SR-06-09-2015-3PCity Council Meeting: June 9, 2015
Agenda Item: IF
To: Mayor and City Council
Chairperson and Housing Authority Members
From: Gigi Decavalles- Hughes, Director of Finance
Subject: Payment Towards Unfunded Pension Liability
Recommended Action
Staff recommends that the City Council and Housing Authority approve budget actions
necessary for a $5 million payment towards the City's unfunded pension liability, as
outlined in the Financial Impacts and Budget Actions section of this report.
Executive Summary
In three of the past four years, the City has paid a lump sum to CalPERS for its
retirement unfunded liability. Staff generally presents this payment for Council approval
and appropriation with budget adoption at the final June meeting. CalPERS rule
changes require staff to make the payment prior to June 15, 2015. Staff therefore
seeks Council authority to appropriate $5 million for this payment, and to release funds
set aside in the General Fund fund balance for this purpose. This payment will increase
the City's total paydown of unfunded liability to $30.1 million, and the annual retirement
savings from the paydowns to $2.4 milllion.
Background
On June 21, 2011 and June 12, 2012, Council authorized lump sum payments to
CaIPERS totaling $20 million. On February 11 2014, Council established these
payments as an ongoing City financial practice by adopting a policy to set aside funds
annually for an additional payment to CalPERS. This payment would be for a minimum
of $1 million in the General Fund, and commensurate amounts in other funds. On June
24, 2014, Council approved an additional $5.1 million payment. On January 27, 2015
and May 27, 2015, staff informed Council of plans to use prior year savings in the
amount of $5 million to make a similar payment for FY 2014 -15, to further reduce the
City's unfunded retirement liability. This payment will bring the total payments through
June 30, 2015 to $30.1 million.
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Discussion
Retirement costs, made up of ongoing costs and outstanding obligations, are a large
part of the City's annual budgets and affect long term financial sustainability. Each
year, the City pays the annual required contribution (ARC), as set by CalPERS. The
ARC includes the cost of benefits each employee accrues each year, and an amount to
pay for the unfunded liability of the plan. The unfunded liability is the gap between the
value of the funds members have paid into the pension fund to cover employee
pensions over time, and the actual cost of the benefits in the future. The unfunded
liability portion of the ARC is based on paying down the gap over a period of 30 years.
These costs make up approximately eight percent of the City's budget, and to a large
extent are outside staff's direct control.
Paying down the unfunded liability at an accelerated level leads to decreased future
liabilities, and therefore lower required payments in the future. Investing funds in the
CalPERS portfolio can also yield a higher return than staff would expect in the City's
portfolio, which is limited by restrictions mandated by State law. Staff estimates that
each $10 million payment is associated with $0.8 million in annual, ongoing savings.
Council has supported this strategy by approving prior payments totaling $25.1 million
to date, and adopting a policy ensuring that, if funds are available, the City will continue
to make payments of at least $1 million in the General Fund and commensurate
amounts in other funds annually. In general, staff recommends paying more than the
minimum, depending on fund availability, as the ongoing savings generated from such
payments provide a strong return on investment. The $5 million payment uses prior
year savings set aside for this purpose.
Upon receiving the payment, CalPERS recalculates the City's required payment for the
following fiscal year, based on the associated lower liability. Staff has made these
payments at the end of June in prior years, and Council has approved the payment
along with budget adoption. For the FY 2014 -15 fiscal year, CalPERS has set a June
15, 2015 deadline to receive the payment and recalculate FY 2015 -16 employer
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contribution requirements. This means that staff must submit the payment prior to this
date to realize savings in FY 2015 -16. Staff therefore recommends that Council
approve the release of reserved funds and budget appropriation.
Financial Impacts & Budget Actions
Approving the proposed payment to CalPERS requires the following budget actions:
1) Appropriate budget to the accounts listed below:
FUND AMOUNT ACCOUNTS
General
Police 1,444,131 01274.511771
Fire 527,525 01274.511772
Miscellaneous 1,935,899 01274.511773
GENERAL FUND TOTAL $3,907,555
Beach
46,844
11274.511773
Housing Authority
23,464
12274.511773
Water
83,161
25274.511773
Resource Recovery & Recycling
119,994
27274.511773
Rent Control
61,495
29274.511770
Pier
25,948
30274.511773
Wastewater
33,969
31274.511773
Airport
18,565
33274.511773
Cemetery
10,077
37274.511773
Big Blue Bus
599,037
41274.511773
Fleet
45,751
54274.511773
Risk Management Administration
24,140
58274.511773
2) Release $3,907,555 from account 1.380010
Prepared by: Stephanie Lazicki, Principal Administrative Analyst
Director of Finance
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Forwarded to Council:
Elaine M. Polachek
Interim City Manager