Item Coversheet
CITY OF CARMEL-BY-THE-SEA
CITY COUNCIL
Staff Report 

March  2, 2021
ORDERS OF BUSINESS

TO:

Honorable Mayor and City Council Members 
SUBMITTED BY:

Sharon Friedrichsen - Director, Contracts and Budgets
APPROVED BY: 

Chip Rerig, City Administrator
SUBJECT:

Receive an update on the City's unfunded pension liability, discuss pension mitigation options, including the development of a pension funding policy, and provide direction to staff

 
RECOMMENDATION:

Receive an update on the City's unfunded pension liability, discuss pension mitigation options, including the development of a pension funding policy, and provide direction to staff.

BACKGROUND/SUMMARY:

The California Public Employees’ Retirement System (“CalPERS”) is the largest pension fund in the country and manages investments for nearly 2 million members on behalf of the State, schools and various public agencies. The City is a public agency member of CalPERS and has two primary CalPERS plans, one for its miscellaneous members and one for safety. Together the City’s plans represent approximately 260 covered members, which includes approximately 74 active members, based upon the most recent actuarial data.

As a member agency, the City makes two types of payment to CalPERS: (1) the annual cost for current employees (“normal cost”) and (2) the unfunded accrued liability (“UAL”).  The UAL is the actuarial liability less the actuarial value of the assets. In other words, it is the difference between the dollar amount CalPERS needs in order to pay for retirement benefits when people retire as compared to the amount that CalPERS currently has on hand to pay for the estimated costs of the retirement benefits.  Ideally, this ratio is 100%; however, the current funded status is 67.4% for safety and 71.5% for miscellaneous members. As a result, the City’s UAL is currently projected at $24.7 million as of 6/30/2021. The Fiscal Year 2020-2021 UAL payment of approximately $1.6 million will increase to $1.8 million in Fiscal Year 2021-2022.  Similar to other public agencies, the City’s pension costs have been on the rise and are projected to continue to increase, especially given the recent return on investments due to the economic impact of COVID-19.


 Over the last decade, the City has used a combination of strategies to help mitigate the costs associated with pension liability.  These strategies have included the issuance of pension obligation bonds; negotiating employee contributions toward the employer’s cost of pensions; and prepaying the annual UAL payment, rather than making quarterly payments, to reduce the amount of interest paid to CalPERS.  More recently, City Council has been exploring additional strategies to address rising pension costs including:  

  • A fresh start amortization and new amortization schedule with CalPERS; 

  • Refinancing other City debt; 

  • Using cash reserves to establish and fund a Pension Rate Stabilization Program (e.g. Section 115 Trust) dedicated to pension and/or other post-employment benefit costs; 

  • Using cash reserves to make a lump sum payment to CalPERS to pay down the UAL; 

  • Issuing new pension obligation bonds and/or restructuring the remaining debt service payments (the pension obligation bond matures in June 2023);

  • Establishing a new internal reserve fund dedicated to pension liability, similar to the Other Post Employment Benefit (OPEB) reserve created by the City in 2003; and

  • Developing a pension financial policy that would specify a dollar amount or percentage of one-time monies, annual surplus revenue and/or debt savings for pension mitigation.

The environment has changed dramatically since Council’s last discussion on this topic, including the passage of the local sales tax initiative (Measure C), the emergence of the coronavirus pandemic and its associated economic impacts, and the refinancing of the Sunset Center Lease Revenue Bond.  Therefore, the purpose of this agenda item is to receive a presentation from NHA Advisors regarding an update on the City’s UAL based upon updated actuarial reports; discuss pension cost management strategies, including the development of a pension financial policy, and provide direction to staff.  In particular, the discussion regarding the creation of a framework for a pension funding policy is timely given that there are four months remaining within the current fiscal year and the development of the Fiscal Year 2021-2022 budget is underway.  For example, the establishment of a pension policy could provide direction to staff regarding setting aside any fiscal year-end surplus toward pension mitigation and/or could direct staff to include funding for pension mitigation, beyond the required UAL payment, as part of the Fiscal Year 2021-2022 budget.

FISCAL IMPACT:

The development of pension mitigation strategies are intended to help mitigate the City's pension liability as the City's UAL is currently projected at $24.7 million.

PRIOR CITY COUNCIL ACTION:

Council received presentations on the City’s pension liability on April 8, 2018 and December 4, 2018. On January 8, 2019, Council adopted a resolution endorsing participation in a pension rate stabilization program and authorized staff to issue a Request for Proposals for a Section 115 Trust. On January 7, 2020, Council received a presentation on various pension cost migration strategies, including the use of a Section 115 trust and making additional payments to CalPERS to reduce the amount of the unfunded accrued liability.

ATTACHMENTS: