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Home My WebLink AboutItem 11 - Approval to Pre-Pay the City’s Safety & Miscellaneous Unfunded Actuarial Obligations FY 2023-24 Finance and Management Services https://www.santa-ana.org/finance Item # {{item. Number}} City of Santa Ana 20 Civic Center Plaza, Santa Ana, CA 92701 Staff Report June 6, 2023 TOPIC: Approval to Pre-Pay the City’s Safety & Miscellaneous Unfunded Actuarial Obligations FY 2023-24 AGENDA TITLE Approve Prepayment for the City’s Contribution to Both the CalPERS Miscellaneous and Safety Employee Pension Unfunded Liability for Fiscal Year (FY) 2023-24 RECOMMENDED ACTION 1. Approve a $9,568,651 pre-payment for the City’s annual Unfunded Actuarial Liability to California Public Employees Retirement System (CalPERS) – Miscellaneous Plan for Fiscal Year 2023-24, to save $319,984. 2. Approve a $12,780,268 pre-payment for the City’s annual Unfunded Actuarial Liability to California Public Employees Retirement System (CalPERS) – Safety Plan for Fiscal Year 2023-24, to save $427,383. DISCUSSION EXECUTIVE SUMMARY The City can choose to pay its obligation to CalPERS in installments over the fiscal year, or by July 31 to receive a discount. The City has prepaid its unfunded liability for the past five years. Once again, the discounted pre-payments are included in the City’s proposed FY 2023-24 budget. If the City Council does not approve the recommendation, the proposed budget will need to increase by $747,367. In September 2021, the City issued $425.8 million of bonds to refinance approximately 75% of the City’s pension obligation debt. The true cost of the bonds is 2.8%, resulting in an estimated net present value savings of $138 million. The proceeds of these bonds were used to reduce the net liability with CalPERS. The proposed pre-payments for Unfunded Actuarial Liability represents the remaining debt not refinanced. DISCUSSION The City provides a defined benefit pension plan to its employees, managed by CalPERS. As employees provide service and accrue service credit, the City incurs a liability. Contributions from both the City and employees offset the liability. When the contributions (plan assets) are less than the accrued liability, there is an unfunded Approval to Pre-Pay the City’s Safety & Miscellaneous Unfunded Actuarial Obligations FY 2023-24 June 6, 2023 Page 2 3 5 0 0 pension liability. This happens when actual plan performance does not meet CalPERS assumptions, such as the investment earnings rate and retiree mortality. The unfunded liability is a debt of the City, as the defined benefit plan is a promise of future pension payments to employees. The unfunded liability for both plans are as follows: Plan Type Unfunded Liability Amount at 6/30/21 Safety (Police and former Fire) $339.4 million Miscellaneous (all other employees) $234.8 million In August 2023, the City will receive the updated CalPERS net liability at June 30, 2022, reflecting receipt of pension obligation bond proceeds in September 2021. Each year, CalPERS requires the City to make a payment on the unfunded liability (UL). One way to reduce the City’s cost is to pay the entire annual contribution in July, rather than spreading the contribution equally over 12 months. If the City chooses to pay the entire contribution by July 31st, the contribution is reduced as follows: Plan Type UL (Pay over 12 months) UL Pre-Pay Amount Savings Miscellaneous $9,888,635 $9,568,651 $319,984 Safety $13,207,651 $12,780,268 $427,383 Projected Savings $747,367 The FY 2023-24 budget has incorporated the assumption that the City will pre-pay its UL for the upcoming fiscal year and realize the above-referenced projected savings. FISCAL IMPACT The General Fund is the primary source for unfunded liability payments. Restricted funds pay for less than one-third of the contributions for miscellaneous employees. The proposed FY 2023-24 pre-payment will result in an estimated net savings of $747,367, which has been included in the proposed FY 2023-24 budget. After the City Council adopts the FY 2023-24 Budget, funds will be budgeted and made available in the following accounts for the specified year: Approval to Pre-Pay the City’s Safety & Miscellaneous Unfunded Actuarial Obligations FY 2023-24 June 6, 2023 Page 3 3 5 0 0 EXHIBIT(S) 1. CalPERS Valuation Report as of 6/30/2021, page 4 – Miscellaneous 2. CalPERS Valuation Report as of 6/30/2021, page 4 – Safety Submitted By: Kathryn Downs, FMSA Executive Director Approved By: Kristine Ridge, City Manager Fiscal Year Accounting Unit – Account No. Fund Description Accounting Unit, Account No. Description Amount Miscellaneous Plan FY 2023-24 01105020-61102 General Fund Unfunded Liability (UAL), Retirement – Employer Unfunded - Miscellaneous $6,397,180 FY 2023-24 Various (Non General Fund) Various (Non General Fund) Unfunded Liability (UAL), Retirement – Employer Unfunded - Miscellaneous $3,171,580 Total $9,568,760 Safety Plan FY 2023-24 01105020-61103 General Fund Unfunded