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UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION POLICY Page 1 City of Santa Ana Council Policy Mayor’s Authorization Subject UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION POLICY Council Approval Date: February 2, 2021 The City’s contribution to fund employee pensions has increased at a faster rate than most other costs. As of June 30, 2019, pension plan assets account for only 67% of the accrued liability; and the plan administrator projects the City’s contribution will continue to increase in the future. This policy addresses strategies to reduce the City’s cost of its employee pension liability. Background The City provides a defined benefit pension plan to its full‐time employees. A defined benefit is a promise to pay future benefits, wherein the City makes annual deposits into the plan and carries the risk of plan assets investment performance. If the plan’s investment return is less than assumed, the City cost to provide the benefit increases. The City has contracted with the California Public Employee Retirement System (CalPERS) to manage the employee pension plan. CalPERS collects contributions from the City and its employees, invests the money, and pays monthly benefits to retirees. Ideally, the plan would be 100% funded, which means plan assets are equal to plan liabilities. A plan with a low funded ratio is at risk for paying future promised benefits. In response to the rising cost of public employee pensions after CalPERS investment losses during the Great Recession of 2009, and to ensure the future solvency of plans under contract with CalPERS, California enacted the Public Employee Pension Reform Act (PEPRA). All public employees hired after PEPRA became effective in January 2013 receive a lesser benefit than those “Classic” employees hired before PEPRA. Santa Ana Employees earn benefits in one of the following four categories. 1. Classic Safety (sworn public safety employees); 2. PEPRA Safety; 3. Classic Miscellaneous (all other non‐sworn City employees); or 4. PEPRA Miscellaneous. The market value of investments in the Santa Ana plan is less than the liability for benefits already earned, and the City has an Unfunded Pension Liability. Each year, the amount of the liability changes based upon actual plan results and CalPERS changes in assumptions. The liability grows when actual plan results do not meet CalPERS assumptions, such as retirees living longer than expected; or when CalPERS changes its assumptions, such as reducing the assumed rate of investment return. Conversely, the liability decreases when actual plan results exceed CalPERS assumptions, such as investments earning more than the assumed rate of return. CalPERS also charges “interest” on the unpaid liability each year, based on the plan’s discount rate, equivalent to the assumed rate of return. CalPERS requires the City to make annual contributions to reduce the unfunded liability. This policy addresses strategies to reduce the cost of the unfunded pension liability. There are two basic strategies to reduce the City’s cost for the unfunded pension liability: 1. Contribute more than required by CalPERS (an Additional Discretionary Payment) to reduce the accrual of interest; or