SR 05-09-2017 8B
Ci ty Council
Housing Authority
Report
City Council Meeting : Jun e 13, 2017
Agenda Item: 8.B
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To: Housing Authority, Mayor and City Council
From: Gigi Decavalles -Hughes, Director , Finance Department
Subject: Payment Towards Unfunded Pension Liability
Recommended Action
1) Staff recommends that the City Council and Housing Authority a pprove budget
a ctions necessary for a $45 million payment to the California Public Employees
Retirement System (CalPERS) towards the City’s unfunded pension liability, as
outlined in the Financial Impacts and Budget Actions section of thi s report.
2) Staff recommends that t he City Council approve a $519,669 General Fund
payment to CalPERS on behalf of the Rent Control Fund, and authorize the City
Manager to advance a $519,669 General Fun d loan to the Rent Control Fund
and negotiate with the Rent Control Board on proposed rep ayment terms starting
in FY 2017/18 .
Executive Summary
The greatest challenge to Santa Monica’s long -term fiscal sustainability is the long -term
unfunded pension obligations for city staff under the California Public Employees
Retirement System (CalPERS). The recent prudent decision by CalPERS to lower rate
of return assumptio ns on its investment portfolio is anticipated to increase the City’s
employer contribution rates by 50% within five years, an increase that makes up $13
million of the General Fund’s projected $19 million shortfall in FY 2021 -22.
The City has consistently taken steps to mitigate increases in its pension costs using a
combination of pay downs of its unfunded liability, employee cost -sharing, and
prepayments that result in discounted c osts. The City’s fiscal policies establish annual
payments above the annual required contribution to CalPERS that accelerate the
paying down of the City’s unfunded pension liability. The payments are for a minimum
of $1 million in the General Fund and a commensurate amount in all other funds. The
policy also provides for additional payments if funds are available. As the fiscal year
nears its end, and with the threat of significant cost increases ahead, staff has reviewed
current balances in its reserve s and has identified $35,080 ,812 in General Fund
reserves and $8,639,60 7 in other operating funds’ reserves that may be used to
increase this year’s annual payment from $1,279,581 to $45,000,000. The annual
retirement cost savings to the City from these p ayments will be at least $3.8 million. To
achieve savings as soon as FY 2017 -18, CalPERS requires payment prior to June 20,
2017.
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In order to make the payment, it is necessary for the General Fund to advance a loan to
the Rent Control Fund in the amount of $519,669 .
Background
On June 21, 2011 (Attachment A), June 12, 2012 (Attachment B), June 24, 2014
(Attachment C), and June 9 , 2015 (Attachment D), Council authorized lump sum
payments to CalPERS totaling $30.1 million. Additionally, staff made a budge ted $1.2
million annual payment in June 2016, and the FY 2016 -17 budget includes a $1.26
million Citywide payment.
Discussion
The City of Santa Monica has a healthy balance sheet with over $1.5 billion in net
assets, including substantial cash reserves an d well -maintained public infrastructure
and consistently balanced operating budgets. All these factors contribute to the AAA
bond rating from all three major credit rating agencies. However, r etirement costs are a
large part of the City’s annual budgets and affect long term financial sustainability.
According to our most recent audited Comprehensive Annual Financial Report, total
pension assets held by CalPERS were valued at $1,160,937,160 with a net unfunded
liability of $386,760,127. The unfunded liab ility 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.
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. In recent year s, changes in the
assumptions used to determine plan participant demographics, the methodology used
to incorporate market fluctuations into annual contributions, and low investment returns
have increased the unfunded liability amount significantly. Pensi o n costs make up
approximately 7 % of the City’s overall budget and 10% of the operating budget, and to a
large extent are o utside staff’s direct control.
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Paying down the unfunded liability at an accelerated level leads to decreased future
liabilities, and therefore results in savings in required payments now and 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 restr ictions mandated by State law.
Cou ncil has supported this strategy by approving prior payments totaling $31.3 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
am ounts in other funds annually, which translated to a total of $1.2 million in FY 2015 -
16. In general, staff recommends paying more than the minimum, depending on fund
availability, as the ongoing savings generated from such payments provide a strong
retur n on investment. The $45 million proposed payment will use $35 million in funds
that have been set aside in the General Fund reserves as a potential supplement to
future capital budgets, including City Yards modernization and contingency, as well as
$8.6 million in fund balance reserves in other funds.
