Pension Liability Policy #21 - Laserfiche WebLink

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UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION POLICY Page 2 2. Refinance the liability, which is a legal debt of the City, at a lower interest rate. Within these two basic strategies, there are a variety of options and associated risks. Application of Additional Discretionary Payments When the City identifies funding for an Additional Discretionary Payment (ADP), there is a strategy to apply the ADP to the unfunded pension liability. The unfunded liability is comprised of layers or “bases” related to each year of actual plan results. Each base is either a loss or gain. CalPERS amortizes most of the bases over twenty years to calculate the annual required contribution to reduce the liability. Loss bases at the beginning of an amortization cycle are desirable targets for an ADP to maximize overall savings. Conversely, loss bases at the end of an amortization cycle are desirable targets to maximize short‐term savings. 1. It shall be the City’s policy to use a targeting strategy, and apply any Additional Discretionary Payments to loss bases at the beginning of an amortization cycle to maximize overall savings. Use Accumulated Fund Balance or One‐Time Money The City has a General Fund to account for unrestricted revenue; and many other “restricted” funds to account for revenue with spending restrictions imposed by law, other governmental agencies, or legally enforceable agreements. The City allocates its unfunded pension liability to each fund based upon the prior year normal cost charged to the fund through payroll. When the City receives more revenue than expected, or spends less than budgeted, a fund balance accumulates. Much like spending from a savings account, accumulated fund balance is a one‐time resource the City can use to pay down a fund’s allocation of the unfunded pension liability. The City has a separate “reserve” policy to establish the minimum fund balance to keep on hand for emergencies and operational cash flow. 2. It shall be the City’s policy to consider an additional discretionary payment to reduce the unfunded pension liability during each annual budget process, when staff identifies accumulated fund balance in excess of reserve policy requirements. Negotiate with Employees Employees are already required to contribute a portion of their pay to the employee pension plan. Even though the City collects the employee contribution from the employee, the City reports the employee contribution to CalPERS as an employer‐paid contribution. This increases the employee income used to calculate the City’s contribution and the retiree benefit. The City may negotiate with its labor groups to require larger contribution from employees, or to stop reporting the employee contribution as employer‐paid. Both options would reduce the City’s normal cost contribution, and may be difficult to negotiate without offering something in exchange. 3. It shall be the City’s policy to propose reductions of the City’s normal cost contribution during labor negotiations, based upon the plan funding ratio and the City’s current and forecasted financial position. Use Cash Planned for Capital Projects and Issue Tax‐Exempt Debt When the City has cash on hand to fund capital projects, the City may consider using the cash to reduce the unfunded pension liability, and instead issue tax‐exempt debt to pay for the project. Tax‐exempt debt carries a low interest rate, and this strategy effectively swaps a higher‐rate debt for a lower‐rate debt.