERS investments earned a 13.3 percent return. Pension reforms have cut benefit levels for new hires, and public employees are contributing more toward their benefits. What is smoothing? For most pension plans, including CalPERS, the plan s investment gains and losses are spread, or smoothed over a period of time in order to minimize short term, year-to-year contribution rate fluctuations. Actuaries accomplish this smoothing by assigning a market-related value to the plan s assets for purposes of determining contribution requirements. This value is called the actuarial value of assets (AVA) or more commonly, the smoothed value of assets. A second measure of assets is the market value of assets (MVA). The MVA reflects the value of the assets if sold in an orderly manner on the valuation date. The conservative approach at evaluating the value of the Pension Assets is to use the Market Value of Assets (MVA). This is the approach that staff uses to evaluate the status of the pension value in the CalPERS System. In the near future staff understands that CalPERS will only be using this system of asset evaluation as well. 21 May 6, 2013 Item 18 6

22 What is a side fund? In Fiscal Year CalPERS moved smaller agencies with less than 100 active employees into risk pools. Del Mar was moved into a risk pool with valuations effective June 30, At this time, a liability or credit was established for each agency to reflect the degree of funding of the City s plan with respect to the funded status of the pool. CalPERS would take the difference (either a credit or debit) and set it aside in an account that the agency would either pay into to pay down the debt or can use as a credit towards other pension costs. This is known as a side fund. The City has a side fund for each of its Miscellaneous, Fire Safety and Lifeguard Safety groups, which have varying debt amortization periods. The City s Miscellaneous Employees side fund has a liability of $2,077,823, and will be paid off by The Fire Safety side fund has a liability of $943,000 with a planned payoff date of The City s Lifeguard Safety side fund has a credit of $57,521, so this funding is used to reduce the City s annual contribution. The side funds have an effective interest rate cost to the City of 7.5 percent, so an early retirement of the side fund liability will be one of the decisions presented to Council as a money-saving strategy during the budget process. What does the Funding Status indicate? Each year, CalPERS actuaries calculate the funding status of the pension for each City- the value amount of the assets divided by the cost of benefits, also called the liabilities. At any given time, if the value of the assets is the same as the value of the liabilities (costs of the pension benefits), the plan is 100 percent funded. If the value of assets is less than the amount needed to fund the pension benefits, there is an unfunded liability. A funded status of 100 percent means if all members were to retire today, CalPERS would have 100 percent of the funds needed to pay benefits. However, many CalPERS members work full careers and will not be retiring for another 10, 20, or 30 years. Results of a recent succession planning survey show 46% of current Del Mar employees plan on retiring/separating within the next eight years. *Del Mar Retirement Pension Fact: Del Mar s Pension funding Status as of the last Actuary Report for 2011: Fire Pension: 70.1 % Funded Other Safety (Lifeguard & Ranger): 80.8 % Funded Miscellaneous Pension: 69.2 % Funded The size of CalPERS unfunded liability varies from year to year and is affected by various factors including investment returns, benefit levels, and the number of retirees compared to active employees. As of June 30, 2011, the average funding of the entire CalPERS system is at about 74 percent. In the past 10 years, CalPERS has been as low as 61 percent funded and as high as 101 percent funded. Within CalPERS, there are more than 2,000 public agency plans that currently range in funding from about 50 percent to greater than 100 percent. 22 May 6, 2013 Item 18 7

23 What is the Unfunded Liability? If the system has assets (stocks, bonds, cash and other investments) equal to the Present Value of Benefits, and all actuarial assumptions come true, no additional contributions are needed to provide future benefits for current active and retired members even taking into account future service and salary increases for active members. The actuarial methods and funding policies determine how much of the Present Value of Benefits should be contributed in the current year and future years so that, together with existing assets, the entire Present Value of Benefits will be funded. Each year an Actuarial Valuation is performed to determine what contributions (if any) are needed to fund the Pension System. The valuation measures current costs of the benefits employees in the plan have earned to date. The cost is compared to the assets in the plan. If the costs are greater than assets, the difference is called the Unfunded Actuarial Liability (UAL). The unfunded liability is the amount of accrued pension liabilities (pension costs) that exceeds assets. Put simply, if the estimated cost is greater in the future than what money is put away, than the projected cost today is short. While this cost isn t due today, the plan will have to contribute more or the return on investments has to increase. How did Agencies get an Unfunded Liability? There are several factors that contributed to a plan s assets becoming less than its liabilities in the past: When CalPERS investment returns were exceeding its expected rate of returns, employers and employees were not required to contribute towards their pension plans. These years were called Pension Holidays. It was during these robust economic times that some plans adopted retroactive enhanced benefit formulas that were not fully funded. In addition, the assumptions CalPERS made for life expectancy, costs of administering the plans, and later, investment returns were wrong and the liabilities exceeded the assets. How did CalPERS respond to the Unfunded Liabilities? CalPERS and State legislators addressed the unfunded liability status of the pension plan in several different ways: 1. AB 340/PEPRA legislation (Effective January 1, 2013): Public Employee Pension Reform Act (PEPRA) mandated the following changes: Reduced Benefit Formulas & Increased Retirement Ages for New Employees Created a new defined benefit formula of 2% at age 62 for all new non-safety employees and a maximum benefit factor of 2.5% at age 67; and for Safety employees a new formula of 2.7% at Age May 6, 2013 Item 18 8

