your calpers contribution path(ology)

Your CalPERS Contribution Path(ology)Mary Beth Redding, Bartel Associates

Michelle Fitzer, City of Pinole

1/9/19

Agenda

• What is the Contribution Path• Possibilities for Changing the Path• City of Pinole’s Pension Strategies

1/9/19

What is the Contribution Path?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%Contribution Projection – Percent of Pay

25th Percentile 50th Percentile 75th Percentile1/9/19

What is the UAL Contribution Path?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%Contribution Projection – Percent of Pay

25th Percentile Projected Contribution 75th Percentile Payment on Current UAL1/9/19

What is the Contribution Path?

• Sample Plan• Safety• UAL = $70,000• Projected UAL Contributions = $145,000• Total Interest = $145,000 - $70,000 = $75,000• 30-year PV of interest on current UAL payments @ 3% = $30,000

1/9/19

How to Change the Path?

• What is your purpose?• Reduce future contributions?

• In general or for a specific time period?

• Reduce the Unfunded Liability• Target funded status?

• Increase future flexibility?

• Other?

1/9/19

How to Change the Path?

• Where to find money

1/9/19

Paying off the Liability – CalPERS Options

• Pay Off UAL Bases• Fresh Start• Combination• “Soft” or “Unofficial”

1/9/19

Paying off the Liability – CalPERS Options

(25)

0

25

50

75

100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Projected Unfunded Liability (Current UAL Only)

21 Years 23 Years 14 Years 24 Years 25 Years 25 years 26 Years27 years 17 Years 28 Years 29 Years 19 Years 30 years 20 years1/9/19

Paying off the Liability – CalPERS Options

• The Unfunded Liability is made of many “bases”• Sample Plan:

• Loss base $11 M 29 years remaining• Loss base $ 7 M 14 years remaining• Other loss bases $75 Million 17 to 28 years• Other gain bases ($23 Million) 25 to 30 years• UAL $70 Million

1/9/19

Paying off the Liability – CalPERS Options• Current CalPERS amortization method can have “negative amortization”

(200)

-

200

400

600

800

1,000

1,200

1,400

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Amortization Payments: Interest and Principal

Principal Interest1/9/19

Paying off the Liability – UAL Bases

• Pay off all or part of a “long” or “short” base• Application of payment agreed with CalPERS• Cannot be changed in the future• Short bases:

• Less interest savings• Greater contribution reduction

• Long bases:• More interest savings• Less contribution reduction

1/9/19

Paying of the Liability – UAL Bases

$-

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

Mill

ions

ORIGINAL $5M/Long $5M/Short

Contribution Projection ($) After Additional Payments -- Current UAL Only

1/9/19

Paying of the Liability – UAL Bases

$-

$10

$20

$30

$40

$50

$60

$70

$80

Mill

ions Current UAL Projection After Additional Payments

ORIGINAL $5M/Long $5M/Short1/9/19

Paying off the Liability – Fresh Start

• Fresh Start• Consolidate all bases and fund over a single period• Cannot be undone

• “Soft” or informal fresh start

1/9/19

Paying off the Liability – Fresh Start

$-

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10Contribution Projection ($) After Fresh Start - Current UAL Only

ORIGINAL 15 Year Fresh Start1/9/19

Paying off the Liability – Fresh Start

$-

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10Contribution Projection ($) After Fresh Start - Current UAL Only

ORIGINAL 15 Year Fresh Start 20 Year Fresh Start1/9/19

Paying off the Liability – Fresh Start

$-

$10

$20

$30

$40

$50

$60

$70

$80 Current UAL Projection After Fresh Start

ORIGINAL 15 Year Fresh Start1/9/19

Paying off the Liability – CalPERS Options

$-

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

Mill

ions

ORIGINAL $5M/Long $5M/Short 15 Year Fresh Start

Contribution Projection ($) After Additional Payments or Fresh StartCurrent UAL Only

1/9/19

Paying off the Liability – CalPERS Options

$-

$10

$20

$30

$40

$50

$60

$70

$80 Current UAL Projection After Additional Payments or Fresh Start

ORIGINAL $5M/Long $5M/Short 15 Year Fresh Start1/9/19

Paying off the Liability – Rate Stabilization

• Use a Section 115 Trust (Rate Stabilization Trust)

• Help pay CalPERS required contributions• Whenever the agency chooses

• Accumulate funds • Pay PEPRA-required contributions if plan is fully funded

1/9/19

Paying off the Liability – Rate Stabilization

$-

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

Mill

ions

ORIGINAL Supplemental Trust

Contribution Projection ($) With Supplemental Trust (Rate Stabilization) --Current UAL Only

1/9/19

Paying off the Liability – Rate Stabilization

$-

$10

$20

$30

$40

$50

$60

$70

$80

Mill

ions Current UAL Projection Combined with Supplemental Trust

(Rate Stabilization)

ORIGINAL Supplemental Trust1/9/19

Paying off the Liability – Option Comparison

-

1

2

3

4

5

6

7

8

9

10

Mill

ions Contribution Projection ($) - Current UAL Only

$5M/Long $5M/Short ORIGINAL Supplemental Trust Fresh Start 151/9/19

Supplemental Trust vs. CalPERS

Supplemental Trust• Flexible• Likely lower long-term return• Investment strategy choice• Does not count for GASB reporting• More visible

CalPERS• Locked In• Likely higher long-term return• No investment choice• Reduces net pension liability for

GASB reporting• More restricted

1/9/19

Other Options

• “Mix and Match”

1/9/19

Other Options

• Court/Legislative solution• Timing• Does not impact current UAL

1/9/19

Cautions

• Analysis above includes only current UAL• See CalPERS valuation report for impact of discount rate change

to 7% at 6/30/18• Normal cost – cost of benefits earned each year• We expect future investment losses especially over next 10 years• Risk mitigation strategy

• Best solution for every agency will be different

1/9/19

City of Pinole’s Pension Strategies

Michelle Fitzer, City Manager

1/9/19

Sharing the PERS Employer Contribution• In 2008 pension formulas were enhanced. The City and our employees

began sharing the Employer Contribution, based on a negotiated formula.• Safety transitioned from 2% @ 50 to 3% @ 55• Miscellaneous transitioned from 2% @ 55 to 2.5% @ 55

• The ER rate was set at the pre-enhancement formula as the baseline. Everything above that rate to be shared 50/50.

• Safety baseline was 11.5%; Miscellaneous baseline was 8.509%.

• In 2011 the employees began paying their Employee Contribution.

• In 2018 the City and EE groups negotiated a 4.5% increase to the base.

• As of 7/1/18 Safety EEs are paying 24.659%; Misc. 20.547% total (ER & EE share).1/9/19

IRS Section 115 Pension Trust

• In June 2018 established a 115 Pension Trust and funded $13 million.

• Selected a moderately conservative investment strategy targeting 5% annual rate of return.

• Given talk at PERS of reducing their target ROR to 6.5%, looking to invest another $3 million.

• Interest is to cap or slightly reduce the City’s pension payments from current revenues, and reduce the percent of EE contribution, through 2036 when rates are expected to decline.

1/9/19

Lessons Learned• There comes a point where the financial pros of the sharing formula are

outweighed by the HR cons: difficulties in recruiting Classic PERS members; challenges in keeping our current Classic member employees.

• Each Employer must develop their own strategy for addressing the pension obligations – no help is coming.

• Unfunded liability payments/funding are a good use of 1-time monies.

• Include your employee groups in the decision making process.

• Be prepared for further modifications in the PERS actuarial assumptions.

• We look forward to our colleagues negotiating sharing formulas!

1/9/19