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Home My WebLink About2013-05-21; City Council; 21233; CalPERS UpdateCITY OF CARLSBAD - AGENDA BILL AB# MTG. DEPT. 21.233 05-21-13 FIN CALPERS UPDATE DEPT. DIRECTOR CITY ATTY. CITY MGR. RECOMMENDED ACTION: To receive a presentation from the Administrative Services Director and a representative from Bartel Associates, LLC regarding recently approved changes approved by CalPERS. ITEM EXPLANATION: The Administrative Services Director and a representative from Bartel Associates, LLC will give an update on new actuarial policies recently approved by the CalPERS Pension & Health Benefits Committee that will impact the city's future retirement rates for safety and miscellaneous employees. FISCAL IMPACT: None ENVIRONMENTAL IMPACT: None EXHIBITS: None DEPARTMENT CONTACT: Chuck McBride 760-602-2430 Charles.McBride@carlsbadca.gov FOR CLERK USE. COUNCIL ACTION: APPROVED • CONTINUED TO DATE SPECIFIC DENIED • CONTINUED TO DATE UNKNOWN CONTINUED • RETURNED TO STAFF WITHDRAWN • OTHER - SEE MINUTES AMENDED • REPORT RECEIVED • • • • X '^m> CITY OF ^ CARLSBAD www.carlsbadca.gov Memorandum May 10, 2013 To: John Coates, City Manager From: Chuck McBride, Administrative Services Director Re: CalPERS RATE INCREASES This memo is intended to provide information in advance of a City Council workshop that will be conducted on May 21, 2013 to address recent changes enacted by CalPERS that will materially affect future pension contributions by the City of Carlsbad. All pension costs in the following memo refer to employer costs only. On April 16, the CalPERS Pension & Health Benefits Committee approved new actuarial policies to address a fundamental problem in participating agency pension plans. In past years, assets in CalPERS pensions have shrunk, while the liability for future pensioners has continued to grow, leaving most participating cities and agencies with funding levels between 65 and 80 percent. Instead of requiring participants to fully fund their pension obligations, CalPERS has allowed smoothing and other actuarial methods that allow participants to remain substantially underfunded and to avoid large increases in pension contributions that would ordinarily be required to bring these plans back into financial alignment. The City of Carlsbad is no exception, as the Miscellaneous pension plan is funded at 71.3 percent of the outstanding pension liability and the Safety plan is funded at 72.4 percent. This means that, based on the market value of assets in June 2011, plan assets fall short of pension liabilities by almost 30 percent (we use the June 2011 figure because CalPERS sets pension contribution rates based on the fiscal year ending two years prior). Based on the market value of assets (MVA) for these plans, this means an unfunded liability of $71.7 million for the Miscellaneous plan and $54.4 million for the Safety plan. In order to address this endemic pension issue, CalPERS has adopted a plan to reach full funding status over 30 years by markedly increasing required contributions to agency's pension plans. In order to allow agencies time to prepare for these increases, CalPERS has delayed implementation until Fiscal Year (FY) 2015-16, and spread the increase over a period of five years. Finance staff has conferred with our CalPERS actuary, in order to understand the magnitude of the effect upon the city's future pension contributions, as recent coverage of this decision has indicated that contribution rates could increase by as much as 50 percent. The increases, however, are based on a number of variables relating to individual agency pension plans, including the volatility ratios of plan assets and liabilities to the agency's annual payroll. Administrative Services Department 1635 Faraday Ave. I Carlsbad, CA 92008 I 760-602-2430 I 760-602-8553 fax Mr. Co ate s May 10, 2013 Page 2 Based on Carlsbad's current pension plan, the increase (as a percentage of payroll) is expected to be 7.5 percent for Miscellaneous employees and 11 percent of payroll for Safety employees. This increase will be spread over five years, beginning In FY 2015-16. The annual increase for each of the five years between FY 2015-16 and FY 2019-20 would be 1.5 percent for Miscellaneous and 2.2 percent for Safety. Staff has applied these assumptions to the ten-year forecast, in order to gauge the impact of the increases. Safety The table below indicates the effect of the increases in city contributions to the Safety pension plan. The first row indicates the annual increase in contributions as a percentage of payroll. The 11 percent increase estimated by our CalPERS actuary results in a steady increase to 46.6 percent of payroll for employees by the year 2020. After this point, rates have stabilized. The baseline indicates the