24 Cap Compensation that Counts Toward Pension Benefits Capped the annual salary that counts towards final compensation for all new employees, excluding judges, at $110,100 (2012 Social Security Contribution and Benefit Base) for employees that participate in Social Security or $132,120 (120% of the Contribution and Benefit Base) for those employees that do not participate in Social Security. Equal Sharing of Normal Cost For Classic Employees: the Pension Reform Act allows the employer to increase the employee s share up to 50 percent of the total annual normal cost of pensions through collective bargaining. However, if that is not accomplished through negotiations by 2018, an employer could impose the employee contributions up to 12 percent of pay for firefighters (currently 9 percent), and up to 11 percent of pay for other Safety (Lifeguard) (currently 9 percent). Prohibit Pension Holidays PEPRA eliminated pension holidays, days in which the investments of CalPERS exceeded assumptions so much that employer and employee stop contributions, making it more difficult for pension funds to meet their liabilities. 2. CalPERS New Policy to Address Losses (Effective 2015/2016): CalPERS previously had an amortization and smoothing policy which spread investment returns over a 15-year period with experience gains and losses paid for over a rolling 30- year period. After a recent policy change, CalPERS will employ an amortization and smoothing policy that will pay for all gains and losses over a fixed 30-year period with the increases or decreases in the rate spread directly over a 5-year period. 3. CalPERS New Policy to address Existing Unfunded Liability (Effective 2015/2016): In an effort to aggressively pay down the existing unfunded liability for cities, starting in 2015/2016, the employer contribution rates will increase approximately 10 percent for that year and the successive four years for an estimated employer rate increase of 50 percent over a five year period. That rate will then be paid for the next 25 years with a 100 percent funding status to be achieved much more quickly. What will be the result? Overall volatility of employer contribution rates will remain the same. Year-to-year changes in rates will be somewhat higher in average years, but lower in years with extreme market events. 24 May 6, 2013 Item 18 9

25 A 100% funded status will be achieved more quickly all gains/losses will be fully amortized and paid for 30 years after they occur. Employer rates are going up, beginning in 2015/16. CalPERS provided two sample public agency plan projected rates: 4. Reduced Discount Rate (likely): CalPERS will be looking at actuarial assumptions in a study next spring. Both economic (discount rate) and demographic assumptions will be considered. This fall, an asset/liability study will yield more information about possible direction of the discount rate assumption. This reduced discount rate will likely drop 0.25%, to 7.25%. The corresponding increase in employer contribution rates would be phased in over 5 years, with roughly half the impact in the first year. This will be on top of the rate increase from changing actuarial methods described above. 5. Increased Life Expectancy Projection (likely): CalPERS does expect to adopt improved future mortality rates. With healthcare advances, a person age 70 today is anticipated to live longer than someone that age would have lived 30 years ago. Current CalPERS assumptions are based on recent data, but do not take this future longevity improvement into account. Since retirees will be projected to live longer (and collect their pensions longer), employer contribution rates will go up approximately 2 to 4 percent. This increase will be on top of both rate increases described above. What efforts has the City of Del Mar undertaken to reform pension costs? The City of Del Mar always budgets for and pays the required pension contribution. It has taken several steps to try and curtail pension costs that other municipalities are currently implementing under mandate, including: Transferring more of the pension contribution costs to the employees: o If the employer pays for part of the employees share, the employer can bargain with employee groups to lower the percentage. The City did this early on with the Miscellaneous group (full 8% pickup in ) in comparison to other jurisdictions 25 May 6, 2013 Item 18 10

