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HomeMy WebLinkAbout2023-09-12; City Council; ; Establishing a Public Agencies Post-Employment Benefits Trust, Appointing Public Agency Retirement System as the Trust Administrator and Amending and Adopting Related CitCA Review JRT Meeting Date: Sept. 12, 2023 To: Mayor and City Council From: Scott Chadwick, City Manager Staff Contact: Zach Korach, Finance Director zach.korach@carlsbadca.gov or 442-339-2127 Subject: Establishing a Public Agencies Post-Employment Benefits Trust, Appointing Public Agency Retirement System as the Trust Administrator and Amending and Adopting Related City Council Policies Districts: All Recommended Actions 1. Adopt a resolution approving the adoption of the Public Agencies Post-Employment Benefits Trust administered by Public Agency Retirement Services 2. Adopt a resolution approving the amendment of City Council Policy No. 86 for pension funding 3. Adopt a resolution approving the adoption of City Council Policy No. 98 for the City’s Pension Trust Investment Policy Executive Summary Pension costs are a significant and hard-to-predict expense for the city. On June 6, 2023, the City Council directed staff to pursue the establishment of a Section 115 Trust. This trust allows the city to stabilize pension cost volatility, maintain local control over the city’s assets, and earn a potentially higher rate of return than if the assets were kept within the General Fund. The City Council is now being asked to take the necessary steps to complete the establishment of the trust. These include adopting resolutions that establish the trust and appoint Public Agency Retirement System (PARS) as the city’s trust administrator and amend and establish policies related to pension funding and investing. Explanation & Analysis California Public Employees' Retirement System The city provides a defined benefit pension to its employees through the California Public Employees' Retirement System, or CalPERS. CalPERS uses a formula to calculate retiree pensions based on an employee’s age, earnings and years of service. It funds these pensions by a combination of employer contributions, employee contributions and investment earnings. Each year, CalPERS determines the employer’s contributions based on actual investment returns and actuarial assumptions including expected investment returns, inflation rates, salaries, retirement ages and life expectancies. Sept. 12, 2023 Item #11 Page 1 of 36 In recent years, CalPERS has twice lowered its expected investment returns (known as discount rates), thereby increasing the likelihood of achieving the target rate of return, but consequently increasing the city’s pension costs. •First, in 2016, the CalPERS Board of Administration voted to lower the CalPERS discount rate assumption from 7.5% to 7.0% incrementally over three years. This was driven by poor investment returns during the Great Recession and actuarial assumption changes increasing the gap between pension assets and liabilities, resulting in CalPERS’ funded ratio falling below desired levels. •Then in 2021, CalPERS completed its quadrennial asset liability management process, which reviewed investment strategies and actuarial assumptions. The fiscal year 2020- 21 investment gain of 21.3% triggered CalPERS’ Funding Risk Mitigation Policy, prompting the CalPERS Board to approve another discount rate reduction from 7.0% to 6.8%. When CalPERS achieves certain levels of return in excess of its target rate, its policy directs portions of the return to be used to relieve pressure on the target rate in future periods. In other words, CalPERS uses a portion of its investment return to fund the additional costs associated with reducing its discount rate. Again, while lowering the discount rate increases the likelihood of CalPERS achieving their target rate of return, the city’s costs increase as a result. City’s CalPERS plan The actuarial liability represents the present value of the plan, the unfunded liability is the difference between pension assets and liabilities and the funded status is the ratio of pension assets to liabilities. As of CalPERS’ June 30, 2021, actuarial valuation, the city’s plan had: •A total actuarial liability of $828.8 million. •An unfunded liability of $115.9 million •A funded status of 86% However, in fiscal year 2021-22, CalPERS experienced an investment loss of -6.1% which significantly reduced the city’s funded status. As of the June 30, 2022, actuarial valuation (released in August 2023), the city’s plan, in total, has: •An actuarial liability of $874.4 million •An unfunded liability of $222.4 million •A funded status of 74.6% While CalPERS’ -6.1% investment performance in fiscal year 2021-22 will not impact the city’s required contributions until fiscal year 2024-25, the city’s current funded status is 74.6%, putting it below the target of 80% set by City Council Policy No. 86. To achieve an 80% funded status, the city would need to contribute an additional discretionary payment of $47,553,869 to CalPERS. Sept. 12, 2023 Item #11 Page 2 of 36 The chart below shows the volatility of CalPERS’ investment returns over the last 20 fiscal years, highlighting the need to take steps to provide more stability for the city’s pension costs. Over the last six years, the city has taken proactive steps to address pension contribution volatility and manage the unfunded liability. Since fiscal year 2016-17, the city has contributed $56.4 million in additional discretionary payments to CalPERS, which has significantly helped increase the plan’s funded status. While contributing additional funds to CalPERS saves the city future interest costs, there is also a higher risk of pension rate volatility during periods of poor investment performance by CalPERS. To mitigate this risk as well as the potential for CalPERS to further reduce its discount rate, many agencies in California have turned to Section 115 Trusts as a solution. Section 115 Trust – A pension rate stabilization program A Section 115 Trust is a tax-exempt investment tool that allows local governments to pre-fund pension and retiree health costs. Once contributions are placed into the trust, assets from the trust can only be used for retirement plan purposes. Withdrawals may be made to either reimburse the city for retirement system contributions or to pay CalPERS directly. The benefits of a Section 115 Trust include: • Local control over assets: The city controls the contributions, withdrawals, investment strategy and risk level of assets in the trust. • Pension rate stabilization: Assets can be transferred to CalPERS at the city’s discretion to pay for normal cost or unfunded actuarial liability contributions and can be used to reduce or eliminate large fluctuations in the city’s pension costs. • Potential for higher investment return than General Fund: Investment requirements that apply to the city’s General Fund assets under California Government Code Section 53601 are not applicable to trust assets. • Diversification: Trust assets will be diversified from CalPERS’ investments. CalPERS historical investment returns Sept. 12, 2023 Item #11 Page 3 of 36 An n u a l in v e s t m e n t re t u r n s w lo ~ §1 §! §1 0 0 0 0 :/< :/< :/< :/< FY 0 3 - 0 4 ■ - FY 0 4 - 0 S FY 0 5 - 6 7 FY 0 6 - 0 7 FY 0 J . 0 8 I )> FY O S - 0 9 ■ :: , :: , C: !!! . FY 0 9 - 1 0 ~· "' 14 3 FY 10 - 1 1 "' :: , ... FY l l - 1 2 ;;, ... C: :, FY 1 2 - U I FY 13 - 1 4 0 [ii 0 FY 14 - 1 S C: :: , ... iil FY 15 - 1 6 I I ;; FY 1 6 - l 7 FY 17 • 1 8 FY 18 - 1 9 FY 19 - 2 0 FY 20 - 2 1 FY 2 1 - 2 2 FY 22 - 2 3 I - The Section 115 Trust will be available to help offset future increases in pension costs while minimizing the impact on the city’s operating budget. It will provide the city with an alternative to sending funds directly to CalPERS while giving the city the flexibility to make additional payments to CalPERS to reduce its unfunded actuarial liability at the city’s discretion. Many cities in California concerned with pension cost volatility have adopted a Section 115 Trust. Over 175 cities, towns and counties, 52 education districts and 72 special districts have established a trust, including Oceanside, San Marcos, Solana Beach, Coronado and Escondido, to name a few within San Diego County. Trust administrator and investment strategy The establishment of a Section 115 Trust requires the city to appoint a trust administrator. Trust administrators are necessary and responsible for administering the trust as well as deploying the investment portfolio for the assets contributed to the trust. The investment strategy itself would be at the sole discretion of the City Council, governed by a City Council- approved investment policy (the proposed City Council Policy No. 98) and managed by the City Treasurer and Finance Department. Bidding process • Staff recommended the City Council take the steps to adopt a Section 115 Trust at the June 6, 2023, City Council meeting. The City Council then directed staff to move forward with the request for proposal process in search of a trust administrator and investment manager for a Section 115 Trust. • Staff released the request on July 17, 2023. • The city received three proposals by the Aug. 4, 2023, deadline. • An internal review committee comprised of the City Treasurer, Deputy City Manager of Administrative Services and Finance Director evaluated the proposals based primarily on the firms’ experience, level of service and proposed fees. • The internal review committee unanimously selected Public Agency Retirement Services, commonly known as PARS, to recommend as the city’s trust administrator. PARS is a pioneer in the design and administration of governmental retirement trusts for public agencies with over four decades of experience and continual corporate growth. PARS developed the first multiple employer Section 115 Trust program for pension prefunding in the nation in 2015 and is one of only two firms that has received what is known as a private letter ruling from the Internal Revenue Service for pension prefunding. A private letter ruling ensures activities in the trust are subject to the IRS Section 115 income tax exemption, that is, that its investment returns are tax-exempt. Nationwide, PARS administers over 640 trusts with a cumulative asset market value of over $10 billion. Within California, PARS administers pension trusts for 146 cities and towns, 29 counties, 52 education districts, and 74 special districts. PARS works with two investment management firms: HighMark, a subsidiary of U.S. Bank, and Vanguard. Both firms offer similar customization for the city’s investment portfolio. Historical investment performance between HighMark and Vanguard is relatively competitive; however, Vanguard offers its services at a significantly lower cost. It is able to do this because it Sept. 12, 2023 Item #11 Page 4 of 36 combines, or pools, its assets to achieve economies of scale. Given these considerations, the internal review committee unanimously selected Vanguard to recommend to the City Council as the city’s investment manager for the Section 115 Trust. The chart below compares the investment performance of HighMark, Vanguard, CalPERS’ California Employers’ Retiree Benefit Trust and the city’s General Fund over the last one, three, five and 10 fiscal years. (The chart compares HighMark and Vanguard’s performance using a capital