City of Santa Monica
California

Staff Report
2532

Payment Towards Unfunded Pension Liability

Information

Department:Finance DepartmentSponsors:
Category:08. Administrative Item

Recommended Action

Recommended Action

1)     Staff recommends that the City Council and Housing Authority approve budget actions 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 this report.

2)     Staff recommends that the 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 Fund loan to the Rent Control Fund and negotiate with the Rent Control Board on proposed repayment terms starting in FY 2017/18.

Staff Report Body

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 assumptions 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 costs.  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 reserves and has identified $35,080,812 in General Fund reserves and $8,639,607 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 payments will be at least $3.8 million.  To achieve savings as soon as FY 2017-18, CalPERS requires payment prior to June 20, 2017.

 

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 budgeted $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 and 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, retirement 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 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.

 

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 years, 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.  Pension costs make up approximately 7% of the City’s overall budget and 10% of the operating 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 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 restrictions mandated by State law.

 

Council 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 amounts 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 return 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 $200,589 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 $519,669 portion of the pay down, allowing the Board the time to incorporate this additional cost into their 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 City’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 million and decrease the unfunded liability amount by an additional 11%. In addition, in response to staff’s request for an updated contribution forecast, CalPERS applied new information that reflects slightly better performance in the City’s experience level and market returns 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 changes would decrease the General Fund deficit 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 recommends 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 $1,263,844 for the annual PERS paydown payment.  The Rent Control Budget includes a $15,737 appropriation for the paydown. An additional $43,720,419 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

ACCOUNTS

General

 

 

Police

$12,290,862

01274.511771

Fire

4,968,440

01274.511772

Miscellaneous

16,865,794

01274.511773

General Fund Subtotal

$34,125,096

 

 

 

 

Payment from GF to HA

200,589

01695.579330

 

Payment from GF to Pier

235,458

01695.578530

 

Payment on behalf of Rent Control*

519,669

01274.511773

 

 

 

*Rent Control Fund FY 2016/17 adopted budget includes an additional $15,737 to be used towards the total $535,406 payment.

General Fund Total

$35,080,812

 

 

 

 

Payment from GF to HA

-200,589

12695.579330

Payment from GF to Pier        

-235,458

 

30695.578530

 

Other Funds

 

 

Housing Authority

200,589

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 Recovery & 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

28274.511773

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

$43,720,419

 

 

2)     Release $35,080,812 from account 1.380254.

Meeting History

Jun 13, 2017 5:30 PM  City Council Regular and Special Joint Meeting
draft Draft