Pension Liability Policy #21
Agenda Packets / Staff Reports
City Council (2004 - Present)
02/02/2021 Regular and Special
Pension Liability Policy #21
7/14/2021 1:56:06 PM
7/14/2021 1:56:03 PM
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UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION POLICY Page 1 <br /> <br /> <br />City of Santa Ana <br /> <br />Council Policy <br /> <br /> <br /> <br />Mayor’s Authorization <br /> <br />Subject <br />UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION <br />POLICY <br /> <br /> <br />Council Approval Date: <br />February 2, 2021 <br /> <br />The City’s contribution to fund employee pensions has increased at a faster rate than most other costs. As of June <br />30, 2019, pension plan assets account for only 67% of the accrued liability; and the plan administrator projects the <br />City’s contribution will continue to increase in the future. This policy addresses strategies to reduce the City’s cost <br />of its employee pension liability. <br />Background <br />The City provides a defined benefit pension plan to its full‐time employees. A defined benefit is a promise to pay <br />future benefits, wherein the City makes annual deposits into the plan and carries the risk of plan assets investment <br />performance. If the plan’s investment return is less than assumed, the City cost to provide the benefit increases. <br /> <br />The City has contracted with the California Public Employee Retirement System (CalPERS) to manage the employee <br />pension plan. CalPERS collects contributions from the City and its employees, invests the money, and pays monthly <br />benefits to retirees. Ideally, the plan would be 100% funded, which means plan assets are equal to plan liabilities. <br />A plan with a low funded ratio is at risk for paying future promised benefits. <br /> <br />In response to the rising cost of public employee pensions after CalPERS investment losses during the Great <br />Recession of 2009, and to ensure the future solvency of plans under contract with CalPERS, California enacted the <br />Public Employee Pension Reform Act (PEPRA). All public employees hired after PEPRA became effective in January <br />2013 receive a lesser benefit than those “Classic” employees hired before PEPRA. Santa Ana Employees earn <br />benefits in one of the following four categories. <br />1. Classic Safety (sworn public safety employees); <br />2. PEPRA Safety; <br />3. Classic Miscellaneous (all other non‐sworn City employees); or <br />4. PEPRA Miscellaneous. <br /> <br />The market value of investments in the Santa Ana plan is less than the liability for benefits already earned, and the <br />City has an Unfunded Pension Liability. Each year, the amount of the liability changes based upon actual plan results <br />and CalPERS changes in assumptions. The liability grows when actual plan results do not meet CalPERS assumptions, <br />such as retirees living longer than expected; or when CalPERS changes its assumptions, such as reducing the <br />assumed rate of investment return. Conversely, the liability decreases when actual plan results exceed CalPERS <br />assumptions, such as investments earning more than the assumed rate of return. CalPERS also charges “interest” <br />on the unpaid liability each year, based on the plan’s discount rate, equivalent to the assumed rate of return. <br />CalPERS requires the City to make annual contributions to reduce the unfunded liability. <br /> <br />This policy addresses strategies to reduce the cost of the unfunded pension liability. <br /> <br />There are two basic strategies to reduce the City’s cost for the unfunded pension liability: <br />1. Contribute more than required by CalPERS (an Additional Discretionary Payment) to reduce the accrual of <br />interest; or <br />
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