appreciation strategy in which funds are invested with approximately 75% in stocks, 20% in bonds and 5% in cash. The General Fund does not invest in these types of funds and is included for comparative performance purposes only.) Varying risk tolerance levels, or investment strategies, can be selected for the trust’s investments. The composition level of fixed income versus equity investments drives the level of risk tolerance. Generally, there are “conservative” strategies that invest more heavily in fixed-income investments (bonds) compared to equities (stocks). Conversely, more aggressive growth and appreciation strategies invest more heavily in equities compared to fixed incomes. While the capital appreciation investment strategy has proven to perform better historically compared to more conservative portfolios, there is a higher level of inherent risk and volatility. Along with maintaining local control over the city's assets, a Section 115 Trust is intended to preserve the assets, particularly by investing more conservatively than CalPERS. Staff recommend a “balanced” investment strategy, with 60% in equity, 35% in fixed-income investments and 5% in cash. A “balanced” investment strategy translates to a 6.25% annual target rate of return, as set forth in the proposed Pension Trust Investment Policy (Attachment A to Exhibit 3). Funding strategy CalPERS’ poor investment performance in fiscal year 2021-22 resulted in the city’s funded status being reduced to 74.6%. To achieve an 80% funded status, the city could consider making a $47.5 million contribution to CalPERS. However, given the volatility of CalPERS’ investment 0% 2% 4% 6% 8% 10% 12% 1-year 3-year 5-year 10-year HighMark Vanguard CalPERS CERBT*General Fund Investment performances compared Sept. 12, 2023 Item #11 Page 5 of 36 I ■ I ■ ■ ■ ■ ■ performance, and to maintain local control over city assets, staff are recommending the City Council amend City Council Policy No. 86 to allow assets in the Section 115 Trust to count toward the city’s calculation of its funded status and 80% target. Policy No. 86 states that “in the event the city is unable to meet the minimum combined pension funded ratio of 80% with current resources (i.e., without borrowing or using reserves), the Finance Director or Deputy City Manager of Administrative Services will identify a reasonable period to return to a minimum 80% funded ratio status.” Rather than making a one-time payment of $47.5 million to CalPERS, staff recommend the city contribute the difference between the current funded status of 74.6% and the 80% target to the Section 115 Trust over a five-year period. The city would make an initial contribution of $10.0 million followed by four annual contributions of $7.5 million with General Fund dollars. Over the five-year period and beyond, assets in the trust would be invested, in accordance with the proposed City Council Policy No. 98 - Pension Trust Investment Policy, with a “balanced” investment strategy. Staff project that at the end of fiscal year 2027-28, assets in the trust will meet the 80% funded status target. Any deposits or withdrawals from the trust will require approval from the City Council. The city’s funded status changes every year based on CalPERS’ investment performance. In the event the city’s combined funded status meets or exceeds the 80% target level, it is important the Section 115 Trust continues to serve the city as a pension rate stabilization tool. The asset balance in the trust will be evaluated to ensure it is on track to accumulate sufficient funds to cover the additional costs associated with a potential future reduction in CalPERS’ discount rate. The city has modeled alternative discount rate scenarios of 6%, 6.25% and 6.5%. The lower the discount rate, the more the city pays to CalPERS. The investment community has forecasted long-term expected rates of return between 6% and 6.5%, and CalPERS’ investment consultant, Wilshire Associates, has forecasted a long-term expected rate of return of 6.2%. Staff Sept. 12, 2023 Item #11 Page 6 of 36 400 350 300 250 200 -= (I), 150 100 50 0 +$66M 6.8% 6.5% +$167M +$118M 6.25% 6% Note: Cost increases are in respect to cost estimates assuming a 6.8% discount rate recommend using a more conservative discount rate of 6.25% for the assets in the Section 115 Trust. While the trust would help ensure an 80% combined funded ratio is maintained, the ultimate funding goal would be for the city to have sufficient assets in the trust to be prepared for further discount rate reductions by CalPERS. With an initial contribution of $10 million, followed by four annual contributions of $7.5 million, and assuming an annual rate of return of 6.25%, not only would the city’s funded status reach 80% over a five-year period, but over a 20-year period there would be sufficient assets in the trust to fund a potential reduction in CalPERS’ discount rate from the current 6.8% to 6.25%. This potential reduction in CalPERS’ discount rate represents an additional $118 million in currently unfunded pension costs for the City of Carlsbad. Projected value of assets assuming 1.48% and 6.25% investment returns Conclusion Staff are recommending the City Council adopt three resolutions: 1. A resolution approving the adoption of the Public Agencies Post-Employment Benefits Trust administered by Public Agency Retirement Services (Exhibit 1). 2. A resolution approving the amendment of City Council Policy No. 86 for pension funding (Exhibit 2) (The proposed changes to Policy No. 86 are shown in Exhibit 4). 3. A resolution approving the adoption of City Council Policy No. 98 for the City’s Pension Trust Investment Policy (Exhibit 3). $- $20 $40 $60 $80 $100 $120 $140 FY 2 4 - 2 5 FY 2 5 - 2 6 FY 2 6 - 2 7 FY 2 7 - 2 8 FY 2 8 - 2 9 FY 2 9 - 3 0 FY 3 0 - 3 1 FY 3 1 - 3 2 FY 3 2 - 3 3 FY 3 3 - 3 4 FY 3 4 - 3 5 FY 3 5 - 3 6 FY 3 6 - 3 7 FY 3 7 - 3 8 FY 3 8 - 3 9 FY 3 9 - 4 0 FY 4 0 - 4 1 FY 4 1 - 4 2 FY 4 2 - 4 3 FY 4 3 - 4 4 Pr o j e c t e d v a l u e o f v s s e t s ( v v n m i l l i o n s ) 1.48% investment return 6.25% investment return Sept. 12, 2023 Item #11 Page 7 of 36 With a Section 115 Trust: • The city would not need to make an immediate payment to CalPERS for $47.5 million. Rather, over a five-year period, the city will contribute assets to the Section 115 Trust to reach a combined 80% funded ratio. • If CalPERS reduces its discount rate, the city will have funds available to mitigate fiscal impacts to the city’s operating budget. • Local control over assets - The city would control the timing of contributions and withdrawals, investment strategy, and risk level of assets in the trust. • Trust assets can be transferred to CalPERS at the city’s discretion to pay for normal costs or unfunded actuarial liability contributions and can be used to reduce or eliminate large fluctuations in the city’s pension costs. • Potential for higher investment returns than would be possible under the limitations that apply to the city’s General Fund assets under Government Code Section 53601. Those limitations are not applicable to assets in the trust. • Trust assets will be diversified from CalPERS’ investments. If a trust is not established and a five-year funding strategy to reach an 80% funded ratio is not approved, then an immediate $47.5 million contribution to CalPERS may be required by City Council Policy No. 86. In addition, • If CalPERS reduces its discount rate, the city may be less prepared to mitigate fiscal impacts on the city’s operating budget. • Continuing to make discretionary payments to CalPERS reduces the city’s local control over assets. • Investment returns in the General Fund may be lower than what the trust’s returns would be • Contributions will continue to be fully concentrated under CalPERS’ management. Fiscal Analysis The city’s current funded ratio is 74.6%, which is $47.5 million below the city’s 80% policy target. Rather than immediately contributing the $47.5 million to CalPERS, $40 million would be contributed to the Section 115 Trust over a five-year period with an annual target rate of return of 6.25%. Contributions to the trust will move the funds from “unassigned” fund balance to “restricted” fund balance in the General Fund. These funds will be available to count towards the city’s funded ratio as set forth in City Council Policy No. 86, as amended, and mitigate budgetary pressures resulting from potential volatility in CalPERS’ required contributions made by the city. The city will pay fees for trust administration and investment management. The fees are calculated on a sliding scale between 0.22% down to 0.12% depending on the total value of assets in the trust. For example, following a $10 million initial contribution to the trust, there would be an annual trust administration fee of $20,000 and an investment management fee of $2,000. The fees will be deducted from trust assets. Next Steps Staff will execute the trust documents and begin implementing the program over the next 60- 90 days in accordance with the city’s proposed Pension Trust Investment Policy. The City Treasurer and staff will regularly monitor the activities in the trust and meet with the trust Sept. 12, 2023 Item #11 Page 8 of 36 administrator and investment manager on a quarterly basis to review the portfolio’s performance. Environmental Evaluation This action does not constitute a project within the meaning of the California Environmental Quality Act under California Public Resources Code Section 21065 and therefore does not require environmental review because it has no potential to cause either a direct physical change in the environment or a reasonably foreseeable indirect physical change in the environment. Exhibits 1. City Council resolution approving the adoption of the Public Agencies Post-Employment Benefits Trust administered by Public Agency Retirement Services 2. City Council resolution approving the amendment of City Council Policy No. 86 for pension funding 3. City Council resolution approving the City Council Policy No. 98 for the City’s Pension Trust Investment Policy 4. City Council Policy No. 86 showing proposed revisions Sept. 12, 2023 Item #11 Page 9 of 36 RESOLUTION NO. 2023-238 ---------------- A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA, APPROVING THE ADOPTION OF THE PUBLIC AGENCIES POST­ EMPLOYMENT BENEFITS TRUST ADMINISTERED BY PUBLIC AGENCY RETIREMENT SERVICES WHEREAS, it is determined to be in the best interest of the City of Carlsbad to set aside funds for the purpose of pre-funding its California Public Employees' Retirement System {CalPERS) pension obligations that will be held in trust for the exclusive purpose of making future contributions of the city's required pension contributions and any employer contributions in excess of such required contributions at the discretion of the city; and WHEREAS, Public Agency Retirement Services (PARS) has made available the PARS Public Agencies Post-Employment Benefits Trust {the Program) for the purpose of pre-funding the City of Carlsbad's pension obligations; and WHEREAS, the city is eligible to participate in the Program, a tax-exempt trust performing an essential governmental function within the meaning of Section 115 of the Internal Revenue Code, as amended, and the regulations issued there under, and is a tax-exempt trust under the relevant statutory provisions of the State of California; and WHEREAS, the city's adoption and operation of the Program have no effect on any current or former employee's entitlement to post-employment benefits; and WHEREAS, the terms and conditions of post-employment benefit entitlement, if any, are governed by contracts separate from and independent of the Program; and WHEREAS, the city's funding of the Program does not, and is not intended to, create any new vested right to any benefit nor strengthen any existing vested right; and WHEREAS, the city reserves the right to make contributions, if any, to the Program; and NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as follows: 1.That the above recitations are true and correct. 