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Council Memorandum
July 22, 2021
To:
From:
Via:
Re:
Honorable Mayor Hall and Members of the City Council
Laura Rocha, Deputy City Manager, Administrative Services
Ryan Green, Finance Director
Geoff Patnoe, Assistant City Manager @
Cal PERS Update (Districts -All)
{city of
Carlsbad
Memo ID# 2021144
This memorandum provides an update on the results of Cal PERS fiscal year (FY) 2020-21 rate of
return on investments and the tangential effect it triggers under the Cal PERS' Funding Risk
Mitigation Policy.
Background
CalPERS recently reported a preliminary 21.3% net return on investments for the 12-month
period that ended June 30, 2021, with plan assets stated at more than $469 billion. The
FY 2020-21 returns bring Cal PERS' total fund performance to 10.3% for the five-year period,
8.5% for the 10-year period, and 6.9% for the 20-year period. Over the past 30 years, the Public
Employees' Retirement Fund returned an annualized return of 8.4%.1 The return is significantly
better than the 6.7% return experienced in FY 2018-19 and 4.3% in FY 2019-20.
Discussion
Annual returns are one of the many factors that influence the city's funded ratio2 and future
pension costs. When returns are above the discount rate, or assumed rate of return, the city
will see an increase in its plan position, or pension assets, and its funded ratio. There is a lag
between returns and their impact to the city -the 21.3% return and associated benefits will not
be seen until FY 2022-23 when the Cal PERS Actuary Report is updated with FY 2020-21
information. The impact will be amortized over a 20-year period, diluting and elongating its
effect, and the FY 2020-21 returns will be reduced due to CalPERS' Funding Risk Mitigation
Policy3 (Policy).
1 https ://www.caIpers.ca .gov/ page/ newsroom/ cal pers-n ews/2021/ ca I pers-strong-preli mi na ry-fisca I-year-
investment-retu rn-trigger-discou nt-rate-red uction
2 The term "funded ratio" refers to the level of the pension plan assets relative to the pension plan liabilities
3 https://www.calpers.ca.gov/docs/funding-risk-mitigation-policy.pdf
Administrative Services Branch
Finance Department
1635 Faraday Avenue I Carlsbad, CA 92008 I 760-602-2430 t I 760-602-8553 f
Council Memo -Cal PERS Update (Districts -All)
July 22, 2021
Page 2 .
The Policy, approved by the Cal PERS Board of Administration in 2015, requires a reduction of
the fund's discount rate, or assumed rate of return, in a year when excess returns are realized.
This is the first time it has been triggered. The discount rate after this change will be 6.8%, from
its current level of 7%. Lowering the discount rate reduces future risk to the city because it
increases the likelihood that Cal PERS can reach its target over time. Consequently, lowering the
discount rate increases the city's unfunded pension liability, which reduces the city's funded
ratio now that existing assets are assumed to grow at a slower rate every yeaL The negative
effect of decreasing the discount rate will be offset by using approximately half of the benefit
from this year's high rate of return.
CalPERS Recent Return Rates and Discount Rate Considerations
Cal PERS is in the process of conducting its Asset Liability Management process where Cal PERS
considers adjusting the discount rate every four years. Cal PERS will discuss proposed discount
rates this September and approve the final discount rates in November 2021. This is the same
process that resulted in a change of the discount rate from 7.5% to 7.0%, phased-in over a
three-year period, in 2017.
Impact to Carlsbad
Estimates of the impacts to the city from the investment returns and discount rate change are
only a few of the many factors that impact Carlsbad's pension liability and annual cost. Within
the next two weeks CalPERS is expected to publish updated Actuary Reports, also called Annual
Valuation Reports. Provided in these reports will be the determination of the minimum
required employer contributions for FY 2022-23 and projected future employer contributions
for FY 2023-24 through FY 2027-28, all based on actual information as of June 30, 2020. This
information will be used to update the 10-year forecast as well as the projected and future
budgets accordingly.
Next Steps
Staff plans to bring forward an update on the city's pension funding status with the city's
request for use of surplus funds for FY 2020-21, if any, in fall of 2021. Staff also expects to
present the FY 2020-21 financial results in Dec. 2021 after its external audit is completed. The
results will include an update of the city's pension funding status.
cc: Scott Chadwick, City Manager
Celia Brewer, City Attorney
Cindie McMahon, Assistant City Attorney