Pension Liability Policy #21 - Laserfiche WebLink

Home Browse Search

UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION POLICY Page 3 The City funds most of its capital projects with restricted money. Therefore, the restricted fund’s allocation of the unfunded pension liability, and the cash available for the project, limits the use of this strategy. In addition, frequent debt issues can negatively affect the City’s credit rating. 4. It shall be the City’s policy to consider paying down the unfunded pension liability when there is at least $20 million of cash available for capital projects, and it is feasible and economically prudent to issue tax‐exempt debt for the projects. Irrevocable Section 115 Trust As an alternative to making an ADP to CalPERS, the City can choose to set aside additional money in a Section 115 Trust. Money placed into the trust is irrevocable, meaning it cannot be withdrawn and used for another expenditure of the City. The City has already established a Section 115 Trust with an initial small deposit. There are two primary benefits associated with a Section 115 Trust. The City has more control over the investment, and the City can use the Trust for rate stabilization. If there are future spikes in pension costs, the City could use money from the Section 115 Trust to help pay some of the required CalPERS contributions. However, in order to utilize the Trust, additional money must be set aside in advance. 5. It shall be the City’s policy to consider adding money to the Section 115 Trust account during each annual budget process. Pension Obligation Bonds The City may consider issuing Pension Obligation Bonds (POBs) to refinance its unfunded pension liability. In a low interest rate environment, issuing POBs can significantly reduce the City’s cost. However, there is risk associated with the refinancing. If actual pension plan results consistently exceed CalPERS assumptions over a long‐term period, the City may pay more overall. The following illustrates this concept. Scenario: The City refinances its pension obligation at 3.75%; and CalPERS assumes a 7% investment return, yet consistently earns a 9% return over a 30‐year period. Baseline is the CalPERS projection from the June 30, 2019 Actuarial Valuation Report. Dollar amounts are in millions. For the first 11 years in this scenario, the City would save money; but over the entire 30‐year period, the City would pay $444 million more. $‐ $10 $20 $30 $40 $50 $60 $70 $80 $90 Year 1 Year 3 Year 5 Year 7 Year 9 Year 11 Year 13 Year 15 Year 17 Year 19 Year 21 Year 23 Year 25 Year 27 Year 29 Baseline Scenario