2.That the City Council hereby adopts the PARS Public Agencies Post-Employment Benefits Trust, effective September 12. 2023; and 3.The City Council hereby appoints the City Manager or their successor or their designee as the city's Plan Administrator for the Program; and Exhibit 1 Sept. 12, 2023 Item #11 Page 10 of 36 4.The city's Plan Administrator is hereby authorized to execute legal and administrative documents with the third-party administrator selected by the City Council and to take whatever additional actions necessary to maintain the city's participation in the Program and to maintain compliance with any relevant regulation issues or as may be issued; therefore, authorizing him/her to take whatever additional actions are required to administer the city's Program. PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of Carlsbad on the 12th day of September, 2023, by the following vote, to wit: AYES: NAYS: ABSTAIN: ABSENT: Blackburn, Bhat-Patel, Acosta, Burkholder, Luna. None. None. None. '{1Y KEITH BLACKBURN, Mayor SHERRY FREISINGER, City Clerk (SEAL) ,,,,,,1111111111,,,,, �"� G CA b.1111111. � 0•'" r(l i, �" .. -��-(\� .:,,::-·· �-.vd\� fu(�,i\\ \�J�/ J � C'! ··· .... ,ur"' ,•· ;:: �/, �1.·• ..... ! ...... ;;_;,,,-,f l/11,,, IFOf\� '""'I' l//l//11111111\\\\11� Sept. 12, 2023 Item #11 Page 11 of 36 ML Attachment A REV. 09/07/2023 AGREEMENT FOR ADMINISTRATIVE SERVICES PUBLIC AGENCY RETIREMENT SERVICES (PARS) THIS AGREEMENT is made and entered into as of the ______________ day of _________________________, 20___, by and between the City of Carlsbad, California, a municipal corporation, ("City"), and Phase II Systems, a corporation organized and existing under the laws of the State of California, doing business as Public Agency Retirement Services and PARS, ("Contractor"). RECITALS A. City requires the professional services of a Contractor that is experienced in trust administration. B. Contractor has the necessary experience in providing professional services and advice related to trust administration. C. Contractor has submitted a proposal to City and has affirmed its willingness and ability to perform such work. NOW, THEREFORE, in consideration of these recitals and the mutual covenants contained herein, City and Contractor agree as follows: 1. SCOPE OF WORK City retains Contractor to perform, and Contractor agrees to render, those services (the "Services") that are defined in attached Exhibit "A", which is incorporated by this reference in accordance with this Agreement’s terms and conditions. 2. STANDARD OF PERFORMANCE While performing the Services, Contractor will exercise the reasonable professional care and skill customarily exercised by reputable members of Contractor's profession practicing in the Metropolitan Southern California Area, and will use reasonable diligence and best judgment while exercising its professional skill and expertise. 3. TERM The term of this Agreement will be effective for a period of three years from the date first above written. The City Manager may amend the Agreement to extend it for two additional one-year periods or parts thereof. Extensions will be based upon a satisfactory review of Contractor's performance, City needs, and appropriation of funds by the City Council. The parties will prepare a written amendment indicating the effective date and length of the extended Agreement. 4. TIME IS OF THE ESSENCE Time is of the essence for each and every provision of this Agreement. 5. COMPENSATION The total fee payable for the Services to be performed during the initial Agreement term will be based on the amount of assets held in the Trust as set forth in Exhibit “B” (“Compensation”). No other compensation for the Services will be allowed except for items covered by subsequent amendments to this Agreement. Payment for the Services will be remitted directly from Plan assets unless the City chooses to make payment directly to Contractor. In the event that the City chooses to make payment directly to the Contractor, it shall be the responsibility of the City to remit payment directly to the Contractor based upon an invoice prepared by Contractor and delivered to City. Sept. 12, 2023 Item #11 Page 12 of 36 2 6. STATUS OF CONTRACTOR Contractor will perform the Services in Contractor's own way as an independent contractor and in pursuit of Contractor's independent calling, and not as an employee of City. Contractor will be under control of City only as to the result to be accomplished, but will consult with City as necessary. The persons used by Contractor to provide services under this Agreement will not be considered employees of City for any purposes. The payment made to Contractor pursuant to the Agreement will be the full and complete compensation to which Contractor is entitled. City will not make any federal or state tax withholdings on behalf of Contractor or its agents, employees or subcontractors. City will not be required to pay any workers' compensation insurance or unemployment contributions on behalf of Contractor or its employees or subcontractors. Contractor agrees to indemnify City within thirty (30) days for any tax, retirement contribution, social security, overtime payment, unemployment payment or workers' compensation payment which City may be required to make on behalf of Contractor or any agent, employee, or subcontractor of Contractor for work done under this Agreement. At the City’s election, City may deduct the indemnification amount from any balance owing to Contractor. 7. SUBCONTRACTING Contractor will not subcontract any portion of the Services without prior written approval of City. If Contractor subcontracts any of the Services, Contractor will be fully responsible to City for the acts and omissions of Contractor's subcontractor and of the persons either directly or indirectly employed by the subcontractor, as Contractor is for the acts and omissions of persons directly employed by Contractor. Nothing contained in this Agreement will create any contractual relationship between any subcontractor of Contractor and City. Contractor will be responsible for payment of subcontractors. Contractor will bind every subcontractor and every subcontractor of a subcontractor by the terms of this Agreement applicable to Contractor's work unless specifically noted to the contrary in the subcontract and approved in writing by City. 8. OTHER CONTRACTORS The City reserves the right to employ other Contractors in connection with the Services. 9. INDEMNIFICATION Contractor and City hereby indemnify each other and hold the other harmless, including their respective officers, directors, and employees, from any claim, loss, demand, liability, or expense, including reasonable attorneys’ fees and costs, incurred by the other as a consequence of, to the extent, Contractor’s or City’s, as the case may be, negligent acts, errors or omissions with respect to the performance of their respective duties hereunder. 10. INSURANCE Contractor will obtain and maintain for the duration of the Agreement and any and all amendments, insurance against claims for injuries to persons or damage to property which may arise out of or in connection with performance of the services by Contractor or Contractor’s agents, representatives, employees or subcontractors. The insurance will be obtained from an insurance carrier admitted and authorized to do business in the State of California. The insurance carrier is required to have a current Best's Key Rating of not less than "A-:VII"; OR with a surplus line insurer on the State of California’s List of Approved Surplus Line Insurers (LASLI) with a rating in the latest Best’s Key Rating Guide of at least “A-:X”; OR an alien non-admitted insurer listed by the National Association of Insurance Commissioners (NAIC) latest quarterly listings report. Sept. 12, 2023 Item #11 Page 13 of 36 3 10.1 Coverage and Limits. Contractor will maintain the types of coverage and minimum limits indicated below, unless the Risk Manager or City Manager approves a lower amount. These minimum amounts of coverage will not constitute any limitations or cap on Contractor's indemnification obligations under this Agreement. City, its officers, agents and employees make no representation that the limits of the insurance specified to be carried by Contractor pursuant to this Agreement are adequate to protect Contractor. If Contractor believes that any required insurance coverage is inadequate, Contractor will obtain such additional insurance coverage, as Contractor deems adequate, at Contractor's sole expense. The full limits available to the named insured shall also be available and applicable to the City as an additional insured. 10.1.1 Commercial General Liability (CGL) Insurance. Insurance written on an “occurrence” basis, including personal & advertising injury, with limits no less than $2,000,000 per occurrence. If a general aggregate limit applies, either the general aggregate limit shall apply separately to this project/location or the general aggregate limit shall be twice the required occurrence limit. Required limit may be satisfied either by a standalone policy or in combination with an excess/umbrella policy. 10.1.2 Automobile Liability. (if the use of an automobile is involved for Contractor's work for City). $2,000,000 combined single-limit per accident for bodily injury and property damage. 10.1.3 Workers' Compensation and Employer's Liability. Workers' Compensation limits as required by the California Labor Code. Workers' Compensation will not be required if Contractor has no employees and provides, to City's satisfaction, a declaration stating this. 10.1.4 Professional Liability. Errors and omissions liability appropriate to Contractor’s profession with limits of not less than $1,000,000 per claim. Coverage must be maintained for a period of five years following the date of completion of the work. 10.2 Additional Provisions. Contractor will ensure that the policies of insurance required under this Agreement contain, or are endorsed to contain, the following provisions: 10.2.1 The City will be named as an additional insured on Commercial General Liability which shall provide primary coverage to the City. 10.2.2 Contractor will obtain occurrence coverage, excluding Professional Liability, which will be written as claims-made coverage. 10.2.3 This insurance will be in force during the life of the Agreement and any extensions of it and will not be canceled without thirty (30) days (10-day notice of cancellation for non-payment of premium) prior written notice to City sent by certified mail pursuant to the Notice provisions of this Agreement. 