annual contribution (in thousands of dollars) presented in the ten year forecast. The new plan indicates the increases adopted by CalPERS in April. The net increase Indicates that, in the first year of the new increases (FY 15-16), the net increase is $328,000. In FY 2019-20, the net increase is $2.1 million, an increase of 31 percent cumulative increase over five years. FY 14-15 FY 15-16 FY 16-17 FY 17-18 FY 13-19 FY W-ZQ Percent of Payroll 35.60% 37.80% 40.00% 42.20% 44.40% 46.60% Baseline ($000) 7,077 7,412 7,697 7,994 8,300 8,619 New Plan 7,077 7,739 8,436 9,166 9,934 10,739 Net Increase 328 738 1,173 1,633 2,120 Miscellaneous In the table below, the reader sees the same analysis of the Miscellaneous, or General, employee pension plan contributions. Under the new plan adopted by CalPERS, pension rates are ramped up by 7.5 percent of payroll over five years. Contributions increase by 30 percent between FY 2014-15 and FY 2019-20 before stabilizing. In the first year of the new plan, the net difference, compared to the ten year forecast, is an additional $313,000. This grows to a net difference of $1.9 million in FY 2019-20. FY 14-15 FY 15-16 FY 16-17 FY 17-19 FY 19-19 FY W-ZQ Percent of Payroll 25.30% 26.80% 28.30% 29.80% 31.30% 32.80% Basline($000) 6,993 7,317 7,624 7,944 8,275 8,620 New Plan 6,993 7,630 8,299 9,001 9,738 10,510 Net Increase 313 674 1,057 1,462 1,891 Mr. Coates May 10, 2013 Page 3 Impact on the Ten-Year Forecast The rate increases are substantial and will use resources that could be programmed for other city uses; however, Carlsbad's financial position is forecast to be healthy enough to absorb these increases. Please note that the ten year forecast contemplates only the General fund impact. As the table below indicates, the total increase in pension rates between both plans ranges from $641,000 in the first year to $4 million in the final year. In total, these contributions add $11.4 million in payroll costs to the General Fund over the five year "ramp up." The Forecast numbers (upper row) indicate the original surplus projected in the ten-year forecast and the Revised Forecast accounts for the additional contribution. (000 omitted) FY 14-15 FY 15-16 FY 16-17 FY 17-18 FY 18-19 FY 19-20 Original Forecast 3,538 5,194 5,979 6,532 8,049 7,318 Pension Impact (641) (1,413) (2,230) (3,095) (4,011) Revised Forecast 3,538 4,553 4,566 4,301 4,954 3,307 The table indicates that, while there is a sizable Impact from the increased contribution, the forecast indicates that we can absorb the impact. At this point, a few observations are in order. • The contribution rate increases are in keeping with the fiscally responsible path that Carlsbad has taken in addressing rising pension costs. The City Council has set aside $3.2 million over the past two fiscal years in order to address the unfunded liability. While these increases are substantial and do not allow flexibility for financial planning, they are designed to bring our pension plans into financial alignment, which was the purpose for our annual budgetary set asides. • Contribution rates may reasonably be expected to stabilize, and even drop, after this five year ramp up. Under AB 340, new employees who have never been employees within the CalPERS system will receive substantially reduced pension benefits. Even new employees who have been part of the CalPERS system (i.e. lateral moves from other cities) will be provided with lower pension benefits under the second tier created by the state legislature. Over time, employees that were part of the city's pension system under the original first tier (3 percent at 60 for Miscellaneous employees) will retire and the employee demographic will shift to employees that receive reduced pension benefits. This will ultimately cause a decrease in our annual pension costs. • Our annual pension contribution can be broken into two parts - the normal cost and the amortized cost. The normal cost is the cost to provide a pension for a year of service by an employee; in other words, the normal cost assumes there are no "surprises" and that all actuarial assumptions hold, including investment return. For example, if an employee is part of a plan that provides 3 percent of his salary per year worked, and that employee earns $100,000, then the normal cost would that amount that would provide $3,000 per Mr. Coates May 10, 2013 Page 4 year for that employee in retirement. The amortized cost, on the other hand, is the result of any changes is the contribution attributed to gains and losses in the plan, changes in plan benefits, or any other changes that would affect the unfunded liability. For example, large investment losses, such as those experienced In FY 2008-09 (a loss of almost 25 percent in one year) are spread over 30 years. Other amortization