26 and now every employee group contributes the full Employee contribution share of the Pension. Offer new employees a lower set of benefits. This will produce future savings, but not in the short-term. These lower set of benefit tiers, called Second Tiers, will create the most savings in the future when new employees replace current employees, and the workforce is composed of mostly new employees. City employee survey data indicates that 32 percent of Del Mar employees will be separating from employment in 4 years and 54 percent in 9 years or later. These are significant changes that will work towards driving down pension costs over the next 5 to 10 years. The plan benefits provided to Del Mar employees as part of their pension contracts are very conservative and include the lowest costs type of benefits within the plans, including: o Final three-year average for final compensation, in lieu of final one year o Lowest COLA percentage allowed (2%) The City does not participate in Social Security. The City has saved 6.25% of payroll each year by not participating in Social Security, which equates to approximately $306,500 in savings in Fiscal Year 2013 alone. Although this is a savings for the City it puts a greater reliance by City employees on the pension that the City provides them since in many cases they will not be able to draw from Social Security. The City does not provide any post-retirement health benefits, or OPEB (Other Post- Employment Benefits). When assets exceeded liabilities for CalPERS investments during the late 90 s, several municipalities adopted enhanced benefit formulas for employees. The City of Del Mar adopted an enhanced benefit formula in 2006, much later than the other municipalities who adopted them in the late nineties. Second (lower benefit) tiers have been adopted for both the Fire and Miscellaneous groups. The City created a pension reserve fund in The City prepaid Miscellaneous and Lifeguard annual payments to save approximately $30, May 6, 2013 Item 18 11

27 What is the current status of Del Mar s Pension Plans? Below is a table that provides statistical information on each of the City s pension plans. Fire Safety Plan 3% at 50 Number of Active Employees: 9 Accrued Market Unfunded Funded Total Side Termination Liability: Value of Assets: Liability: Ratio: Fund: Liability: $10,643,309 $(7,458,733) $3,184, % $(1,192,033) $7,842,925 ANNUAL COSTS: Normal Cost: Unfunded Liability: Side Fund: Total Annual Contributions: Percent of Payroll: $138,534 $57,322 $212,636 $408, % Other Safety (Lifeguard) Plan 2% at 50 Number of Active Employees: 6 Accrued Liability: Market Value of Unfunded Liability: Funded Ratio: Total Side Fund Termination Liability: Assets: (Surplus): $2,633,193 $(2,128,336) $504, % 66,805 $1,446,574 ANNUAL COSTS: Normal Cost: Unfunded Liability: Side Fund: Total Annual Contributions: Percent of Payroll: $77,741 $27,924 $(9,651) $96, % Miscellaneous Plan 3% at 60 Number of Active Employees: 35 Accrued Market Unfunded Funded Total Side Termination Liability: Value of Assets: Liability: Ratio: Fund: Liability: $18,476,303 $(12,790,346) $5,685, % $(2,272,002) $13,824,242 ANNUAL COSTS: Normal Cost: Unfunded Liability: Side Fund: Total Annual Contributions: Percent of Payroll: $342,075 $139,775 $240,333 $722, % 27 May 6, 2013 Item 18 12

28 TOTAL ALL PLANS Number of Active Employees: 50* Accrued Market Unfunded Total Side Termination Liability: Value of Assets: Liability: Fund: Liability: $31,752,805 $(23,377,415) $9,375,390 $(3,397,230) $23,113,741 ANNUAL COSTS Normal Cost: Unfunded Liability: Sidefund: Total Annual Contributions: Percent of Payroll: $558,350 $225,021 $443,318 $1,226,689 *The City currently has a total of 51 full-time employees; one employee is in the PEPRA 2% at 62 plan. 28 May 6, 2013 Item 18 13

29 How do all the CalPERS policy changes affect future pension costs? The graph below reflects the estimated City pension costs inclusive of the new CalPERS amortization schedule to 100 percent funding. What efforts are being considered by the City of Del Mar to continue to manage pension costs? The City is proposing to pay off the $3,020,916 Pension Side fund liability saving the City approximately $1,000, May 6, 2013 Item 18 14

30 The graph below shows City pension costs under the same assumptions, but based upon retirement of the side fund obligation effective for the Fiscal Year The City is looking at alternative compensation methods that either do not contribute to increasing the City s pension costs or significantly limits the amount that is contributing to pension costs. Departmental and/or position assessments are being performed initially on all Departments and for each position that becomes open if that position wasn t covered under a previous assessment. The City is looking into ways to further strengthen the City s finances to ensure the ability to cover future significant changes in the financial markets. 30 May 6, 2013 Item 18 15