10.3 Providing Certificates of Insurance and Endorsements. Prior to City's execution of this Agreement, Contractor will furnish certificates of insurance and endorsements to City. 10.4 Failure to Maintain Coverage. If Contractor fails to maintain any of these insurance coverages, then City will have the option to declare Contractor in breach, or may purchase replacement insurance or pay the premiums that are due on existing policies in order to maintain the required coverages. Contractor is responsible for any payments made by City to obtain or maintain insurance and City may collect these payments from Contractor or deduct the amount paid from any sums due Contractor under this Agreement. Sept. 12, 2023 Item #11 Page 14 of 36 4 10.5 Submission of Insurance Policies. City reserves the right to require, at any time, complete and certified copies of any or all required insurance policies and endorsements. 11. BUSINESS LICENSE Contractor will obtain and maintain a City of Carlsbad Business License for the term of the Agreement, as may be amended from time-to-time. 12. ACCOUNTING RECORDS Contractor will maintain complete and accurate records with respect to costs incurred under this Agreement. All records will be clearly identifiable. Contractor will allow a representative of City during normal business hours to examine, audit, and make transcripts or copies of records and any other documents created pursuant to this Agreement. Contractor will allow inspection of all work, data, documents, proceedings, and activities related to the Agreement for a period of three (3) years from the date of final payment under this Agreement. 13. OWNERSHIP OF DOCUMENTS All work product produced by Contractor or its agents, employees, and subcontractors pursuant to this Agreement is the property of City. In the event this Agreement is terminated, all work product produced by Contractor or its agents, employees and subcontractors pursuant to this Agreement will be delivered at once to City. Contractor will have the right to make one (1) copy of the work product for Contractor’s records. 14. COPYRIGHTS Contractor agrees that all copyrights that arise from the services will be vested in City and Contractor relinquishes all claims to the copyrights in favor of City. 15. NOTICES The name of the persons who are authorized to give written notice or to receive written notice on behalf of City and on behalf of Contractor under this Agreement. For City For Contractor Name Laura Rocha Name Mr. Daniel Johnson Title Deputy City Manager, Administrative Services Title President Department Finance Address 4350 Von Karman Avenue, Suite 100 City of Carlsbad Newport Beach, CA 92660 Address 1635 Faraday Avenue. Carlsbad, CA 92008 Phone No. (800) 540-6369 Email djohnson@pars.org Phone No. 442-339-2415 Each party will notify the other immediately of any changes of address that would require any notice or delivery to be directed to another address. Sept. 12, 2023 Item #11 Page 15 of 36 5 16. CONFLICT OF INTEREST Contractor shall file a Conflict of Interest Statement with the City Clerk in accordance with the requirements of the City of Carlsbad Conflict of Interest Code. The Contractor shall report investments or interests as required in the City of Carlsbad Conflict of Interest Code. Yes No If yes, list the contact information below for all individuals required to file: Name Email Phone Number 17. GENERAL COMPLIANCE WITH LAWS Contractor will keep fully informed of federal, state and local laws and ordinances and regulations which in any manner affect those employed by Contractor, or in any way affect the performance of the Services by Contractor. Contractor will at all times observe and comply with these laws, ordinances, and regulations and will be responsible for the compliance of Contractor's services with all applicable laws, ordinances and regulations. Contractor will be aware of the requirements of the Immigration Reform and Control Act of 1986 and will comply with those requirements, including, but not limited to, verifying the eligibility for employment of all agents, employees, subcontractors and consultants whose services are required by this Agreement. 18. DISCRIMINATION AND HARASSMENT PROHIBITED Contractor will comply with all applicable local, state and federal laws and regulations prohibiting discrimination and harassment. 19. DISPUTE RESOLUTION If a dispute should arise regarding the performance of the Services the following procedure will be used to resolve any questions of fact or interpretation not otherwise settled by agreement between the parties. Representatives of Contractor or City will reduce such questions, and their respective views, to writing. A copy of such documented dispute will be forwarded to both parties involved along with recommended methods of resolution, which would be of benefit to both parties. The representative receiving the letter will reply to the letter along with a recommended method of resolution within ten (10) business days. If the resolution thus obtained is unsatisfactory to the aggrieved party, a letter outlining the disputes will be forwarded to the City Manager. The City Manager will consider the facts and solutions recommended by each party and may then opt to direct a solution to the problem. In such cases, the action of the City Manager will be binding upon the parties involved, although nothing in this procedure will prohibit the parties from seeking remedies available to them at law. 20. TERMINATION In the event of the Contractor's failure to prosecute, deliver, or perform the Services, City may terminate this Agreement for nonperformance by notifying Contractor by certified mail of the termination. If City decides to abandon or indefinitely postpone the work or services contemplated by this Agreement, City may terminate this Agreement upon written notice to Contractor. Upon notification of termination, Contractor has five (5) business days to deliver any documents owned by City and all work in progress to City address contained in this Agreement. City will make a Sept. 12, 2023 Item #11 Page 16 of 36 □ ■ 6 determination of fact based upon the work product delivered to City and of the percentage of work that Contractor has performed which is usable and of worth to City in having the Agreement completed. Based upon that finding City will determine the final payment of the Agreement. City may terminate this Agreement by tendering thirty (30) days written notice to Contractor. Contractor may terminate this Agreement by tendering thirty (30) days written notice to City. In the event of termination of this Agreement by either party and upon request of City, Contractor will assemble the work product and put it in order for proper filing and closing and deliver it to City. Contractor will be paid for work performed to the termination date; however, the total will not exceed the lump sum fee payable under this Agreement. City will make the final determination as to the portions of tasks completed and the compensation to be made. 21. COVENANTS AGAINST CONTINGENT FEES Contractor warrants that Contractor has not employed or retained any company or person, other than a bona fide employee working for Contractor, to solicit or secure this Agreement, and that Contractor has not paid or agreed to pay any company or person, other than a bona fide employee, any fee, commission, percentage, brokerage fee, gift, or any other consideration contingent upon, or resulting from, the award or making of this Agreement. For breach or violation of this warranty, City will have the right to annul this Agreement without liability, or, in its discretion, to deduct from the Agreement price or consideration, or otherwise recover, the full amount of the fee, commission, percentage, brokerage fees, gift, or contingent fee. 22. CLAIMS AND LAWSUITS By signing this Agreement, Contractor agrees that any Agreement claim submitted to City must be asserted as part of the Agreement process as set forth in this Agreement and not in anticipation of litigation or in conjunction with litigation. Contractor acknowledges that if a false claim is submitted to City, it may be considered fraud and Contractor may be subject to criminal prosecution. Contractor acknowledges that California Government Code sections 12650 et seq., the False Claims Act applies to this Agreement and, provides for civil penalties where a person knowingly submits a false claim to a public entity. These provisions include false claims made with deliberate ignorance of the false information or in reckless disregard of the truth or falsity of information. If City seeks to recover penalties pursuant to the False Claims Act, it is entitled to recover its litigation costs, including attorney's fees. Contractor acknowledges that the filing of a false claim may subject Contractor to an administrative debarment proceeding as the result of which Contractor may be prevented to act as a Contractor on any public work or improvement for a period of up to five (5) years. Contractor acknowledges debarment by another jurisdiction is grounds for City to terminate this Agreement. 23. JURISDICTION AND VENUE Any action at law or in equity brought by either of the parties for the purpose of enforcing a right or rights provided for by this Agreement will be tried in a court of competent jurisdiction in the County of San Diego, State of California, and the parties waive all provisions of law providing for a change of venue in these proceedings to any other county. 24. SUCCESSORS AND ASSIGNS It is mutually understood and agreed that this Agreement will be binding upon City and Contractor and their respective successors. Neither this Agreement nor any part of it nor any monies due or to become due under it may be assigned by Contractor without the prior consent of City, which shall not be unreasonably withheld. Sept. 12, 2023 Item #11 Page 17 of 36 7 25. ENTIRE AGREEMENT This Agreement, together with any other written document referred to or contemplated by it, along with the purchase order for this Agreement and its provisions, embody the entire Agreement and understanding between the parties relating to the subject matter of it. In case of conflict, the terms of the Agreement supersede the purchase order. Neither this Agreement nor any of its provisions may be amended, modified, waived or discharged except in a writing signed by both parties. This Agreement may be executed in counterparts. 26. AUTHORITY The individuals executing this Agreement and the instruments referenced in it on behalf of Contractor each represent and warrant that they have the legal power, right and actual authority to bind Contractor to the terms and conditions of this Agreement. 