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Consider Pension Debt Refinancing and Policy February 2, 2021 Page 2 If the City Council decides to move forward with pension debt refinancing, the proposed Unfunded Employee Pension Liability Cost Reduction Policy (Exhibit 3) is necessary to establish parameters for refinancing and a plan for funding future pension debt, and obtain the best credit rating possible. DISCUSSION The City provides a defined benefit pension plan to its full-time employees and part-time employees who have worked more than 1,000 hours in a single year. A defined benefit is a promise to pay a future benefit based on a formula incorporating salary and the number of service years. The City contracts with the California Public Employee Retirement System (CaIPERS) to administer the plan. CaIPERS collects contributions from the City and its employees, invests the money, and makes pension payments to retirees. CaIPERS employs actuaries to determine the contributions necessary to meet future obligations. When the market value of plan assets are less than the liability for benefits accrued to date, there is an unfunded pension liability. The unfunded liability is a legal debt of the City, and the City carries the risk of plan performance. The ratio of plan assets to the liability is the "Funded Ratio". Ideally, the plan should have a funded ratio of 100% (assets = liabilities). Annual contributions include a "Normal Cost" component for the current accrual of benefits (expressed as a percentage of pensionable wages), and a payment to reduce the unfunded liability (expressed as a dollar amount). If the City remits the annual unfunded liability payment to CaIPERS by July 31, the City receives an early payment discount of approximately 3.3%. CaIPERS Annual Pension Payments Normal Costs + Benefits earned this year Unfunded benefits earned in prior by employees years by employees+ retirees o off Fixed Payngfl $ Amount $14 Million $48 Million The City has two (2) different employee pension plans: one (1) for sworn public safety officers, and one (1) for all other employees. Within each plan, there are two (2) levels of benefits: one (1) for employees who became CaIPERS members after the California Public Employee Pension Reform Act (PEPRA) effective January 1, 2013, and one (1) for employees hired prior to PEPRA (referred to as "Classic" members).