periods are shorter. For example, Carlsbad adopted the current pension plan (3 percent at 60 for Miscellaneous) in 2003 and chose to spread the additional cost over 20 years. These amortized costs comprise approximately half of our annual contributions. It should be noted that the amortized cost related to the increased benefits adopted in 2003 will be paid off in 11 years and will reduce the amortized cost for Miscellaneous employees by $2.2 million per year. As seen in the previous narrative, the plan recently adopted by CalPERS will cause some financial duress beginning in FY 2015-16. However, the plan will address a fundamental problem in the pension system. The rate increases adopted by CalPERS are expected to remove some uncertainty from pension funding, a goal that our City Council has pursued over the past several years. Finally, there may be more changes coming. The chief actuary for CalPERS, Alan Miligan, will be proposing changes in mortality methodologies and another decrease in the assumed investment rate of return of 7.5 percent. If CalPERS adopts such recommendations, this could cause annual contribution rates to rise again. If you have question on this matter, please contact me at (760) 602-2430 or on e-mail at chuck.mcbride@carlsbadca.gov. CM:tm lis CITY OF ^ CARLSBAD Memorandum May 14, 2013 To: From: Re: Mayor and City Council ^ John Coates, City Manager ^2^- ' Council Workshop May 21, 2013 The agenda for the May 21, 2013 City Council workshop includes the following items: • Update on recent changes to CalPERS actuarial policies • Update on recent changes to storm water permit requirements • Alga Norte Park name In order to prepare for the discussion regarding CalPERS, we have prepared the attached memorandum for your review and consideration. I have placed a hardcopy of this information in your in-basket for your convenience. Should you desire any additional information in order to prepare for the workshop, please let me know. JC:mf Attachment Cc: City Clerk City Attorney Assistant City Manager Administrative Services Director Public Works Director Date: 5" Distributio City Clerk Asst. City Clerk Deputy Clerk Book /a City Hall ^ 1200 Carlsbad Village Drive I Carlsbad, CA 92008 I 760-434-2820 I 760-720-9461 fax I www.carlsbadca.gov <^ *^^> CITY OF CARLSBAD \t\t^^^t www.carlsbadca.gov Memorandum May 10, 2013 To: John Coates, City Manager From: Chuck McBride, Administrative Services Director Re: CalPERS RATE INCREASES This memo is intended to provide information in advance of a City Council workshop that will be conducted on May 21, 2013 to address recent changes enacted by CalPERS that will materially affect future pension contributions by the City of Carlsbad. All pension costs in the following memo refer to employer costs only. On April 16, the CalPERS Pension 8i Health Benefits Committee approved new actuarial policies to address a fundamental problem in participating agency pension plans. In past years, assets in CalPERS pensions have shrunk, while the liability for future pensioners has continued to grow, leaving most participating cities and agencies with funding levels between 65 and 80 percent. Instead of requiring participants to fully fund their pension obligations, CalPERS has allowed smoothing and other actuarial methods that allow participants to remain substantially underfunded and to avoid large increases in pension contributions that would ordinarily be required to bring these plans back into financial alignment. The City of Carlsbad is no exception, as the Miscellaneous pension plan is funded at 71.3 percent of the outstanding pension liability and the Safety plan is funded at 72.4 percent. This means that, based on the market value of assets in June 2011, plan assets fall short of pension liabilities by almost 30 percent (we use the June 2011 figure because CalPERS sets pension contribution rates based on the fiscal year ending two years prior). Based on the market value of assets (MVA) for these plans, this means an unfunded liability of $71.7 million for the Miscellaneous plan and $54.4 million for the Safety plan. In order to address this endemic pension issue, CalPERS has adopted a plan to reach full funding status over 30 years by markedly increasing required contributions to agency's pension plans. In order to-allow agencies time to prepare for these increases, CalPERS has delayed implementation until Fiscal .Y^ar (FY) 2015-16, and spread the increase over a period of five •years.