27. INFORMATION FURNISHED TO CONTRACTOR Contractor will provide the Services contingent upon the City providing Contractor the information specified in the exhibit attached hereto as Exhibit “C” (“Data Requirements”). It shall be the responsibility of the City to certify the accuracy, content, and completeness of the Data so that Contractor may rely on such information without further audit. It shall further be the responsibility of the City to deliver the Data to Contractor in such a manner that allows for a reasonable amount of time for the Services to be performed. Unless specified in Exhibit “A”, Contractor shall be under no duty to question Data received from the City, to compute contributions made to the Plan, to determine or inquire whether contributions are adequate to meet and discharge liabilities under the Plan, or to determine or inquire whether contributions made to the Plan are in compliance with the Plan or applicable law. In addition, Contractor shall not be liable for nonperformance of Services to the extent such nonperformance is caused by or results from erroneous and/or late delivery of Data from the City. In the event that the City fails to provide Data in a complete, accurate and timely manner and pursuant to the specifications in Exhibit “C”, Contractor reserves the right, notwithstanding the further provisions of this Agreement, to terminate this Agreement upon no less than ninety (90) days written notice to the City. 28. FORCE MAJEURE When a party’s nonperformance hereunder was beyond the control and not due to the fault of the party not performing, a party shall be excused from performing its obligations under this Agreement during the time and to the extent that its performance is prevented by such cause. Such cause shall include, but not be limited to: any incidence of fire, flood, acts of God or unanticipated communicable disease, acts of terrorism or war commandeering of material, products, plants or facilities by the federal, state or local government, a material act or omission by the other party or any law, ordinance, rule, guidance or recommendation by the federal, state or local government, or any agency thereof, which becomes effective after the date of this Agreement that delays or renders impractical either party’s performance under the Agreement. /// /// /// /// /// /// Sept. 12, 2023 Item #11 Page 18 of 36 8 CONTRACTOR CITY OF CARLSBAD, a municipal corporation of the State of California By: By: (sign here) [INSERT TITLE OF PERSON AUTHORIZED TO SIGN (City Manager or Mayor or Division Director as authorized by the City Manager)] Daniel Johnson, President (print name/title) ATTEST: By: (sign here) SHERRY FREISINGER Tod Hammeras, Chief Financial Officer City Clerk (print name/title) If required by City, proper notarial acknowledgment of execution by contractor must be attached. If a corporation, Agreement must be signed by one corporate officer from each of the following two groups. Group A Group B Chairman, Secretary, President, or Assistant Secretary, Vice-President CFO or Assistant Treasurer Otherwise, the corporation must attach a resolution certified by the secretary or assistant secretary under corporate seal empowering the officer(s) signing to bind the corporation. APPROVED AS TO FORM: CINDIE K. McMAHON, City Attorney BY: _____________________________ Deputy City Attorney Sept. 12, 2023 Item #11 Page 19 of 36 9 EXHIBIT “A” SCOPE OF SERVICES Contractor will provide the following services for the City of Carlsbad Public Agencies Post-Employment Benefits Trust: 1. Plan Installation Services: (A) Meeting with appropriate City personnel to discuss plan provisions, implementation timelines, actuarial valuation process, funding strategies, benefit communication strategies, data reporting, and submission requirements for contributions/reimbursements /distributions; (B) Providing the necessary analysis and advisory services to finalize these elements of the Plan; (C) Providing the documentation needed to establish the Plan to be reviewed and approved by City legal counsel. Resulting final Plan documentation must be approved by the City prior to the commencement of PARS Plan Administration Services outlined in Exhibit “A”, paragraph 2 below. 2. Plan Administration Services: (A) Monitoring the receipt of Plan contributions made by the City to the trustee of the PARS Public Agencies Post-Employment Benefits Trust (“Trustee”), based upon information received from the City and the Trustee; (B) Performing periodic accounting of Plan assets, reimbursements/distributions, and investment activity, based upon information received from the City and/or Trustee; (C) Coordinating the processing of distribution payments pursuant to authorized direction by the City, and the provisions of the Plan, and, to the extent possible, based upon City-provided Data; (D) Coordinating actions with the Trustee as directed by the Plan Administrator within the scope of this Agreement; (E) Preparing and submitting a monthly report of Plan activity to the City, unless directed by the City otherwise; (F) Preparing and submitting an annual report of Plan activity to the City; (G) Facilitating actuarial valuation updates and funding modifications for compliance with the applicable GASB pronouncements and/or statements, if prefunding OPEB obligations; (H) Coordinating periodic audits of the Trust; (I) Monitoring Plan and Trust compliance with federal and state laws. 3. Contractor is not licensed to provide and does not offer tax, accounting, legal, investment or actuarial advice. Sept. 12, 2023 Item #11 Page 20 of 36 10 EXHIBIT “B” COMPENSATION Contractor will be compensated for performance of Services, as described in Exhibit “A” based upon the following schedule: An annual asset fee shall be paid from Plan assets based on the following schedule: For Plan Assets from: Annual Rate: $1 to $10,000,000 0.25% $10,000,001 to $15,000,000 0.20% $15,000,001 to $50,000,000 0.15% $50,000,001 and above 0.10% Annual rates are prorated and paid monthly. The annual asset fee shall be calculated by the following formula [Annual rate divided by 12 (months of the year) multiplied by the Plan asset balance at the end of the month]. Trustee and Investment Management Fees are not included. Sept. 12, 2023 Item #11 Page 21 of 36 11 EXHIBIT “C" DATA REQUIREMENTS Contractor will provide the Services under this Agreement contingent upon receiving the following information. City is solely responsible for ensuring that all information and documentation provided to Contractor is true, correct, and authorized: 1.Executed Legal Documents: (A)Certified Resolution (B)Adoption Agreement to the Public Agencies Post-Employment Benefits Trust (C)Trustee Investment Forms 2. Contribution – completed Contribution Transmittal Form signed by the Plan Administrator (orauthorized Designee) which contains the following information: (A)City name (B)Contribution amount (C)Contribution date (D)Contribution method (Check, ACH, Wire) 3.Distribution – completed Payment Reimbursement/Distribution Form signed by the PlanAdministrator (or authorized Designee) which contains the following information: (A)City name (B)Payment reimbursement/distribution amount (C)Applicable statement date (D)Copy of applicable premium, claim, statement, warrant, and/or administrative expense evidencing payment (E)Signed certification of reimbursement/distribution from the Plan Administrator (orauthorized Designee) 4.Other information pertinent to the Services as reasonably requested by Contractor andActuarial Provider. Sept. 12, 2023 Item #11 Page 22 of 36 RESOLUTION NO. 2023-239 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA, APPROVING THE AMENDMENT OF CITY COUNCIL POLICY NO. 86 FOR PENSION FUNDING WHEREAS, the City Council of the City of Carlsbad, California has determined that financial policies are central to a strategic, long-term approach to financial management; and WHEREAS, the city's Pension Funding Policy, City Council Policy No. 86, was adopted by the City Council on June 18, 2019; and WHEREAS, the city wishes to amend the policy for purposes of including assets, contributed to the city's Section 115 Pension Trust, in the city's overall pension funded ratio or status calculation. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as follows: 1.That the above recitations are true and correct. 2.That the City Council of the City of Carlsbad, California accepts the Pension Funding Policy dated September 12, 2023 (Attachment A). PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of Carlsbad on the 12th day of September, 2023, by the following vote, to wit: AYES: NAYS: ABSTAIN: ABSENT: Blackburn, Bhat-Patel, Acosta, Burkholder, Luna. None. None. None. ftt � KEITH BLACKBURN, Mayor SHERRY FREISINGER, City Clerk (SEAL) ,,,,,,11111111111,,,,, :S-"� � CA b 1111,, � O·,.-r(l q_,. S' � ..•• ��� � �" / � •• •. \1\� "'-'m·· ��o[ 11 �\�l % \�� • j � � .... _..,� / §� �··· ... ,u,•u• •• • � %,, Ali_······!··"··�,'I-J ,,,,111 IFO��''".:$' 111111111111111111'� Exhibit 2 Sept. 12, 2023 Item #11 Page 23 of 36 City Council POLICY STATEMENT Subject: Pension Funding Policy Purpose Policy No. 86 Date Issued Sept. 12,2023 Resolution No. 2023-239 The purpose of this policy is to provide reasonable assurance that the costs of the city's defined benefit pension plans will be funded in an equitable and sustainable manner. It codifies the city's commitment to fund these benefits based on regular actuarial valuations, and to measure and report them i11 accordance with generally accepted accounting principles (GAAP). Adhering to a funding policy that embodies these funding and accounting principles is a prudent governance practice, and helps achieve intergenerational equity among those who financially support the plan. It also ensures that resources are available to fulfill the city's contractual promises to its employees, and minimizes the chance that funding of these benefits will interfere with the city's ability to provide essential services to the public. Background The city provides defined benefit retirement benefits through the California Public Employees' Retirement System (Cal PERS). Cal PERS is a multiple-employer public employee defined benefit pension plan. All full-time and certain part-time employees hired and all city safety employees, are eligible to participate in Cal PERS. CalPERS provides retirement and disability benefits, annual cost of living adjustments, and death benefits to plan members and their beneficiaries. Benefits are based on years of credited service, equal to one year of full time employment. CalPERS acts as a common investment and administrative agent for participating public entities within the State of California. Benefit provisions and all other requirements are established by State of California statute and city resolution. Pension Funding: A Guide for Elected Officials, issued by eleven national groups including the U.S. Conference of Mayors, the International City/County Management Association, and the Government Finance Officers Association, established the following five general policy objectives for a pension funding policy: 1.Actuarially Determined Contributions - a pension funding plan should be based upon an actuarially determined contribution (ADC) that incorporates both the cost of benefits in the current year and the amortization of the plan's unfunded actuarial accrued liability. 2.Funding Discipline - a commitment to make timely, actuarially determined contributions to the retirement system is needed to ensure that sufficient assets are available for all current and future retirees. 