Item 40 - Refinancing City’s Pension Obligations with California Public Employees Retirement System

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10 4826-7904-2280v7/200434-0005 Annual CalPERS Contributions The City is required to contribute the actuarially determined amounts necessary to fund benefits for its members. Employer contribution rates for all public employers are determined on an annual basis by the CalPERS actuary and are effective on the July 1 following notice of a change in the rate. Total plan contributions are determined through the CalPERS annual actuarial valuation process. The required employer contribution is comprised of a Normal Cost (herein defined) component and a component equal to an amortized amount of the Pension Liability or Annual Unfunded Accrued Liability (“UAL”) Payment. The Normal Cost is the annual cost of service earned by active employees for the upcoming Fiscal Year, which is expressed as a percentage of payroll. The annual UAL payment is the amortized dollar amount needed to fund past service credit earned (or accrued) for members who are currently receiving benefits, active members, and for members entitled to deferred benefits, as of the valuation date. The UAL is a fixed dollar annual payment, billed monthly. The City’s pension cost contributions to CalPERS fluctuate each year. Many assumptions are used to estimate the ultimate liability and the contributions that will be required to meet those obligations. See “—Potential Impacts on Future Contributions.” Normal Costs “Normal Cost Contributions” (being the amount of Normal Cost contributed annually) are based on a percentage of reportable payroll, which includes base salary plus special pays allowed by CalPERS. The City pays the entire Normal Cost Contribution, including the employee share, and in turn, employees reimburse the City for the employee share of the Normal Cost Contribution. The result is the City’s Normal Cost Contribution is based on the reportable payroll plus the employee share of the Normal Cost Contribution. This arrangement is referred to as Employer Paid Member Contribution (the “EPMC”), which increases the employee’s pensionable income. The Normal Cost Contribution for Fiscal Year 2022-23 is summarized in Table 2 below, which are based on projected payroll estimated by CalPERS. TABLE 2 City of Santa Ana Normal Cost Contribution as a Percentage of Payroll Fiscal Year 2022-2023 Miscellaneous Plan Safety Plan Total Normal Cost Rate (1) 18.93% 32.14% Employee Contribution Rate 7.70% 10.07% Employer Contribution Rate 11.23% 22.07% Projected Payroll $ 71,055,915 $ 52,074,227 Employer Required Contribution $ 7,979,580 $ 11,492,782 (1) The Employer Normal Cost is a blended rate for all benefit groups in the plan. For detail regarding the normal cost by benefit group, see “Normal Cost by Benefit Group” in the “Liabilities and Contributions” section of each respective actuarial report. Source: CalPERS Annual Valuation Reports as of June 30, 2020. On December 21, 2016, the CalPERS Board of Administration voted to lower its discount rate from the current rate of 7.50% to 7.00%. The reduction of the discount rate resulted in an increase of approximately 1% to 3% to the normal cost rate as a percentage of payroll for most retirement plans over the past few years. The normal cost rates in the future are projected to decline over time as Classic employees retire and new employees are hired that are subject to PEPRA or other similar lower cost benefit tiers. Table 3 below sets forth the projected employer contribution rates for the current and next five (5) fiscal years. This projection assumes that all actuarial assumptions will be realized and that no further changes to assumptions, contributions, benefits, or funding will occur during the projection period.