- V , . Finance staff has C0tsferred viixJ(\ our CalPERS actuary, in order to understand the magnitude of Fhe effect 4|p/5jf^eiCjg's future pension contributions, as recent coverage of this decision has indicated thaf conlr(but^ could increase by as much as 50 percent. The increases, •however, are^\)^e(if dti^a^n\ber of variables relating to individual agency pension plans, including the volatility ra^bs'^f |)lan assets and liabilities to the agency's annual payroll. Administrative Services Department W 1635 Faraday Ave. I Carlsbad, CA 92008 I 760-602-2430 I 760-602-8553 fax Mr. Coates May 10, 2013 Page 2 Based on Carlsbad's current pension plan, the increase (as a percentage of payroll) is expected to be 7.5 percent for Miscellaneous employees and 11 percent of payroll for Safety employees. This increase will be spread over five years, beginning in FY 2015-16. The annual increase for each of the five years between FY 2015-16 and FY 2019-20 would be 1.5 percent for Miscellaneous and 2.2 percent for Safety. Staff has applied these assumptions to the ten-year forecast, in order to gauge the impact of the increases. Safety The table below indicates the effect of the increases in city contributions to the Safety pension plan. The first row indicates the annual increase in contributions as a percentage of payroll. The 11 percent increase estimated by our CalPERS actuary results in a steady increase to 46.6 percent of payroll for employees by the year 2020. After this point, rates have stabilized. The baseline indicates the annual contribution (in thousands of dollars) presented in the ten year forecast. The new plan indicates the increases adopted by CalPERS in April. The net increase indicates that, in the first year of the new increases (FY 15-16), the net increase is $328,000. In FY 2019-20, the net increase is $2.1 million, an increase of 31 percent cumulative increase over five years. FY 14-15 FY 15-X6 FY 1^17 FY 17-18 FY 18-19 FY 19-20 Percent of Payroll 35.60% 37.80% 40.00% 42.20% 44.40% 4660% Baseline ($000) 7,077 7,412 7,697 7,994 8,300 8,619 New Plan 7,077 7,739 8,436 9,166 9,934 10,739 Net Increase 328 738 1,173 1,633 2,120 Miscellaneous In the table below, the reader sees the same analysis of the Miscellaneous, or General, employee pension plan contributions. Under the new plan adopted by CalPERS, pension rates are ramped up by 7.5 percent of payroll over five years. Contributions increase by 30 percent between FY 2014-15 and FY 2019-20 before stabilizing. In the first year of the new plan, the net difference, compared to the ten year forecast, is an additional $313,000. This grows to a net difference of $1.9 million in FY 2019-20. FY 14-15 FY 15-16 FY lfi-17 FY 17-18 FY 18-19 FY 19-20 Percent of Payroll 25.30% 26.80% 28.30% 29.80% 31.30% 32.80% Basline ($000) 6,993 7,317 7,624 7,944 8,275 8,620 NewPlan 6,993 7,630 8,299 9,001 9,738 10,510 Net Increase 313 674 1,057 1,462 1,891 Mr. Coates May 10, 2013 Page 3 Impact on the Ten-Year Forecast The rate increases are substantial and will use resources that could be programmed for other city uses; however, Carlsbad's financial position is forecast to be healthy enough to absorb these increases. Please note that the ten year forecast contemplates only the General fund impact. As the table below indicates, the total increase in pension rates between both plans ranges from $641,000 in the first year to $4 million in the final year. In total, these contributions add $11.4 million in payroll costs to the General Fund over the five year "ramp up." The Forecast numbers (upper row) indicate the original surplus projected in the ten-year forecast and the Revised Forecast accounts for the additional contribution. (000 omitted) FY 14-15 FY 15-16 FY 16-17 FY 17-18 FY 18-19 FY l$-ZQ Original Forecast 3,538 5,194 5,979 6,532 8,049 7,318 Pension Impact (641) (1,413) (2,230) (3,095) (4,011) Revised Forecast 3,538 4,553 4,566 4,301 4,954 3,307 The table indicates that, while there is a sizable impact from the increased contribution, the forecast indicates that we can absorb the impact. At this point, a few observations are in order. • The contribution rate increases are in keeping with the fiscally responsible path that Carlsbad has taken in addressing rising pension costs. The City Council has set aside $3.2 million over the past two fiscal years in order to address the unfunded liability. While these increases are substantial and do not allow flexibility for financial planning, they are designed to bring our pension plans into financial alignment, which was the purpose for our annual budgetary set asides. • Contribution rates may reasonably be expected to stabilize, and even drop, after this five year ramp up. Under AB 340, new employees who have never been employees within the CalPERS system will receive substantially reduced pension benefits. Even new employees who have been part of the CalPERS system (i.e. lateral moves from other cities) will be provided with lower pension benefits under the second tier created by the state legislature. Over time, employees that were part of the city's pension system under the