3.Intergenerational equity -annual contributions should be reasonably related to the expected and actual cost of each year of service, so the cost of employee benefits is paid by the generation of taxpayers who receives services from those employees. Attachment A Sept. 12, 2023 Item #11 Page 24 of 36 Pension Funding Policy Sept. 12, 2023 Page 2 4.Contributions as a stable percentage of payroll -contributions should be managed so that employer costs remain consistent as a percentage of payroll over time. 5.Accountability and transparency -clear reporting of pension funding should include an assessment of whether, how, and when the plan sponsor will ensure sufficient assets are available for all current and future retirees. The financial objective of a defined benefit pension plan is to fund the long-term cost of benefits provided to the plan participants. To assure that the plan is financially sustainable, the plan should accumulate adequate resources in a systematic and disciplined manner over the active service life of benefitting employees. This funding policy outlines the method the city will utilize to determine its actuarially determined contributions to fund the long-term cost of benefits to the plan participants and annuitants. Statement of policy The city will ensure the costs of the city's defined benefit pension plans will be funded in an equitable and sustainable manner. The city commits. to fund these benefits based on regular actuarial valuations and commits to maintaining no less than an 80% funded ratio, with a target funded ratio of 80% to 85%. The city will ensure that resources are available to both fulfill the city's contractual promises to its employees and minimize the chance that funding these benefits will interfere with the city's ability to provide essential services to the public. Procedure To achieve the purpose of this policy, the city will take the following actions: 1.The city will use the actuarially determined contribution (ADC) provided by CalPERS annually to serve as the basis for its pension contributions. The ADC will include the normal cost for current service (variable cost) and the amortization of any unfunded amount (fixed cost). The normal cost will be calculated using the entry age normal cost method using economic and non­ economic assumptions approved by the CalPERS Board of Administration. 2.The city will review the CalPERS annual actuarial valuations to validate the completeness and accuracy of the member census data and the reasonableness of the actuarial assumptions. 3.The city supports a policy of funding the full amount of the actuarially determined contribution each year and making the full contribution as determined by CalPERS. In the event the city is unable to fund the full amount of the actuarially determined contribution in each year with current resources (i.e., without borrowing or using reserves), the administrative services Finance Director or Deputy City Manager of Administrative Services will identify a reasonable period to return to full funding. 4.The city will commit to a combined (both the city's miscellaneous and safety plans) pension funded ratio of no less than a minimum of 80%, with a target funded ratio range of 80% to 85%. For the purposes of this policy, the term "funded ratio" refers to the level of the pension plans Sept. 12, 2023 Item #11 Page 25 of 36 Pension Funding Policy Sept. 12, 2023 Page 3 assets, at market value, in proportion to the pension plans accrued liability. This is an annual point-in-time measure, as of the valuation date. Assets contributed to the city's Section 115 Pension Trust shall be counted towards the calculation of this point-in-time measure. 5.Contributions to and withdrawals from the city's Section 115 Pension Trust shall require authorization by the City Council. 6.In the event the city is unable to meet the minimum combined pension funded ratio of 80% with current resources (i.e., without borrowing or using reserves), the Finance Director or Deputy City Manager of Administrative Services will identify a reasonable period to return to a minimum 80% funded ratio status. 7.The city will demonstrate accountability and transparency by communicating all information necessary for assessing the city's progress toward meeting its pension funding objectives. This will be achieved, in part, by ensuring full and accurate implementation of Governmental Accounting Standards Board No. 68, effective fiscal year 2014-15. 8.As part of the annual budget adoption process, the City Manager or Deputy City Manager of Administrative Services will report to the City Council on the following: a.most recent actuarially determined pension contribution b.most recent actuarially funded ratio and its compliance with either #4 or #5 above c.any other significant issues associated with funding the defined benefit pension in a stable and equitable manner as described above. 9.Staff will monitor changes to and expansions of pension funding best practices, as well as any additional guidance provided by the Government Finance Officers Association that relate to the funding of defined benefit pensions. Staff will return to City Council with modifications to this policy as needed. Sept. 12, 2023 Item #11 Page 26 of 36 RESOLUTION NO. 2023-240 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA, APPROVING THE ADOPTION OF CITY COUNCIL POLICY NO. 98 FOR THE CITY'S PENSION TRUST INVESTMENT POLICY WHEREAS, the City Council of the City of Carlsbad, California has determined that financial policies are central to a strategic, long-term approach to financial management; and WHEREAS, the city's Pension Trust, established for the sole purpose of benefiting the general public, has available funds to invest in accordance with principles of sound treasury management; and WHEREAS, the city invests funds in accordance with provisions of California Government Code Section 53600. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as follows: 1.That the above recitations are true and correct. 2.That the City Council of the City of Carlsbad, California accepts the Investment Policy for the Pension Trust dated September 12, 2023 (Attachment A). PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of Carlsbad on the 12th day of September, 2023, by the following vote, to wit: AYES: NAYS: ABSTAIN: ABSENT: Blackburn, Bhat-Patel, Acosta, Burkholder, Luna. None. None. None. �r KEITH BLACKBURN, Mayor SHERRY FREISINGER, City Clerk (SEAL) \,,,,1111111111111111, #''ox f CAFl,i''''❖/. �" ... ��.(\� :::;:, ... � ••. '11<S)� &-!m ..... � §o[�} ?:.A\oi \\.�w/1 % (!··• ... �..,\:rt-....... $ � �{ ........... ..\.,,. � r,,,1,, /Fo�·�·\,,�,� ill//1/1111\II\I\\\' Exhibit 3 Sept. 12, 2023 Item #11 Page 27 of 36 zj City Council POLICY STATEMENT Subject: Pension Trust Investment Policy • Purpose Policy No. Date Issued 98 Sept. 12, 2023 Resolution No. 2023-240 The city established a Section 115 Trust with Public Agency Retirement Services (PARS) to assist in stabilizing the potential impact of pension cost volatility on the city's operating budget. The city intends to use the trust to pre-fund pension costs and proactively address any unfunded liability. The city's goal is to have sufficient assets in the trust to maintain an 80% funded ratio or status and to fund the additional costs associated with a potential future reduction in CalPERS discount rate from 6.8% and 6.25%. Account Name: City of Carlsbad Pension Trust Account Number: XXXXXXXX Investment Authority: Full Investment Authority Current Assets: $0 Time Horizon: Long-Term Target Rate of Return: 6.25% Communication Schedule: Meetings will be conducted at least once per year Investment Manager: Vanguard Institutional Advisory Services Investment Objective: "Balanced" This investment objective is designed to provide a moderate amount of current income with moderate growth of capital. Investors should have sufficient tolerance for price and return volatility and substantial periodic declines in investment value. This objective is recommended for investors with a long-term time horizon. The strategic asset allocation ranges and tactical targets for this objective are listed below: Benchmark Asset Class Range Target Fixed Income 35-45%40% Equities 49-59%54% Real Estate 4-8%6% Commodities n/a 0% Cash n/a 0% Attachment A Sept. 12, 2023 Item #11 Page 28 of 36 Pension Trust Investment Policy Sept. 12, 2023 Page 2 Background The city provides a defined benefit pension to its employees through the California Public Employees' Retirement System {CalPERS). Cal PERS uses a formula to calculate retiree pensions based on an employee's age, earnings, and years of service. It funds these pensions by a combination of employer contributions, employee contributions and investment earnings. Each year, CalPERS determines the employer's contributions based on actual investment returns and actuarial assumptions including expected investment returns (known as discount rates), inflation rates, salaries, retirement ages and life expectancies. In recent years, CalPERS has twice lowered its discount rate, thereby increasing the likelihood of achieving the target rate of return, but consequently increasing the city's pension costs. First, at their Dec. 21, 2016, meeting, the Cal PERS Board of Administration voted to lower the Cal PERS discount rate assumption from 7.5% to 7.0% incrementally over three years. This was driven by poor investment returns during the Great Recession and actuarial assumption changes increasing the gap between pension assets and liabilities, resulting in the Cal PERS funded ratio falling below desired levels. Then in November 2021, CalPERS completed its quadrennial Asset Liability Management process, which reviewed investment strategies and actuarial assumptions. The fiscal year 2020-21 investment gain of 21.3% triggered CalPERS' Funding Risk Mitigation Policy, prompting the Cal PERS Board to approve another discount rate reduction from 7.0% to 6.8% at the November 15-17, 2021, meetings. When CalPERS achieves certain levels of return in excess of their target rate, their policy directs portions of the return to be used to relieve pressure on the target rate in future periods. Again, while lowering the discount rate increases the likelihood of Cal PERS achieving their target rate of return, the city's costs increase as a result. Over the last six years, the city has taken proactive steps to address pension contribution volatility and manage the unfunded liability. Since fiscal year 2016-17, the city has contributed $56.4 million in additional discretionary payments to CalPERS, which has significantly helped increase the plan's funded status. While contributing additional funds to Cal PERS saves the city future interest costs, there is also a higher risk of pension rate volatility during periods of poor investment performance by CalPERS. To mitigate this risk as well as the potential for CalPERS to further reduce its discount rate, the city has established a Section 115 Trust. Statement of policy SECTION 1: OVERVIEW This document defines the investment policy, guidelines and performance objectives applicable to the assets of the City of Carlsbad's Section 215 Trust. The goal of this Policy is to create an investment framework within which the assets can be actively yet prudently managed. Sept. 12, 2023 Item #11 Page 29 of 36 Pension Trust Investment Policy Sept. 12, 2023 Page 3 The purpose of this document is threefold: •First, it will set forth an investment structure for managing the Portfolio assets. This structure is expected to produce an appropriate level of overall diversification and total investment return over the investment time horizon. •Second, it will serve to encourage effective communications between the organization and parties involved with investment management decisions. •Third, it will provide a framework to measure ongoing investment performance. Within the constraints imposed by this Policy, Investment Managers are expected to comply with all applicable