While most funds have the necessary reserves on hand to make the pay down, staff
recommends that the General Fund make forgivable loans to the Housing Authority and
Pier Funds in the amounts of $20 0 ,5 89 and $235,458, respectively, to make the
paydown, as both funds are projected to require subsidies in the next two years.
Additionally, staff recommends that the General Fund would loan funds to the Rent
Control Fund for its $5 19,669 portion of the pay down, allowing the Board the time to
incorporate this additional cost into thei r budget. Staff will work with the Rent Control
Board to negotiate a repayment plan of this amount at a proposed annual interest rate
of 1.3%, reflecting the amount earned on the Cit y’s portfolio .
Staff estimates that the $45 million payment would result in $3.8 million in on -going
savings, $3 million of which would be in the General Fund. This payment would bring
the total unfunded liability paydown through June 30, 2017 to $76.3 m illion and
decrease the unfunded liability amount by an additional 11%. In addition, in response to
staff’s request for an updated contribution forecast, Cal PERS applied new information
that reflects slightly better performance in the City’s experience le vel and market returns
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to the City’s plan . The updated information has allowed CalPERS to lower the pre -
paydown contribution amounts by up to $4 million annually citywide beginning in FY
2018 -19 . Barring any other changes, the combination of these two ch anges would
decrease the General Fund defici t in FY 2021 -22 by $6 million.
Upon receiving the payment, CalPERS will recalculate the City’s required payment for
the following fiscal year, based on the associated lower liability. For the FY 2017 -18
fiscal year, CalPERS has set a June 20, 2017 deadline to receive the payment and
recalculate FY 2017 -18 employer contribution requirements. This means that staff must
submit the payment prior to this date to realize savings in FY 2017 -18. Staff therefore
recomm ends that Council approve the release of reserved funds and budget
appropriation.
Financial Impacts and Budget Actions
The FY 2016 -17 Revised Budget includes an appropriation of $1,2 63 ,8 44 for the annual
PERS paydown payment. The Rent Control Budget incl udes a $15,737 appropriation
for the paydown. An additional $43,7 20,419 appropriation is necessary to make the
$45,000,000 payment to CalPERS. The following budget actions are required:
1) Appropriate budget to the accounts listed below:
FUND AMOUNT ACCOUNT S
General
Police $12,290,862 01274.511771
Fire 4,968,440 01274.511772
Miscellaneous 16,865,79 4 01274.511773
General Fund Subtotal $34,125,096
Payment from GF to HA 20 0 ,5 89 01695.5 79330
Payment from GF to Pier 235,458 01695.5 78530
Payment o n behalf of Rent Control* 519,669 01274.511773
*Rent Control Fund FY 2016/17 adopted budget includes an additional $15,737 to
be used tow ards the total $535,406 payment.
General Fund Total $35,0 80,812
Payment from GF to HA -20 0 ,5 89 12695.5 79330
Payment from GF to Pier -235,458
3 0 695.5 78530
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Other Funds
Housing Authority 20 0 ,5 89 01274.511773
Pier 235,458 01274.511773
Clean Beaches and Ocean 646 06274.511773
Beach 460,818 11274.511773
Water 666,846 25274.511773
Resource Recover y & Recycling 1,020,872
82,108
278,245
347,972
93,297
5,092,749
379,457
216,597
$43,724,481
27274.511773
Community Broadband 82,108 28274.51177 3
Wastewater 278,245 31274.511773
Airport 347,972 33274.511773
Cemetery 93,297 37274.511773
Big Blue Bus 5,092,749 41274.511773
Fleet 379,457 54274.511773
Risk Management Administration 216,597 58274.511773
GRAND TOTAL $43,7 20 ,4 19
2) Release $35 ,080,812 from account 1.380254.
Prepared By: Stephanie Lazicki, Principal Administrative Analyst
Approved
Forwa rded to Council
Attachments:
A. June 21, 2011 Staff Report
B. June 12, 2012 Staff Report
C. June 24, 2014 Staff Report
D. June 9, 2015 Staff Report