original first tier (3 percent at 60 for Miscellaneous employees) will retire and the employee demographic will shift to employees that receive reduced pension benefits. This will ultimately cause a decrease in our annual pension costs. • Our annual pension contribution can be broken into two parts ~ the normal cost and the amortized cost. The normal cost is the cost to provide a pension for a year of service by an employee; in other words, the normal cost assumes there are no "surprises" and that all actuarial assumptions hold, including investment return. For example, if an employee is part of a plan that provides 3 percent of his salary per year worked, and that employee earns $100,000, then the normal cost would that amount that would provide $3,000 per Mr. Coates May 10, 2013 Page 4 year for that employee in retirement. The amortized cost, on the other hand, is the result of any changes is the contribution attributed to gains and losses in the plan, changes in plan benefits, or any other changes that would affect the unfunded liability. For example, large investment losses, such as those experienced in FY 2008-09 (a loss of almost 25 percent in one year) are spread over 30 years. Other amortization periods are shorter. For example, Carlsbad adopted the current pension plan (3 percent at 60 for Miscellaneous) in 2003 and chose to spread the additional cost over 20 years. These amortized costs comprise approximately half of our annual contributions. It should be noted that the amortized cost related to the increased benefits adopted in 2003 will be paid off in 11 years and will reduce the amortized cost for Miscellaneous employees by $2.2 million per year. As seen in the previous narrative, the plan recently adopted by CalPERS will cause some financial duress beginning in FY 2015-16. However, the plan will address a fundamental problem in the pension system. The rate increases adopted by CalPERS are expected to remove some uncertainty from pension funding, a goal that our City Council has pursued over the past several years. Finally, there may be more changes coming. The chief actuary for CalPERS, Alan Miligan, will be proposing changes in mortality methodologies and another decrease in the assumed investment rate of return of 7.5 percent. If CalPERS adopts such recommendations, this could cause annual contribution rates to rise again. If you have question on this matter, please contact me at (760) 602-2430 or on e-mail at chuck.mcbride(5)carlsbadca.gov. CM:tm 1 1 City of Carlsbad CalPERS Update May 21, 2013 Pension Life Cycle 30 60 80 Contributions Benefit Definitions •Actuarial Value of Assets (AVA) •Market Value of Assets (MVA) •Discount Rate •Present Value of Benefits (PVB) Pension Life Cycle 30 60 80 Contributions Benefit Unfunded Liability Pension Cost Components Normal Cost + Amortized Cost Annual Required Contribution (ARC) Actuarial Assumptions •Discount Rate = 7.5% •Amortization Periods: –20-year period for plan amendment or changes in actuarial assumptions and methods –Rolling 30 year period for gains and losses Actuarial Assumptions •Asset valuation – Corridor Approach •Payroll Growth = 3% •Pre- and post-retirement mortality rates •Service Retirement Carlsbad’s Current Structure Miscellaneous •Tier 1 –Formula: 3 percent @ 60 •Tier 2 Hired after November 2011 –Formula: 2 percent @ 60 •Tier 3: Hired after December 2012 –Formula: 2 percent @ 62 8 Carlsbad’s Current Structure Safety •Tier 1 –Formula: 3 percent @ 50 •Tier 2 Hired after October 2010 –Formula: 2 percent @ 50 •Tier 3: Hired after December 2012 –Formula: 2.7 percent @ 57 9 Current Situation •Employer Rates •Plan funded status •Market Volatility 10 Contibution Rates FY 13-14 FY 14-15 FY 15-16 Safety 33.9% 35.6% 36.2% Miscellaneous 24.0% 25.3% 25.7% Funded Status - Misc * Zillow 0% 20% 40% 60% 80% 100% 120% 140% 160% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 AVA MVA Funded Status - Safety * Zillow CalPERS History of Investment Returns 12.5% 14.5% 2.0% 16.3% 15.3% 20.1% 19.5% 12.5% 10.5% -7.2% -6.1% 3.7% 16.6% 12.3% 11.8% 19.1% -5.1% -24.0% 13.3% 21.7% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Annual Rate of Return CalPERS Changes •New amortization and smoothing •Reduced discount rate •Mortality Assumption 15 CalPERS Changes AMORTIZATION & SMOOTHING •Measurement: Market Value of Assets •Timing of Contribution Increases •Why change methodology? 16 Strategies •Employee Rate •Budgetary •Statutory 21 22 22 Miscellaneous Before Direct Rate Smoothing Miscellaneous Direct Rate Smoothing Miscellaneous Direct Rate Smoothing + Assumption Changes Miscellaneous All Changes – Expected Investment Return Safety Before Direct Rate Smoothing Safety Direct Rate Smoothing Safety Direct Rate Smoothing + Assumption Changes Safety All Changes – Expected Investment Return