fiduciary and due diligence requirements under the "prudent investor" rules, which state: "Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived." All applicable laws, rules and regulations from various local, state, federal and international political entities that may impact the Portfolio are to be adhered to. SECTION 2: DIVERSIFICATION The Investment Manager is responsible for maintaining the balance between the various asset classes based on the investment objective's strategic asset allocation. As a general policy, the Investment Manager will maintain reasonable diversification at all times by asset class, credit quality, issuer, sector, industry, and country. The following parameters shall be adhered to in managing the portfolio: Fixed Income Assets •The fixed income investments are to maintain intermediate-term average weighted duration, between three and seven years. •At the time of purchase, no single fixed-income issuer shall exceed 2% of the total market value of the Portfolio, except for U.S. Treasury or Agency obligations. •The direct high-yield portion shall constitute no more than 10% of the total market value of the Portfolio. •Hedged fixed-income positions shall constitute no more than 10% of the total market value of the Portfolio. E.9.!!l!Y. & Growth Assets •The domestic equity investments are expected to be diversified at all times by size, industry, sector, and style (Large Cap, Mid Cap, and Small Cap). Sept. 12, 2023 Item #11 Page 30 of 36 Pension Trust Investment Policy Sept. 12,2023 Page 4 •At the time of purchase, no individual equity security shall exceed 3% of the total market value of the Portfolio. •The international equity investments (including emerging markets) shall constitute no more than 25% of the total market value of the Portfolio. •The real estate investments shall be captured through the use of diversified mutual funds or ETFs investing in REITs; and shall constitute no more than 15% of the total market value of the Portfolio. •The commodities investments shall be captured through the use of diversified mutual funds or ETFs; and shall constitute no more than 10% of the total market value of the Portfolio. •Hedged equity positions shall constitute no more than 10% of the total market value of the Portfolio. SECTION 3: PERMITTED ASSET CLASSES AND SECURITY TYPES Fixed Income & Cash Equivalent Investments: •Domestic Certificates of Deposit (rated A-1/P-1 or better) •Domestic Commercial Paper (rated A-1/P-1 or better) •Floating Rate Notes •Money Market Mutual Funds •U.S. Treasury Bonds, Bills and Notes •U.S. Agency (and Instrumentality) Discount Notes, Notes, and Bonds •Treasury Inflation-Protected Securities (TIPS) •Municipal Bonds and Notes •Corporate Bonds •Mortgage-Backed Bonds (MBS) •Asset-Backed Bonds (ABS) •High-Yield Bonds (rated B-/B3 or better) •Dollar denominated Foreign Bonds and Notes •Bond Mutual Funds Equity Investments: •Common & Preferred Stocks •American Depository Receipts (ADRs) •Domestic and International Equity Mutual Funds (Open and Closed) •Emerging Market Equity Funds or Exchange Traded Funds (ETFs) Alternative Investments: •Commodities Mutual Funds or Exchange Traded Notes (ETNs) •REIT Investment or Pooled Strategy or Fund of REITs •Registered Hedge Funds or Hedge Fund of Funds Sept. 12, 2023 Item #11 Page 31 of 36 Pension Trust Investment Policy Sept. 12, 2023 Page 5 SECTION 4: PROHIBITED ASSET CLASSES AND TRANSACTIONS The Investment Manager is prohibited from purchasing or holding any of the following types of investments: •Partnerships unless investing in Master Limited Partnerships invested in a mutual fund and limited in scope and allocation of Portfolio based on asset class limitations of table above •Letter stock and other unregistered securities; physical commodities or other commodity contracts; and short sales or margin transactions•Investments in the equity securities of any company with a record of less than three years of continuous operation, including the operation of any predecessor •Investments for the purpose of exercising control of management •Direct or indirect exposure to cryptocurrencies •Leveraged securities, other than registered Hedged Equity and Hedged Fixed Income positions SECTION 5: DUTIES AND RESPONSIBILITIES 1)CITY OF CARLSBAD CITY COUNCIL a)Establish, approve, and maintain investment objectives, guidelines, and policies. b)Appoint Investment Managers who can be reasonably expected to adhere to the investment guidelines and meet the investment objectives as established. c)Monitor the investment performance of the Portfolio and compare actual investment performance relative to an appropriate benchmark index given the stated investment guidelines and objectives set forth in this Policy. d)Conduct a formal review of the Portfolio's asset allocation, investment structure and performance annually or more frequently as the need arises. e)Periodically review the Portfolio performance against objectives. 2)INVESTMENT MANAGER The Investment Manager will be responsible for carrying out the activities related to the Portfolio in accordance with the Policy including: a)Manage the day-to-day investment of Portfolio assets in accordance with the Policy guidelines and objectives included herein. b)Exercise full investment discretion and prudence in the selection and diversification of investments. c)Promptly bring to the attention of the City Treasurer or designee any investment that is subsequently downgraded and fails to meet the quality guidelines, along with a recommendation of retention or disposal. Sept. 12, 2023 Item #11 Page 32 of 36 Pension Trust Investment Policy Sept. 12, 2023 Page 6 d)Provide on a quarterly basis the following investment reporting: (i)Year-to-date rate of return (ii)Annualized one, three, five, etc. rates of return SECTION 6: INVESTMENT POLICY STATEMENT REVIEW The City Council will review and adopt this Investment Policy Statement at least annually to determine whether stated investment objectives are still relevant and the continued feasibility of achieving the same. It is not expected that the Policy will change frequently. In particular, short-term changes in the financial markets should not require adjustments to the Policy. If at any time the Investment Manager finds the above guidelines too restrictive or possibly injurious to investment returns, they should communicate that information immediately to the City Council. Sept. 12, 2023 Item #11 Page 33 of 36 Policy No. Date Issued Resolution No. Exhibit 4 Subject: Pension Funding Policy Purpose The purpose of this policy is to provide reasonable assurance that the costs of the city’s defined benefit pension plans will be funded in an equitable and sustainable manner. It codifies the city’s commitment to fund these benefits based on regular actuarial valuations, and to measure and report them in accordance with generally accepted accounting principles (GAAP). Adhering to a funding policy that embodies these funding and accounting principles is a prudent governance practice, and helps achieve intergenerational equity among those who financially support the plan. It also ensures that resources are available to fulfill the city’s contractual promises to its employees, and minimizes the chance that funding of these benefits will interfere with the city’s ability to provide essential services to the public. Background The city provides defined benefit retirement benefits through the California Public Employees’ Retirement System (CalPERS). CalPERS is a multiple-employer public employee defined benefit pension plan. All full-time and certain part-time employees hired and all city safety employees, are eligible to participate in CalPERS. CalPERS provides retirement and disability benefits, annual cost of living adjustments, and death benefits to plan members and their beneficiaries. Benefits are based on years of credited service, equal to one year of full time employment. CalPERS acts as a common investment and administrative agent for participating public entities within the State of California. Benefit provisions and all other requirements are established by State of California statute and city resolution. Pension Funding: A Guide for Elected Officials, issued by eleven national groups including the U.S. Conference of Mayors, the International City/County Management Association, and the Government Finance Officers Association, established the following five general policy objectives for a pension funding policy: 1. Actuarially Determined Contributions – a pension funding plan should be based upon an actuarially determined contribution (ADC) that incorporates both the cost of benefits in the current year and the amortization of the plan’s unfunded actuarial accrued liability. 2. Funding Discipline - a commitment to make timely, actuarially determined contributions to the retirement system is needed to ensure that sufficient assets are available for all current and future retirees. 3. Intergenerational equity - annual contributions should be reasonably related to the expected and actual cost of each year of service, so the cost of employee benefits is paid by the generation of taxpayers who receives services from those employees. Sept. 12, 2023 Item #11 Page 34 of 36 City Council POLICY STATEMENT City Council Policy Statement Date Page 2 4. Contributions as a stable percentage of payroll - contributions should be managed so that employer costs remain consistent as a percentage of payroll over time. 5. Accountability and transparency - clear reporting of pension funding should include an assessment of whether, how, and when the plan sponsor will ensure sufficient assets are available for all current and future retirees. The financial objective of a defined benefit pension plan is to fund the long-term cost of benefits provided to the plan participants. To assure that the plan is financially sustainable, the plan should accumulate adequate resources in a systematic and disciplined manner over the active service life of benefitting employees. This funding policy outlines the method the city will utilize to determine its actuarially determined contributions to fund the long-term cost of benefits to the plan participants and annuitants. Statement of policy The city will ensure the costs of the city’s defined benefit pension plans will be funded in an equitable and sustainable manner. The city commits to fund these benefits based on regular actuarial valuations and commits to maintaining no less than an 80% funded ratio, with a target funded ratio of 80% to 85%. The city will ensure that resources are available to both fulfill the city’s contractual promises to its employees and minimize the chance that funding these benefits will interfere with the city’s ability to provide essential services to the public. Procedure To achieve the purpose of this policy, the city will take the following actions: 1. The city will use the actuarially determined contribution (ADC) provided by CalPERS annually to serve as the basis for its pension contributions. The ADC will include the normal cost for current service (variable cost) and the amortization of any unfunded amount (fixed cost). The normal cost will be calculated using the entry age normal cost method using economic and non- economic assumptions approved by the CalPERS Board of Administration. 