Liability (UAL), Retirement - Employer Unfunded - Police $8,978,800 FY 2023-24 01105020-61104 General Fund Unfunded Liability (UAL), Retirement - Employer Unfunded - Fire $3,801,480 Total $12,780,280 CalPERS Actuarial Valuation - June 30, 2021 Miscellaneous Plan of the City of Santa Ana CalPERS ID: 4843991156 Page 4 Required Contributions Fiscal Year Required Employer Contributions 2023-24 Employer Normal Cost Rate 12.55% Plus Required Payment on Amortization Bases $9,888,635 Paid either as 1)Monthly Payment $824,053 Or 2)Annual Prepayment Option*$9,568,651 Required PEPRA Member Contribution Rate 7.75% The total minimum required employer contribution is the sum of the Plan’s Employer Normal Cost Rate (expressed as a percentage of payroll and paid as payroll is reported) plus the Employer Unfunded Accrued Liability (UAL) Contribution Amount (billed monthly (1) or prepaid annually (2) in dollars). * Only the UAL portion of the employer contribution can be prepaid (which must be received in full no later than July 31). For additional detail regarding the determination of the required contribution for PEPRA members, see ”PEPRA Member Contribution Rates” in the “Liabilities and Contributions” section. Required member contributions for Classic members can be found in Append ix B. Fiscal Year Fiscal Year 2022-23 2023-24 Normal Cost Contribution as a Percentage of Payroll Total Normal Cost 18.93% 20.47% Employee Contribution1 7.70% 7.92% Employer Normal Cost2 11.23% 12.55% Projected Annual Payroll for Contribution Year $71,055,915 $73,868,846 Estimated Employer Contributions Based On Projected Payroll Total Normal Cost $13,450,885 $15,120,953 Employee Contribution 5,471,305 5,850,413 Employer Normal Cost 7,979,580 9,270,540 Unfunded Liability Contribution 29,148,807 9,888,635 % of Projected Payroll (illustrative only) 41.02% 13.39% Estimated Total Employer Contribution $37,128,387 $19,159,175 % of Projected Payroll (illustrative only) 52.25% 25.94% 1 For classic members, this is the percentage specified in the Public Employees’ Retirement Law, net of any reduction from the use of a modified formula or other factors. For PEPRA members, the member contribution rate is based on 50% of the normal cost. A development of PEPRA member contribution rates can be found in the “Liabilities and Contributions” section. Employee cost sharing is not shown in this report. 2 The Employer Normal Cost is a blended rate for all benefit groups in the plan. For a breakout of normal cost by benefit group, see “Normal Cost by Benefit Group” in the “Liabilities and Contributions” section. EXHIBIT 1 CalPERS Actuarial Valuation - June 30, 2021 Safety Plan of the City of Santa Ana CalPERS ID: 4843991156 Page 4 Required Contributions Fiscal Year Required Employer Contributions 2023-24 Employer Normal Cost Rate 24.17% Plus Required Payment on Amortization Bases $13,207,651 Paid either as 1)Monthly Payment $1,100,638 Or 2)Annual Prepayment Option*$12,780,268 Required PEPRA Member Contribution Rate 12.75% The total minimum required employer contribution is the sum of the Plan’s Employer Normal Cost Rate (expressed as a percentage of payroll and paid as payroll is reported) plus the Employer Unfunded Accrued Liability (UAL) Contribution Amount (billed monthly (1) or prepaid annually (2) in dollars). * Only the UAL portion of the employer contribution can be prepaid (which must be received in full no later than July 31). For additional detail regarding the determination of the required contribution for PEPRA members, see ”PEPRA Member Contribution Rates” in the “Liabilities and Contributions” section. Required member contributions for Classic members can be found in Append ix B. Fiscal Year Fiscal Year 2022-23 2023-24 Normal Cost Contribution as a Percentage of Payroll Total Normal Cost 32.14% 34.43% Employee Contribution1 10.07% 10.26% Employer Normal Cost2 22.07% 24.17% Projected Annual Payroll for Contribution Year $52,074,227 $54,983,323 Estimated Employer Contributions Based On Projected Payroll Total Normal Cost $16,736,657 $18,930,758 Employee Contribution 5,243,875 5,641,289 Employer Normal Cost 11,492,782 13,289,469 Unfunded Liability Contribution 34,703,128 13,207,651 % of Projected Payroll (illustrative only) 66.64% 24.02% Estimated Total Employer Contribution $46,195,910 $26,497,120 % of Projected Payroll (illustrative only) 88.71% 48.19% 1 For classic members, this is the percentage specified in the Public Employees’ Retirement Law, net of any reduction from the use of a modified formula or other factors. For PEPRA members, the member contribution rate is based on 50% of the normal cost. A development of PEPRA member contribution rates can be found in the “Liabilities and Contributions” section. Employee cost sharing is not shown in this report. 2 The Employer Normal Cost is a blended rate for all benefit groups in the plan. For a breakout of normal cost by benefit group, see “Normal Cost by Benefit Group” in the “Liabilities and Contributions” section. EXHIBIT 2