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HomeMy WebLinkAboutStaff Report 8579 City of Palo Alto (ID # 8579) Finance Committee Staff Report Report Type: Action Items Meeting Date: 10/17/2017 City of Palo Alto Page 1 Summary Title: City's Pension Liability Discussion & Strategies Title: Review and Recommend Strategies to Address the City’s Pension Liability From: City Manager Lead Department: Administrative Services RECOMMENDATION Staff recommends the Finance Committee continue to discuss the City’s pension obligations and recommend no more than three scenarios to be discussed as alternative assumptions in informing the City’s calculation of pension liabilities and annual contributions. BACKGROUND As part of the adoption of the City’s FY 2018 Budget, the City Council referred to the Finance Committee the task of identifying funding options to further address the City’s pension liability. Staff began this discussion with the Finance Committee at the September 19, 2017 Finance Committee meeting. At this meeting the Committee reviewed the CalPERS Valuation Reports for the Miscellaneous and Safety Pension Plans as of June 30, 2016 and the assumptions used in the development of them. The staff report including attached CalPERS valuation reports can be found here: http://www.cityofpaloalto.org/civicax/filebank/documents/59559 At the September 2017 meeting, the committee provided direction for return at future meetings with a strict focus on the assumptions used to calculate the City’s pensions costs and liabilities as well as a more easily understood communication strategy. All parties agreed that a series of meetings will be necessary to address these assumptions. Once the assumptions are determined, the Committee will take up potential solutions and implications. Below is a list of suggested action items the Committee provided staff to address following the September meeting: 1. Develop an easily understood explanation for a general audience articulating the City’s pension discussion and variables that may impact it 2. Provide total cost per employee assuming an alternative discount rate 3. How best can the City utilize expert resources to further inform this pension discussion City of Palo Alto Page 2 4. Relook at the FY 2018 Adopted Budget and adjust the General Fund expenses to reflect a six (6) percent discount rate for the retirement system and compare this adjusted total expense to the Adopted revenues 5. Provide the potential payment schedule should the city choose to accelerate the amortization period (also known as “fresh start” or “refinancing the mortgage”) 6. Provide employee compensation in tabular form including salary, benefits, unfunded pension liability, unfunded retiree medical liability for each scenario DISCUSSION It is anticipated that Bartel and Associates will provide an in-depth presentation at the October 17, 2017 meeting. Mr. John Bartel, President of Bartel Associates will provide an update on the City’s pension trusts at CalPERS including the breakdown of the discount rate (i.e., Real Rate of Return and inflations assumptions), demographic information, funding status, projected future rates and contributions based on different scenarios with sensitivity analysis, and answer questions from the Committee. Staff continues to work on the guidance the Finance Committee previously provided at the September meeting. The remaining information in the report provides the analysis and information available to date, specifically items two (2), four (4), and five (5), outlined in the Background section above. Staff will continue to work on the additional initiatives and bring them back as part of presentations of future Finance Committee meetings. Provide total cost per employee assuming an alternative discount rate The Finance Committee discussed what the impact to an average employee total compensation is should an alternative discount rate be assumed. For illustrative purposes, the graphs below outline the average total cost of an employee in the Miscellaneous and Safety retirement plans including the marginal cost of a 6 percent discount rate compared to the current 7.375 percent discount rate assuming a five year phase-in. This rate impacts both the normal cost as well as the unfunded accrued liability (UAL) annual cost. City of Palo Alto Page 3 *Overtime is included for each plan, but is averaged only for the total overtime budget for eligible groups divided by the eligible number of employees. Overtime is not pensionable, and changes to the discount rate would be de minimis on the overtime budget. Relook at the FY 2018 Adopted Budget and adjust the General Fund expenses to reflect a six (6) percent discount rate for the retirement system and compare this adjusted total expense to the Adopted revenues The FY 2018 Adopted Budget CalPERS contribution was developed based on the June 30, 2015 CalPERS reports which reflected a discount rate of 7.5 percent for FY 2018 phasing down to 7.0 percent by FY 2020. If the discount rate were to be adjusted to 6.0 percent assuming a five- year phase in beginning in FY 2019, the annual contribution for both retirement plans would increase $8.6 million, from $39.7 million to $48.3 million in all funds. The General Fund share would increase $5.4 million, from $25.2 million to $30.6 million for both retirement plans reflecting year over year growth of 11.2 percent compared to the 8.4 percent reflected in the Adopted Budget. FY 2018 Adopted General Fund Budget @ 7.5% % Growth from Prior Yr FY 2018 General Fund Budget REVISED @ 6.0% % Growth from Prior Yr Revenue $207,042 6.1% $207,042 6.1% Expense $210,427 8.4% $215,827 11.2% Gap ($3,385)* ($8,785) * Use of $3.4 million from the Budget Stabilization Reserve (BSR) was adopted, bringing the BSR to the City Council approved level of 18.5% of Adopted Budget expenses. City of Palo Alto Page 4 Provide the potential payment schedule should the city choose to accelerate the amortization period (also known as “fresh start” or “refinancing the mortgage”) The annual CalPERS valuation reports for both the Miscellaneous and Safety pension plans includes schedules for alternative amortization schedules, offering the option of a "Fresh Start", which means the pension trust amortization changes from a 30 year amortization plan to either 15 or 20 years. Once an agency chooses this option the Actuarial Determined Contribution (ADC) is recalculated and the agency MUST pay the higher annual payment; it is a commitment similar to refinancing a home mortgage. CalPERS provides a 30 year amortization schedule and alternatives on page 17 of their actuary reports. These tables are based on the current assumed rate of return for FY 2017 of 7.5% and a discount rate of 7.5% over the amortization period. The schedule does not reflect the impact of the adopted discount rate changes that will become effective beyond June 30, 2016. Staff anticipates that the adopted discount rate changes will be incorporated into subsequent valuation reports. Should the Council decide on alternative valuation assumptions, the City would need to contract with a firm such as Bartel and Associates to revise these tables based on our custom valuation assumptions. Below illustrates the data in the CalPERS report tables and difference in the annual contribution towards the unfunded liability for both the Miscellaneous and Safety plans combined. RESOURCE IMPACT Implications will be determined based on policy direction in subsequent conversations. City of Palo Alto Page 5 ENVIRONMENTAL IMPACT This report is not a project for the purposes of the California Environmental Quality Act. Environmental review is not required.