2. The city will review the CalPERS annual actuarial valuations to validate the completeness and accuracy of the member census data and the reasonableness of the actuarial assumptions. 3. The city supports a policy of funding the full amount of the actuarially determined contribution each year and making the full contribution as determined by CalPERS. In the event the city is unable to fund the full amount of the actuarially determined contribution in each year with current resources (i.e., without borrowing or using reserves), the administrative services Finance Director or Deputy City Manager of Administrative Services will identify a reasonable period to return to full funding. 4. The city will commit to a combined (both the city’s miscellaneous and safety plans) pension funded ratio of no less than a minimum of 80%, with a target funded ratio range of 80% to 85%. For the purposes of this policy, the term “funded ratio” refers to the level of the pension plans Sept. 12, 2023 Item #11 Page 35 of 36 City Council Policy Statement Date Page 3 assets, at market value, in proportion to the pension plans accrued liability. This is an annual point-in-time measure, as of the valuation date. Assets contributed to the city’s Section 115 Pension Trust shall be counted towards the calculation of this point-in-time measure. 5. Contributions to and withdrawals from the city’s Section 115 Pension Trust shall require authorization by the City Council. 6. In the event the city is unable to meet the minimum combined pension funded ratio of 80% with current resources (i.e., without borrowing or using reserves), the Finance Director or Deputy City Manager of Administrative Services will identify a reasonable period to return to a minimum 80% funded ratio status. 7. The city will demonstrate accountability and transparency by communicating all information necessary for assessing the city’s progress toward meeting its pension funding objectives. This will be achieved, in part, by ensuring full and accurate implementation of Governmental Accounting Standards Board No. 68, effective fiscal year 2014-15. 8. As part of the annual budget adoption process, the City Manager or Deputy City Manager of Administrative Services will report to the City Council on the following: a. most recent actuarially determined pension contribution b. most recent actuarially funded ratio and its compliance with either #4 or #5 above c. any other significant issues associated with funding the defined benefit pension in a stable and equitable manner as described above. 9. Staff will monitor changes to and expansions of pension funding best practices, as well as any additional guidance provided by the Government Finance Officers Association that relate to the funding of defined benefit pensions. Staff will return to City Council with modifications to this policy as needed. Sept. 12, 2023 Item #11 Page 36 of 36 Tammy Cloud-McMinn From: Sent: To: Subject: Mary Real <anewday4me2020@gmail.com > Monday, September 11, 2023 4:47 PM All Rece ive -Agenda Item # J1 For the Information of the: CITY COUNCIL Dat~ll;;)ll,CA v cc >" CM ..-ACM ...--DCM {3) ./ City Clerk; Council Internet Email; Scott Chadwick; Geoff Patnoe; Mary Real Item 11 General Comments, 9-12-2023 Carlsbad City Council Meeting To all Concerned Citizens who favor accountability and discussions about how the City of Carlsbad decides to spend your money and provide or cut services that enhance your enjoyment of living in this area that you are paying for?. Are YOU being short-changed so that the City of Carlsbad can pay for PERS retirement contributions by cutting services for library hours and failing to consider building a second senior center south of town? Did the City Council consider any other options to raise funds and keep around 40% of revenue in the general fund? No, they cut the Library hours for Sunday operation without consulting the general public. It must be nice to be an authoritarian leader who makes the decisions without public input? Mayor Blackburn and City Council members please stop punishing the people by cutting services before exploring all options? We want the best library service, and Carlsbad can afford it if you consider all ways to trim or save money. Has Staff (some of whom are very, very smart and unbiased) studied other ways of saving money that does not include cutting services to seniors and library users? If not, why not? While the Current City Council Members may be smarter than the rest of us, do you really know everyt hing about this issue or are you taking the easy way out by allowing services to be cut without exploring other options? The City of Oceanside, which does not have the resources that Carlsbad has, keeps the library open on Sunday as does the County. Are you satisfied with mediocre service to seniors and library patrons? Don't you think that there should be more input from the public and a Staff study before you "save" money by cutting services to seniors and library patrons? Or are you going to say nobody is complaining which is not the only way to "manage", is it? What options are you looking at to open and provide better services up to the standards of Carlsbad's reputation as a leader, not just a mediocre OK kind of town? Please consider a staff report and reduce the general fund by 2 percent (instead of around 40% make it 38% funding) and maintain the higher standard of services without the general public having to picket your City Council meetings? Isn't that real leadership, instead of the vanity exercise of lip service to "serving the public"? Thank you for your time, Mary Lucid anewday4Me2020@gmail.com CAUTION: Do not open attachments or click on links unless you recognize the sender and know the content i safe. 1 Tammy Cloud-McMinn From: Sent: To: Subject: Mary Real <anewday4me2020@gmail.com> Monday, September 11',· 2023 5:06 PM City Clerk; Council Internet Email; Scott Chadwick; Geoff Patnoe; Mary Real Item 11 Comments Carlsbad 9-12-2023 City Council Meeting Dear Concerned Community Members: Do you favor accountability and discussions about how the City of Carlsbad decides to spend your money and provide or cut services that enhance your enjoyment of living in this area? Is it time for more input or more Staff reports on options for saving and spending money? Why does the City Council and the Mayor want to make decisions without more than 3 minutes of public comment about how to "save" money AND provide more services that are needed? Is it easier to ask Staff to save money and allow them to cut library hours on Sunday? Should a percentage of the budget for each department require spending on improvements even if that cuts down the amount of money that automatically reverts to the General Fund budget if it is not used by department heads that want to keep their jobs and the favor of the City Manager and his bosses, the Mayor and the City Council? Park & Rec. did not even give out Free 50 cent coffee per cup even though kind and compassionate people donated MONEY for the benefit of seniors during the Holiday season to cheer up the seniors! Where is the money going? I am in favor of the 115 Trust and spending more money to maintain a level of service here in the area. Did the Council and Mayor Blackburn consider other cuts or contributions from Staff before cutting services to library patrons and seniors? Are you planning for the future ---building a senior center south of town? If not, why not? Should there be a discussion on the amount of money needed in the General Fund? Thanks, Mary Lucid anewday4Me2020@gmail.com en attachments or click on links unless you recognize the sender and know the content i 1 Establishment of a Section 115 Pension Trust Zach Korach, Finance Director 1 { City of Carlsbad TODAY’S PRESENTATION •CalPERS background and history •City pension plan status •Challenges •Section 115 Trust •Recommended actions 2 { City of Carlsbad CALPERS •City provides defined benefit pension to its employees through CalPERS •Employee’s age, earnings and years of service •Pension benefits are funded by employer and employee contributions and CalPERS’ investment earnings •CalPERS dictates annual required contributions based on actual investment returns and actuarial assumptions 3 ITEM 11: Section 115 Trust When target rate of return is not achieved, city contributions increase and strain city resources -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 An n u a l I n v e s t m e n t R e t u r n s Annual Investment Return Discount Rate CALPERS RETURNS HISTORY 4 I I I ■ -I -- CITY OF CARLSBAD •FY 11-12: Established 2nd Benefit Tier at 2% @ 60 •City Council Policy No. 86 •FY 16-17: $9 million •FY 17-18: $11 million •FY 18-19: $20 million •FY 20-21: $10 million •FY 21-22: $6.4 million 5 ITEM 11: Section 115 Trust { City of Carlsbad CITY PENSION PLAN STATUS –JUNE 30, 2022 6 June 30, 2021 June 30, 2022 Present Value of Projected Benefits 530,619,478$ 559,893,293$ Entry Age Normal Accrued Liability 456,814,169$ 481,393,865$ Market Value of Assets 404,515,911$ 369,436,837$ Unfunded Accrued Liability 52,298,258$ 111,957,028$ Funded Ratio 88.6%76.7% June 30, 2021 June 30, 2022 Present Value of Projected Benefits 458,282,303$ 485,436,500$ Entry Age Normal Accrued Liability 372,017,358$ 393,017,010$ Market Value of Assets 308,342,667$ 282,537,994$ Unfunded Accrued Liability 63,674,691$ 110,479,016$ Funded Ratio 82.9%71.9% June 30, 2021 June 30, 2022 Present Value of Projected Benefits 988,901,781$ 1,045,329,793$ Entry Age Normal Accrued Liability 828,831,527$ 874,410,875$ Market Value of Assets 712,858,578$ 651,974,831$ Unfunded Accrued Liability 115,972,949$ 222,436,044$ Funded Ratio 86.0%74.6% CalPERS Miscellaneous Plan Status CalPERS Safety Plan Status CalPERS Miscellaneous & Safety Plan Status $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,000 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 Estimated Pension Payment Schedule Normal Cost Unfunded Liability■ ■ CHALLENGES STATE AND CALPERS CONTROL UNDERFUNDED PENSION SYSTEM VOLATILITY RISK 7 { City of Carlsbad SOLUTION: SECTION 115 TRUST GIVES CITY LOCAL CONTROL OF PENSION ASSETS PREFUNDS FUTURE PENSION COSTS STABILIZES VOLATILITY IN PENSION COSTS DIVERSIFIES PENSION ASSETS FROM CALPERS 8 9 Section 115 Pension Trust Manages investments in trust -Complies with city investment policy -Reports on performance -Legal compliance Administers trust -Accounting -Contribution/withdrawal -Legal compliance -Makes contributions to trust -Monitors performance -Controls timing of contributions/withdrawals -Establishes policy ( City of Carlsbad -aS PARS FUNDING STRATEGY 10 1. Maintain 80% funded status •Amend City Council Policy No. 86 •Contribute $40 million over 5-year period 2. Monitor and maintain asset balance to plan for future unfunded pension costs •Potential CalPERS discount rate reduction RECOMMENDED FUNDING SCHEDULE 11 $10 M initial investment $7.5 M in contributions for 4 fiscal years 6.25% target rate of return +x $118 M In 20 years = GOAL: Achieve investment balance to maintain 80% funded status and fund a reduction in CalPERS discount rate from 6.8%to 6.25%over a 20-year time horizon RECOMMENDED ACTION 12 •Adopt resolution establishing a Public Agencies Post-Employment Benefits Section 115 Trust, appointing PARS as Trust Administrator •Adopt a resolution amending City Council Policy No. 86 –Pension Funding •Adopt a resolution adopting City Council Policy No. 98 –Pension Trust Investment Policy QUESTIONS? 13